When Does the Lease End?

April 7, 2013

Commercial lease can be difficult to negotiate. Residential leases are usually for one year or less, while commercial leases are often created for longer intervals. A longer lease is important in a commercial setting for many reasons. While individuals can buy a home, many businesses are never in a position to purchase all the space they need for the business. There are costs and benefits for both sides to consider when signing a multiyear lease.

The owner has the benefit of consistent rent for the duration of the lease and less often has to worry about the costs associated with finding new tenants. The building owner is also protect if the local real estate prices drop during the lease because the rent will not change. However, the owner may also lose money if local prices increase, because he will be unable to capitalize on it. The same issue, of course, applies to the renters as well. Also, having the ability to rent for multiyear terms, allows a business owner to make better decisions. The length of the lease may be a deciding factor regarding design decisions because at the end the lease you often have to revert the space to condition in which you received it. Some changes are just easier to remove than others.

Another factor that should be considered in a commercial lease is the possibility of the building owner selling the building. This can be an issue for the renter because depending on your lease and the goals of the new owner you could be kicked out sooner than expected which could harm your business. Take for example, the California case of Principal Mutual Life Ins. Co. v. Vars, Pave, McCord & Freedman. In this case, Vars, Pave, McCord & Freedman (VPMF) signed a five year lease for office space (the lease) in an office building owned by 16030 Associates (the landlord). She the end of the lease, VPMF chose to renew it for another five years. During the second lease, the landlord sold the building to Principal Mutual Life Insurance Company (Principal), the defendants. Within a year after the building was sold, VPMF decided to leave the office space. The issue in the case is whether there is a valid lease between VPMF and Principal.

In the lease signed by VPMF, there was an attornment clause. Attornment is the act of a tenant by which he agrees to become the tenant of the property’s new owner. When a lease obligates a tenant to attorn to a new landlord in the event of a foreclosure, the terms of the attornment provision will govern how that is to occur and its effect on the existing lease. This case is complicated because even though the firm agreed to enter a new lease with a new landlord, the firm and the original landlord also agreed that the firm’s lease would be automatically subordinated to any future encumbrances, which, by operation of law, end the lease in the event of foreclosure.

The court found that Principal was a third party beneficiary to VPMF’s contract with the first landlord. A third party may qualify as a contract beneficiary where the contracting parties must have intended to benefit that individual, an intent which must appear in the terms of the agreement. The purpose of the attornment clause was to benefit any future owner, which in this case is Principal. A third party beneficiary may enforce a contract at any time before it is rescinded. If rescission has not occurred according to the statutory procedures, but the contract is instead terminated for some other reason, a third party beneficiary may still enforce the agreement. In this case the lease was never rescinded. It ended by operation of law, but the attornment clause was specifically designed to take effect upon the lease’s end by foreclosure. Therefore, VPMF was required to sign a new lease with Principal as long as it was for the same terms as the original lease.

Before signing a contract, it is important to review it carefully. All agreements are a delicate balance between what you need and how much you are willing to pay for it. A business attorney can help you find the terms most beneficial to you. If you need a business lawyer in the Sacramento area, please call our Sacramento business attorney.

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