Bernstein Shur Monthly – February 2018

Bernstein Shur Welcomes Three New Shareholders

Chad W. Higgins, Portland ME
Christopher M. Dargie, Portland ME
Kristin A. Mendoza, Manchester NH

Leasing Commercial Space: Key Tenant Considerations

By: James D. Kerouac

Most businesses have a need for real estate in which to operate, and leasing office space or other commercial space is often the most appropriate way to procure the needed real estate. But for many business owners and executives, leasing commercial space is not one of their core competencies. The process of negotiating a lease and the language of commercial leasing are foreign to most business owners and executives, even to the most seasoned and experienced owners and executives.

If your business is in the market to lease new commercial space, there are a number of important issues to consider as you evaluate your options.  Here are just some of those considerations:

Get Professional Help!

Businesses often decide to go it alone as they search for and acquire new leased space. They are told by landlords that the lease is the “standard” commercial lease, and all tenants sign the lease without modification. Unfortunately for those businesses, there are pitfalls that can be avoided in “standard” commercial leases and areas in commercial leases where even the smallest commercial tenant can get the benefit of negotiating better terms by engaging the right team. Although commercial landlords generally have the upper hand in terms of leverage, there are always opportunities to negotiate the terms of the deal to protect the tenant and maximize the deal for the tenant’s benefit.

Understand the Economics of the Deal

The rental terms of commercial leases come in three basic flavors: (1) gross; (2) triple net or “NNN”; and (3) modified gross.

In a lease where rent is payable on a gross basis, the tenant pays rent at a fixed rate set forth in the lease and the landlord pays all expenses associated with the operation of the property, including property taxes, insurance and maintenance. In a gross lease, the landlord builds into the pricing of the lease the anticipated cost to operate the property and tenant has no additional responsibility for any operating costs.

In a triple net lease, the tenant is responsible for its proportionate share of the annual expenses incurred by the landlord for property taxes, insurance and maintenance. The tenant pays a lower base rent, which is “net” of operating expenses. In addition to the base rent, the landlord will charge tenant for its proportionate share of operating expenses, including taxes, insurance and maintenance costs.

A modified gross lease is something of a hybrid between a gross lease and a triple net lease. In a modified gross lease, the lease includes a base rent, which includes an amount to cover the annual operating expenses for the first year of the lease. Each year after the “base year” (which is typically the first calendar year of the lease term), the tenant will pay its proportionate share of operating expenses incurred by the landlord over the landlord’s operating expenses for the base year.

A tenant will need to understand the actual cost of the space that they plan to lease. So it is critical that the tenant understands the parameters of which expenses will be passed along to the tenant as “operating expenses” in a triple net lease or a modified gross lease, the anticipated amount of those expenses and any other expenses that the tenant will bear under the lease.

Fit-Up of the Space

The lease will need to address the details of the preparation of the leased premises for the tenant’s occupancy, and which party is responsible for the work, including space planning, permits and approvals and construction. When the landlord is responsible for performing the fit-up, it is critical that the lease address the plans and specifications for the work, the timing of completion of the work and the tenant’s inspection and acceptance of the space upon completion of the work. If the tenant will perform the fit-up of the work, the lease will need to provide a process for the landlord’s review and approvals of the tenant’s plans and specifications, supervision of tenant’s work and include insurance and indemnification provisions to protect the landlord during the construction.

Failure to comprehensively address the fit-up provisions of the lease can lead to major unwanted surprises later, from unanticipated delays in delivery of the space to delivery of space in a condition that is inconsistent with the tenant’s expectations.

Tenant Options

Depending on the tenant’s leverage, the tenant may be able to negotiate options that can be exercised at a future date. To the extent that the tenant may wish to include options in the lease, the tenant should make sure that the basic terms of any such options are included in the letter of intent or term sheet. The most common option in commercial leases is the option to renew the term of the lease for additional, successive periods of time after the initial term. For some tenants that expect or hope to grow their business during the term of the lease, the tenant may wish to negotiate options to expand the leased premises when and if other (usually adjacent) space owned by the landlord becomes available.  Such options may take the form of a right of first refusal or a right of first offer. In very rare cases, a landlord may be willing to provide a tenant with the option to terminate the lease prior to the expiration of the term, to relinquish portions of the leased premise or to purchase the property.

Rights to Sublease and Assign

While most tenants do not have any plans to sell their business or reduce their space needs at the time a lease is signed, it is important to pay attention to the provisions of the lease governing assignment of the lease or subleasing space. Particularly close attention should be paid to the subleasing and assignment provisions of the lease if the tenant has plans to sell the business or bring in new partners or shareholders or other equity investors during the term of the lease.

Contact Us. 

Bernstein Shur’s Real Estate Practice Group can help potential tenants understand and negotiate all manner of commercial leases. To learn more about our commercial leasing practice, please contact Jim Kerouac at 603-665-8824 or jkerouac@bernsteinshur.com.

Introducing The Bernstein Shur E-Discovery Newsletter

As part of its commitment to providing sophisticated and cost-effective litigation services to individuals and businesses in ME and throughout the country, Bernstein Shur is excited to announce its new E-Discovery Newsletter.

No matter the forum or subject matter, litigation often is expensive, time-consuming, disruptive, and stressful. One significant part of the litigation process that has become increasingly daunting in recent years is discovery—that is, the formal process of exchanging information between parties to a lawsuit. Discovery, which not too long ago centered on paper documents, has evolved into something completely different today, in large part because of the explosion of new data and new technology.

For example, according to some estimates, more than 90% of all data in the world was created after 2015, and the statistics for average daily data usage in 2017 alone are staggering: 5.2 billion Google searches, 4.3 billion Facebook messages, 269 billion emails, and 22 billion text messages each day. To live in today’s world is to constantly create and consume electronic data. And much of that electronically stored information, or ESI, has become increasingly important in litigation, too: litigants and their attorneys must look to where the evidence is, and that requires consideration of novel and challenging issues relating to ESI and electronic discovery, or “e-discovery,” including questions about how to identify, collect, process, review, and produce ESI.

The Bernstein Shur E-Discovery Newsletter will tackle the e-discovery issues that individuals, businesses, and attorneys may encounter in modern state and federal court litigation, including topics such as new developments in e-discovery rules, case management and controlling ballooning e-discovery costs, e-discovery tools for small businesses and small law firms, document preservation practices and litigation holds, technology assisted review and artificial intelligence, using ESI search terms, new sources of ESI, confidentiality and the attorney-client privilege, and much more.

The attorneys at Bernstein Shur understand that e-discovery—like litigation generally—can be challenging, and even overwhelming at times. We hope that the E-Discovery Newsletter will provide some clarity to everyone involved in the process. If you’re interested in subscribing, please send an email to Adam Prescott at aprescott@bernsteinshur.com.

Do You Know the Most Common Kinds of Cyberattacks?

The Association of Financial Professionals (AFP) conducts an annual payment fraud and control survey—according to the 2016 survey results, published May 2017, a whopping 74% of corporate respondents reported that their company fell victim to payment fraud in 2016, making it the largest year on record. Fraudsters are continuing to succeed in their attempts to attack organizations. The main take-away: ongoing awareness and preparation are key. Check out these top tips from Susan Giffard , Director of Treasury Management & Government Banking at Camden National Bank, Rob Simopoulos , Co-Founder of Launch Security, and Tony Perkins , Attorney and Chief Information Security Officer at Bernstein Shur.

What are the most common kinds of cyberattacks?
First, it’s important to understand where cyberattacks come from and what they typically look like. Rob Simopoulos shares that phishing emails are the most common attack method , and attackers often work to disguise themselves as company employees, customers, or vendors. These emails can often be difficult to identify. According to the FBI’s public service announcement from May 2017, Business Email Compromises (BEC) and email account takeover is now a $5 billion scam that targets unauthorized transfers of funds.

Susan Giffard says that fraudsters can research companies through public websites, press releases, social media, and more. Fraudsters look for ways to trick employees into believing emails with company information are authentic. Be on guard for payment scams—in particular, pay attention to requests that:

• Have a sense of urgency, a call for help, or a need for confidentiality
• Add a new contact at a supplier or vendor representing the company
• Update a payment account, typically without a request for a phone contact
• Indicate a change to payment instructions or payment type (check to wire)
• Communicate a sudden change in business practice

Businesses are also seeing an increase in corporate payment fraud—primarily through fraudulent checks and wire transfers. According to the AFP’s 2016 survey, checks have been (and continue to be) the payment most exposed to fraud, but only 10% of the companies targeted incurred a financial loss as a result. Lack of positive pay and clerical errors were two primary reasons for financial loss due to check fraud. Organizations use positive pay to guard against check fraud; it’s a well-established and effective method of protecting payments.

Bernstein Shur partnered with Camden National Bank and Launch Security to offer expert advice on managing fraud and cybersecurity for local businesses. For more information and advice, please reach out to the panelists:

Tony Perkins, Attorney and Chief Information Security Officer at Bernstein Shur
Susan Giffard, Director of Treasury Management & Government Banking at Camden National Bank
Rob Simopoulos, Co-Founder of Launch Security

Buyers Beware, Contractors Relax: New Jersey Tightens the Time in Which to Bring a Lawsuit on a Construction Defect

By: Zachary Brandwein

Recently purchased a property? Discovered a construction defect? Your time to bring a lawsuit based on the defect may be quickly expiring.

In a recent decision, the New Jersey Supreme Court held that the statute of limitations for construction defects begins to run when any owner, whether current or prior, knew or reasonably should have known of a defect. Although this ruling is not applicable to disputes in ME courts, it offers a potential preview of how a ME court might rule in a similar situation.

In The Palisades at Fort Lee Condominium Association, Inc. v. 100 Old Palisade, LLC, et al., the project in question was completed in 2002. The project was operated as a rental property for two years. In 2004, the property was sold and the new owner converted it to condominiums. An engineering report prepared in connection with the conversion determined the building to be in generally good condition. The conversion also established a condominium association which operated and managed the condominium.

Over time, and pursuant to New Jersey law, as the units were conveyed, the condominium owners assumed ownership of the building. In 2006, the owners, acting through their association, finally took full ownership of the building. The owners then retained their own engineering firm to evaluate the property. The new report was completed in 2007, and identified a number of construction defects.

In 2009, the owners filed a complaint against a number of parties, including contractors and subcontractors on the project. The subcontractor defendants argued that the owners’ suit was time-barred by New Jersey’s statute of limitations. The owners’ countered, arguing that the clock on their claim only started to run when they received their engineering report in 2007.

The New Jersey Supreme Court held that the statute of limitations on a claim begins to run on the date on which the earliest owner knew or should have known, through the exercise of reasonable diligence, of the defect. If a prior owner knew or should have known about the defect, a subsequent owner is imputed with the same knowledge. The Court remanded the case for more factual findings, but its ruling has major implications for both property buyers and contractors.

The concern for the buyer of a previously owned property is that the buyer’s time to bring a lawsuit may have already started to run or may have even expired. If a prior owner either knew or should have known of a construction defect and did not bring suit, the subsequent buyer’s claim may be time-barred.

For contractors and subcontractors, this new rule offers some protection and certainty that their exposure to a suit will not continue indefinitely. Each new change in ownership of the property will not renew the statute of limitations.

It remains to be seen whether other states like ME will adopt this standard, but the issue bears watching.