February 2005
Volume 1, Number 2
Table of Contents

Some Less-Traveled Areas Of Due Diligence For Commercial Tenants And Their Counsel
By Jennifer Burton

In addition to focusing upon the oft-quoted mantra about location, sophisticated commercial tenants often recognize that a well-drafted commercial lease can be worth its weight in gold. On the other hand, when seeking legal input focused upon the lease document, commercial tenants (and perhaps their counsel) sometimes overlook the full range of value that counsel can bring to the property selection due diligence process.

For example, careful attention is typically paid to the functional and aesthetic aspects of the property, and to ensuring that the lease agreement itself accurately expresses the intended business terms. Unlike the situation in an actual acquisition, however, tenants may less readily recognize the importance of reviewing the status of a landlord's title and related matters of record. However, a prudent attorney (and client) will take the extra step and conduct a thorough review of the title and other items that may be gleaned from the official property records and, in some instances, unofficial sources. Naturally, this degree of care becomes even more significant for a tenant contemplating a long-term lease.

Depending upon the nature of a client's business, counsel's title review may unearth issues that could dramatically affect the desirability of the proposed leasehold. In addition to the more universal concern of identifying existing lienholders with whom non-disturbance arrangements should be obtained to avoid the risk of a disruptive foreclosure displacement, there is a range of other issues that may be unearthed. This article touches on three illustrative areas that may be of concern to tenants or otherwise have an impact upon the value of a leasehold: easements, zoning and evidence of "sick building" syndrome.

Easements

Underground Utility. Easements may prove even more nettlesome to a tenant than to an owner. Of particular interest are the problems that may arise from underground utility easements, aviation easements and overhead electric line easements. Underground utility easements may affect a tenant's ability to install in-ground signage or landscaping. In particular, the tenant and counsel should review any easements for restrictive language regarding digging or placement of rooted plants (eg, trees). For example, a landlord may grant an easement to a utility company to run cable conduit underground. There may be meaningful limitations on landscaping if the easement language states that the easement area must be free and clear of underground impediments or structures. This may be unacceptably restrictive for a long-term tenant who places significance on the right to landscape the premises (including planting trees or bushes that form deep roots) or to place in-ground signs on the premises. Moreover, given ongoing technological developments, it seems that infrastructure improvements and replacements are merited and are occurring on a more frequent basis than was the case a generation ago. Consequently, even when landscaping or signage is not an issue, all-important access can be disrupted and street appeal for certain retail businesses can be marred. Even though temporary, those types of occurrences can be devastating to certain types of businesses.

Aviation. A less obvious type of easement that may affect a tenant's use is an aviation easement. This is an easement right granted to third parties that allows them to fly aircraft over the grantor's premises at an unusually low or otherwise prohibited altitude. When the premises are not located below the flight patterns of a major airport, a prospective tenant is apt to become aware of disruptive air traffic only after moving in. This may especially be the case when a neighboring property contains a helipad that is not visible from the street. (The existence of a helipad should also be checked when reviewing zoning ordinances andthe like, as discussed below, inasmuch as aviation activity is, in some jurisdictions, the subject of special use permit requirements.) However, given that normal general aviation flight practice calls for landing patterns to be followed in the vicinity of 1500 feet and those patterns can sometimes extend more than one-half mile from a small airport, flight rights should be considered to be a potential problem in many locations. Counsel should be especially prepared to raise a red flag if an express easement of this type is found of record and permits "low-flying" aircraft (eg, less than 1500 feet or small aircraft). It is not difficult to imagine that aviation takeoffs and aerobatic practice activities would be a very bad mix for some tenants, eg, a tenant that operates a recording studio. Vibration and fumes may also be a factor. These conditions could affect employee productivity and customer satisfaction, and could pose potential health concerns to both employees and invitees.

Overhead Electric Lines. In light of ongoing mixed perceptions regarding health concerns that may be involved, a tenant and its attorney should also be on the lookout for overhead electric line easements. Ideally, counsel should confirm that such an easement right does not exist and, in the lease, preclude the landlord from granting any such easement during the lease term (or any renewal thereof). This type of easement may be of particular concern for a tenant that uses electronic equipment. Overhead electric lines may result in magnetic fields that adversely affect the use and operation of some high-tech equipment.

Zoning

A second area of potential concern centers upon zoning. A landlord's assurances to the contrary are of little comfort when facing an enforcement action, especially if the landlord's defense or other indemnification obligations (if any are included in the lease) are limited, such as when the lease limits recourse to the landlord's equity in the property or the landlord does not have any deep financial pockets. In addition to confirming that the scope of permitted uses includes all current and future activities contemplated by the tenant, counsel should check for restrictions related to signage and parking. Commercial leases are sometimes silent or vague about a tenant's right to install signs. However, the tenant should not find comfort in the lack of restrictive language. Municipalities often impose signage limitations by ordinance (whether in a zoning ordinance or otherwise) that must be adhered to. There may also be potential signage restrictions or mandatory specifications in subdivision declarations, commercial park owners' association governing documents or other restrictive covenants. A prudent tenant's attorney should review these documents for potential limitations.

The availability of parking is another major concern. In most cases, a commercial lease only designates the number of parking spots allotted to a tenant. However, this may not be enough. Consider a situation in which a commercial tenant is allowed to "build-out" in the future. The tenant should consider if the current parking allotted under the lease contemplates the "build-out" options. Specifically, if a tenant were to add space, would it have to provide additional parking to comply with zoning laws? Attorneys and their clients should address these issues during lease negotiations to help avoid disruptive and unpleasant surprises in the course of a lease term.

'Sick Building' Syndrome

A rather unique due diligence area of emerging importance centers upon a variety of concerns commonly lumped together under the term "sick building" syndrome. A property may be saddled with a "sick building" issue due either to environmental or reputational problems.

Environmental Problems. An environmentally sick building may suffer from a range of undesirable conditions including poor air quality, the existence of mold, or inadequate heating and cooling capabilities. Attorneys and their clients should be aware of the growing concerns related to air quality in office buildings and other structures that rely on recirculated air. While liability claims for damages related to injuries sustained from sick building syndrome may be directed against building owners, contractors and engineers, a tenant should bear in mind that it may also be targeted for claims made by its invitees, guests or employees. Depending upon the nature of the premises and the intended usage, it may be appropriate to obtain and review an environmental assessment of the premises in advance of finalizing a lease.

For example, a long-term commercial tenant may want to consider hiring an environmental engineer to inspect the premises for signs of sick building syndrome during the lease negotiations. Similarly, for leases of any significant duration or scope, or if the appearance of the property or surrounding area raises suspicions, a tenant should consider devoting resources to commissioning a more extensive environmental review, including searching local and federal dockets and other relevant records and databases to ascertain if the property or any neighboring properties have been involved in any environmental matters, including cleanup activities or litigation related to environmental matters.

Finally, prudent attorneys will try to negotiate for contractual protections in the lease, including requiring continuing environmental disclosures and indemnification clauses to shield their client from potential sick building syndrome liability.

Reputational Problems. An "unsavory" building is one that suffers from a poor reputation. This poor reputation may be attributed to perceptions concerning the locale, which is especially problematic for commercial tenants who have not previously had a local presence and thus may be unaware of local attitudes formed on the basis of past conditions. For example, a smaller commercial tenant may find a property that fits its budget constraints and that includes many amenities. However, the fact that the property is located in a reputed drug trafficking area may doom the tenant to failure. The areas surrounding the building are sometimes as important as the location and amenities offered.

Similarly, a property may be stigmatized by events that occurred on the premises. Examples of notorious sites will likely come to mind for many readers. This is especially the case for the locations of grisly crimes or prominent disasters, such as nightclub fires and the like that have received strong media attention over the years. Even the occupants of nearby buildings may feel the effects of proximity in the form of comments and questions from patrons about the events in question. A potential tenant should be aware of the history of a building and the history of the area surrounding its potential property before entering into a lease.

Local assistance is readily available to aid a tenant in evaluating the reputation of the property. For example, a tenant could consult with a local commercial real estate broker or property manager whose job would be to scout out the building, review public records and provide an opinion about the general area of the property. The tenant may also want to search local records, newspapers and magazine articles for additional information. This is a task that has become increasingly easy in an age of computerized research.

Summary

Commercial tenants and their attorneys appropriately exercise care when negotiating and signing leases. In this matter, a tenant is often able to avoid or minimize problems that would otherwise require resolution during a lease term, when the tenant may have considerably less bargaining power and may suffer irremediable damage. However, complete due diligence is needed to develop a fully protective lease arrangement and the items to be examined should, in many cases, include the topics outlined in this article. Accordingly, proactive attorneys will ensure that their due diligence checklists include documents such as updated title insurance policy commitments, underlying recorded documents, environmental reports, zoning and other applicable ordinances, and general local information.

Jennifer Burton is an associate in the Chicago office of Schiff Hardin, LLP. She is a member of the firm's Real Estate Department.

Commercial Leasing Law and Strategy, August, 2004

Copyright © 2004 ALM Properties, Inc., All rights reserved; Jennifer Burton

Copr. (C) 2004 West, a Thomson business. No claim to orig. U.S. govt. works. This article is reprinted with permission from West, a primary sponsor of the General Practice, Solo and Small Firm Division.

 

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