Rent Control SFU Exemption Deadline

Deadline Approaching for Landlords of SFH units

URGENT TO LANDLORDS OF SINGLE DWELLING UNITS

Deadline Approaching for Landlords Exempt from Rent Control under AB 1482 

If you are a landlord exempt from statewide rent control in California, you must notify your tenants that you are exempt in writing by August 1, 2020.  Failure to do so means that you will be subject to statewide rent and eviction control.

To be exempt, landlords must own a building “alienable separate from title to any other dwelling unit”. Qualified properties include standard Single Family Residences (SFR), single condominium units, and townhomes.

If this applies to you, you must send your tenant, in writing, the appropriate notice by August 1, 2020. If you are unsure if this applies to you or if you need any other help serving this notice, contact a real estate attorney. If you qualify, this will exempt you from both Eviction and Rent Control under state law.

For all new tenancies starting or renewed on or after July 1, 2020, your lease agreement MUST include specific language from the statute (8)(B)(i).

Please Note: This document does not constitute legal advice. Please consult an attorney for legal advice on what to do in a particular situation.

 

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Does Business Insurance Cover Damage from Civil Unrest?

Can-business-insurance-help-during-civic-unrest

Will Business Insurance Cover Property Damage From Civil Unrest?

By Brian Selogie

Just as businesses across Southern California and much of the United States were beginning the long process of recovering from forced closures and dismal earnings caused by the ongoing COVID-19 pandemic, recent protests and demonstrations, in some instances accompanied by violence, damage and looting, now threaten the economic survival of many businesses across the country.
 
How and when affected businesses respond to the property damage, lost inventory, and business interruption posed by this latest challenge will depend largely upon whether insurance coverage applies under business owners’ general liability and special form insurance policies.  This provides an overview of the terms included and the coverage typically provided under a business owner’s policy, and it provides general guidance regarding the process of submitting an insurance claim, as well as the obligations owed to policyholders by insurers.
 

What does a General Liability Insurance policy typically cover?

As an initial matter, the terms of and coverage provided under various insurance policies differ widely based largely on premiums paid, deductible amounts, the policies of the particular insurance carrier, and the election of business owners to secure coverage for specific causes of loss.  In that regard, most “general liability” insurance policies provide coverage for “bodily injury” or “property damage” resulting from “covered causes of loss.” Often times, the definition of “property damage” under general liability policies will include phrases such as “physical injury to tangible property, including all resulting loss of use of that property, as well as loss of use of tangible property that is not physically injured”.  Of course, reading and understanding your specific policy is critical.
 

Understand your “Covered Causes of Loss” in your Policy

Although the definition of “property damage” mentioned above appears broad and wide-ranging, policyholders should be aware that most policies explicitly limit the scope of coverage for losses resulting from such damage to only those losses arising out of a “covered cause of loss”.  Again, the events that constitute a “covered cause of loss” vary widely from policy to policy, although a typical list of covered causes of loss may include: “fire; lightning; explosion, windstorm or hail; smoke; aircraft or vehicles; riot or civil commotion; vandalism; leakage from fire extinguishing equipment; sinkhole collapse; volcanic action; falling objects; weight of snow, ice or sleet; water damage.”
 

Can I add a policy for more protection?

Yes. In addition to “general liability” policies, many business owners elect to hold coverage under so-called “special form”, “fire”, or “all-risk” policies.  The scope of such a policy is typically broader than that of a general liability policy, and includes coverage for all losses except those expressly excluded under the policy.  Special form policies may include coverage for losses related to issues such as damage to equipment, personal property, improvements, and inventory, as well as business interruption and rental loss. 

 

Review what is included and what is not included in your policy

Of note, policyholders should review the language of their policies very carefully to determine whether any losses or causes of loss are expressly excluded by the insurance company.  As an example all too familiar to myriad policyholders, many insurers have adopted the position that no coverage applies for any loss related to the COVID-19 pandemic, as those losses are specifically identified in so-called “virus exclusions”.  Accordingly, policyholders would be prudent to confirm that no such exclusion applies for the losses arising out of recent vandalism, riots, violent demonstrations, and looting.  As discussed further below, business owners should consider consulting with attorneys to evaluate the specific terms of their insurance policies, including both general liability and special form policies, in order to determine the coverage provided thereunder.
 

How do I submit a business insurance claim?

The first step in submitting an insurance claim for any loss, including a loss arising out of recent violence, looting, and civil unrest, is for business owners to become familiar with the details of their particular policies.  Of course, reviewing an insurance policy can present a challenging, mind-numbing task, as policies often contain hundreds of pages of arcane, convoluted language along with myriad references, cross-references, and defined terms.  Nevertheless, an in-depth understanding of the terms of each particular policy is indispensable to preparing and submitting an informed, effective notice of claim or “tender” to an insurance carrier.
  
Once a business owner becomes familiar with the terms of a policy, he or she should evaluate the policy in order to determine whether coverage applies for the particular loss at issue— in this case, such losses may include damage to physical property, personal property, inventory, equipment and/or business interruption or lost revenue.  If the business owner believes that coverage applies, he or she ought to confirm whether the particular “cause of loss”— in this case likely vandalism, riot, or civil commotion— is also covered under the policy.  If so, the policyholder should attempt to articulate the basis for the claimed loss in a well-reasoned and comprehensive fashion.  Of course, the assistance of an effective attorney often makes the difference between acceptance of or denial by the insurance company of an insured’s tender of claim. 
 

What obligations does an Insurer owe to a beneficiary?

Under the law, an insurance carrier owes the insured a contractual duty as well as a duty of good faith and fair dealing with respect to the handling and payment of any claim.   Of note, the insurance carrier’s duty to protect the insured’s interests obligates it to investigate any claim thoroughly: “[I]t is essential that an insurer fully inquire into all possible bases that might support the insured’s claim … [A]n insurer cannot reasonably and in good faith deny payments to its insured without thoroughly investigating the foundation for its denial.”  Indeed, adequacy of investigation is “[a]mong the most critical factors bearing on the insurer’s good faith”.  In addition, “the insurer’s early closure of an investigation and unwillingness to reconsider a denial when presented with evidence of factual errors will fortify a finding of bad faith.”
 

What do I do if my claim is denied?

In our experience, insurance companies often deny claims as a matter of course. We are hearing from our clients that these claims for property damage from vandalism and looting are being denied.  If this happens to you, reviewing your policy with an attorney can help you determine if pursuing litigation for recompense for your damages or a cause of bad faith is a wise option for you.
 
Ultimately, the impact that any disruptive, damaging event might have on a particular business owner hinges on a number of factors, not the least of which is whether coverage applies under any applicable insurance policy.  In light of the foregoing, affected business owners ought to review their policies and consult with an attorney if necessary to gain an in-depth understanding of the coverage afforded thereunder.  Insurance premiums represent a significant expenditure for most policyholders, and business owners should strive to be well-informed of their rights and the obligations of their insurance carriers in relation to bargained-for insurance coverage.  In the event that policyholders find their coverage inadequate protection from certain causes of loss, it may be prudent to consider renegotiating the terms of their respective policies in order to secure coverage for potentially catastrophic losses such as those currently suffered by business owners all over the country.
 
 
Please Note: This document does not constitute legal advice. Please consult an attorney for legal advice on what to do in a particular situation.
 

See, e.g., Gruenberg v. Aetna Ins. Co. (1973) 9 C3d 566, 573, 108 CR 480, 485California Shoppers, Inc. v. Royal Globe Ins. Co. (1985) 175 CA3d 1, 54, 221 CR 171, 200Chateau Chamberay Homeowners Ass’n v. Associated Int’l Ins. Co. (2001) 90 CA4th 335, 346, 108 CR2d 776, 783

See, Egan v. Mutual of Omaha Ins. Co. (1979) 24 C3d 809, 819, 169 CR 691, 695-696 (emphasis added); Agricultural Ins. Co. v. Sup.Ct. (MKDG/Rhodes SC Partnership) (1999) 70 CA4th 385, 402, 82 CR2d 594, 604 (citing text); Shade Foods, Inc. v. Innovative Products Sales & Marketing, Inc. (2000) 78 CA4th 847, 879, 93 CR2d 364, 386

Shade Foods, Inc. v. Innovative Products Sales & Marketing, Inc. (2000) 78 CA4th 847, 880, 93 CR2d 364, 387 (emphasis added).  

 

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Memorial Day Tribute to Major Albro Lynn Lundy Jr.

USAF Major Albro L. Lundy Jr., Skyraider pilot

Memorial Day Tribute to Major Albro Lynn Lundy Jr.

This Memorial Day we are featuring a tribute that was written by a fellow pilot about the father of one of our partners, Albro Lundy.  His father is one of the thousands of heroes who gave their lives for our country and we honor them all today by remembering their sacrifice.

Memorial Day Tribute

By John R. Bucher, St. John Fisher and UCLA classmate of Albro Lundy III

It is late afternoon on December 24th, 1970.  You are a forward-deployed squadron pilot, a US Air Force (USAF) Major, and one of America’s top F-4 Phantom fighter pilots.  You are nine months into an overseas combat tour, but not in the F-4 Phantom this time, rather as a pilot in one of the most vaunted, highly respected A-1E Skyraider squadrons providing armed Search and Rescue (SAR) and Close Air Support (CAS) for downed pilots in enemy territory, one of the most formidable and noble tactical aircraft missions ever conceived.

You are 37 years of age and you have a wife and six children who live in Southern California. In addition to being an Air Force fighter pilot and Skyraider rescue SAR pilot, you are a UCLA Bruin alum who previously played college basketball for Coach John Wooden, so you know a thing or two about teamwork.  At this point, you have already been awarded the Silver Star for Valor, two Distinguished Flying Crosses, the Air Force Medal, and six Air Force Commendation Medals.

It is Christmas Eve and there is no place you would rather be than at home with your family in California; however, your country has deployed you to Southeast Asia to fight and fly some of the most dangerous missions over North Central Laos and other hostile grounds. On this Christmas Eve, the flight leader of the evening’s SAR mission has unexpectedly taken himself off the flight schedule.  Other qualified flight leads are slow to step up, so you agree to be assigned this mission to provide armed cover for a SAR sortie to rescue an American pilot shot down on December 23rd over hostile territory.  In addition to the extraction rescue helicopters, you will be providing armed cover for one of the most respected, yet invisible, group of Forward Air Controllers (FACs), the world-famous Ravens.

Late Christmas Eve, as you strap into the massive Douglas Skyraider powered by the Wright 3,350 cubic inch, dual-row, 18-cylinder, supercharged radial engine, you say a prayer for your six children, wife and family back home in Southern California, and get on with the mission that has fallen into your hands because others were unable or unwilling to spend this day on what is undoubtedly one of the most dangerous categories of tactical air combat missions in existence:  low-altitude, armed SAR support. You are mindful that the Ban Ban Valley is notorious for the intensity of its enemy air defense weapons.

While the Wright R-3350 engine is the most sophisticated piston powerplant ever installed on a warbird, the engine’s complex plumbing renders it vulnerable to the intense type of anti-aircraft ground fire often encountered over Laos and other hostile territories.  Enroute to the rescue sight, after encountering heavy ground fire, there are indications of trouble as engine boost pressure tapers off, oil pressure drops and cylinder head temperatures skyrocket. Shortly thereafter, the engine begins to cough and seize, and you realize that there is only one remaining move to play, as dreadful as it may be.

You make a brief radio call to let your Sandy wingman, the Ravens and other elements of this critical rescue mission know that Sandy 03 must eject from the stricken aircraft.  You are not afraid.  Your training and fighter pilot instincts take over. You initiate ejection from the Stanley Yankee ejection seat and are literally fired by two rockets with ballistics that launch you dozens of feet out of the cockpit and above the doomed Skyraider.  What happens next is the material from which movie scripts are written (and should be in this case).

Between Christmas Eve of 1970 and April 7, 2004, your family would undergo one of the most remarkable, courageous and tortuous journeys to discover what actually happened after you ejected from your Skyraider.  Over the years, your wife, Johanna would be told conflicting and incongruous information about your aftermath.  Your brave sons would travel multiple times to Cambodia, Laos and Vietnam in search of signs of your life’s trail.  Ultimately, after a Newsweek magazine cover story that only partially revealed the subsequent scope of the quest for the truth, your remains would be returned by the government of Vietnam to the United States of America.

And, on April 7th of 2004, a division of F-16 fighting Falcons would perform a missing man formation flyover that drained every remaining tear from the solemn gathering of family and friends at Arlington National Cemetery that sunny afternoon upon your internment at this sacred site.

Your name is Major Albro Lynn Lundy, Jr.  You and your family are the shining example of why our country established Memorial Day as a national holiday.  Your sacrifice and that of the Lundy family and all other American families who suffered such losses will never be forgotten.  May God bless all Americans who gave their lives in defense of the freedom we now enjoy, and may we never take it for granted.

Albro Lundy III attorney

   Albro L. Lundy III, son of Major Albro L. Lundy Jr.

BB&L Coronavirus May Update

Hermosa Beach Safety Measures for COVID-19

Law Firm Baker, Burton & Lundy is Serving Clients Safely During the COVID-19 Crisis.

Although there has been a loosening of the Stay at Home orders to prevent the spread of COVID-19, the reopening of the offices of BB&L will be calibrated to keep its clients and family of employees safe.  To this end, only selective times are being offered for in-person meetings on Pier Avenue when phone and Zoom meetings cannot accomplish your goals effectively.

We hope you understand.  We are in this for the long haul, and maintaining the health and safety of you, our clients, as well as the talented people we have working for you is a very high priority.

We are following the guidance of the Hermosa Beach City, which is tracking with the County of Los Angeles and State of California orders. Check these links for the latest updates on the partial re-opening:  Hermosa Beach City Coronavirus Response and County of Los Angeles Public Health Department Road to Recovery.

 

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Summary of Tenant Approaches to Rent Abatement due to COVID-19

Hermosa Beach Ready for a Storm

 

Summary of Tenant Approaches to Abatement of Rent Related to COVID-19

March 27, 2020

Businesses large and small are being dramatically affected by the Shelter in Place orders of government due to the COVID-19 crisis.  Rent is one of the most significant costs for most businesses.  This is a Summary evaluating the potential bases for excusing (or at least delaying) the obligation of commercial tenants to pay rent during closures related to the COVID-19 pandemic. 

Although the Summary provides analysis of applicable legal authorities in the context of terms commonly included in most commercial lease agreements, it is important to recognize that each particular lease will include unique terms and each particular jurisdiction will apply unique rules of law, and may or may not be subject to governmental moratoria.  Therefore, the viability of relief under the various theories discussed in the Summary will ultimately require independent analysis of the terms of each specific lease as well as the laws and authorities applied in each governing jurisdiction.

With the foregoing in mind, please find a summary of the various approaches to negotiating abatement of rent during closures related to the COVID-19 pandemic below:

  • Express Rent Abatement Provisions: Some leases might expressly provide tenants with the right to abate rent in the event that they are unable to use the Premises for reasons beyond tenant’s reasonable control. Each specific lease will need to be reviewed accordingly. Generally speaking, the abatement provisions in each lease will yield tenants’ strongest argument in negotiating abatement of rent.

All leases will address abatement resulting from casualty.  In the event of a casualty, tenants may have the right to abate rent to the extent the premises is untenantable. “Casualty” is generally not defined in leases, although a common definition is “accident, mishap, or disaster”.  Nonetheless, whether a casualty has occurred will likely be subject to legal argument and interpretation by courts. As such, the right to abate rent on the basis of a casualty provision will ultimately hinge on the language of the particular provision at issue, as well as the authorities applied in a particular jurisdiction.  In any event, taking the position that COVID-19 is a casualty and rent should abate, should be an argument generally used in all cases.

  • Force Majeure: Force majeure provisions typically delay or excuse performance when extraordinary events occur that are unforeseeable and beyond the control of the parties. Force majeure may excuse tenants’ obligation to remain open during the COVID-19 pandemic. However, a force majeure provision, on its own, likely does not excuse tenants’ refusal to pay rent. Of note, leases frequently state that tenants’ obligation to pay rent cannot be excused by force majeure.
  • Compliance with Law: Most leases provide that tenants must operate from their leased premises in compliance with all applicable laws. In jurisdictions where all non-essential businesses have been ordered closed during the COVID-19 pandemic, operating from the premises would be illegal. This may create a frustration of purpose argument.
  • Common Law Principle of Frustration of Purpose: This principle provides that a party may be excused from performing its contractual obligations if a change in circumstances makes it physically or commercially impossible to perform the contract, or would render performance radically different. This principle may provide tenants with a reasonable basis to abate rent during business closures related to the COVID-19 pandemic. Unlike the doctrine of impossibility of performance, frustration of purpose applies where performance remains possible, but the reason the parties entered the agreement has been frustrated by an overriding circumstance that was not anticipated, such that the value of performance by the party standing on the contract (likely, the value of operating a business from a leased premises) is substantially destroyed. Tenants may have a strong argument that frustration of purpose excuses the obligation to pay rent during the COVID-19 pandemic.  It is worth noting that some leases will attempt to have tenants waive all equitable defenses.
  • Common Law Principle of Impossibility of Performance: Impossibility of performance is a defense to a breach of contract action and the burden of proof in establishing it rests on a defendant. “Impossibility” is defined in section 454 of the Restatement of Contracts, as not only strict impossibility but as impracticability because of extreme and unreasonable difficulty, expense, injury, or loss involved. This principle does not provide tenants with a strong argument to abate rent, as landlords will contend that payment of rent has not been rendered “impossible” by COVID-19, regardless of whether tenants can operate their businesses during the pandemic.
  • Moratoria on Commercial Evictions: A number of jurisdictions, including the County of Los Angeles, have now issued temporary prohibitions on evicting commercial tenants during the COVID-19 pandemic. However, the Los Angeles moratorium and similar prohibitions generally do not excuse the obligation to pay rent and often postpone payment to a later date.  Rather, they provide that tenants may not be evicted as a result of inability to perform under a lease as a result of the pandemic.  Again, the applicability of these prohibitions will depend entirely upon the language of each specific moratorium.
  • Business Interruption and Business Income/Rent Loss Insurance: The tenants to commercial leases may look to business interruption insurance as a source of relief during the COVID-19 pandemic and landlords may look to business income/rent loss insurance. Business interruption insurance typically provides coverage in the event of losses sustained as a result of direct interruptions to business operations. We anticipate that insurance carrier(s) will vigorously contest these claims both on the basis of lack of physical damage and specific policy exclusions.

Commercial landlords may seek reimbursement under business income/rent loss insurance for income lost while a tenant ceases operations or the leased premises is repaired or rebuilt as the result of a covered loss.  Whether such coverage will be effective during the pandemic will depend on the language of each policy and specific exclusions thereto.

  • Cautionary Note: On a cautionary note, commercial tenants should be aware that California Civil Code section 1951.4 provides landlords with a draconian remedy in the event that tenants vacates the premises prior to receiving notice to vacate. Under section 1951.4, a landlord faced with a tenant who has prematurely vacated the premises, can continue the lease for the unexpired lease term and continue to collect rent with no duty to mitigate damages.  This landlord remedy only applies in situations where: it is specifically provided in the lease; and tenants have the right to assign or sublet the premises.

Please Note: This document does not constitute legal advice. Please consult an attorney for legal advice on what to do in a particular situation.

BBL COVID-19 Update

Hermosa Beach Ready for a Storm

 

We are here for you during the COVID-19 crisis

March 21, 2020

To our BB&L Clients, Colleagues and Friends:

At this tumultuous and uncertain time, we want to reach out and let you know that the law office of Baker, Burton & Lundy is still active to meet your legal needs. We have temporarily closed our physical office for all but critical matters to help prevent public exposure to COVID-19 and to honor the California Safer at Home directive issued March 19 by Governor Newsom.  [Here is a direct link for more information: https://covid19.ca.gov/stay-home-except-for-essential-needs/]

We have put measures in place to have all of our resources available to help our clients and prospective clients.  We are available to review and analyze all new client matters especially for estate planning issues.

We are committed to assisting our clients to effectively operate and adapt throughout this time and to help keep legal processes and business moving forward as much as possible. We are staying on top of laws, rules, regulations and policies that govern your businesses and interactions with governmental regulators and the courts, as they change on a daily, sometimes hourly, basis.

While our staff and attorneys will generally be working remotely, they will be working.  Please feel free to call us with any questions you have about your case, legal situation or new matter. If your call does not ring through to a BB&L team member, please leave a message and we will return your call as soon as possible.  We have been and will continue rearranging meetings to be held by phone or on a remote basis.

On the bright side, we have promoted our real estate and business attorney Clint Wilson to partner in the firm and we have added Brian Selogie to our transactional team. Visit the links below on our website to learn more about both of them. We are very excited about how this will help us better serve our clients.

We wish you the very best and most of all good health.  Check in with government information sources and follow the recommended protocols as closely as possible for your protection and those around you.

Acting together we can and will weather this storm.

Baker, Burton & Lundy

Brad Baker, Kent Burton, Albro Lundy, Evan Koch, Clint Wilson, Brian Selogie, Teresa Klinkner and all of the BB&L Team

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How to Negotiate Casualty Issues in Commercial Leases

How to Negotiate Casualty Provisions in Commercial Leases

How to Negotiate Casualty Loss Protections in your Commercial Lease

Tenant Tip Series *

By Clint Wilson & Brian Selogie

With worsening wildfires, heavy rains, and mudslides threatening commercial structures across the State, the importance of casualty provisions in California commercial leases has increased in recent years. Along with rising uncertainty regarding the susceptibility of certain properties to damage and loss, casualty provisions have become the subject of heavy negotiation between landlords and tenants. This article discusses the rights and obligations typically set forth in a commercial lease arising from a casualty event, and provides guidance on how a commercial tenant can negotiate for certain casualty provisions to best protect its interests.

Understanding the Basics of Casualty in a Commercial Lease

The casualty section of a commercial lease identifies the circumstances in which a landlord and tenant will be obligated to restore the leased premises following a casualty event. Alternatively, depending on the extent of the damage caused to the premises by the casualty event, a casualty section may establish the rights of the parties to terminate the lease.  As such, any prospective tenant should thoughtfully assess the impact that a casualty event might have on its business, and negotiate its casualty and termination rights accordingly.

In one scenario, a tenant may determine that its business would be devastated or completely lost following a casualty event. Under those circumstances, the tenant should negotiate for certain termination rights that will provide the flexibility to relocate and recommence its business operations.  Otherwise, the tenant may remain bound by the lease and forced to endure excessive closures and delays during the landlord’s repair and restoration of the premises. On the other hand, a tenant may determine that its business could withstand and survive a casualty event.  In this case, the tenant may prioritize the continuation of the lease, and the tenant should negotiate to limit the landlord’s termination rights arising from a casualty event.

How Does Insurance Affect a Casualty Event?

Understanding the insurance implications of a casualty event will aid in negotiating the termination rights discussed below.  At the outset, it’s worth noting that most casualty events will be covered by property insurance (i.e., special form property insurance). Commercial leases generally require the landlord to insure the premises (the cost of which is subject to reimbursement by the tenant), and the tenant to insure its personal property and improvements made to the premises. If the casualty event does not result in either party having the right to terminate the lease, then the landlord will restore the premises, after which, the tenant will restore its personal property and the improvements previously made to the premises. The landlord’s property insurance should also include rent loss insurance, and the tenant should also carry business interruption insurance, such that both parties can mitigate the monetary losses arising from a casualty event.

Options for Tenants to Limit Landlord Termination Rights

The most common circumstance in which a landlord and/or a tenant will have the right to terminate a lease, occurs when the premises is totally destroyed. Other than total destruction of the premises, a casualty section might also provide the landlord with the right to terminate the lease in the event that: (i) the damage caused by the casualty event will take longer than some period of time to restore (e.g., six months is commonly used); or (ii) some portion of the premises is destroyed and rendered untenantable (e.g., anywhere from 25% to 50% is used); or (iii) the casualty event is not covered by the landlord’s property insurance (e.g., earthquake damage).

Continuing the Lease Following a Casualty Event

If a tenant is confident that it can withstand a casualty event and its primary concern is continuing its lease despite the casualty event, then the tenant should negotiate to limit the landlord’s termination rights described above. With respect to the landlord’s termination right described in subsection (i) above, the tenant may negotiate to extend the time period resulting in termination from six months to a longer period (e.g., twelve months). In negotiating to extend this time period, the tenant should emphasize the work necessary to restore the premises, which may include securing an architect, approving plans and specifications, obtaining permits, working with the insurance company, hiring a contractor, and performing the actual restoration work.

Those collective obligations will likely take much longer than six months to fulfill, and tenants should negotiate to extend the time period required for a landlord to terminate the lease (e.g., twelve months). Additionally, most landlords carry at least one year of rent loss coverage and since tenants effectively pay for such coverage through triple net expenses or gross rent, landlords will generally concede to extending the time period required to exercise a termination right to twelve months.

Preserving the Value of Tenant’s Improvements

Often times, tenants will invest substantial time, money, and resources into their leased premises through alterations, improvements, fixtures, and signage. Accordingly, tenants may incur substantial losses if the landlord has broad termination rights arising out of casualty events and property damage, including the right to terminate a lease in event of a casualty with minor uninsured damage to the premises. With respect to the landlord’s termination right arising for an uninsured casualty event described in subsection (iii) above (i.e., the casualty event is not covered by the landlord’s property insurance), tenants should negotiate to insert a threshold restoration cost for the landlord to have the right to forgo restoration of the premises and terminate the lease.

Such a threshold cost would preclude the landlord from terminating the lease in the event of an uninsured casualty event with minor monetary damage to the premises (e.g., $5,000).  In order to avoid undue losses if the landlord terminates the lease due to an uninsured casualty event that results in minor damage to the premises, the tenant should negotiate for a cost threshold (e.g., $50,000) that the landlord would otherwise have to pay out-of-pocket before the landlord would have the right to terminate the lease.

How do you Protect Tenant’s Termination Rights?

Most commercial leases limit the tenant’s right to terminate the lease in the event of casualty resulting in the total destruction of the premises.  As discussed above, however, there may be circumstances under which a tenant would benefit from the ability to terminate its lease following an event of casualty. Tenants concerned with the impacts of potential casualty events and desiring the flexibility of relocating their business should negotiate for additional termination rights. Common tenant termination rights include the right to terminate in the event that the premises will take longer than some period of time to restore (e.g., six months), or in the event that the landlord has commenced restoration of the premises, but has not completed restoring the premises within some period of time (e.g., six months).

Additionally, the tenant can negotiate for termination rights similar to those of landlord, including the right to terminate in the event some portion or more of the premises is destroyed and rendered untenantable (e.g., anywhere from 25% to 50% is used). Additional termination rights will give a tenant the option, if necessary, to terminate the lease and relocate its business rather than remaining bound by the lease and bearing the burden of disruption and delay caused by a landlord’s lengthy restoration of the premises.

Ultimately, the impact that any casualty event might have on a particular tenant hinges on a number of factors, including the tenant’s particular business, the strength of tenant’s brand, the location of the premises, tenant’s prior business performance in the premises, and the severity of the casualty event.  In light of the foregoing, it remains prudent for tenants to carefully consider their susceptibility to damage arising out of a casualty event.  Armed with an informed and honest assessment of the impacts posed by casualty, tenants should be well-prepared to negotiate for appropriate casualty provisions, including the right to terminate the lease as a measure of protecting the tenant’s business into the future.

 

* Tenant Tip Series is a series of different tips provided by Baker Burton & Lundy for commercial tenants to consider while negotiating retail leases, restaurant leases, commercial leases or industrial leases. This series will regularly address a variety of important tenant-oriented issues that arise during lease negotiations.

Please Note: This document does not constitute legal advice. Please consult an attorney for legal advice on what to do in a particular situation.

 

 
Brian Selogie & Clint Wilson

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To learn more about how Baker, Burton & Lundy’s experienced attorneys can represent or advise you, please call (310) 376-9893 or fill out the form below.

Baker, Burton & Lundy Congratulates New Law Partner Clint Wilson

Baker, Burton & Lundy Expands Attorney Partners
BB&L Partners Clint Wilson, Kent Burton, Brad Baker, Evan Koch & Albro Lundy

Baker, Burton & Lundy Congratulates New Law Partner Clint Wilson

Baker, Burton & Lundy is proud to announce that Clint Wilson has been made a partner at the Hermosa Beach law firm. Clint specializes in a full range of real estate and business transactions for individual, professional and corporate clients and joined BB&L’s respected transactional team in 2015. He joins partners Brad Baker, Kent Burton, Albro Lundy and Evan Koch in leading the award-winning law firm.

“Clint’s previous business experience gives him an edge in helping our clients” said partner Kent Burton.  “Clint has an ability to see both sides of situations – assisting our clients who are large-scale tenants as well as developers and landlords – which helps him negotiate and craft agreements that are sound for the long term.”

An avid writer eager to share information, Clint has published legal articles and started a Tenant Tip series for the Baker, Burton & Lundy blog.

Before graduating Loyola Law School Cum Laude, Clint worker as an Operations Manager in the Port of Los Angeles, managing longshoremen 25 years his senior, earning the respect of the unions and quickly moving up the ranks of management.  He received his bachelor’s degree in Business Administration and Economics from St. Mary’s College of California.  The grit that made him a distinguished football player and scholar-athlete at St. Mary’s is the same quality which makes him an excellent attorney and member of the partner team at Baker, Burton & Lundy today.

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Clint Wilson

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To learn more about how Baker, Burton & Lundy’s experienced attorneys can represent or advise you, please call (310) 376-9893 or fill out the form below.

How to Negotiate Common Area Costs (CAM) in Commercial Leases

Commercial Real Estate Tenant Tips

How to Negotiate Common Area Costs or CAM in Your Lease

Tenant Tip Series

By Clint Wilson

Tenant Tip Series is a series of different tips provided by Baker Burton & Lundy for commercial tenants to consider while negotiating retail leases, restaurant leases, commercial leases or industrial leases. This series will regularly address a variety of important tenant-oriented issues that arise during lease negotiations.

Today’s tip identifies different strategies that any tenant in a multi-tenant project or shopping center should utilize during lease negotiations to gain some cost control measures over Additional Rent. “Additional Rent” is the amount a tenant is obligated to pay under the lease in addition to the base rent and includes the amorphous “common area costs” (also commonly known as “CAM Costs,” “Operating Costs” and “Operating Expenses”). A tenant in a multi-tenant project or shopping center will generally be obligated to reimburse the landlord for its pro rata share of such expenses, which are usually broadly defined to include any and all costs the landlord incurs for real estate taxes, and in maintaining, repairing, replacing, improving, insuring and managing the project or shopping center.

The Issue With Common Area Costs (CAM)

Since common area costs and the increases thereof are generally not fixed or even capped, they often outpace the annual increases in base rent. Additionally, landlord-oriented leases will include few or no limits on the type of and amount of charges the landlord includes as common area costs, thereby enabling the less scrupulous landlord to use common area costs as a means of profiting from such charges. It’s worth emphasizing that the purpose of common area costs is to reimburse the landlord for legitimate expenses associated with the project or shopping center (and specifically the common areas) and not to provide the landlord with the opportunity to profit from such charges. With that said, there are many charges and expenses that should either be excluded from the definition of common area costs or capped to ensure that tenants are paying only their fair share of such costs.

As an example, most leases provide that the landlord can charge the tenant for a management fee for the landlord or some third-party company to manage the project or the shopping center. Without a cap on the amount the landlord can charge as a management fee, the landlord could charge a reasonable management fee or an exorbitant management fee for the landlord’s cousin to manage the project or shopping center. The landlord might also charge a separate administration and supervision fee in addition to the management fee. We have seen these fees as high as 30% of the common area costs, which is an indicator that the landlord is using common area costs to generate additional income. As such, the importance of negotiating certain cost control measures over common area costs becomes paramount in controlling the amount the tenant pays in additional rent.

There are also various other charges and expenses that should be excluded from common area costs which are usually included by the landlords with more favorable leases, including capital expenditures, attorneys’ fees, damages caused by the acts of landlord, etc. In order to make sure that the tenant is paying for legitimate common area costs, here are few suggestions.

Steps To Reducing Common Area Costs (CAM)

1. Establish a First Year Cap on CAM Costs

First, the tenant should start by asking the landlord for a budget of what common area costs are projected to be for the first calendar year during the lease term. A good starting position would be to then ask for a first year cap on common area costs based on the projected common area costs set forth in the budget. If the landlord rejects this proposal, then the tenant can propose that the projected common area costs plus 5% should serve as the first year cap, which will provide the landlord with some flexibility if the actual common area costs are more than what was projected in the budget. Also, getting a budget of common area costs will provide the tenant with insight as to what expenses and charges the landlord intends to include in common area costs. This is helpful in identifying any expenses and charges that should be excluded from common area costs, as further discussed below.

2. Set an Ongoing Cap on CAM Costs

Along with the first year cap, the tenant should also request an ongoing cap on common area costs so that such costs cannot increase year-over-year in excess of some percent (e.g., 5%). An ongoing cap will provide the tenant with a much clearer picture of what common area costs (and additional rent) will be in the future. Being better able to forecast future expenses is beneficial to any tenant. It’s worth noting that certain items of common area costs are generally excluded from ongoing caps, including real estate taxes and insurance costs.

3. Negotiate the Exclusions from CAM Costs

The tenant should also provide the landlord with a list of items that should be excluded from common area costs, such as mortgage payments, capital expenditures and management fees in excess of some percent of common area costs, etc. This ensures that the landlord is not using common area costs to generate profits but to actually cover legitimate expenses relating to the common areas of the project or shopping Center. We typically negotiate on behalf of our client-tenants an extensive list of expenses that are excluded from common area costs.

4. Include an Audit Right

Lastly, the tenant should always negotiate for an audit right (i.e., the right to review the landlord’s books and records relating to common area costs) to keep the landlord honest. If the tenant elects to have an audit performed and the results show that the tenant overpaid for common area costs during the applicable year, then the landlord should then reimburse the tenant the overpayment amount or credit such amounts from the next installment of rent.

Final Thoughts on CAM Cost Control

These are just a few cost control measures that can assist the tenant with controlling and reducing its common area costs and Additional Rent. Over the term of the lease, which might be 5 to 20 years, this can equate to considerable savings to the tenant. Obviously, negotiating to include these measures depends on many factors, including the leverage either party possesses in the negotiation and what is considered customary at that time in that market. If you need assistance in the negotiation process, please reach out to an attorney experienced in commercial lease negotiations.

Please Note: This document does not constitute legal advice. Please consult an attorney for legal advice on what to do in a particular situation.

 

Albro Lundy III attorney

Clint Wilson

call Baker, Burton & Lundy

To learn more about how Baker, Burton & Lundy’s experienced attorneys can represent or advise you, please call (310) 376-9893 or fill out the form below.

How to Avoid Having a Lien Recorded Against Your Home after Construction

Avoiding Construction Liens on your Home

How to Avoid Having a Lien Recorded Against Your Home after Construction

By Clint Wilson

During the remodel or renovation of your home, here are some steps to take to help ensure that your property remains lien free after construction is complete. First, it’s worth mentioning that during construction, various subcontractors and materialmen may have sent you preliminary lien notices. These notices are meant to inform you which subcontractors and materialmen, if not paid in full, have the right to record a lien against your property. If any subcontractors or materialmen have previously provided you with a lien notice, you will definitely need to obtain unconditional lien releases upon completion of work.

With that said, the home improvement agreement between you and the general contractor should already provide for most of the following, however, if it does not (or if there was no agreement), here are some items worth requesting from your general contractor to help ensure your home remains lien free after construction.

  • Conditional lien releases from those subcontractors and materialmen that have completed their work (or portion thereof) but have not been paid in full.

    Conditional lien releases should be submitted by the general contractor with each application for payment or invoice. “Conditional” means that they will release their lien rights upon getting paid. Each conditional lien release should be followed by an unconditional lien release once payment has been made.

  • Unconditional lien releases from those subcontractors and materialmen that have been paid in full.

    Unconditional lien releases from subcontractors and materialmen that have completed their work and have been paid in full should accompany subsequent applications for payment or invoices.

  • Unconditional lien releases from all subcontractors and materialmen once the general contractor has been paid in full, or preferably, prior to final payment being made.

    Note that pursuant to an agreement with the general contractor, the owner might have negotiated for the right to withhold some portion of the general contractor’s fee until the owner is provided with all unconditional lien releases and the project is complete. As such, the general contractor will need to ensure that all subcontractors and materialmen are paid and have provided unconditional lien release prior to receiving its final payment.

  • Notice of Completion.

    Also, depending on the project, a Notice of Completion recorded by the general contractor against the property. The Notice of Completion will limit the period of time that any subcontractor or materialmen can file a lien against the property from 90 days to 30 days.

Hopefully by asking for these items, or better yet, having the general contractor required to provide these items in your home improvement agreement, you can avoid having a lien recorded against your property. Avoiding a lien is always easier than removing one from your property and it is prudent to seek legal advice for your specific situation.

 

Please Note: This document does not constitute legal advice. Please consult an attorney for legal advice on what to do in a particular situation.

 

Albro Lundy III attorney

Clint Wilson

call Baker, Burton & Lundy

To learn more about how Baker, Burton & Lundy’s experienced attorneys can represent or advise you, please call (310) 376-9893 or fill out the form below.