Category: Real Estate Best Practices

Even if you think you are going to grow, move or sell your business by the planned expiration of your lease, it is still in your best interests to secure a renewal right.  First, you don’t know what the future holds and your current plans to double in size where you are may morph into plans to double in size by expanding to a new market.  In that instance, you will want to keep your current location.  And no matter how valuable your tenancy might be to your new landlord now, you cannot predict the future.

Example: you are a Fortune 500 company leasing one full floor for five years in a ten story building.  In year three of your lease, a Fortune 100 company leases the two floors above you and the one beneath you.  They negotiate a right to take your space at expiration of your lease. How can they do this? You don’t have a renewal right.  Or, at expiration, they request your space.  As much as your landlord wants to retain you, it is more important to him to retain the potentially four floor Fortune 100 tenant than you.

Now if you have a renewal right at a predetermined rate (either a specific dollar amount or a fair market rent determined by both parties), you still have the option to stay.  You also have the option to work with the landlord to be relocated within the building at the landlord’s cost because the landlord cannot just opt not to renew your lease.

Disclaimer: I am and always have been a tenant representative.  If you represent landlords, apply the opposite rule to the above rant.

In my twenty years in tenant representation, I have brokered numerous building purchases and sales.  In most of these transactions, both sides have sophisticated attorneys drafting purchase and sale agreements, title companies working out closing details and bankers focusing on the exchange of funds.
However, I have found that there are some very specific areas that are often overlooked.  This is my top five:

1. Transfer of property management. Does the building currently have a facility manager or management company? If so, what is the term of their contract and is it transferable or terminable? How much notice is required for either?

2. Security systems. This is a big problem in retail bank sales. Government privacy regulations often require all such security systems to be wiped completely clean. At one banking client of mine, this meant taking a magnet to the security system. This is not conducive to reuse of the system. Is the buyer aware of this?

3. Insurance. Is the buyer covered for liability during any due diligence they conduct on site? Do both the buyer’s and seller’s insurance companies realize that the asset is changing hands? No one wants to have an asset with no coverage. Similarly, no one wants to pay for coverage on an asset they no longer own.

4. Leases. As many sellers have learned the hard way, working out tenant issues at the time of sale is a struggle. Do not wait until you are asking a tenant to sign an estoppel certificate to ask them if there are any problems with their tenancy. Resolution of significant problems can and will hold up a sale.

5. Leases, part two. If you are a buyer, read every word of every tenant lease. Otherwise, there may be an exclusivity provision or signage stipulation of which you are unaware.

If you have learned some other lessons you are willing to share, I would love to see your comments below.

Mike Brown, Partner, Bradley

You have worked hard and you now have in your hand a signed purchase and sale agreement (“PSA”) for your client. Closing is set in 45 days but there is still a lot of work to be done. During the 45 day time period, the Buyer sought to modify the PSA (1) orally; (2) by a signed amendment; and (3) by an email. You wonder if any of the attempted amendments are effective.

As an initial matter, whenever faced with a question regarding the interpretation of a contract such as the PSA, first look to the contract itself.  Hopefully your PSA has an Integration or Merger Clause or perhaps an Amendment Clause.  If so, the terms of those clauses will govern whether, and how the PSA can be modified.  If there is no such clause, the state law that governs your contract will determine whether the modification is effective.

An example of a typical merger clause in a Purchase and Sale Agreement might be as follows:

“Entire Agreement.  This Agreement represents the entire agreement between Purchaser and Seller and supercedes any other agreements or understanding whether written or oral and may not be changed unless in writing and fully executed by both Purchaser and Seller.”

This looks good right?  It says this is the full agreement of the parties and it also says that the agreement cannot be changed unless that change is (1) “in writing” and (2) fully executed by both Purchaser and Seller.”  That all seems clear until someone sends an email or text message.  Aren’t those writings?  What does it mean to be a “fully executed” document?

The interest of the drafter of this PSA seems to be fairly clear – he or she wanted to ensure that any modification be in the form of a written contractual-type document signed by both parties.  However, case law and various federal and state statutes may lead to a different conclusion.

First, what constitutes a “writing” is not as straight forward as you might think.  A writing can be an email or even a text message.  The actual purpose of a “writing” has long been to avoid disputes over oral agreements or alleged oral modifications because oral agreements are subject to the foibles of memory, and the never ending dispute of “he said/she said.”  Because of the many issues surrounding oral agreements, most states have some version of the Statute of Frauds which generally requires certain type agreements to be in writing.  Specific among these are contracts for the sale of land.  Whether a writing meets the requirements of a statute of frauds will vary from state to state.  In general, a writing need not be a formal contract, but must be sufficiently complete and definite and reflect the intentions of the parties.  The writing must contain the essential terms of the parties agreement.  With such a general definition, emails and even text messages can constitute a writing.[1]

Second, a fully executed contract might not mean exactly what you would think in all situations.  One might be able to review an email or text message and clearly see a “writing;” however, can an email or text message function as a “signature” or an “executed” writing?

In June 2000, President Bill Clinton signed into law the Electronic Signatures in Global and National Commerce Act.  That Act set a single national standard for using electronic signatures in legal documents.  As a general matter, the Act allowed people to “sign” documents without actually physically signing a hard copy.

Many states, including Alabama, have passed their own state law version of the electronic signatures act.  Ala. Code § 8-1A-1 et. seq.  Under most versions of this sort of act, an “electronic signature” is, in fact, a “signature.”  So, when a document has an electronic signature block or something denoting an intent to “sign” the record, it may be a signature.

“Electronic signature” has been defined to include the use of an electronic symbol or process with intent to sign or authenticate.[2]  The details of just what is needed in terms of the requisite symbol or processes has been left to the states and courts.  Some courts have found that an email or even a text identifying the sender’s name, along with the affirmative step of sending the email or test is enough.  Other courts have looked for a “signature block,” some looking for an automated signature and others allowing a manually typed name.  The Alabama statute says that “[T]he effect of an electronic signature attributed to a person…is determined from the context and surrounding circumstances at the time of its creation, execution, or adoption, including the parties’ agreement, if any, and otherwise as provided by law.”  Ala. Code § 8-1A-9.

So, with so many variables as to what constitutes an executed writing, what should you do?  First, be as clear as possible – if you want “writing” or “executed” to mean “not an email” or “not a text,” then clarify that within the body of the PSA or, state within the body of the electronic communication that the email or text is not meant to bind, nor can it bind your client.  Second, make sure you keep your client apprised of all correspondence you receive from or send to the other side.  That will enable the client to participate in the decision making without ending up being bound by your text or email that was not intended to be anything more than confirmatory.

[1] St. John’s Holdings, LLC v. Two Electronics, LLC, No. 16 MISC. 000090 (RBF), a Massachusetts Land Court held that text messages between two real estate brokers may be sufficient to constitute a finding contract for purchase of a commercial property.

[2] Ala. Code § 8-1A-2 defines “Electronic Signature” as: “An electronic sound, symbol, or process attached to or logically associated with a record and executed or adopted by a person with the intent to sign the record.”

In the McKinsey Quarterly article “The CEO Guide to Customer Experience”, McKinsey states “companies that create exceptional customer experiences can set themselves apart from their competitors”.  The authors of the article go on to suggest that companies apply behavioral psychology to customer interactions to accomplish this goal.  “For example, savvy companies can design the sequence of interactions with customers to end on a positive note…One pilot study at a consumer-services firm found that more improvements in net-promoter scores accrued from “soft” behavioral-psychology initiatives rather than from “hard” improvements in operations.”

So what does this mean to service providers? In brokerage, I think it is relatively easy to end our interactions with our clients on a high note because deals typically conclude with the client staying in space they like or moving to the new space they desire; overall, a positive outcome.  However, we can ensure this happy ending by carefully reviewing the lease and work letter (if applicable) so that our clients’ expectations are well articulated in the document.  We can also help generate a positive outcome by staying involved after lease signing to ensure that the build-out process, if any, goes smoothly.  Even after move in, our clients know that we are their partners and will help them resolve any problems we are able to for the life of the lease.

In law, it’s harder to end on a positive note.  In transactional work, if a deal progresses smoothly, a lawyer has “met expectations”.  If the deal is a home run, typically the business people get the credit.  If it falls apart, you can be sure someone is going to be looking for a lawyer to blame.  Similarly, in litigation, a client is either suing or being sued.  Even if they are the prevailing party in the end, usually they are still frustrated because they had to go through litigation in the first place and it cost them a lot of money.  So a win doesn’t really feel like a win.  And, in almost all cases, the law firm’s bill is the last interaction the firm has with a client until another matter arises.

So how can a law firm redesign the sequence of interactions to end on a high note?  If not already doing so, law firms could schedule client meetings after the conclusion of a matter to debrief on the project or litigation and brainstorm process improvements for the next deal or lessons learned to avoid similar litigation in the future.  The attorney involved could draft new contract language for the client’s form file based on the concluded transaction or write a training plan for employees to avoid similar litigation in the future.  This might help the client feel like with its attorney’s help, they learned something from one interaction that will improve the next one.

How can you redesign your client interactions to end on a high note?

After design and construction of their new San Francisco location was completed, Littler Mendelson utilized a novel approach to assigning offices.  By analyzing security card swipes over the prior year, they determined which attorneys spent the most days working in the office and those attorneys were given priority status in the office selection.  Philosophically, the firm was not punishing those who worked from home but rather recognizing that those attorneys who spent the most time in their offices should have their pick of them.  Note that Littler did not tell their attorneys ahead of time that this was the criteria so there was no gaming the system!

Is a Lease in Alabama valid if the signatures are not witnessed?

In short, No.

I asked one of the talented lease lawyers I work with, Adam Sigman of Sirote & Permutt, this question recently and immediately received this reply:

Alabama’s version of the Statute of Frauds provides that leases (except those with a term of one year or less) are void unless the agreement or a memorandum, setting out the consideration in writing, is signed by the party to be charged or that party’s authorized agent (Ala. Code § 8-9-2).
The signature(s) must be at the foot of the document and be attested by one witness or, where the party cannot write, by two witnesses (Ala. Code § 35-4-20). A proper acknowledgement by a notary public or other authorized officer satisfies the witness requirement (Ala. Code § 35-4-23).

Also, per Adam, any lease for a term longer than twenty years (including renewal options) must be recorded to be valid.

Now, if you want to know what your remedies are if these requirements are not met, call your lawyer!

I would be happy to sit down and map out a process for documenting this for your clients. My initial thoughts are that you have to consider:

1. What are the economic incentives to extend the lease or not opt to terminate?
2. What are the client’s future commercial office needs (historic growth, projected growth, etc.)?
3. Does this office space accommodate these future needs?
4. Are there other trends or industry issues that might affect their needs?

–   Based on the above (not meant to be all inclusive), does the office meet their future needs and are the economic incentives strong enough that they would lead one to believe that it is reasonably certain that an extension will be executed keeping in mind the high threshold criteria of meeting this requirement.

I think the standard was written in this way to provide for more wide use in various industries and situations.”

At Colliers Alabama, we are making an effort to get together with our clients after their accounting teams have had a chance to consider this issue themselves and come up with a go-forward approach to lease renewal options to ensure that we are getting them the flexibility they need without adversely affecting their financial statements.  We know that it is important to them to stay in front of this and other industry issues so as not to be the recipients of unwelcome surprises.