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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 responsibilities.

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 resolution form).

2. Notice

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 transaction)

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 contract

Changes to laws negatively affect the premises

Government has cited the owner or tenant for code violations

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 Reference

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 always.

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 terms."

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 exact boundaries.

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 Demised Premises.

"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 Lease."

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 sale agreement:

"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 "Appurtenances");

(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 property/premises.

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 AGREEMENT.

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

Title: President"

AND

"Randy Piazza, a single man

___________________________________ (signature)

Name: Randy Doe, Guarantor"

d. How does an LLC sign?

"XYZ LLC, an Arizona limited liability company

By: _________________________________

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 separate property

___________________________________ (signature)

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 LLC

By: _________________________________

Name: ______________________________

Title: President of ABC Inc."