Martin Shell: Commercial Leases in the Art Context

Commercial Leases in the Art Context: Survival Guide

{Audio transcript} It’s a pleasure to be here. As my introduction discussed I’m in real estate litigation, and I do a lot of landlord tenant litigation. So, from that fire I have some tidbits that I think can help anyone who is negotiating a lease. We’ll start with the premises that you have made it to Williamsburg, you’re ready to set up shop, and the landlord hands you this piece of paper. Now, certainly let’s start with the premises that you want a lease. A lease gives you the right, legal right, to occupy the space. If you don’t have a signed writing, a contract, a lease (it can have many names), you arguably have no right to be there, and it would be very easy for somebody to remove you. So, if you’re confronted with this situation, you certainly want to say to whoever is about to give you the space: “I want a lease.”

Leases start out as a general form. The form is about six pages that’s been used probably for over twenty years. But, of course, in New York, things aren’t that simple. So, the six-page lease attaches to a forty-eight page rider. The rider is attached to the lease and you have to worry about all the terms and conditions in there. So, I think it’s helpful to go through a couple of those terms and how they may affect you in a court at some point.

So, let’s just talk about who is going to be signing this lease. You have the owner of the premises – the landlord – and you. Now, you do not want to sign any lease individually. Why? Because you are individually liable for all the money due under that lease. It’s much better if you have a company that is responsible, because then that company can shelter you from liability. And there’s the magic takeaway term called a ‘Good Guy Guarantee.’

You want a Good Guy Guarantee that states you are agreeing to pay the landlord a certain amount of money should, unfortunately, things go bad and the landlord wants to remove you from the premises. In that case, at least you are not on the hook for the whole term. Most leases are five years, could be ten years. If you enter into a lease in year one, and unfortunately things don’t go as planned and you have to leave, you are liable for the remainder of those four years, depending on the length of your lease.

Now, it just so happens in New York, that most likely a landlord will find somebody else to take over that space. However if they can’t, and there’s no obligation, repeat no obligation that the landlord does that, you are on the hook for those remaining years. It’s far better to have a company on the hook, that you could potentially put in bankruptcy and not care about, than you individually. Thus, the Good Guy Guarantee. Basically the way it works is, you would say to the landlord, “look, when I leave I’m going to be kind. I won’t owe you any money, but I’m going to leave before the lease ends and you agree not to come after me individually.” One good takeaway.

Another thing is, any lease is going to require you to give a security deposit. Footnote here: generally, security deposits are one to two months, maybe three months. Security does not apply to rent. A lot of people think, oh, I’m going to leave, I’m going to just use my security deposit. Doesn’t work that way. Security deposits are for your destruction of the property. So when you leave, if something has to be cleaned up, that’s what the security deposit is for. Otherwise, the landlord is supposed to return it to you. In practice, I understand a lot of times it does get applied to rent, but that is actually not the way it’s supposed to work.

You certainly want to make sure that the amount of rent is clear in the lease. So, if you’ve agreed to pay $1,000.00 a month, you want to make sure the lease says $1,000.00. The lease is also going to have an escalation clause. Every year the lease money due is going to go up; you’re going to have to pay more rent. So, you want to make sure that’s correct.

The next big thing on the lease is the use of the lease. And, in this particular instance, you’re going to be using it for commercial purposes. So, it is important when thinking about commercial purposes that it is used for such. That means you generally cannot sleep there. You don’t get to sleep there, you don’t get to have your friends sleep there. It’s not your apartment; it’s used for business purposes.

If you’re not using the lease the way it’s supposed to be used, you may be considered in breach of the lease. Now, the takeaway with this is, whatever the use clause says, you want it to be as broad as possible. So let’s say you’re an artist and your going to make, going back to my high school days, wicker baskets. I know every professor I had used wicker baskets, but you don’t want it limited to just wicker baskets. Because, let’s say the world doesn’t want to buy wicker baskets. You want to make something else, so you want broad use terms. You want to say, I want to use this place to create art. The landlord shouldn’t care.

Let’s talk about another big provision in leases: assignment and sublease. Every lease includes such a provision, and in general, every lease says you cannot do either without the Landlord’s consent. Let’s talk about it – what is an assignment? An assignment basically says that somebody else is going to come in, take over the space and pay the rent for you. Rather than the rent coming from you personally, it’s going to come from the person who’s taken over. That person is called the assignee, you are the assignor. Generally, that’s not allowed without landlord consent.

The other big thing is called the sublease. That is, when I rent out the space to someone else. They pay me and I’m still generally paying the landlord. Assignment and sublease both kind of overlap, because the principle is the same. You’re no longer occupying the space, and somebody else is there, and it becomes their burden to pay. However, the kicker is, if they don’t pay, you’re still on the hook to pay. It doesn’t necessarily matter.

Now, in general, both of these are not allowed. And people get into trouble with this all the time. Especially with services like Airbnb. You think, oh great, I’m going to leave for the weekend and get somebody else in here. Generally it’s not allowed, and if the landlord wanted to enforce the terms of the lease, that would be considered a breach. So, without going into great emphasis on AirBnB, my general recommendation is it’s probably not the best idea with a commercial space.

Let us talk a little bit now about defaults, which is how you end up in court and potentially talking to somebody like me. So, generally it’s a failure to pay, usually rent. Now let’s talk about this, because this is another important takeaway. Under New York statute, if you fail to pay your rent, a landlord may send you a three-day notice. Only three days. You have three days to pay your rent or they’re going to take you to court and then they’re going to (again, this goes against your record, because this is a public record) try and collect the money from you in court.

So, what do you do? You want to negotiate a longer cure period in your lease. You don’t want just three days to pay rent on demand. I would argue you want 30 – 60 days, try and get as many days as you can. There is no set rule here, but hopefully you can negotiate something longer than three days.

Now, regardless of what you negotiated, if you haven’t paid your rent, you are likely going to get some sort of notice. That notice may be called a demand for payment, or it may be called a ‘Notice to Cure.’ You have a period of time in which to cure. So you have to pay your rent. What happens if you don’t? You are going to get a legal action brought against you. You’re going to be served with papers. Here’s a very important thing: the landlord cannot lock you out without a court order. So, he can’t scare you and say, “I’m changing the locks, you didn’t pay the rent.” I would love it if landlords did that because then you could sue them for damages.

Rest assured, you cannot be locked out. It is a very lengthy process before you would actually be removed from the premises. Probably takes two or three months. But, taking that a step further, once you fail to pay your rent and are now in court, the landlord sued you for a very important non-payment of rent. Generally, what’s going to happen in court is the judge is going to want you to enter into some sort of settlement. The agreement is likely going to provide for a longer term to pay the rent. Most landlords are not going to kick a tenant out immediately for failure to pay rent. There’s going to be some sort of extension of time period.

If you fail to pay during that period, you will be removed from the premises. A lot of tenants that I get will ask, “Can I avoid that?” The answer is no. No landlord is going to agree and just say, “I got it, I took you to court, you failed to pay your rent, I’m just going to give you another chance and start the whole proceeding over again.” Doesn’t work that way. The landlord wants the space. More importantly, they want their money. Unfortunately, that’s the world we live in.

So, you’re going to set up some sort of payment plan and if you pay you’ll be allowed to stay. Let’s say you don’t and you can’t agree on the payment terms and you just can’t afford to pay. Ultimately, you will be evicted. How does that process work? Very quickly, it works in this sense. The judge enters a judgment of possession for the landlord and claims a warrant of removal shall issue. Then the landlord has to go to a marshal. The marshal goes to court and submits the paperwork to get the warrant of removal issued by the court and the judgment of possession. Only a marshal can do this. The landlord cannot do this personally. The marshal then comes, puts a notice on the door, and says you’re going to be evicted. And generally – I think it’s six days – the marshal says, “I’m coming back in six days to remove you.” You have now six days to try and make some sort of stay, which you could do by paying the rent at any time to stay longer, or, ultimately, you may be locked out of the premises.

But, keep in mind, once the marshal comes, you definitely want to come see me, if you want to continue to stay in your space.

Now, some overview of the notices that we’re talking about here. You have:

The Notice to Cure starts everything (or, demand for payment). So, you want to try to comply with that. At the very least, you want to call your landlord and say, “I know I haven’t paid, I need more time.” I think a lot of time, the reaction is to run for cover and think nothing’s going to happen, and bury your head in the sand. Generally, it doesn’t work. The landlord is going to come after you, unfortunately. They are either going to want your money or somebody else’s money, right. So I recommend trying to make a deal.

After you get this Notice to Cure, what will likely come down the pipeline is a Notice to Terminate. This is a very important one: Notice to Terminate. You don’t want one. If you get a notice to terminate and it becomes effective, you’re going to have no rights. The court is not going to be able to help you do anything to continue to stay in that property. I’m going to talk about the notice to terminate again in a little bit, because it comes up again, but I just wanted to mention that.

Then after this notice to terminate, you get some court papers. The court papers that are filed are called the Notice of Petition, followed by a Petition. You get served with the papers. Ultimately, then there’s the Warrant of Removal that gets served on you by the marshal. It’s quite an extensive process.

In Kings County, I can tell you that it could take anywhere from three to four months to get an eviction. Manhattan’s a little quicker, and generally you can get evicted in about two months. Now, you only get evicted – very important here – for a breach of your lease. So, obviously a non-payment is the most frequent, and the courts are familiar with this and there are procedures in place to offer forgiveness. So if you’re not paying your rent, what may happen is that a landlord goes to court and asks for non-payment of rent, and the judge is going to encourage you to work out something to allow you to stay.

There’s also a breach which doesn’t involve non-payment. These are a bit harder to deal with, and let’s just talk about some of the things that result. You’re paying the rent but you can still be in breach of your lease. How can that occur? Number one: you’re assigning your lease or subletting your lease. This happens all the time and all that I can say to you is the best advice is don’t let your landlord know.

Okay, and if your landlord doesn’t know it’s not going to hurt you, but if your landlord knows and doesn’t like it? Well, landlords like to be in the business of being a landlord. They don’t want tenants to be landlords. So if you have a landlord that thinks, well, I’m charging $2,000.00 and now your subleasing and making $1,000.00, well, I want that money. And by the way, most leases will provide a provision that allows them to recover such money, even in a court of law. So, assigning and subleasing generally constitute a breach.

If you fail to get the necessary permits to operate your business, that is a breach. If you fail to maintain insurance – big one. Landlords want to know their space is correctly protected with insurance. They usually require proof of insurance every year. If you don’t provide them that, that is called material breach, and it could result in removal. If you’re serving food and you need a health permit, for example. Or, if you alter the premises without consent. In fact, I’m in a landlord / tenant trial right now where the commercial tenant painted the facade white and the landlord is incredibly upset.

So, you don’t want to make alterations without the landlord’s approval. Now, these are all breaches that don’t include payment. What is going to happen in these sorts of breaches is very similar to non-payment of rent. You’re going to get a notice to cure. It’s going to give the time period that is provided in the lease to fix the situation. Obviously, from a tenant perspective, you want as much time as possible. Let’s say you cannot fix the cure within the time frame. If you cannot do so that is going to allow the landlord to terminate the lease.

Remember I discussed this earlier: termination of the lease is a bad thing. The court can’t do anything for you once your lease is terminated. So, it’s very important to extend your cure period. The courts allow that by something called a Yellowstone Injunction. The takeaway here is that you can extend your cure period. You want to make sure your cure period is extended before your lease is terminated. You go to court and say, “I got this notice to cure, I’m going to fix this, I’m going to get insurance, judge please don’t let them terminate my lease, I want to stay in possession,” and the court will grant it, almost always. As long as you can fulfill the requirements, you’re going to get it.

The requirements are very low, for a reason. The judges in the courts want to give tenants the ability to cure. But if you don’t do it, if you fail to cure in a timely fashion without it being extended and the termination notice is triggered, then you’re not going to have any defense. You will ultimately have to be removed. So, the Yellowstone Injunction is very important.

I wanted to mention one other thing, one final little tidbit to take away from this is to negotiate attorneys’ fees. Obviously, we all like to get paid. So, every lease includes a provision where if the landlord has to remove you, pursue you, they get their attorneys’ fees back. So even if you owe $10,000.00 in rent, now you are going to have to pay their attorneys’ fees as well.

What you want to always include is reciprocal attorneys’ fees. You always want to have a good offense if they’re pursuing you, and you can countersue them for something. Say the landlord breached the lease and didn’t provide some sort of service that he was supposed to. Then you could try and get your attorneys’ fees back. It provides leverage down the road.

So when you’re negotiating your lease, I’ll leave it at this: try and get your attorneys’ fees reciprocal, as long a cure period as possible, a Good Guy Guarantee, and don’t sign the lease in your own name. And if you want more tidbits, call me.