10 Commonly Overlooked Clauses in Commercial Real Estate Transactions
In a commercial real estate deal, the parties often
overlook "boilerplate" language that could significantly impact their
Commercial real estate transactions typically involve
multiple documents that can include hundreds of pages. These documents
memorialize the transaction and bind the parties to the four corners of the
documents. Many times clients focus on the contract clauses that deal with the
business terms of the deal and clauses that directly deal with liabilities, such
as environmental liability. Meanwhile, the parties often overlook "boilerplate"
language that could significantly impact their responsibilities.
In this presentation summary, we look at 10 such clauses that are
commonly overlooked but could have a large impact on the transaction.
1. The Parties
a. Who cares; why is this provision important? You
and your client want a binding contract. Unnamed parties are not bound by the
contract. Improperly named parties may not be bound by the contract.
b. Who are the parties?
"Landlord/Seller: XYZ Investments, LLC, an Arizona
limited liability company"
"Tenant/Buyer: Andrew Stone and Elizabeth Stone,
husband and wife" or "Andrew Stone, a single man"
c. Does the landlord/seller actually own the
property? Go to mcassessor.maricopa.gov to verify ownership. Search by
property address or landlord/seller name. You can also verify ownership by
viewing the deed.
d. Is the signatory authorized to sign? Go to
the Arizona Corporation
Commission website to determine who (a person or entity) has authority.
For an LLC, have the "manager" sign, or, if no manager, have one or more members
sign. For a corporation, have an officer, generally the President or CEO, sign.
For a partnership, the general partner should sign. For an LLC, ask for a copy
of the Articles of Organization and Operating Agreement. For a corporation, ask
for a copy of the Articles of Incorporation and Bylaws. For a partnership, ask
for a copy of the Partnership Agreement.
e. Is a formal board resolution required? Large or
Fortune 500 companies won't typically require a board resolution because
leasing/selling is in their ordinary course of business (and the transaction is
likely not material to its net worth). Mid-sized companies may; ask your
client. A lender may require a resolution (and will typically supply the
a. Who cares; why is this provision important?
Arizona courts typically require strict compliance with contract notice
provisions by a party intending to exercise rights (option to purchase, option
to extend) or by party in a default situation. Failure to comply may require
another notice be given or the rights and remedies of the non-defaulting party
may be lost.
b. Exactly how and when are official communications
between the parties supposed to occur? Check the contract's notice provision.
Follow its requirements to the 'T'. If in doubt, send notice by first class mail
AND certified mail, return receipt requested. Keep the return receipt for
future use. Notice is typically needed in the following situations:
A party fails to comply with the contract
(non-payment of rent, HVAC not operational, no insurance coverage produced,
violation of use provision; failure to post earnest money or close the
An option or other right will be exercised
(option to renew/extend, option to take additional space, option to purchase,
option to relocate tenant, option to extend closing, notice of title issues)
A hazardous substance has spilled or leaked
Buyer decides to terminate escrow and sales
Changes to laws negatively affect the premises
Government has cited the owner or tenant for
c. Is email allowed? Check the contract's notice
provision. If it does not specifically permit email for official notices,
emailed notices are not effective. An amendment to the contract can add email
as an effective means for notices. If email is a permissible means, keep a copy
of the transmission and notice of receipt/reading for future use.
d. What happens if a party changes their address?
Check the contract's notice provision for how a change of address is
communicated and follow that provision. If the contract is silent, send written
change of address by first class mail AND certified mail, return receipt
requested, and keep the receipt.
3. Dispute Resolution
a. Who cares; why is this provision important?
Disputes frequently arise between or among contracting parties. Prompt,
efficient and conclusive resolution serves all interests. Litigation and
arbitration are time-consuming and expensive and their outcome is uncertain.
b. How are disputes to be resolved? Check the
contract, which may provide for a tiered approach of (i) notice, (ii)
negotiation, (iii) mediation, (iv) arbitration and (v) lastly, litigation. One
or more of the following approaches may be required by the contract (arbitration
may be required instead of litigation). If no approach is required by the
contract, try informal negotiations and mediation. Litigation and arbitration
should be your last recourse.
Negotiation: All parties and/or their legal
counsel should attempt informal discussions of their dispute.
Mediation: A third party, often not related
to the contracting parties, agrees to hear the evidence and encourages the
parties to reach a resolution. There are professional mediators who can be
retained for a fee.
Arbitration: A third party, often not related
to the contracting parties, is hired to hear the evidence and make a binding or
non-binding decision on the dispute. Professional arbitrators are hired for a
fee, typically on an hourly basis.
Litigation: One party files a complaint in a
Justice, Superior or Federal court against the other(s). An entity must be
represented by counsel, but an individual can represent himself/herself. There
will be numerous documents to be prepared, depositions may be taken, hearings at
the courthouse held, and decisions by the court made. Expect substantial
attorneys' fees and time commitments. If the case goes to trial, expect a final
decision in 2 years from initiating the case.
c. Where are disputes to be resolved? Check the
contract, which may indicate where (the State) and in which court (Justice,
Superior or Federal) a lawsuit may be filed or a mediation or arbitration
initiated. If the contract is silent, the State where the dispute arose is
typically the venue for dispute resolution. Commercial contracts may require
litigation to be brought in an inconvenient forum, for example where the other
party is incorporated or has its headquarters.
d. What about urgent matters? Litigation is not a
fast process, even as to emergencies. You can file for restraining orders and
injunctions in Superior Court and typically get a hearing in 30-60 days.
Bankruptcy filings get immediate court attention. Arbitration and mediation can
be expedient if the parties agree and pay the fees.
4. Entire Agreement / Merger / Incorporation by
a. Who cares; why is this provision important? If
these clauses are included, there are no "sidebar" agreements---a court will be
bound to the four corners of the document and all verbal representations or
agreements made before the contract is executed will have no effect. If you
made an agreement before contract execution and it's important to your client,
it should be included in the contract.
b. Sample entire agreement, merger and incorporation
clauses (purchase and sale contracts have similar provisions):
"SECTION 42. ENTIRE AGREEMENT. This Lease constitutes the entire agreement between the
parties hereto pertaining to the subject matter hereof and shall not be changed
or added to except in writing signed by all parties hereto. All prior and contemporaneous agreements,
representations, statements and understandings of the parties, oral or written,
that modify, amend, or vary or purport to modify, amend or vary any of the terms
of this Lease are hereby superseded and merged herein. All exhibits attached hereto shall, by this reference,
be deemed a part of this Lease as though set forth in full herein."
5. Indemnify, Defend and Hold Harmless
a. Who cares; why is this provision important? These
provisions assign risk between the contracting parties. They require us to
think about "what if's" and determine ahead of time who will be responsible for
a calamity, loss or accident.
b. What kinds of losses occur? Losses do happen:
fire, water damage, rain, tornado or high winds, falling trees, hail damage,
cars that plunge into buildings, street widening.
c. How do you apportion risk between the contracting
parties? Check contract provisions on how the premises or property are defined,
what happens on a casualty or condemnation (eminent domain), who has
released/waived claims, what insurance coverage and indemnifications exist and
have your client call its legal counsel. The determination of who is
responsible for what loss is a complex legal interpretation.
d. What is 'indemnification'? Indemnification is an
agreement by one party to be responsible for the future losses of another party. Arizona law frowns on contract language by which a party is indemnified from
damages caused by its own negligence. Shouldn't a party be responsible for the
damages of the other party when the first caused the damages? Yes—but not
e. What is an agreement to 'defend'? This is a
provision that creates or requires a party to defend the other party in a
lawsuit. Understand that, when this provision is present, the defending party
would have to bear the cost of defending itself AND the other party.
f. What is 'hold harmless? A hold harmless
provision bars the party responsible for indemnification from bringing suit
against the party being indemnified. If the party at fault is indemnified by the
other, the other party has no remedy against the party at fault.
6. Representations and Warranties
a. Who cares; why is this provision important? We all
make decisions based upon our knowledge, observations and assumptions.
Representations and warranties provide some comfort to a party making a decision
based upon assumptions. If the representation or warranty turns out to be
incorrect and damages the receiving party, a claim can be made against the party
making the representation or warranty to cover losses.
b. What is a 'representation'? This is a
presentation of facts or reasons expressed in words or inferred from conduct to
induce a course of action, such as the signing of a contract.
c. Sample representation (purchase and sale contracts
have similar provisions):
"SECTION 0.1 AREA OF DEMISED PREMISES. Tenant hereby represents and warrants to Landlord that
Tenant has made its own investigation and examination of all the relevant data
relating to or affecting the Demised Premises and is relying solely on its own
judgment in entering into this Lease; specifically, and without limitation,
Tenant represents and warrants to Landlord that Tenant has had an opportunity to
measure the actual dimensions of the Demised Premises and agrees to the square
footage figures set forth herein for all purposes of this Lease."
d. What is a 'warranty'? A warranty is a written
statement that promises that statements (representations) made are true and that
if not true the maker will make good on the erroneous statements.
e. Sample warranty provision (purchase and sale
contracts have similar provisions):
"SECTION 45. AUTHORITY TO EXECUTE. Any individual executing this Lease on behalf of or as
representative for a corporation or other person, firm, partnership or entity
represents and warrants that the party signing is duly authorized to execute and
deliver this Lease on behalf of said corporation, person, firm, partnership or
other entity, and said entity is duly authorized and organized to do business in
Arizona and that this Lease is binding upon said entity in accordance with its
7. The Premises Defined
a. Who cares; why is this provision important? A
weak or undetailed definition of the real estate being leased costs unnecessary
confusion, results in ambiguities and ultimately may lead to litigation. A
comprehensive, detailed definition of the real estate earmarks the premises with
b. How should the premises be defined in a lease?
Determine the exact scope of the real estate being leased. Is the landlord
offering a space lease, where the boundaries are typically measured from the
middle of the interior walls? Or a standalone building, where the tenant is
responsible for all of the building from top to bottom? Or a ground lease
only? Include the legal descriptions of the premises and any larger related
real estate, e.g., the shopping center or office park.
c. Is an approximate square footage OK? NEVER
describe the premises or other points of reference as "approximately" X square
feet, unless the lease permits tenant to confirm the square footage after lease
execution. Always include a deemer provision that the parties agree on the
exact square footage of the premises and the center or building.
d. What about additional areas? If tenant will also
be leasing otherwise common areas, such as the front sidewalk or a patio, those
should be included within the 'premises' definition. And, determine whether
these other areas are exclusive to the tenant's use.
e. Tenant's proportionate share determines monthly
CAM charges: Tenant's proportionate share of common area maintenance costs and
expenses is dependent upon the square footage of the premises. The calculation
of proportionate share can be determined a number of ways, as long as the
numerator and denominator of the fraction are consistent: apples to apples.
For example, the fraction can be determined by the square footage of the
premises to the square footage of all leased space within the shopping center or
building; or by the leasable square footage of the premises to the leasable
square footage of the shopping center or building.
f. 'Premises' definition determines landlord and
tenant rights and obligations: If a water leak occurs, look to the definition
of premises to determine whether cleanup and repair is the landlord's or the
tenant's obligation (or is shared by them as to their respective portion). If
the tenant pays real estate taxes on the premises, check the tax bill to
determine whether any other portion of the building or common areas not being
leased as 'premises' was erroneously included. If a slip and fall personal
injury occurred outside the 'premises', landlord would typically be responsible
for the person's damages.
g. Sample definition
of 'premises' in a shopping center lease:
"The demised premises
has a mailing address of 1234 N. 40th St., Suite #1, Phoenix, Arizona 85018 and
consists of 2,204 square feet (the "Demised Premises"), calculated by measuring:
(i) from and to the interior midline of the interior walls, and (ii) from the
ceiling tiles to the top of the slab, the perimeter boundary of which is
outlined on the Site Plan attached hereto as Exhibit A and designated as Suite
#1. The Demised Premises shall not be deemed to include either the land lying
thereunder or the exterior walls or roof of the building in which the Demised
Premises are located.
"The Demised Premises are demised and let subject to the
following: (a) the existing state of the title to the Demised Premises, the
Shopping Center and the real property upon which the same are situated; and (b)
all zoning regulations, restrictions, rules and ordinances, building or use
restrictions and other laws and regulations now in effect or hereafter adopted
by any governmental authority having jurisdiction thereof. Landlord reserves
the right to place in, under, over or through the Demised Premises pipes, wires,
lines, and facilities serving other areas of the Shopping Center and adjacent
properties owned by Landlord, provided such right is exercised in a manner that
does not unreasonably interfere with Tenant's conduct of its business at the
"Tenant represents and warrants to Landlord that Tenant
has had an opportunity to measure the actual dimensions of the Demised Premises
and agrees to the square footage figure set forth above for all purposes of this
8. The Property Defined
a. Who cares; why is this provision important?
An ill or undetailed definition of the real estate being purchased/sold costs
unnecessary confusion, results in ambiguities and ultimately may lead to
litigation. A comprehensive, detailed definition of the real estate earmarks
exact boundaries and property rights.
b. How should the property be defined in a purchase
agreement? Determine the scope of the property being purchased. An office
condominium, whereby the building from top to bottom is being purchased, as well
as undivided interests in the common areas? Raw acreage of 100 acres, but not
including the Salt River Project canal meandering through. Building 4 in an
office park plus the 15 parking spaces identified on the attached site plan as
spaces numbered 1-15. Order an ALTA survey to confirm the boundaries (as well as
exceptions, easements, and adverse possessors), backed by a title commitment.
Include the exact legal description within the purchase and sale agreement that
has been confirmed by the survey and title commitment.
c. What about additional areas or rights? For 5 years
a selling farmer has 'used' a field adjacent to his own crops for storage of his
tractors and he erroneously thinks the field is part of the acreage he has
sold. A developer intends to demolish an old building to make room for an auto
race track, but learns that the private sewer line serving the old building also
serves neighboring businesses, who pay monthly fees for the service. An
easement on the west side of a shopping center being purchased is necessary for
access to the property. Are water rights included in the purchase? Access
easements adjacent to the property? A development agreement with the Town that
has not yet been completed? An option to purchase neighboring property? These,
too, need to be included in the definition of the property being purchased.
d. Sample definition of 'property' in a purchase and
"Section 2.1: Subject to the
terms set forth in this Agreement, at the Closing, Seller shall sell, convey,
transfer, assign and deliver to Purchaser, and Purchaser shall purchase and
accept from Seller, all right, title and interest of Seller in and to the
property and assets set forth in this Section 2.1, but expressly excluding the
Excluded Property (collectively, the "Property"):
(a) Land. The land described in Schedule
2.1(a) (the "Land"), together with: (i) any and all trees, bushes, landscaping,
and foliage on or about the Land; (ii) all of Seller's right, title and interest
in and to any and all easements, rights-of-way, and all rights, privileges,
tenements, hereditaments, and appurtenances in any way belonging or appertaining
to the Land, including, without limitation, the entire right, title and interest
of Seller, if any, in and to any land lying in the bed of any and all public and
private streets, roads, avenues, rights-of-ways, highways or passage-ways
(whether open, closed or proposed) within, in front of, behind, or otherwise
adjoining, adjacent to, or abutting against the Land or any part thereof; (iii)
all of Seller's right, title and interest in and to any and all water and other
riparian rights, air rights, development rights, and mineral, oil, gas and other
hydrocarbon substances situated at, upon or under the Land (collectively, the
(b) Improvements. All buildings, structures
and improvements located on or affixed to the Land and all fixtures on the Land
which constitute real property under Applicable Law (the "Improvements"; the
Land, the Appurtenances, and the Improvements are referred to collectively
herein as the "Real Property"). Tenant Leases. All leases, subleases, licenses,
concessions and similar agreements granting a real property interest to any
other Person for the use or occupancy of any portion of the Real Property (the
"Tenant Leases"), together with all security deposits held by Seller thereunder,
to the extent such Tenant Leases and security deposits are transferable;
(c) Equipment Leases. All leases and purchase
money security agreements for any equipment, machinery, vehicles, furniture or
other personal property located at the Real Property (the "Equipment Leases"),
together with all deposits made thereunder, to the extent such Equipment Leases
and deposits are transferable; and
(d) Operating Agreements. All maintenance,
service and supply contracts, credit card service agreements, and all other
contracts and agreements which are held by or on behalf of Seller in connection
with the Real Property (the "Operating Agreements"), together with all deposits
made or held by Seller thereunder, to the extent such Operating Agreements and
deposits are transferable."
9. "As Is" "Where Is"
a. Who cares; why is this provision important? These
are one of the most recognizable but misunderstood provisions in a commercial
real estate transaction. If the deal is an "AS IS" "WHERE IS" transaction, but
the Seller/landlord makes representations, warranties and covenants in the
contract, it's NOT an AS IS WHERE IS purchase or lease as to the matters
described in the reps and warranties.
b. What does "AS IS" "WHERE IS" mean? "AS IS" "WHERE
IS" are terms used to describe a sale or lease transaction in which the
seller/landlord offers the property/premises in their present, existing
condition and location to prospective buyers/tenants. The term gives notice to
buyers/tenants that they are taking a risk on the quality and condition of the
c. Why do an "AS IS" "WHERE IS" transaction? The
seller/landlord has no interest in or money for improving the
property/premises. May make for a faster closing of the transaction.
Seller/landlord may reside outside the State or country and/or has no history or
firsthand knowledge of the property/premises. The purchase price/rent may be
reduced because the property/premises is not in pristine condition.
d. When should a transaction NOT be "AS IS"? When
environmental contamination and/or underground storage tanks exist. When the
seller/landlord knows or has reason to know of latent, material hazards, defects
and/or other features materially detrimental to the buyer/tenant. When
covenants, representations and warranties negating the AS IS WHERE IS condition
are required by the buyer/tenant.
e. How is an AS IS WHERE IS provision negated? The
property is sold in an AS IS WHERE IS condition, but the seller makes
representations that the property is free of environmental contamination, was
never used to store hazardous chemicals and was never subjected to the
application of pesticides. The premises are leased in an AS IS condition, but
landlord agrees to maintain all of the building infrastructure serving the
premises for the length of the lease. The disclosure statement discloses facts
contrary to the AS IS WHERE IS provision.
f. How to honor the AS IS provision? Include a
standard AS IS provision (see below). If the seller/landlord agrees to give
some covenants, representations or warranties, make sure that the AS IS
provision is preceded by this phrase: "Except as otherwise provided in this
Agreement/Lease…" Repeat this phrase before every covenant, representation and
warranty throughout the contract.
g. Sample AS IS WHERE IS provision in a purchase and
sale agreement (leases have similar provisions):
Section 1.2 LIMITATION ON
SELLER'S REPRESENTATIONS AND WARRANTIES. PURCHASER ACKNOWLEDGES AND AGREES
THAT, EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN THIS AGREEMENT OR ANY CLOSING
DOCUMENT, (I) THE PURCHASE OF THE PROPERTY SHALL BE ON AN "AS IS", "WHERE IS",
"WITH ALL FAULTS BASIS", SUBJECT TO REASONABLE WEAR AND TEAR FROM THE DATE OF
THIS AGREEMENT UNTIL CLOSING, AND (II) NONE OF SELLER, MANAGER, EMPLOYER OR ANY
OF THEIR AFFILIATES, NOR ANY OF THEIR RESPECTIVE SHAREHOLDERS, MEMBERS,
PARTNERS, TRUSTEES, DIRECTORS, OFFICERS, MANAGERS, EMPLOYEES, AGENTS OR
REPRESENTATIVES, NOR ANY PERSON PURPORTING TO REPRESENT ANY OF THE FOREGOING,
HAVE MADE ANY REPRESENTATION, WARRANTY, GUARANTY, PROMISE, PROJECTION OR
PREDICTION WHATSOEVER WITH RESPECT TO THE PROPERTY OR ANY ASPECT THEREOF OR THE
PROPERTY OR ANY PORTION THEREOF, WRITTEN OR ORAL, EXPRESS OR IMPLIED, ARISING BY
OPERATION OF LAW OR OTHERWISE, INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR ANY REPRESENTATION OR
WARRANTY AS TO (A) THE CONDITION, QUANTITY, QUALITY, USE, OCCUPANCY OR OPERATION
OF THE PROPERTY OR ANY PORTION THEREOF, (B) THE PAST, PRESENT OR FUTURE REVENUES
OR EXPENSES WITH RESPECT TO THE PROPERTY, (C) THE COMPLIANCE OF THE PROPERTY OR
ANY PORTION THEREOF OR THE OPERATION OF THE PROPERTY WITH ANY ZONING
REQUIREMENTS, BUILDING CODES OR OTHER APPLICABLE LAW, OR (D) THE ACCURACY OF ANY
ENVIRONMENTAL REPORTS OR OTHER INFORMATION SET FORTH IN THE SELLER DUE DILIGENCE
MATERIALS PROVIDED TO PURCHASER WHICH WERE PREPARED FOR OR ON BEHALF OF SELLER. PURCHASER ACKNOWLEDGES AND AGREES THAT PURCHASER IS NOT RELYING ON ANY
STATEMENT MADE OR INFORMATION PROVIDED TO PURCHASER BY SELLER, MANAGER, EMPLOYER
OR ANY OF THEIR AFFILIATES, OR ANY OF THEIR RESPECTIVE SHAREHOLDERS, MEMBERS,
PARTNERS, TRUSTEES, DIRECTORS, MANAGERS, OFFICERS, EMPLOYEES, AGENTS OR
REPRESENTATIVES, OR ANY PERSON PURPORTING TO REPRESENT ANY OF THE FOREGOING,
EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES EXPRESSLY MADE BY SELLER IN THIS
Purchaser's Initials _________
10. Signature Blocks
a. Who cares; why is this provision important? Just
like having a correct description or definition of the parties ensures that the
contract can be enforced, properly executed signature blocks result in binding
the parties to their contract. Parties' signatures must be affixed only by
persons in authority representing the party in the transaction.
b. What information must a signature block contain?
If an entity is a party, make sure the signature block includes the entity's
name, the State of formation, and the signator's title. Not including each
component may have the unintended consequence of binding the signator personally
to the contract.
c. What if a person needs to sign individually and as
an owner of a company? Each of these roles needs its own signature block:
"Randy's Pizza Joint, Inc., an Arizona corporation
By: _________________________________ (signature)
Name: Randy Piazza
"Randy Piazza, a single man
Name: Randy Doe, Guarantor"
d. How does an LLC sign?
"XYZ LLC, an Arizona limited liability company
Name: Jane Zebra
Title: Member/Manager (circle one)"
e. How does a married person sign when he/she is not
dealing with community property?
"Jane Doe, a married person dealing with her sole and
Name: Jane Doe"
And obtain a disclaimer deed or confirmation (as to a
lease) from the husband. Ask a few questions concerning the length of the
marriage, the source of funds for the purchase/lease and whether the couple has
a pre-marital agreement. If the marriage is a lengthy one and/or the source of
funds is wages earned during the marriage, the buyer/tenant is likely not
dealing with sole and separate property. If the couple has a pre-marital
agreement, ask to review a copy to answer these questions.
REMEMBER: "sole and separate property" is generally:
(i) property brought into the marriage and retained as sole and separate (not
commingled), (ii) property given to the person (not to the couple), and (iii)
property bequeathed or inherited by the person.
f. How does a married person sign a lease when only
one signature is desired?
"Sam Doe, a married person
Name: Sam Doe"
And obtain the written consent of the wife to the lease.
g. How does an entity sign for another entity?
Indicate the names of both entities and the titles of each layer:
"WTV LLC, an Arizona limited liability company
By: ABC Inc., an Arizona corporation, Manager of WTV
Title: President of ABC Inc."