Narrow Scope of Tenant's Self-Help Right

At the beginning of negotiations, when you ask yourself the broad question of what rights you can put into the lease to protect yourself if your tenant defaults, “self-help” should come to mind as one of the remedies you can rely on. Most standard commercial leases include a “self-help” right—that is, the right to cure a tenant’s default and collect any attorney’s fees associated with the process—to protect the owner. But strong or savvy tenants might push for a self-help right that they, too, can exercise in the event that they must perform any of your obligations at their own expense.

As with most rights that you agree to give to a tenant, you’ll want to narrow it as much as possible. With the help of New Jersey attorney Steven A. Weisfeld, we’ll tell you how to put three important limits on a tenant’s self-help right, and give you a Model Lease Clause: Set Out Self-Help Right Triggers, that you can adapt for your leases.

Where to Include the Provisions

Self-help rights will typically appear in the default clause of the lease, says Weisfeld. However, he has occasionally seen them included in the repair clause of a lease. “It’s not unreasonable to put a self-help provision in the repair clause, because it’s providing that the owner has the right to make repairs that are the tenant’s obligations at the tenant’s expense,” Weisfeld explains.

It’s most commonly included in the default clause, however, because the owner can exercise its self-help right only in the event that the tenant defaults by failing to cure a problem within the required amount of time after the owner gives it the proper notice. The tenant’s right to cure is also triggered by the owner’s default.

“Just as the owner doesn’t want the tenant to make repairs to the common areas or under some circumstances items like the roof or other parts of the shopping center or office building, the tenant doesn’t want the owner to come into its space and make changes if the tenant isn’t in default, which is why both parties’ self-help rights are appropriate in the default clause,” Weisfeld notes.

Get Broad Self-Help Right for Yourself

Your self-help right should be straightforward. The lease should provide that if you must take care of any of the tenant’s responsibilities, and it fails to pay you within a certain period of time, you have the right to deduct the cost from its security deposit.

Note that getting a self-help right is especially important at retail properties, because retail tenants generally have more maintenance responsibilities due to buildouts that are more complex than those of office tenants. “Retail tenants are responsible for more complex items such as the heating, ventilation, and air conditioning (HVAC) system,” says Weisfeld. And retail tenants that rent stand-alone space have even greater responsibilities; they are often responsible for their own roof and exterior, items that wouldn’t be the case for an office building tenant, he adds. “Fewer tenant repair obligations in the office context mean fewer opportunities for an owner to have to fix issues that are the tenant’s responsibility,” he says.

Don’t be surprised, however, when a tenant insists on its own self-help right that it can exercise if you’re in default. A tenant could argue that it should be protected in the event that you don’t perform your obligations, usually with respect to landscaping, snow removal, roof maintenance, or the HVAC system.

Limit Tenant’s Right in Three Ways

If you must give this remedy to a tenant, make sure you limit it to specific areas or items. Otherwise, you could be on the hook for paying for things that the tenant, but not you, deemed to be necessary to fix, or that will affect your costs or liability for other items at the property. 

Limit #1: Require tenant to give sufficient notice. Allow yourself enough time to cure whatever problem is at issue before you’re deemed to be in default. You can do this by requiring the tenant to give you sufficient notice—at least 30 days [Clause, par. 1(a)]. You’ll also want to carve out your right to take additional time to cure if you’ve started the repairs within the notice period and are using due diligence to complete them but won’t be able to cure within that period, Weisfeld suggests [Clause, par. 1(b)]. 

Limit #2: Set threshold for costs to be covered. Set out that the tenant has to meet three requirements before it has the right to cure [Clause, par. 2]. First, it shouldn’t be able to automatically fix issues. The tenant must first provide notice to your mortgagee and the mortgagee must fail to cure your default within a specified time period before the tenant can fix the problem itself [Clause, par. 2(a)]. Second, the tenant may not be in default itself [Clause, par. 2(b)]. Third, state that the self-help right can be exercised only for problems that “materially adversely affect” the tenant’s business operations,” Weisfeld stresses [Clause, par. 2(c)]. Making the distinction that a problem must materially adversely affect the tenant is a key point; it’ll stop the tenant from trying to exercise its self-help right to fix an issue that it’s simply unhappy with as opposed to one that is truly problematic.

Practical Pointer: Consider spelling out in the default clause that you’ll cover only reasonable costs the tenant incurs if it has to make arrangements to fulfill your responsibilities [Clause, par. 2]. You don’t want the tenant to go above and beyond what’s necessary and leave you to foot the bill for costs you ordinarily wouldn’t incur, especially if the tenant has gotten some upgrade to its space as a result of the extra expenditure.

Limit #3: List eligible areas. “The owner should limit what the tenant can use self-help for,” says Weisfeld. Owners typically say no to tenants’ requests for self-help for problems outside the tenant’s own premises. For example, allowing a tenant to use self-help for a problem in the shopping center or office building’s common areas would turn into a nightmare if every tenant decided to “fix” issues in those areas.

“Be clear that you’re not going to allow the tenant to do any work in common areas,” urges Weisfeld. Even though a problem in a common area might affect that tenant, the common area affects everybody, and it would be chaotic if every tenant exercised its self-help right with respect to shared portions of the property, he points out. “Make it clear to the tenant that, if you’re giving it a self-help right, it’s only with respect to the tenant’s particular premises,” he recommends [Clause, par. 3].

Don’t Let Self-Help Do More Harm than Good

Self-help isn’t always a matter of the tenant doing repairs and then passing off the bill to the owner—a tenant’s use of self-help can have dire, unforeseen consequences. For example, a tenant could inadvertently nullify your roof bond by using a different contractor than you’ve used to fix the roof, Weisfeld warns.

If you have qualms with the tenant being able to touch certain parts of its premises or the building or center, make that clear [Clause, par. 3]. In the roof example, you can specify that the tenant must use your roofing contractor to make any required roof repairs. But also say that the tenant will be responsible for and must defend you, indemnify you, and hold you harmless from any costs or expenses incurred by you as a result of the tenant’s actions that would void your roof warranty.

Restrict Rent Offset Right

“When a tenant negotiates its self-help right, a key question is what happens when the tenant presents the owner with a bill for the work the tenant has done, but the owner refuses to pay for the work,” says Weisfeld. Tenants commonly ask for the right to offset those repair costs against their monthly rent. This can be a huge problem for you; if the repairs are close to or exceed the tenant’s base rent, you’ll be left collecting nothing for the month.

You can limit this to protect your bottom line, either by not giving the tenant an offset right [Clause, par. 2], or by capping it at a certain percentage of the monthly rent, say, 25 percent. “There’s usually some negotiation over the extent to which the tenant can offset the cost of self-help in the event the owner fails to pay the tenant promptly,” says Weisfeld, who notes that this is an important aspect. “If the owner does agree on an offset right, insist that the tenant doesn’t have offset rights against additional rent.”

An owner might insist that the cost of repairs that exceed a certain percentage of the amount of monthly rent must be spread out over the remaining months of the lease. “The lease language would specify that the tenant wouldn’t be able to offset any more than 25 percent of the rent each month until the costs are recouped, but there is a caveat: If there isn’t enough of the lease term left over which to spread the cost, then the tenant has the right to offset more than that percent,” Weisfeld notes.

Insider Source

Steven A. Weisfeld, Esq.: Member, Beattie Padovano, LLC, 50 Chestnut Ridge Rd., Ste. 208, Montvale, NJ 07645; www.beattielaw.com.