07/16/2000

PLAIN ENGLISH P'LEASE (a/k/a The Saga of the Poorly Drafted Lease)

By Michael Schwartz and Julie Ann Keir

ACG Professionals, Inc.

We've all seen it: the poorly drafted, ambiguous commercial real estate Lease, replete with so much "legalese" that it gives the reader a migraine headache upon trying to decipher its meaning. Quite often, complex Leases create more questions than they were designed to answer. At ACG Professionals, Inc., we review, analyze and abstract thousands of commercial real estate Leases each year. As such, we are constantly faced with the daunting task of reading and transcribing into abstract form many difficult and hard to interpret Leases. For those of you who can relate, we ask:

1. Why are Leases drafted in such a manner?
2. What can be done to change Lease drafting techniques and reflect plain English language so that the average layperson can better understand Lease terms and calculate their economic and non-economic impact in an easier manner?

This article will answer the foregoing questions in an attempt to persuade drafters of real estate Leases to approach the process in a better way and to enable both the Lease drafter and Lease reader to agree with one another.

Why Are Leases Drafted In Such Difficult Terms?

Commercial real estate Leases are read on a daily basis by many people including property managers, lease administrators, lease collection personnel, and accounts payable clerks. As is evident from these job titles, however, most lease readers are not attorneys nor have legal backgrounds. A recent article found that real estate documents contain the most "legalese" of all legal documents and, moreover, "Leases are the most poorly written of all legal documents in terms of clarity." Why, then, are Leases written so poorly and filled with such difficult language when the average Lease reader has little or no legal background?

The answer to this question is twofold. First, virtually all Leases are drafted by attorneys or legal assistants with significant attorney input. Very often, the Lease drafter is a young associate or paralegal in a law firm trying to impress the partner with his or her legal acumen. As such, the drafter is trained and feels compelled to use "legalese" in preparing a Lease. However, unlike legal briefs, memoranda and related legal documents, the typical Lease-reading audience does not consist of other attorneys, but the property managers, lease administrators and other personnel mentioned above. Sure, some provisions in a Lease, such as condemnation, casualty or default, will apply in legal proceedings and be referred to by attorneys. However, provisions such as rent clauses, recoveries, renewal options or go-dark provisions are generally not referenced by attorneys on a daily basis. Yet these provisions often contain hard to interpret provisions written in "legalese" as well.

The second answer is attributable to time constraints. Often the associate or legal assistant -- and the law partner too -- engaged in the drafting of a Lease is so pressed for time that they do not think clearly about what they are drafting. They often do not put in enough time to draft the Lease let alone to think about who is their ultimate audience.

A few examples of poorly drafted Lease provisions must be highlighted before we address how Lease drafting techniques might be improved upon. The following Renewal Option clause was recently abstracted by ACG from a New York office building (the actual names referenced in the Lease have been changed, however):

"Subject and subordinate to the rights granted to the tenants under Leases between the Landlord and either Company, Inc. or Law Firm with respect to the 28^th and 29^th Floors of the Building and subject and subordinate to any rights granted or that may be granted to tenants with respect to the Comparable Space and the Supplemental Space (if the same shall be Leased to the Tenant), the Tenant may elect to extend and renew the term of this Lease for one (1) ten-year period, as hereinafter provided, by giving written notice thereof to the Landlord not earlier than February 1, 2003 and not later than March 31, 2003, as to which March 31, 2003 date time is of the essence; provided, however, that the Tenant's notice shall not be deemed properly given to the Landlord unless such notice contains the following legend prominently set forth in bold type: "LANDLORD IS REQUIRED UNDER SECTION 30.1 OF THE LEASE TO NOTIFY THE TENANT IN WRITING WITHIN ONE HUNDRED FIVE (105) DAYS AFTER THE DATE ON WHICH THE LANDLORD RECEIVES THIS NOTICE WHETHER THE TENANT'S EXERCISE OF THE OPTION TO RENEW THE TERM OF THE LEASE AS SET FORTH IN THIS NOTICE IS EFFECTIVE."

The same section continues on, indeed with no paragraph break, with respect to the rent payable in connection with the foregoing renewal option, as follows:

"Upon and in the event of the giving of such notice by the Tenant in a timely manner to extend and renew the term of this Lease, and provided that the Landlord shall have given, or be deemed to have given, the notice provided for in clause (a) above, the initial term of this Lease shall (unless said initial term shall sooner have expired or terminated pursuant to any of the conditions of limitation or other provisions of this Lease or pursuant to law) be deemed extended and renewed for one additional period of ten (10) years (herein called the "Renewal Term"), namely, the period commencing on February 1, 2004 and ending on January 31, 2014 (subject to earlier termination pursuant to any of the conditions of limitation or other provisions of this Lease or pursuant to law), such extension and renewal to be subject to and upon all of the terms and conditions of this Lease (including, without limitation, Article Twenty-four hereof) except that during the Renewal Term the fixed rent payable hereunder shall be equal to the sum of (i) the product obtained by multiplying the Tenant's Area by the R.E. Tax Share of the Real Estate Taxes for the Tax Year beginning on July 1, 2002 and ending on June 30, 2003, (ii) the product obtained by multiplying the Tenant's Area by 110% of the O.E. Share of the Cost of Operation and Maintenance for the Computation Year beginning on January 1, 2003 and ending on December 31, 2003 and (iii) ninety-five (95%) percent of the amount, if any, by which the Fair Market Rental Value (as defined in Section 30.3 below and determined in accordance with the provisions of this Article) for a Lease, the term of which commences on February 1, 2004, exceeds the sum of the amounts described in clauses (i) and (ii) above."

This is one sentence that contains over 300 words! James Joyce would be very proud of this drafter who likely wanted to impress somebody with how much legalese he or she could include. No doubt, however, a lot of time was spent drafting this provision and incorporating all of the relevant renewal option terms in the sentence. Yet the drafter did not think about who was going to interpret this provision once the renewal is triggered and rent must be calculated and paid. How is the average lease administrator, who we should add is as pressed for time as the attorney who drafted this sentence, supposed to calculate what renewal option rent to place on the property rent roll from this language? Could not the drafter have spent the same amount of time breaking the sentence up or incorporating a table or chart to illustrate option rents? These questions are answered in part B below.

What Can Be Done To Change Drafting Techniques?

Now that we have identified that there exists a Lease drafting problem, what can be done to incorporate better Lease drafting techniques so that the average Lease reader can better understand Lease terms?

1. Remember the Audience

When drafting legal documents the Lease drafter must remember who is the audience. This is critical if Lease language is to be interpreted accurately. So often (see above examples) we see Lease language that is written or authorized by lawyers for lawyers. Remember that most people reading a Lease are not lawyers or paralegals nor have legal backgrounds. This is particularly frustrating for lease administration and accounting staff, clients and others who handle Lease files. Imagine your lease administrator pulling his or her hair out because he or she cannot accurately calculate the renewal rent in the earlier example due to run-on ambiguity. Or how about the accounts payable clerk responsible for processing monthly rental payments? When the renewal rent kicks in, he or she will be required to spend an inordinate amount of time calculating how much rent should be paid, if they are able to calculate it at all. Alternatively, are they supposed to contact an attorney in order to interpret what should otherwise be a simple Lease concept? Such a proposition is highly inefficient and unlikely. What often happens in such instances is that a "guess" is made as to the amount payable. The landlord's lease administration personnel likely are equally as perplexed to figure out the renewal rent provision that they often merely accept the tenant's payment without question or verification with the Lease.

Potentially, a lot of money can be lost in the leasing process because the Lease drafter made the provision too difficult to understand to the average Lease reader. Typically, Leases are not read by other attorneys but by clerical staff with little or no legal background. Therefore, it is critical for the Lease drafter to remember who is the audience.

2. Take the Time to Engage in Better Lease Drafting Techniques

In the game of football, the most difficult opponent does not necessitate a difficult game plan. Similarly, difficult Leases with difficult concepts do not necessarily have to be stated in difficult terms. When drafting a difficult Lease, it is best to start with an outline of the basic points and continue through the process with each drafting round becoming more detailed and complex. The outline should include the basic deal points provided by the broker, leasing representative or other staff person involved in the Lease transaction. Be sure to include in the outline all monetary issues, Landlord's recoveries, Tenant's and Landlord's rights, expansion rights or rights of first offer, and other clauses specific to the type of property in question such as radius or kickout clauses for retail Leases. A good, concise outline also serves as backup for any future questions regarding the deal. The drafter must keep track of the outline and check-off every point as it is incorporated in the drafting process. Outlines can save a lot of confusion and searching through files to have a check-off list available to review during the drafting process or in the future once a deal is completed.

The drafter should then engage in a rough draft of the Lease by expanding on each point of the outline with 1 or 2 sentences as a round #2 of the drafting process. Then expand each sentence to encompass a whole paragraph for round #3. In addition, there are numerous sources that might be used to aid in drafting thereby precluding the drafter from having to "reinvent the wheel." Possible sources include associates within the office, other similar deals recently completed in the same property, or standard language compiled by the landlord or tenant in question. Other sources include Lease drafting books, standard forms, standard language issued by your company, other law firms, real estate industry associations and the like. Don't be too shy to ask around the office either. The Lease in question has likely been drafted before. But in all cases, remember that someone other than the drafter will be reading and interpreting the Lease on a daily basis. Don't leave Lease interpretation to someone else (including a judge in the event of litigation) -- say what you mean.

3. Take the Time to Engage in the Review Process

Upon completion of the Lease language, review and read the Lease to ensure that it is clear. Have a third party non-legal person such as a secretary or accounting clerk read the Lease for clarity as well. If he or she has difficulty, it needs to be redrafted so that the average Lease reader can understand the Lease with little or no difficulty. Then, upon soliciting any comments, dissect and review the language again as an additional check on your drafting skills. Be sure to verify that all Lease clauses: 1) are concise and do not ramble on; 2) make a clear point; 3) make sense to the average Lease reader; 4) cover all important economic and non-economic issues; 5) incorporate "what if scenarios" in plain English; 6) contain no spelling or grammatical errors.

Once you have completed a particularly complex Lease it is also wise, time permitting, to leave it aside for a day or two (or if time is of the essence, for an hour or two) and come back to reread it for content, clarity and accuracy. The level of understanding the drafter should be striving for is simplicity, not complexity. One's drafting skills are only as good as one's effectiveness to communicate to the reader. It does not bode well to have invested numerous hours drafting a Lease only to have it so complex and convoluted that the drafter is the only one able to understand its meaning. This becomes additionally inefficient and costly in the subsequent lease administration process. Take the necessary extra time to review and make sure every provision is understandable to the average Lease reader.

Lease Amendments

Remembering the audience and taking the time to engage in better Lease drafting techniques and document review is equally as critical for a Lease Amendment as for the Lease itself. Often, Lease drafters think that because it is a simple Amendment they can just whip it up, copy the old one off the hard drive and go to it. It will be done in a matter of minutes. No, No, No. Do not draft another Amendment without reviewing the legal file! In the course of ACG's reviewing and abstracting thousands of Lease files each year, we can't tell you how many times we have come across two Second Amendments in the file, or Amendments citing the wrong Lease date or missing square footage on an expansion because prior Amendments are not contained in the Lease file. Be sure to check all files and documentation up to the date of drafting the Amendment. The review process should also include reviewing the Lease correspondence file. Very often, we find that two or three critical letter agreements were hidden away in the correspondence file and not cited or referenced in the Amendment. Do your homework before jumping in and drafting a Lease Amendment. Leave an accurate paper trail of the entire Lease transaction. And remember, the audience reading the Amendment is the same audience reading the Lease.

Conclusion

In summation, the commercial real estate Lease is often poorly drafted. Attorneys incorporate so much legalese in them that Lease administrators and others who read and review Leases on a daily basis have trouble identifying and understanding critical Lease terms. With careful thought taken into consideration as to whom the audience is and what is trying to be reflected in the applicable Lease provision, Leases can be drafted in a clearer manner to avoid traditional ambiguity and poor draftsmanship.

Michael Schwartz is Vice President of ACG and National Director of Due Diligence. You may contact Mr. Schwartz at mschwartz@acgpro.com or at www.acgprofessionals.com

Julie Ann Keir is Senior Analyst at ACG. You may contact Ms. Keir at jkeir@acgpro.com or at www.acgprofessionals.com