February 4, 2018
This week, we were working on a small (six tenant) retail acquisition. There were only two different “standard” lease forms in place at this center, but each of the leases had very significant changes to the lease.
One of the ways these leases were so different from each other was in the definition of the term of the lease. Several defined the Commencement Date as the date of the lease and then a Rent Commencement Date as the earlier of opening or the Commencement Date plus xxx days. Others did not define a Commencement Date but defined a Rent Commencement Date only.
Lease Year definitions also varied – some defined from the Commencement Date while other defined from the Rent Commencement Date.
There were numerous changes. One defined rents as increasing each Lease Year, with Lease Year defined as from the Rent Commencement Date. In this case, the Rent Commencement Date was 5/24/15. The Lease Year was ultimately 6/1-5/31. However, the Offering Memorandum reflected the rent as increasing on 8/1. Why? The seller had inadvertently used 8/1 because the tenant had been granted a 60 day rent abatement at the beginning of the term. 60 days from the Rent Commencement Date. That abatement did not change the Rent Commencement Date and did not change the definition of Lease Year. A two month (every year) acceleration of rent bumps.
But, out bigger issue was another lease executed 4/24/14, which happened to be the defined Commencement Date. Lease Year was also measured from this Commencement Date – so the first Lease Year was 4/24/14-4/30/15. However, the Rent Commencement Date was ultimately not until 11/24/15. The Term was defined as 10 Lease Years from the Commencement Date. The seller had inadvertently measured from the Rent Commencement Date (both the Lease Year and the Term). The seller was, therefore, presenting the Term as 11/24/15-11/30/25. However, the reality was that the Term actually ran from 4/24/14-4/30/24 – a difference of 19 months!!!
I would venture to guess that the intent was the seller’s presentation. However, without a letter agreement or amendment, the buyer can only count on a Term ending 4/30/24, not 11/30/25.
One funny (to someone who appreciates lease language) was that the bump date of minimum rent did not change. While the term was measured from the Commencement Date and by Lease Year, the rental periods were defined by “Years” from the Rent Commencement Date.
All of these problems were clearly unintentional. But, unintentional or not, lease language has consequences.