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Category: Commercial Leases


What Is So Good About a Good Guy Guaranty?

October 24th, 2014 — 2:43pm

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divorce1In a commercial lease, a “good guy” guaranty is often signed by one or more of the tenant’s principals. A “good guy” guaranty functions to ensure the payment of rent (and sometimes the performance of other obligations) under the lease through the date that the tenant surrenders possession of the premises. It is less onerous than a personal guaranty which would obligate the guarantor to all of the lease obligations during the entire term of the lease Continue reading »

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The typical scenario in which a “good guy” guaranty becomes operative is as follows: the tenant can no longer pay rent and would like to cancel the lease prior to the lease expiration date; the tenant gives the landlord notice that it would like to surrender the space; the tenant surrenders possession of the space on the agreed upon date; and the “good guy” guarantor is liable up until the date of surrender. Even though the guarantor will be released from liability on the surrender date, the named tenant will remain liable under the lease.

Although the “good guy” guarantee is more favorable to the tenant than an unlimited guaranty, there are some pitfalls. Among the concerns are: (i) the amount of notice that tenant must give the landlord prior to vacating the premises; and (ii) the scope of the guarantor’s liability.

Notice

The “good guy” guaranty provides that the tenant must give the landlord advance notice of the intent to surrender the premises before a guarantor will be released. The notice period reduces the likelihood that the space will be vacant by giving the landlord a sufficient amount of time to find a new tenant.

How much notice is required? Notice periods may range anywhere from one to three months or longer. The guarantor will be liable for certain agreed to lease obligations up until the space is surrendered with the proper notice.

Scope of Liability

The scope of liability under the “good guy” guaranty can vary widely. Some may state that the guarantors are only liable for monetary obligations, such as rent, additional rent, holdover charges and the security deposit.

Many current “good guy” guaranties, however, include the guaranty of performance of all other lease obligations, including the duty to repair the premises, remove any improvements and to indemnify the landlord in connection with personal injury actions which are not covered by insurance.

We have noticed that it is common for term sheets of commercial leases to simply provide for a “good guy” guaranty without describing what it is that the tenant’s principal will be guaranteeing and for how long. While brokers often say “you will only be liable for the rent”, this is rarely the case. More often than not, the tenant’s principal agrees to a guaranty without knowing what obligations they will ultimately be responsible for.

Since the liability that a “good guy” guarantor is exposed to can vary widely, we urge proposed tenants to work with their attorney to clarify the obligations they are willing to assume before agreeing to a “good guy” guaranty in the term sheet. Otherwise, it may be difficult to change the terms of the guaranty while negotiating the lease and the tenant’s principal may wind up with more exposure than he or she bargained for.

By: Jerome J. Strelov and Ryan V. Stearns

Comment » | Commercial Corner, Commercial Leases, Good Guy Guarantees, News

BIDs Are Creeping Into Commercial Leases

October 9th, 2014 — 2:19pm

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bids

Business Improvement Districts (BIDs) have serious monetary implications to tenants of commercial buildings. NYC has 69 BIDs, the most of any city in the U.S., so commercial tenants should be aware of their existence and their potential monetary effect.

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BIDs are creatures of a statute which allows for the formation of neighborhood economic development organizations. These organizations are designed to deliver certain additional services to the neighborhoods they represent, which may include capital improvements, sanitation, security and neighborhood amenities, such as Wi-Fi. The property owners pay a “BID assessment” to the applicable BID to finance those supplemental public services. For example, the East Midtown Partnership is a BID which covers a large area of the city spanning from Madison Avenue to 2nd Avenue and East 49th Street to 63rd Street, affecting approximately 818 retail businesses. The East Midtown Partnership provides, among other things, sanitation services, business promotional services and holiday lighting.

The amount of assessment paid by property owners is determined by a specific formula that each BID creates for its district. The East Midtown Partnership’s budget is capped by the City at $2.2 million, which sum is funded by building owners (or more likely, their commercial tenants) within the BID. According to Rob Byrnes, president of the East Midtown Partnership, the landlords or commercial tenants within his BID contribute roughly $.08 per square foot of commercial space. Residential buildings are assessed a nominal $1.00 per residential unit while any commercial tenants within the residential building are assessed pursuant to the standard formula.

BIDs have monetary implications for tenants of commercial leases, as the fees paid by the landlord will likely be passed down to the tenant. A lease for retail space which is part of the East Midtown Partnership, for example, will undoubtedly include a provision requiring the tenant of the space to pay the BID assessment.

It is our contention, however, that the BID assessment is effectively a tax imposed upon the landlord, similar to a property tax. As such, it should be treated as a tax for purposes of the lease and the tenant should only be required to pay the increases, if any, over a base BID assessment year. As this is often not the case, tenants should be on the lookout for lease provisions requiring them to pay their proportionate share of the BID assessment.

Ryan V. Stearns and Jerome J. Strelov

Comment » | BID, Commercial Leases, News

Art On The Wall? You May be In For A Surprise

May 22nd, 2013 — 1:01pm

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artIs your restaurant tenant planning to have a mural painted?  Are you planning to install a sculpture in the lobby of one of your buildings?  Be cautioned that it might not be easy to remove that work and you might find yourself on the wrong end of a lawsuit if you damage the work.  Even after artists transfer their ownership interests in artwork they created, they still may have rights known as “moral rights” to works located on your property.  Here’s the skinny on what you need to know about moral rights and how they can affect your property. Continue reading »

Background

The Visual Artists Rights Act (“VARA”) is an amendment to the federal copyright law that grants certain moral rights to visual artists, including the rights of attribution and integrity.  Under the right of attribution, an artist has the right to claim authorship of her work and to prevent the use of her name as the author of: (i) any artwork she did not create or (ii) any artwork that has been distorted, mutilated or modified in a way that is prejudicial to her honor or reputation.  Under the right of integrity, the artist may generally prevent: (i) any intentional distortion, mutilation or modification of an artwork that is prejudicial to her honor or reputation and (ii) the destruction of any work of recognized stature.

Importantly, artists maintain these rights regardless of whether they have sold or otherwise transferred the artwork or their copyright interests in the work.  For works created on or after June 1, 1991, the effective date of VARA, the rights provided for endure for the life of the artist, or in the case of a joint work, the life of the last surviving artist.  These rights may not be transferred, but they can be waived by a writing signed by the artist.

Certain exceptions to these rights exist.  For example, modifications caused by the passage of time (such as fading or dulling) or the inherent nature of the materials used to create the artwork do not violate an artist’s rights under VARA.  Additionally, modifications resulting from conservation (e.g., re-touching) or the public presentation (including lighting and placement) of an artwork are not VARA violations unless the modifications are caused by gross negligence.   Moreover, the law only applies to a “work of visual art,” which is defined to include paintings, drawings, prints, sculptures and artistic photographs, existing in a single copy or in a limited edition of 200 copies or fewer.  Posters, maps, globes, charts, technical drawings, diagrams, models, applied art, motion pictures and other audio-visual works are specifically excluded from the definition of that term.  Additionally, works “made for hire,” which are works that are prepared by an employee within the scope of her employment, are not protected under VARA.

Of interest to building owners is the so-called “building exception,” which applies to works “incorporated in or made a part of a building in such a way that removing the work from the building will cause modification of the work.”  These works do not get protection from modification if the artist consented to the installation of his work in the building (if pre-VARA) or if the building owner and the artist executed a written acknowledgment that removal of the work may subject it to modification (if post-VARA).  In addition, the right of integrity does not apply where an artwork can be removed without damage from a building, provided the building owner either makes a diligent, good-faith attempt without success to notify the artist of the intended removal or provides notice to the artist, who fails to remove the work or pay for its removal.  When the building owner has complied with this notice requirement, the artist has no claim under VARA when the work is removed.

Since its enactment over twenty years ago, courts have decided several hard cases interpreting the language of VARA.  In the real estate context, several courts have grappled with cases questioning whether the statute applies at all to the artwork in question.  For example, in Carter v. Helmsley-Spear, Inc. , 71 F.3d 77 (2d Cir. 1995), a trio of artists filed a lawsuit to prevent a building owner and manager from altering artwork that they were commissioned to create for a commercial building located in Long Island City, including several sculptural forms that they affixed to the walls and ceiling of the building’s lobby.   In that case, the court rejected the landlord’s claim that the work was “applied art” since it was affixed to the building, but nonetheless dismissed the artists’ case because the court found the artwork was “work made for hire,” and therefore not a work of visual at under VARA.   In Phillips v. Pembroke Real Estate, Inc., 459 F.3d 128 (1st Cir. 2006), an artist tried to prevent a manager of a public park from removing several sculptures that he created specifically for the park, including stone forms that were integrated into the landscape of the park.  The artist eventually lost the case after an appellate court ruled that his sculpture was site-specific artwork, which is not covered by VARA.   This ruling was called into doubt by a court which recently dismissed on other grounds an artist’s VARA claim challenging the modification of a wildflower garden he created for a city park.  See Kelley v. Chicago Park Dist., 635 F.3d 290 (7th Cir. 2011). Although the property holders prevailed in these cases, they had to endure protracted legal battles in order to resolve the artists’ claims under VARA.

The Take Away

Before artwork is installed on your building, you might want to consider whether to add language in your agreements protecting you from potential VARA claims.  If you are commissioning artwork to be displayed on your building, you should consider whether to include a provision in your commission agreement whereby the artist waives any and all moral rights, including the artist’s rights under VARA.  If you want to hire an artist to create artwork to be incorporated into your building in such a way that removal would damage the work, you should also consider obtaining a written acknowledgment signed both by you and the artist stating that the installation of the work may subject the work to damage.  You should also keep records that include the artists’ contact information and update these records regularly so that you can comply with your notification obligations in the event that you wish to remove an artwork from your premises.

If you think your tenant may commission artwork to be installed in a leased premises, you might want to consider including in the lease the tenant’s agreement to obtain a VARA waiver from any artist hired to create artwork for display on the premises.  You also may want to include in your lease a provision whereby the tenant would indemnify you for any damages incurred as a result of a VARA claim.

By Amelia K. Brankov, counsel at the law firm of  Frankfurt Kurnit Klein & Selz.

2 comments » | Art, Commercial Corner, Commercial Leases, News

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