Legal Corner – February 2009
Here is some questions and answers by one of our legal writers, Stephen C. Duringer. It is written specifically for issues that face commercial property owners, so we hope you can find benefit from his advice. We hope to continue to blog additional intelligent and relevant content in the future.
Question
I am about to enter into a five year term lease for an industrial unit in Southern California. The unit has been vacant several months and I don’t want to lose this deal, seems like good tenants are kind of few and far between lately. We’ve agreed on just about all of the deal points except a couple. At the last minute the tenant requested the lease be prepared with a subsidiary of his company rather than the parent company, saying it’s for ‘tax reasons.’ Additionally, he wants to make the use provision extremely broad rather than specific allowing him to do just about anything in the premises without having to get my permission. He knows I need to lease the space, but I’m not sure I want to give in on these points, what are my options?
Answer
Negotiating commercial leases involves a bit of horse trading. Often, terms that are very important to your tenant may not be so important to you, and vice versa. Knowing the pros and cons of each deal point allow you to knowingly accept or reject certain risks when considering certain requests. Generally, parties meet somewhere in the middle of a request, allowing certain concessions, but protecting the interests of the Lessor. The tenant’s last minute request to substitute a subsidiary in its stead is an attempt to shift the risk away from the financially stable parent company, and obligate a less financially qualified entity, often times a mere shell, with relatively few assets. Screen the proposed replacement tenant as you would any proposed tenant to determine if it meets your rental criteria. Is it an existing concern or a new entity recently formed solely for the purpose of signing this lease? Is it an independent business concern, generating its own revenue stream? With its own assets? Or merely a subsidiary of the parent with no independent means of sustainability. There are many options to offer that would allow the tenant to satisfy his ‘tax reason’ while still protecting the Lessor’s interests. You may allow the replacement tenant, but require the parent company to guaranty the lease. The Guaranty can range from an unconditional full term guaranty to a limited guaranty based either on a certain period of time, or a certain maximum exposure. An increased security deposit adds protection as well. Options such as an irrevocable declining letter of credit issued by a reputable financial institution allow parties to salvage deals that might otherwise fail. Use provisions are important for a number of reasons. It is important that the tenant’s use does not overburden the facility, or interfere with the neighbors. Certain unacceptable tenant uses may involve high levels of noise, or the use of corrosive or carcinogenic materials, or other toxic byproducts. As your facility is an industrial complex, parking is no doubt limited. It is important that the approved uses do not overburden the limited available parking. Rather than approving a very broad undefined use, it is better to identify the allowed use, but allow the tenant to request approval for a change of use in the event its operations change in the future.
Question
Often when a commercial tenant vacates their space, they leave various items behind. Many times it’s just trash, but sometimes there are boxes of stuff that actually have value. I’ve always just thrown the stuff out, but I don’t think that is really the right way to handle abandoned property. What is the proper way to handle abandoned items left behind?
Answer
It is very important that abandoned personal property be disposed of pursuant to California law. If done properly, you will insulate yourself from liability, if improperly, you could be sued by the former tenant and risk exposure to substantial damages. The law just changed effective January 1, 2009, changing the threshold value before a public sale is required. When a tenant vacates property and leaves personal property behind, California requires that you provide notice and an opportunity for the tenant to reclaim it. Depending on the estimated value of the property, if the tenant fails to reclaim it, then you may be obligated to advertise and hold a public auction. The first step once you discover the abandoned property is to send out a written notice to your former tenant or any other entity who you believe has an interest in the property. The notice will inform the former occupant that they have fifteen days, if the former tenant was served personally, or eighteen days if served by mail to reclaim the abandoned property by arranging for the pick up of the property and for paying the reasonable storage value. If the tenant vacated the property pursuant to an eviction order served by the Sheriff, then no written notice is required, the notification was already included on the writ of possession that the Sheriff posted on their door. After waiting the fifteen days, or eighteen if served by mail, the next step is to determine the reasonable value of the property left behind. For commercial tenancies, if the reasonable value of the property is less than $750.00 or $1.00 per square foot of the vacated space, whichever is less, then the landlord can dispose of the abandoned property as it sees fit, can throw it away, can sell it, or can keep for its own use. If the value exceeds that threshold value, $750.00 or $1.00 per square foot, then the landlord must advertise a public auction once a week for two weeks, and actually hold an auction on the third week to sell all of the property to the highest bidder. The notices that you should use are quite specific and the type of advertisement and acceptable publications are limited, you should contact your attorney for specific procedures to follow in the event this becomes necessary.
Question
I recently closed escrow on a single tenant building in Southern California. The tenant has been there several years and has a pretty sweetheart lease. The base rent is way under market, and he has a couple of options to renew that pretty much keeps him under market for the next ten years. Even though the lease requires the tenant to maintain the property, it looks like hell, not painted, not maintained, kind of a dump. By the way, he also seems to like paying his rent late, just got last months rent yesterday, three weeks late! What can I do?
Answer
A building’s value, to a large extent, will depend on the value of the lease in place. Certainly the price you paid for the building was influenced by the under market lease and the poor condition of the building. The two options to renew at less than market rents would have negatively impacted the price you were willing to pay as well. By allowing the building to fall into disrepair, and by paying the rent three weeks late, your tenant has provided you with an opportunity to substantially increase the value of your investment. Certain defaults, if uncured, will allow you to take legal steps to terminate the existing lease, and along with terminating the current lease, all options to renew would become ineffective. Go through the lease terms carefully, identify which terms are being violated by the tenant. Review the requirements for exercising the tenant’s right to extend. Most options require that the tenant not be in default when exercising an option. Further, most leases will cancel a tenant’s right to extend if the tenant has been served with three separate notices of default during the preceding term, even if the defaults were actually cured. Additionally, if a notice to cure a breach is served upon the tenant, and the tenant fails to cure during the relevant cure period, then the landlord will then have the right to file an unlawful detainer action against the tenant and remove the tenant from possession. Quite often, after the filing of suit, the parties may wish to negotiate a settlement and allow the tenant to remain in possession. As part of the negotiated agreement, the landlord will want to redraft the lease agreement in a more favorable light, and either eliminate the options to renew, or change them in such a way that would be acceptable to the landlord. A tenant, failing to cure a notice of breach, has very little negotiating power when faced with the likelihood of being evicted from the premises.
Question
Never saw this before, but I just got a request from one of my tenants asking for a Franchise Tax Board Form 590, a Withholding Exemption Certificate. What the heck is that, and why am I getting this request now?
Answer
California recently passed a law requiring commercial tenants to withhold taxes from rent payments paid to non residents of California, and to remit the taxes to the FTB quarterly, unless an exemption applies. Non residents may be individuals or foreign corporations, LLCs or partnerships. Commercial tenants are required to withhold 7% from payments that exceed $1,500.00 in a calendar year, and be submitted quarterly to the FTB along with FTB form 592. Withholding is not required for residential properties, or if the landlord is a California resident, whether an individual or a corporation, LLC or partnership, or is qualified to do business in California. Complete the form as required, and if an exemption applies, your tenants will not be required to withhold taxes from your rent payments.
Question
One of my commercial tenants failed to pay the rent and CAM charges due for this month. I’m kind of new at this, what type of notice do I serve?
Answer
Your lease will determine which notice to serve and how many days the tenant will have to cure the default. If your CAM charges are specifically identified as “additional rent” pursuant to your lease agreement, then you may demand both the base rent and the CAM charges as “additional rent” on a single Notice To Pay Rent Or Quit. If the CAM charges are not identified as “additional rent” then you must serve a Notice To Pay Rent Or Quit for the base rent only, and also serve a separate Notice To Perform Condition Or Covenant Or Quit, demanding payment of the CAM fees, late fees and any other non-rent sum due per the terms of the lease. The statutory cure period is Three Calendar Days, but may be changed by the terms of the lease. Many leases extend the cure period to be three business days, or five or even ten days. Ensure that the cure period on your notice of default is consistent with the cure period articulated in your lease. Additionally, remember that if you include the correct language on your notice, you will be able to accept partial payments from your tenant without voiding the notice. Make sure you use industry standard notices prepared by an attorney specializing in landlord tenant law, and specifically designed for use with commercial properties.
The foregoing is presented in a general nature to address general legal issues. Specific inquiries regarding a particular situation should be addressed to your attorney. The Duringer Law Group, PLC, one of the largest and most experienced landlord tenant law firms, specializes in evictions and in the collection of debt, representing landlords exclusively throughout Southern California. The firm may be reached at 714.279.1100 or 800.829.6994 or 877.387.4643. Visit our website at www.DuringerLaw.com for more information.
