Commercial Real Estate Leases - Law Seminars International

Commercial Real Estate Leases - Law Seminars International Commercial Real Estate Leases - Law Seminars International

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L A W S E M I N A R S I N T E R N A T I O N A L A Comprehensive Two-Day Conference on Commercial Real Estate Leases Practical information on negotiating and enforcing commercial leases October 2 and 3, 2008 Phoenix, AZ Copyright 2008 by Law Seminars International

L A W S E M I N A R S I N T E R N A T I O N A L

A Comprehensive Two-Day Conference on

Commercial Real Estate

Leases

Practical information on negotiating and enforcing commercial leases

October 2 and 3, 2008

Phoenix, AZ

Featuring Speakers From:

• Arendt Law Group PLC

• Arizona State University Sandra

Day O’Connor School of Law

• Burch & Cracchiolo PA

• CB Richard Ellis

• City of Mesa Office of

Economic Development

• City of Phoenix - Mayor’s Office

• De Rito Partners, Inc.

• Fennemore Craig, P.C.

• Gallagher & Kennedy, P.A.

• Grubb & Ellis

• Kunz, Plitt, Hyland, Demlong

& Kleifield

• Lee & Associates

• Mariscal, Weeks, McIntyre &

Friedlander, P.A.

• Quarles & Brady

• Ryley Carlock & Applewhite PA

• Snell & Wilmer LLP

• Solheim Research

• Squire Sanders & Dempsey LLP

• Stinson Morrison & Hecker LLP

• The Shely Firm PC

An Advanced Two-Day Conference on

Practical information on negotiating and enforcing commercial leases

October 2 & 3, 2008

Phoenix, Arizona

Wyndham Phoenix Hotel

13.25 AZ CLE credits including 1 Ethics | AZ Real Estate is pending (call about others)

8:30 a.m., 50 East Adams Street

October 2 & 3, 2008 | Phoenix, Arizona

Wyndham Phoenix Hotel

Please register me:

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If you cannot attend, check boxes to order:

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800 Fifth Avenue, Suite 101, Seattle, WA 98104

tel (206)567-4490 or (800)854-8009

fax (206)567-5058 | www.lawseminars.com

08ACLAZ WS

Thursday, October 02, 2008

8:00 Registration and Continental Breakfast

8:30 Introduction and Overview

Gary L. Birnbaum, Esq., Program Co-Chair

Mariscal, Weeks, McIntyre & Friedlander, P.A. ~ Phoenix, AZ

Don J. Miner, Esq., Program Co-Chair

Fennemore Craig, P.C. ~ Phoenix, AZ

8:45 Opening Address: Recent Developments with an Impact

on the Real Estate Market

The Hon. Phil Gordon, Mayor

City of Phoenix - Mayor’s Office ~ Phoenix, AZ

9:15 The Current Real Estate Market and Implications for

Business Planning in Commercial Real Estate

Scot Rigby, Director

City of Mesa Office of Economic Development ~ Mesa, AZ

9:45 Financing Considerations for Lease Negotiations

Robert Bornhoft, Esq.

Quarles & Brady ~ Phoeniz, AZ

10:30 Break

10:45 Negotiating Key Lease Provisions and Making the

Deal Happen

Perspectives on best current thinking on negotiating and drafting

leases; practical tips for recognizing and avoiding potential dealkillers,

from letter of intent to move-in

Landlord’s perspective

James B. Connor, Esq.

Gallagher & Kennedy, P.A. ~ Phoenix, AZ

Tenant’s perspective

11:45 Customizing the ADR Clause in the Lease

Jay D. Wiley, Esq.

Snell & Wilmer LLP ~ Phoenix, AZ

Issues including: Choice of process, provider, complexity, and

formality

Robert Dauber, Esq., Ph.D., Clinical Professor

Arizona State University

Sandra Day O’Connor School of Law

Tempe, AZ

Commercial Real Estate Leases Conference

12:30 Lunch (on your own)

1:45 Insurance Considerations for Commercial Leases

Drafting and negotiating leases to address issues of insurance,

waivers, indemnities, exculpation clauses and subrogation waivers

and evaluating how those provisions relate to each other

Joshua D. Rogers, Esq.

Kunz, Plitt, Hyland, Demlong & Kleifield ~ Phoenix, AZ

2:30 Condemnation: Resolving the Potential Conflicts

Between Landlord and Tenant

Gary L. Birnbaum, Esq., Program Co-Chair

3:15 Break

3:30 Emerging Issues in Environmental Law: Concerns and

Remedies

New cases on cleanup liability; allocation of liability; update on

the Arizona Department of Environmental Quality’s No Further

Action letter policy; indoor air toxicity; stormwater management

Rhett B. Larson, Esq.

Gallagher & Kennedy, P.A. ~ Phoenix, AZ

4:15 Urban Redevelopment: Special Issues for Leasing in

Mixed-Use Developments

Common Area Maintenance (CAM); percentage rent issues;

exclusives, radius, co-tenancy, and out-parcel issues; emergence

of lifestyle considerations

Thomas C. Arendt, Esq.

Arendt Law Group PLC ~ Phoenix, AZ

5:00 Continue the Exchange of Ideas: Reception for Faculty

and Attendees Sponsored by Fennemore Craig P.C. and

Mariscal, Weeks, McIntyre & Friedlander, P.A.

About the Conference

LAW SEMINARS

INTERNATIONAL

We dedicate all of our efforts

to producing high-quality

professional education

programs.

Our seminars provide an

opportunity for lawyers to

learn about their clients’

businesses and for the clients

to learn about the legal issues

impacting their business.

This conference will focus on the business and legal aspects of commercial leases. Current market conditions

will be addressed. Insightful, practical and readily useable information will be provided in a manner useful to

real estate lawyers, brokers, lenders, landlords, and tenants in negotiating, drafting, implementing and enforcing

commercial leases. Basic concepts will be explained to ensure that those with less experience are not left

behind, but panel discussions and presentations will quickly extend into more sophisticated areas. Current

issues will be discussed and examples provided. Specific suggestions for lease provisions and ways to handle

particular issues will be offered. Speakers will address issues relating not only to lease negotiations but also

relating to issues between landlords and tenants that arise during tenancy.

Our goal is to help participants learn about and apply new and updated concepts to real world situations,

based on the knowledge of experienced real estate lawyers, leasing agents, and other professionals. Program

participants and speakers will include prominent feasibility experts and local government officials, in addition

to lawyers and brokers with substantial experience in the commercial leasing field.

A must for anyone who wants to know deeper concepts and understand important aspects relating to

commercial leasing.

~ Program Co-Chairs: Gary L. Birnbaum, Esq. and Don J. Miner, Esq.

Friday, October 03, 2008

8:00 Registration and Continental Breakfast

8:30 Ethical Considerations in Commercial Transactions

Practical ethics advice: Determine who is the client in a transaction;

who can pay your fees other than the client (and what you

must disclose); tips for writing a conflict waiver; recent trends in

bar complaints for commercial transactions.

Lynda C. Shely, Esq.

The Shely Firm PC ~ Scottsdale, AZ

9:30 Special Issues for Leases on State Lands and Indian

Reservations

State lands: Discussion of the unique aspects of State Trust land

ground leases and the legal constraints relating to leases of Land

Trust

Michael P. Ripp, Esq.

Ryley Carlock & Applewhite PA ~ Phoenix, AZ

Indian reservations

Don J. Miner, Esq., Program Co-Chair

10:30 Break

10:45 Special Issues for Shopping Centers

Redevelopment and neighborhood centers taking the place of

traditional covered roof malls

Judi Butterworth, Principal

De Rito Partners, Inc. ~ Phoenix, AZ

Karen Solheim, Principal

Solheim Research ~ Santa Monica, CA

12:00 Lunch (on your own)

1:15 Quick Takes on Special Lease Situations

Mindy Korth, Executive Vice President, Moderator

CB Richard Ellis ~ Phoenix, AZ

Big box stores

Spencer W. Cashdan, Esq.

Mariscal, Weeks, McIntyre & Friedlander, P.A. ~ Phoenix, AZ

Commercial Real Estate Leases Conference

Liquor licenses-proximity issues

Clare H. Abel, Esq.

Burch & Cracchiolo PA ~ Phoenix, AZ

Industrial and warehouse

Robert F. Buckley, Senior Vice President

Grubb & Ellis ~ Phoenix, AZ

Office space

2:45 Break

3:00 Remedies and Enforcement

R. Craig Coppola, CRE, SIOR, Principal

Lee & Associates ~ Phoenix, AZ

Perspectives on tenants in trouble and landlords in trouble; prebankruptcy

foreclosure; reorganizations in bankruptcy actions;

tenant in default beyond the mere eviction; how to draft a lease to

minimize the bankruptcy risk; avoiding the midnight move

Bryan A. Albue, Esq., Moderator

Fennemore Craig, P.C. ~ Phoenix, AZ

Landlord’s perspective

Scott A. Klundt, Esq.

Quarles & Brady ~ Phoenix, AZ

Tenant’s perspective

C. Taylor Ashworth, Esq.

Stinson Morrison & Hecker LLP ~ Phoenix, AZ

Bankruptcy phase: Creditor’s perspective

Donald L. Gaffney, Esq.

Snell & Wilmer LLP ~ Phoenix, AZ

Debtor’s perspective

Thomas J. Salerno, Esq.

Squire Sanders & Dempsey LLP ~ Phoenix, AZ

5:00 Evaluations and Adjourn

Registration & Other Conference Information

Call us at: 800-854-8009 or

206-567-4490

Fax the registration form to us at:

206-567-5058

Email us at:

registrar@lawseminars.com

Web site: www.lawseminars.com

Mail the registration form on the

front page.

Walk-ins are welcome, subject to

space availability.

Registration is complete when

we receive payment or agree to

later payment.

Regular tuition for this

program is $995 with a group rate of

$845 each for two or more registrants

from the same firm. For government

employees, we offer a special rate

of $695. For students and people in

their job for less than a year, our rate

is $497.50. All rates include admission

to all seminar sessions, food and

beverages at breaks, and all course

materials. Make checks payable to

Law Seminars International.

You may substitute another person

at any time. We will refund

tuition, less a $50 cancellation fee,

if we receive your cancellation by

5:00 p.m. on Friday, September 26,

2008. After that time, we will credit

your tuition toward attendance at

another program or the purchase of a

Homestudy. There is a $25 cancellation

fee for Course Materials orders

and $50 for Homestudy orders.

The conference

will be held at the Wyndham

Phoenix Hotel at 50 East Adams

Street |in Phoenix, AZ 85004. Call

the hotel directly at (602) 333-0000

for reservations at the special negotiated

rate of $209/nt and mention that

you are attending a Law Seminars

International conference. Rooms are

on a first come, first served basis.

This program qualifies for 13.25 AZ

CLE credits including 1 Ethics. AZ

Real Estate is pending. Upon request,

we will apply for CLE credits in

other states and other types

of credits.

Our complete

Homestudy Course, consisting

of a DVD recording and the written

course materials, is available for

$1005. The written course materials

alone are available for $100. We will

ship your Homestudy order via UPS

ground within two weeks after the

seminar or the date we receive payment

(whichever is later).

Program

Co-Chair, Managing Director and

senior litigation and real estate attorney

at Mariscal, Weeks, McIntyre

& Friedlander, P.A., focuses on

complex commercial, real estate

and eminent domain litigation. He

is listed in The Best Lawyers in

America and is Associate Dean of

the Sandra Day O’Connor College

of Law at Arizona State University.

Program Co-Chair,

partner at Fennemore Craig, P.C.,

focuses on real estate and business

transactions, development, finance,

leasing and real estate brokerage.

He is listed in The Best Lawyers in

America and Chambers USA.

Opening

Address, Mayor of the City of

Phoenix, was elected in 2003.

Formerly, as chief of staff for

Mayor Rimsza, he focused on

public safety and co-founded a task

force that created legislation to

penalize criminal landlords.

Moderator,

director at Fennemore Craig, P.C.,

specializes in creditors’ rights and

bankruptcy. He is a member of

the American Bankruptcy Institute

and is Board Certified in Business

Bankruptcy Law.

Moderator,

Executive Vice President at CB

Richard Ellis, is an investment sales

broker in the Capital Markets Group

focusing on rehab development,

financing, structuring deals in capital

markets, leasing, management,

site selection and network planning.

shareholder at

Burch & Cracchiolo PA, concentrates

in real estate, zoning and

condemnation law and is certified

as a specialist in Real Estate

Law by the Arizona Board of Legal

Specialization.

partner at

Arendt Law Group, PLC, focuses

on commercial real estate transactions

and is a certified Real Estate

Specialist. He is listed in The Best

Lawyers in America.

partner

at Stinson Morrison & Hecker

LLP, practices in the Bankruptcy

and Creditors’ Rights Division.

He is listed in The Best Lawyers

08ACLAZ

Faculty: Commercial Real Estate Leases Conference

in America for Bankruptcy and

Creditor-Debtor Rights Law.

partner at

Quarles & Brady, focuses on retail

and office leasing transactions, purchase

and sale of real estate, commercial

loan and financing, uniform

Commercial Code and acquisition/

sales of businesses.

Senior Vice

President of the Investment Group

at Grubb & Ellis, assists clients with

property evaluation, strategic planning,

portfolio planning and development

feasibility/coordination.

principalat

De Rito Partners, Inc. specializes

in selling commercially zoned land

and investments. She is former

State Director for the International

Council of Shopping Centers.

shareholder

of Mariscal, Weeks,

McIntyre & Friedlander, P.A.,

focuses on commercial leasing, real

estate transactions, acquisitions,

sales and finance. He has an AV rating

by Martindale-Hubbell.

shareholder of

Gallagher & Kennedy, P.A. practices

corporate finance and real

estate law, including negotiating

leases with national retail tenants,

assisted borrower clients with securitized

loans and synthetic leases.

principal at

Lee & Associates has been awarded

the NAIOP Office Broker of the

Year six times in the past twelve

years. He has earned the top three

designations in the real estate industry:

CCIM, CRE and SIOR.

Clinical

Professor at Arizona State

University Sandra Day O’Connor

School of Law, instructs student

attorneys in the Civil Practice

Clinic. He serves on the Arizona

Supreme Court’s Alternative

Dispute Resolution Advisory

Committee.

partner at

Snell & Wilmer LLP focuses in

bankruptcy and workout law; privacy

law; and electronic communications.

He was appointed first federal

Consumer Privacy Ombudsman

in a case involving Internet companies

running official Amber Alert

Systems.

partner at

Quarles & Brady, focuses on

commercial litigation and creditors’

rights. He is the editor of the

Brigham Young University Law

Review; Order of the Coif.

environmental

attorney of Gallagher & Kennedy,

P.A., practices environmental and

natural resource law relating to

water quality, water rights, environmental

compliance, and environmental

due diligence.

is the Director of the

City of Mesa Office of Economic

Development.

shareholder at

Ryley Carlock & Applewhite PA,

represents banks and life insurance

companies in real estate, agricultural

and commercial loan transactions,

loan restructuring and workouts,

and loan enforcement.

attorney with

Kunz, Plitt, Hyland, Demlong &

Kleifield, focuses on insurance coverage

and defense.

partner at

Squire Sanders & Dempsey LLP

leads the firm’s international financial

restructuring practice. He

is listed in The Best Lawyers in

America and Southwest Super

Lawyers.

partner at The

Shely Firm PC, provides ethics and

risk management advice to lawyers

and law firms. She is on the

State Bar’s UPL Advisory Opinion

Committee, the Professionalism

Committee and the Consumer

Information and Education Task

Force.

Principal at

Solheim Research, provides real

estate research, including mall

expansion/reuse of space, renovation

and/or repositioning studies,

trade area studies, site selection and

analysis, feasibility studies and sales

transfer analysis.

partner at Snell

& Wilmer LLP focuses on real

estate and real estate finance. He

was named in Chambers USA:

America’s Leading Lawyer for Real

Estate and The Best Lawyers in

America, and a “Southwest Super

Lawyer” by Law and Politics

Magazine.

Phoenix, Arizona

50 East Adams Street

(602) 333-0000

Attorneys, real estate and

environmental professionals,

lenders, owners, managers,

brokers, leasing agents, and others

who are involved in landlord/

tenant relationships and who deal

with lease negotiation, drafting,

defaults and litigation

Customizing the ADR clause

in the lease

Business planning in

commercial real estate

Financing considerations

and key provisions for

lease negotiations

Insurance considerations for

commercial leases

Resolving potential conflicts

between landlord and tenant

Concerns and remedies in

environmental law

Special issues in mixed-use

developments, state lands and

Indian reservations

Ethical considerations in

commercial transactions

Unique lease situations

Remedies and enforcement

when tenants or landlords are

in trouble

Mail

800 Fifth Ave., Suite 101

Seattle, WA 98104

Phone

(206) 567-4490

or (800) 854-8009

Fax

(206) 567-5058

Email

registrar@lawseminars.com

A Comprehensive Two-Day Conference on

Commercial Real Estate Leases

Practical information on negotiating and enforcing commercial leases

October 2 and 3, 2008, in Phoenix, AZ

Table of Contents

Topic Speaker #

Introduction and Overview

Gary L. Birnbaum 1

Don J. Miner 2

Opening Address: Recent Developments with an Impact on the Real Estate Market

Phil Gordon 3

The Current Real Estate Market and Implications for Business Planning in Commercial Real

Estate

Scot Rigby 4

Financing Considerations for Lease Negotiations

Robert Bornhoft 5

Negotiating Key Lease Provisions and Making the Deal Happen

James B. Connor 6

Jay D. Wiley 7

Customizing the ADR Clause in the Lease

Robert Dauber 8

Insurance Considerations for Commercial Leases

Joshua D. Rogers 9

Condemnation: Resolving the Potential Conflicts Between Landlord and Tenant

Gary L. Birnbaum 10

Emerging Issues in Environmental Law: Concerns and Remedies

Rhett B. Larson 11

Urban Redevelopment: Special Issues for Leasing in Mixed-Use Developments

Thomas C. Arendt 12

Ethical Considerations in Commercial Transactions

Lynda C. Shely 13

Special Issues for Leases on State Lands and Indian Reservations

Michael P. Ripp 14

Don J. Miner 15

Page 1 of 2

800 Fifth Avenue, Suite 101, Seattle, WA 98104 | 206 567 4490 | 800 854 8009 | fax 206 567 5058

www.lawseminars.com

Table of Contents

Topic Speaker #

Special Issues for Shopping Centers

Judi Butterworth 16

Quick Takes on Special Lease Situations

Karen Solheim 17

Mindy Korth 18

Spencer W. Cashdan 19

Clare H. Abel 20

Robert F. Buckley 21

Remedies and Enforcement

R. Craig Coppola 22

Bryan A. Albue 23

Scott A. Klundt 24

C. Taylor Ashworth 25

Donald L. Gaffney 26

Thomas J. Salerno 27

Page 2 of 2

Faculty

Commercial Real Estate Leases

October 2 and 3, 2008

Phoenix, AZ

Ms. Clare H. Abel

Burch & Cracchiolo PA

702 E. Osborn

#200

Phoenix, AZ 85015

T: (602) 234-9920 F:

Email: chabel@bcattorneys.com

Mr. Thomas C. Arendt

Arendt Law Group PLC

5009 E Washington

suite 125

Phoenix, AZ 85034

T: (602) 244-1400 F:

Email: tarendt@atlawgroup.com

Mr. Gary L. Birnbaum

Mariscal, Weeks, McIntyre &

Friedlander, P.A.

2901 N. Central Avenue

Suite 200

Phoenix, AZ 85012

T: (602) 285-5009 F:

Email: gary.birnbaum@mwmf.com

Mr. Bryan A. Albue

Fennemore Craig, P.C.

3003 North Central Avenue

Suite 2600

Phoenix, AZ 85012-2913

T: (602) 916-5311 F:

Email: balbue@fclaw.com

Mr. C. Taylor Ashworth

Stinson Morrison & Hecker LLP

1850 North Central Avenue

suite 2100

Phoenix, AZ 85004

T: (602) 279-1600 F: (602) 586-5200

Email: tashworth@stinson.com

Mr. Robert Bornhoft

Quarles & Brady

One Renaissance Square

Two North Central Ave

Phoeniz, AZ 85004

T: (602) 230-5576 F: (602) 420-5172

Email: rbornhoft@quarles.com

800 Fifth Avenue, Suite 101, Seattle, WA 98104 | 206 567 4490 | 800 854 8009 | fax 206 567 5058

www.lawseminars.com

Faculty for Commercial Real Estate Leases (con't)

Mr. Robert F. Buckley

Grubb & Ellis

2375 East Camelback Rd

suite 300

Phoenix, AZ 85016

T: (602) 954-9000 F: (602) 468-8588

Email: bbuckley@brephoenix.com

Mr. Spencer W. Cashdan

Mariscal, Weeks, McIntyre &

Friedlander, P.A.

2901 North Central Avenue

Suite 200

Phoenix, AZ 85012

T: (602) 285-5041 F: (602) 285-5100

Email: spencer.cashdan@mwmf.com

Mr. R. Craig Coppola

Lee & Associates

3200 E. Camelback Road

Suite 100

Phoenix, AZ 85018

T: (602) 954-3762 F: (602) 954-0510

Email: ccoppola@lee-associates.com

Mr. Donald L. Gaffney

Snell & Wilmer LLP

400 E Van Buren

Phoenix, AZ 85004-2202

T: (602) 382-6254 F:

Email: dgaffney@swlaw.com

Mr. Scott A. Klundt

Quarles & Brady

Two North Central Avenue

One Renaissance Square

Phoenix, AZ 85004-2391

T: (602) 229-5212 F: (602) 420-5060

Email: sklundt@quarles.com

Ms. Judi Butterworth

De Rito Partners, Inc.

3200 Camelback Rd

Suite 175

Phoenix, AZ 85018

T: (480) 834-8500 F: (602) 381-1981

Email: judi.butterworth@derito.com

Mr. James B. Connor

Gallagher & Kennedy, P.A.

2575 E Camelback Rd

Suite 1100

Phoenix, AZ 85016

T: (602) 530-8524 F: (602) 530-8500

Email: jbc@gknet.com

Professor Robert Dauber

Arizona State Univ.

S.D. O'Connor School of Law

P.O. Box 877906

Tempe, AZ 85287

T: (480) 965-7359 F: (480) 965-2427

Email: bob.dauber@asu.edu

The Hon. Phil Gordon

City of Phoenix - Mayor's Office

200 W. Washington St.

11th floor

Phoenix, AZ 85003

T: (602) 262-7111 F: (602) 495-5583

Email: mayor.gordon@phoenix.gov

Ms. Mindy Korth

CB Richard Ellis

2415 E. Camelback Rd

First Floor

Phoenix, AZ 85016

T: (602) 735-5274 F:

Email: mindy.korth@cbre.com

Faculty Page 2 of 3

Faculty for Commercial Real Estate Leases (con't)

Mr. Rhett B. Larson

Gallagher & Kennedy, P.A.

2575 East Camelback Road

suite 1100

Phoenix, AZ 85016

T: (602) 530-8064 F: (602) 530-8500

Email: rhett.larson@gknet.com

Mr. Scot Rigby

City of Mesa Office of Economic

Development

20 East Main Street

suite 200

Mesa, AZ 85201

T: (480) 644-5176 F: (480) 644-3458

Email: scot.rigby@cityofmesa.org

Mr. Joshua D. Rogers

Kunz, Plitt, Hyland, Demlong &

Kleifield

3838 N. Central Ave.

Ste. 1500

Phoenix, AZ 85012

T: (602) 331-4600 F: (602) 331-8600

Email: jdr@kunzlegal.com

Ms. Lynda C. Shely

The Shely Firm PC

6501 E Greenway Pkwy

Suite 103-406

Scottsdale, AZ 85254-2067

T: (480) 905-7237 F: (480) 905-1773

Email: lshely@cox.net

Mr. Don J. Miner

Fennemore Craig, P.C.

3003 N. Central Av.

Suite 2600

Phoenix, AZ 85012-2913

T: (602) 916-5373 F:

Email: dminer@fclaw.com

Mr. Michael P. Ripp

Ryley Carlock & Applewhite PA

One North Central Avenue

Suite 1200

Phoenix, AZ 85004-4417

T: (602) 440-4823 F: (602) 257-6923

Email: mripp@rcalaw.com

Mr. Thomas J. Salerno

Squire Sanders & Dempsey LLP

40 N Central

Suite 2700

Phoenix, AZ 85004-4440

T: (602) 528-4043 F:

Email: tsalerno@ssd.com

Ms. Karen Solheim

Solheim Research

838 11th St

Suite 103

Santa Monica, CA 90403

T: (310) 393-5066 F: (310) 394-9845

Email: kmsolheim@aol.com

Mr. Jay D. Wiley

Snell & Wilmer LLP

400 E Van Buren

Phoenix, AZ 85004-2202

T: (602) 382-6261 F:

Email: jdwiley@swlaw.com

Faculty Page 3 of 3

L A W S E M I N A R S I N T E R N A T I O N A L

A Comprehensive Two-Day Conference on

Commercial Real Estate Leases

Practical information on negotiating and enforcing commercial leases

October 2 and 3, 2008

Phoenix, AZ

Introduction and Overview

Gary L. Birnbaum, Esq.

Mariscal, Weeks, McIntyre & Friedlander, P.A.

Phoenix, AZ

Don J. Miner, Esq.

Fennemore Craig, P.C.

Phoenix, AZ

Gary L. Birnbaum of Mariscal, Weeks, McIntyre & Friedlander, P.A. Speaker 1: 1

R~ N o t e s ~

Law Seminars International | Commercial Real Estate Leases | 10/02/08 in Phoenix, AZ

Gary L. Birnbaum of Mariscal, Weeks, McIntyre & Friedlander, P.A. Speaker 1: 2

R~ N o t e s ~

Don J. Miner of Fennemore Craig, P.C. Speaker 2: 1

R~ N o t e s ~

Don J. Miner of Fennemore Craig, P.C. Speaker 2: 2

R~ N o t e s ~

L A W S E M I N A R S I N T E R N A T I O N A L

A Comprehensive Two-Day Conference on

Commercial Real Estate Leases

Practical information on negotiating and enforcing commercial leases

October 2 and 3, 2008

Phoenix, AZ

Opening Address: Recent Developments with an

Impact on the Real Estate Market

Phil Gordon

City of Phoenix - Mayor's Office

Phoenix, AZ

Phil Gordon of City of Phoenix - Mayor's Office Speaker 3: 1

R~ N o t e s ~

Phil Gordon of City of Phoenix - Mayor's Office Speaker 3: 2

R~ N o t e s ~

L A W S E M I N A R S I N T E R N A T I O N A L

A Comprehensive Two-Day Conference on

Commercial Real Estate Leases

Practical information on negotiating and enforcing commercial leases

October 2 and 3, 2008

Phoenix, AZ

The Current Real Estate Market and Implications

for Business Planning in Commercial Real Estate

Scot Rigby

City of Mesa Office of Economic Development

Mesa, AZ

Scot Rigby of City of Mesa Office of Economic Development Speaker 4: 1

R~ N o t e s ~

Scot Rigby of City of Mesa Office of Economic Development Speaker 4: 2

R~ N o t e s ~

L A W S E M I N A R S I N T E R N A T I O N A L

A Comprehensive Two-Day Conference on

Commercial Real Estate Leases

Practical information on negotiating and enforcing commercial leases

October 2 and 3, 2008

Phoenix, AZ

Financing Considerations for Lease Negotiations

Robert Bornhoft, Esq.

Quarles & Brady

Phoeniz, AZ

Robert Bornhoft of Quarles & Brady Speaker 5: 1

FINANCING CONSIDERATIONS FOR LEASE NEGOTIATIONS

by Robert S. Bornhoft, Esq.

Quarles & Brady LLP

I. LANDLORD FINANCING

A. Subordination, Non-disturbance and Attornment Agreements ("SNDAs")

1. Historical Considerations.

The SNDA evolved historically as a mechanism through which lenders and

tenants could obtain more certainty with respect to their respective rights and

obligations in the event of a default and foreclosure with respect to the landlord's

interest in the property. Common law principles with respect to a number of the

issues traditionally addressed in SNDAs vary significantly from state to state. For

instance, in some states, a foreclosure by a lender may automatically terminate the

lease. In other states, the lender may have the right to "pick and choose" those

leases that the lender wants to retain in the event of a foreclosure. The SNDA

allows the parties to eliminate uncertainties and avoid undesirable outcomes in the

common law application of various concepts that could impact their interests.

2. Objectives of the Parties

a. Lender's Objectives.

The lender want its liens to have a first priority position, ahead of all

interests of tenants under leases.

The lender wants a mechanism to ensure that it can retain credit tenants

and cash flow from existing leases in the event of a foreclosure.

The lender wants to insulate itself from potential liability under each lease

to the greatest extent possible.

The lender generally wants to address certain unacceptable or problematic

lease provisions to make them acceptable from the lender's standpoint.

The lender may require specific terms and agreements to ensure that its

loans meet the underwriting requirements necessary for securitization.

The lenders wants greater certainty with respect to legal outcomes.

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b. Tenant's Objectives.

The tenant wants to ensure that it has the right to retain possession, use

and occupancy of the premises, notwithstanding any foreclosure that may occur.

The tenant wants to avoid "renegotiating" the lease through the SNDA.

The tenant wants to ensure that the landlord's obligations under the lease

are performed, even if the landlord's interest is held by another party.

The tenant wants greater certainty with respect to legal outcomes.

c. Landlord's/Borrower's Objectives.

The landlord's primary goal is to GET THE DEAL DONE! The landlord

may be a party to the SNDA, but to a large degree, the landlord typically is a third

party to this negotiation.

3. What Does the Lease Require?

In the majority of cases, the nature of a tenant's obligation to subordinate

will be established by language in the underlying lease. Therefore, it is prudent to

check the requirements of the lease at the beginning of any SNDA negotiations.

Most lease forms typically contain subordination clauses that

automatically subordinate the lease to the landlord's lien. Some provisions go

even farther and obligate the tenant to provide specifically enumerated

representations and agreements to the lender, upon the lender's request. Tenants

need to be aware of such provisions when negotiating their leases and any

SNDAs.

In some cases, particularly with larger retail tenants, it is not uncommon to

negotiate a form of SNDA concurrently with the negotiation of the lease and to

attach the SNDA form as an exhibit to the lease.

It is not uncommon for tenants to negotiate "automatic" non-disturbance

provisions into their leases in those cases where the lease already provides for an

automatic subordination by the tenant.

Although not directly tied to the SNDA, it also is common for landlords to

include provisions in their lease forms obligating the tenant to provide financial

information, sales figures and/or similar such information to prospective lenders.

Such provisions are generally helpful in facilitating financing transactions

because they allow lenders to confirm the creditworthiness of the underlying

tenants.

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4. The Basic Provisions

a. Subordination

The tenant's agreement that its lease will be in a subordinate position to

the lender's lien.

While the loan is outstanding, in the event of any conflict between the

terms of the loan and the terms of the lease, the terms of the loan will control,

subject to the other express agreements of the parties in the SNDA.

Note that if the landlord's lien instrument is recorded prior to the

consummation of the lease, the lease already will be subordinate to the landlord's

lien when the lease is consummated, but the parties may still enter into an SNDA

under such circumstances (e.g., most credit tenants will still require an SNDA to

confirm their non-disturbance rights (and possibly other rights) if there is a senior

lien).

b. Non-disturbance.

The agreement of the lender that if the lender forecloses, the lender will

not disturb the tenant's ongoing possession of the premises.

Most sophisticated tenants will always require non-disturbance rights in

exchange for an agreement to subordinate the lease.

Most lenders are willing to agree to non-disturbance rights for subordinate

tenants. One common exception, however, applies to related party tenants.

Lenders often are not willing to provide non-disturbance rights to tenants that are

related to the landlord/borrower.

c. Attornment.

The agreement of the tenant to recognize the purchaser at a foreclosure

sale as the landlord under the lease and to pay rent under the lease to said

purchaser.

5. Other Commonly Negotiated Provisions.

a. Limitations on Lender's Liability for Certain Defaults.

Although some limitation of this nature is common in virtually every

SNDA, the scope and specific terms for such limitations can be extremely

contentious. The tenant may be able to negotiate carve outs to the limitations on

lender's liability in certain cases, such as, e.g., with respect to continuing defaults

(e.g., a leaky roof). A common approach to resolving contested liability issues in

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this type of provision is to provide for liability to the lender only after the giving

of notice and an opportunity to cure.

b. Offsets for defenses.

The lender typically requires a waiver of any offsets or defenses that a

tenant may have against the landlord. Tenants that have negotiated offset rights

directly into the lease will strongly resist such a waiver. A common compromise

is for the tenant to retain certain offset rights, but to agree to provide additional

notice and cure rights to the lender before such offset rights can be implemented.

Another common compromise is to place a cap on the amount that can be offset in

any given period so that the overall impact of the offset on cash flow is

minimized.

c. Prepaid rent.

Generally, the SNDA provides that the lender is not obligated for pre-paid

rent or is only obligated for a minimal amount of pre-paid rent. A provision

obligating the lender with respect to rent paid up to thirty (30) days in advance is

quite typical.

d. Amendments and modifications.

The SNDA typically restricts or limits the types of future amendments and

modifications that can be made to the lease without the lender's consent. The

tenant may be able to negotiate a carve out to allow for certain types of

amendments and modifications (e.g., amendments already expressly allowed by

the lease; amendments that do not affect the term, reduce the rent, or that

otherwise materially impact any of the economic terms of the lease).

e. Security Deposits.

The lender typically seeks to limit its liability with respect to the return of

any security deposit that is not actually paid over to lender by the landlord. A

tenant, on the other hand, does not want to be left holding the bag if the landlord

misappropriates the deposit and it is not turned over to the lender upon

foreclosure.

f. Construction Obligations.

Lenders often try to limit any obligation to commence or complete any

construction required under the lease from an after a foreclosure. Obviously, such

limitations are often unacceptable to tenants that have expressly negotiated for

specific construction obligations.

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g. Purchase Options.

Lender's typically try to eliminate the tenant's right to exercise any

purchase options. A compromise in some cases is to allow the option to continue

but to require that the minimum purchase price must be at least equal to the entire

amount owing on the loan.

h. General Limitations of Liability.

Lenders often seek to insulate themselves from certain types of liabilities

that landlords often are more willing to assume (e.g., liability for environmental

representations and warranties).

Lenders also often seek to limit their liability to the interest in the

property. This typically will not be a problem if the lease already limits the

landlord's liability in such a manner (as many leases do). If, however, a tenant

has negotiated for a broader scope of landlord liability, the tenant will not

willingly allow the lender to obtain a greater limitation of liability. One

compromise in such cases is to limit liability to the lender's interest in the

property, but only so long as the lender maintains a minimum equity stake in the

property (typically 10% or 20"%).

i. Insurance and Condemnation Proceeds.

This is often one of the most problematic areas of SNDA negotiations.

The tenant typically will want insurance and condemnation proceeds made

available for restoration of the premises. The lender, on the other hand, will want

the flexibility either to allow use of proceeds for construction or to apply the

proceeds to reduce the balance of the loan.

j. Self-help rights.

Many lender's will try to eliminate or reduce self help rights available to a

tenant, especially in cases where the tenant can obtain an offset against rent upon

exercise of the self help right. Again, a typical compromise here is the providing

of notice and an opportunity for the lender to cure before any self help (and

possibly offset) right is triggered.

k. Notice and/or Cure Rights.

Most lenders will require that tenants agree to provide additional notice

and cure rights to the lender before exercising any rights and remedies under the

lease. Tenants typically are willing to provide notice, but may object to

lengthening time periods.

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l. Limitation of Termination Rights.

Lenders often seek the elimination of tenant termination rights in SNDAs.

Tenants generally may be willing to provide additional notice before exercising a

termination right, but further restrictions on the ability to exercise termination

rights are often hotly contested by tenants.

m. Compliance with Certain Retail Lease Provisions.

Many lenders seek to avoid any obligation to comply with certain typical

retail lease provisions, such as radius restrictions, exclusive rights, "go dark"

provisions, etc. Again, if a tenant has negotiated specifically for such rights in the

lease, the tenant likely will strongly oppose any such accommodations to the

lender.

6. Bargaining Power.

The bargaining power of the parties will have a huge impact on the

negotiation of virtually all provisions in the SNDA.

One major factor in determining the relative bargaining power of the

parties is whether the SNDA is being entered into before or after the landlord's

loan. If the tenant is entering into the lease after the landlord's lien instrument has

been recorded, the tenant typically will have little bargaining power to extract any

concessions with respect to the SNDA from the landlord. If, on the other hand,

the lease was entered into prior to the loan and the SNDA, the tenant's bargaining

power is significantly enhanced

Another major factor impacting bargaining power is the credit nature of

the tenant. For example, a large national retail tenant will have a significantly

greater ability to negotiate favorable SNDA terms than will a small "mom and

pop" tenant.

[A sample SNDA form is attached at the end of this outline as Exhibit A.]

B. Tenant Estoppel Certificates

1. In General.

A tenant estoppel certificate is a written acknowledgement from a tenant with

respect to certain factual matters relating to the tenant's lease.

In some cases, lenders may be willing to proceed with tenant estoppel certificates

rather than SNDAs.

It also is quite common for the SNDA to be expanded to include estoppel

provisions.

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2. Customary provisions.

Estoppel certificates can cover a variety of factual matter relating to a particular

lease. Some of the most common items typically covered in estoppel certificates

are the following:

a. Identification of the documents that constitute the entire lease (e.g., the

original lease along with any amendments and related documents).

b. Confirmation of the binding nature and effectiveness of the lease.

c. The lease commencement and expiration dates.

d. Whether any renewal options or termination options are present.

e. Tenant's possession of the premises.

f. Date through which rent has been paid.

g. The existence of any defaults by tenant and/or landlord.

h. That tenant has no rights to offset or deduct any amounts from the rent.

i. Whether any litigation relating to the property has been commenced or

threatened.

j. Any security that has been provided for the lease.

k. Whether any construction obligations remain with respect to the lease.

3. Typical Tenant Protections

a. Knowledge qualifiers.

b. Carve outs for matters expressly provided for in the lease.

c. Limitations on remedies for error or non-compliance.

4. What Does the Lease Require?

As with SNDAs, a good starting point in negotiating any estoppel certificate is to

look at the lease and see what it requires. Leases will typically contain provisions

obligating a tenant to provide an estoppel certificate, if requested, within a stated

period of time. The specific terms for the estoppel certificate also may be

outlined in the lease. Many lease forms also provide remedies to the landlord if

the tenant fails to execute an estoppel in a timely manner. For instance, under

such circumstances, it is common for lease forms to provide that the landlord can

execute the estoppel as attorney-in-fact for the tenant or to provide that the

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estoppel shall be deemed to have been given by the tenant in a “clean” form with

no claims, offsets, etc.

[A sample Estoppel Certificate form is attached at the end of this outline as Exhibit B.]

II.

TENANT FINANCING

A. Landlord Lien Rights & Waivers

1. Statutory Landlord's Liens.

In most states (including Arizona), landlords are entitled to a statutory lien on a

tenant's personal property if a tenant fails to pay rent. More specifically in

Arizona, A.R.S. §33-362 provides for a lien in favor of the landlord on all nonexempt

property of the tenant upon the leased premises for the payment of rent.

2. Consensual Security Interests.

Landlord's also can obtain consensual security interests from tenant's to secure

obligations under the lease. Such security interests can secure not only payment

of rent, but also the payment and performance of other obligations under the

lease.

Such security interest provisions are common in many landlord form leases and

tenants need to be careful to avoid the inadvertent grant of a security interest

through such a provision.

3. Waivers.

Landlord's liens and security interests can be a significant impediments to a

tenant's ability to obtain financing, especially if the tenant's prospective lender

desires to secure financing with a security interest in personalty that potentially

could be subject to the landlord's lien (or security interests). This is often the case

when a tenant seeks equipment financing or other purchase money financing or

working capital financing secured by a "blanket" lien in the tenant's assets.

Lenders that provide such financing to tenants customarily require that their liens

have priority. Consequently, any liens and security interests in favor of the

landlord must, therefore, be waived or subordinated.

Landlords typically (but not always) are willing to grant such waivers or

subordinations, so long as the waiver does not impair any of the landlord's rights

in the real property and fixture.

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4. Customary Lien Waiver Provisions.

a. Subordination or waiver of both the landlord's lien and any landlord's

security interest to the liens and security interests of the tenant's lender.

b. Consent to the liens and security interests of the tenant's lender (with such

consent intended to ensure that the granting of the liens and security

interests in favor of tenant's lender do not trigger a default under the

lease).

c. A right of entry in favor of tenant's lender to remove its collateral (often

with indemnification and repair agreements provided by tenant's lender

with respect to such entry). Tenant's lender also may want the right to sell

the collateral from the premises. Such a provision is not uncommon, but

can be difficult to obtain.

d. Notice of defaults and an opportunity to cure in favor of tenant's lender.

e. Landlords sometimes require that the tenant's lender agree to pay rent in

exchange for occupying the premises in connection with the recovery or

sale of collateral.

5. Bargaining Power.

Again, bargaining power is a key in determining what agreements the tenant and

its lender ultimately can negotiate with the landlord. For this reason, it is strongly

advisable for tenants to negotiate this item up front, at the same time that the lease

is negotiated, as the tenant's bargaining power will be greatest at that time.

[A sample Landlord Lien Waiver form is attached at the end of this outline as Exhibit C.]

B. Ground Leases; Leasehold Encumbrances; Elements of a Financeable Lease

1. In General.

Land owners and developers often use ground leases essentially as financing

devices to facilitate development. Lenders presented with the opportunity to

finance such ground leased real property will often obtain a leasehold mortgage

on the tenant's interest in the ground lease.

Similarly, many tenants seek to negotiate in their leases provisions that allow for

the providing of leasehold mortgages to facilitate any future financing plans that

they may have. For example, such provisions are quite common for chain tenants.

Tenants typically need to negotiate up front for provisions that allow for such

encumbrances.

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2. Customary Provisions for a Financeable Lease.

a. A lease term extending beyond the maturity of the loan. Some rating

agencies require even more, specifying that the term of the lease must

extend for a significant period (e.g., 10 or 20 years) beyond the maturity

date of the loan.

b. Rights to notice and cure in favor of the lender.

c. Right of the lender to obtain a new lease (on substantially the same terms)

if the old lease is terminated for any reason.

d. The right to assign and mortgage the leasehold estate without restriction.

e. Provisions insuring that the loan controls over the lease with respect to the

application of casually insurance and condemnation proceeds.

f. No right of the parties to cancel the lease.

g. Fixed rent or variable rent tied to the income from the property.

h. Landlord estoppel provisions.

3. Encumbering the Fee.

In some cases, the landlord/owner may agree to subject its fee interest to the lien

of the tenant's lender to facilitate the contemplated financing. In such a case, the

transaction really ends up in many respects being the same as a more typical fee

mortgage transaction.

If the landlord has separately encumbered the fee apart from the leasehold

encumbrance, for the lease to be financeable, the fee mortgage will need to be

subordinated to the lease.

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EXHIBIT A

When recorded, return to:

_______________________

[SNDA FORM]

SUBORDINATION, NON-DISTURBANCE,

ATTORNMENT and ESTOPPEL AGREEMENT

THIS AGREEMENT is made and entered into this _____ day of ____________, 20___, by

and among

, a(n) (the "Beneficiary"), whose address is

, a(n)

(the "Lessee"), whose address is

, and

, a(n) (the "Lessor"), whose

address is .

RECITALS

A. Beneficiary is the owner and holder of that Promissory Note dated

_________________________, in the principal sum of

DOLLARS ($________________), secured

by a Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing (the "Deed of

Trust") recorded prior to or contemporaneously with the recording hereof **[in Docket

__________, page ____,] **[at Recorder's No. ___________________,] in the records of

__________________ County, Arizona, which Deed of Trust constitutes a lien or encumbrance

on that real property more particularly described on Exhibit "A" attached hereto and by this

reference incorporated herein. Lessor and Lessee hereby authorize Beneficiary, or any title

company recording this Agreement at the direction of Beneficiary, to insert the recording

information for the Deed of Trust in the space provided above in this paragraph.

B. Lessee is the holder of a leasehold estate (the "Leased Premises") included in the

real property described on Exhibit "A" attached hereto and by this reference incorporated herein,

pursuant to the terms of that **[unrecorded] lease (the "Lease") dated __________________,

**[a memorandum of which was recorded on __________________, **[in Docket

______________, page _________,] **[at Recorder's No. ___________,] in the records of

_______________ County, Arizona] and executed by Lessee and Lessor.

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C. Lessee and Beneficiary desire to confirm their understanding with respect to the

Lease and the Deed of Trust.

AGREEMENT

NOW, THEREFORE, in consideration of the mutual covenants and agreements herein

contained, the parties hereto agree and covenant as follows:

1. The Lease is now, and shall at all times continue to be, subject and subordinate in

each and every respect to the Deed of Trust and to all extensions, modifications, renewals,

replacements, substitutions and/or consolidations thereof. Nothing contained herein shall be

deemed or construed as limiting or restricting the enforcement by Beneficiary of any of the

covenants, conditions, provisions or remedies of the Deed of Trust, whether or not consistent

with the Lease.

2. So long as Lessee is not in default (beyond any period given Lessee to cure such

default) in the payment of rent or in the performance of any of the terms, covenants or conditions

of the Lease to be performed by Lessee, Beneficiary shall not disturb or interfere with Lessee's

possession and occupancy of the Leased Premises during the term of the Lease or any extension

thereof duly exercised by Lessee.

3. If the interests of Lessor shall be transferred to and owned by Beneficiary by

judicial foreclosure, private trustee sale or any other manner, and Beneficiary succeeds to the

interest of Lessor under the Lease, Lessee shall be bound to Beneficiary under all of the

covenants, conditions and provisions of the Lease for the remaining term thereof, and any

extension thereof duly exercised by Lessee, with the same force and effect as if Beneficiary were

the lessor under the Lease. Lessee hereby attorns to Beneficiary as its lessor effective

immediately upon Beneficiary's succeeding to the interest of Lessor under the Lease. The

Lessee's attornment shall be self-operative and shall be effective immediately upon Beneficiary's

succeeding to the interest of Lessor under the Lease without the execution of any further

instruments by any of the parties hereto.

4. If the interests of Lessor shall be transferred to and owned by Beneficiary by

judicial foreclosure, private trustee sale or any other manner, and Beneficiary succeeds to the

interest of Lessor under the Lease, Beneficiary shall be bound to Lessee under all of the terms,

covenants and conditions of the Lease with the same force and effect as if Beneficiary were the

Lessor under the Lease, except that Beneficiary shall not be:

(a) Liable for any act or omission of any prior lessor (including

Lessor) [**, except that Beneficiary shall be obligated to cure any continuing

default that commences prior to the transfer event and continues thereafter (e.g., a

roof leak that is the responsibility of Lessor prior to the transfer event shall remain

the responsibility of Beneficiary or such other transferee after the transfer event)];

(b) Subject to any offsets or defenses that Lessee might have against

any prior lessor (including Lessor);

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might have paid for more than the current month to any prior lessor (including

Lessor) and all such rent shall remain due and owing notwithstanding such

advance payment;

(d) Bound by any amendment or modification of the Lease made

without its consent and written approval;

(e) **Bound to commence or complete any construction or to make

any contribution toward construction or installation of any improvements upon

the Leased Premises required under the Lease or any expansion or rehabilitation

of existing improvements thereon, or for restoration of improvements following

any casualty not required to be insured under the Lease or for the costs of any

restoration in excess of any proceeds recovered under any insurance required to

be carried under the Lease;

(f)

Premises;

**Bound by any restriction on competition beyond the Leased

(g) **Personally liable under the Lease. Beneficiary's liability under

the Lease shall be limited to the ownership interest of Beneficiary in the Leased

Premises; or

(h) **Liable for any conflict between the provisions of the Lease and

the provisions of any other lease affecting the Premises (including, but not limited

to, any provisions relating to renewal options and options to expand).

In addition, Beneficiary shall not have any liability or responsibility under or

pursuant to the terms of the Lease or this Agreement after it ceases to own an

interest in or to the property described on Exhibit "A".

5. Lessor certifies to Beneficiary that a true and correct copy of the Lease has been

delivered to Beneficiary. Lessor and Lessee certify to Beneficiary and agree as follows:

(a) The Lease has been executed and delivered by the parties, is in full

force and effect, and has not been modified or amended;

(b) No default exists under the Lease, and no event has occurred and

no condition exists that with notice or lapse of time, or both, would constitute a

default under the Lease;

_______________________, and full rental will then accrue or is now accruing

thereunder;

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(d) No rent under the Lease has been paid more than one month in

advance of its due date;

(e) Beneficiary shall have no liability or responsibility for the

application or return of any security deposit of Lessee unless actually received by

Beneficiary;

(f) Lessee, as of the date hereof, has no charge, lien or claim of offset

under the Lease or otherwise, against rents or other charges due or to become due

thereunder;

(g) Lessee has not received notice of any assignment, mortgage or

pledge of Lessor's interest in the Lease or any rents or other amounts payable

thereunder;

(h) The only persons or entities in possession of the Leased Premises

or having any right to the possession or use of the Leased Premises (other than the

record owner or holders of recorded easements) are those holding under the

Lease;

(i) Lessee has no option or right of first refusal under the Lease to

acquire the Leased Premises and no other right or interest in or under any

contract, option or agreement involving the sale or transfer of the Leased

Premises; and

(j) Except for this Agreement, the Lease constitutes the entire

agreement between the parties with respect to the Leases Premises.

6. Lessee shall give written notice to Beneficiary of any failure by Lessor to perform

or observe any of the covenants, conditions or provisions of the Lease, and Beneficiary shall

have the right, but not the obligation, to cure such failure. In the event of any such failure by

Lessor, Lessee shall not take any action with respect to such failure, including without limitation

any action to terminate, rescind or avoid the Lease or to withhold any rent thereunder, for a

period of thirty (30) days after notice thereof to Beneficiary; provided, however, that if such

failure cannot reasonably be remedied within that thirty (30) day period, Lessee shall not take

any action with respect to such failure, including without limitation any action to terminate,

rescind or avoid the Lease or to withhold any rent thereunder, so long as Beneficiary shall

commence to remedy the failure within the thirty (30) day period and thereafter shall diligently

prosecute the remedy to completion.

7. In the event that Lessee receives any notice from Beneficiary to pay rent or other

sums or render any other performance under the Lease to Beneficiary, Lessee may render

performance in accordance with such notice without any duty of inquiry and despite any

knowledge or notice to the contrary with the same force and effect as if such payment or

performance were rendered to Lessor, and Lessor hereby releases and discharges Lessee of and

from any liability to Lessor resulting from Lessee's payment of such rent to Beneficiary in

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accordance with this Agreement and/or with any separate written notice or instructions from

Beneficiary.

8. All notices required or permitted to be given hereunder shall be in writing and

may be given in person or by United States mail, by commercial delivery service or by electronic

transmission with verified receipt. Any notice directed to a party to this Agreement shall become

effective upon the earliest of the following: (i) actual receipt by that party; (ii) delivery to the

designated address of that party, addressed to that party; or (iii) if given by certified or registered

United States mail, twenty-four (24) hours after deposit with the United States Postal Service,

postage prepaid, addressed to that party at its designated address. The designated address of a

party shall be the address of that party shown at the beginning of this Agreement or such other

address as that party, from time to time, may specify by notice to the other parties.

9. The term "Beneficiary" shall be deemed to include _______________

_____________________________________________ and its successors and assigns, including

anyone who shall have succeeded to Lessor's interest by or through judicial foreclosure, private

trustee's sale, or other proceedings brought pursuant to the Deed of Trust or deed in lieu of such

foreclosure or proceedings.

10. Each covenant, condition and provision of this Agreement shall be interpreted in

such manner as to be effective and valid under applicable law but if any covenant, condition or

provision of this Agreement shall be held to be void or invalid, the same shall not affect the

remainder hereof which shall be effective as though the void or invalid covenant, condition or

provision had not been contained herein.

11. This Agreement may not be modified orally or in any other manner than by an

agreement in writing signed by the parties hereto or their respective successors in interest. This

Agreement shall inure to the benefit of and be binding upon the parties hereto, their successors

and assigns.

12. This Agreement shall be governed by and construed according to the laws of the

State of Arizona.

13. This Agreement may be executed in any number of counterparts, and each

counterpart executed by any of the undersigned, together with all other counterparts so executed,

shall constitute a single instrument and agreement of the parties.

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COMMERCIAL REAL ESTATE LEASES

CONFERENCE, OCTOBER 2 AND 3, 2008

Robert Bornhoft of Quarles & Brady Speaker 5: 16

IN WITNESS WHEREOF, these presents are executed as of the date indicated above.

By:

Name:

Title:

BENEFICIARY

By:

Name:

Title:

LESSEE

By:

Name:

Title:

LESSOR

[ADD ACKNOWLEDGMENTS AND EXHIBITS]

A-6

COMMERCIAL REAL ESTATE LEASES

CONFERENCE, OCTOBER 2 AND 3, 2008

Robert Bornhoft of Quarles & Brady Speaker 5: 17

EXHIBIT B

[ESTOPPEL CERTIFICATE FORM]

**[When recorded, return to:

__________________________

Attention: ___________________, Esq.]

LESSEE'S ESTOPPEL CERTIFICATE AND AGREEMENT

The undersigned, ____________________________________________________, a(n)

_____________________________, whose address is _________________________________

_______________________ (hereinafter called "Lessee"), hereby certifies to ______________

_________________________________________, a(n) _________________________, whose

address is _____________________________________________________________________

(hereinafter called "Lender"), and agrees as follows:

AGREEMENT

1. Lessee is the holder of a leasehold estate (hereinafter called the "Leased

Premises") included in the real property described on Exhibit "A" attached hereto and by this

reference incorporated herein, pursuant to the terms of that **[unrecorded] lease (hereinafter

called the "Lease") dated _________________, **[a memorandum of which was recorded on

________________________, **[in Docket ______________, page _________,] **[ at

Recorder's No. _______________,] in the records of ________________ County, Arizona,]

between __________________________________________________________________, a(n)

_________________________, whose address is ______________________________________

_______________________ (hereinafter called "Lessor"), and Lessee.

2. A true and correct copy of the Lease is attached hereto. The Lease represents the

entire agreement between the parties thereto as to the Leased Premises. The Lease is presently in

full force and effect and unmodified or unchanged.

3. Possession of the Premises has been turned over to Lessee, and Lessee is entitled

to continuing, undisturbed possession, subject to the terms of the Lease.

B-1

COMMERCIAL REAL ESTATE LEASES

CONFERENCE, OCTOBER 2 AND 3, 2008

Robert Bornhoft of Quarles & Brady Speaker 5: 18

4. Minimum monthly rent has been paid through ________________. No rent under

the Lease has been paid more than thirty (30) days in advance of its due date.

5. A security deposit in the amount of $_____________ has been paid by Tenant

and is being held by Landlord under the terms of the Lease.

6. The Lease expires on ___________. Lessee has _________ options of ________

years each to extend the term of the Lease.

7. No default exists under the Lease.

8. Lessee, as of the date hereof, has no charge, lien or claim of offset under the

Lease or otherwise, against rents or other charges due or to become due thereunder.

9. Lessee has not received notice of any assignment, mortgage or pledge of Lessor's

interest in the Lease or any rents or other amounts payable thereunder.

10. Lessee has no right or interest in or under any contract, option or agreement

involving the sale or transfer of the Leased Premises.

11. Lessee shall give written notice to Lender of any failure by Lessor to perform or

observe any of the covenants, conditions or provisions of the Lease, and Lender shall have the

right, but not the obligation, to cure such failure. In the event of any such failure by Lessor,

Lessee shall not take any action with respect to such failure, including without limitation any

action to terminate, rescind or avoid the Lease or to withhold any rent thereunder, for a period of

thirty (30) days after notice thereof to Lender; provided, however, that if such failure cannot

reasonably be remedied within that thirty (30) day period, Lessee shall not take any action with

respect to such failure, including without limitation any action to terminate, rescind or avoid the

Lease or to withhold any rent thereunder, so long as Lender shall commence to remedy the

failure within the thirty (30) day period and thereafter shall diligently prosecute the remedy to

completion.

12. All notices required or permitted to be given hereunder shall be in writing and

may be given in person or by United States mail, by delivery service or by electronic

transmission. Any notice directed to a party to this Agreement shall become effective upon the

earliest of the following: (i) actual receipt by that party; (ii) delivery to the designated address of

the party, addressed to that party; or (iii) if given by certified or registered United States mail,

twenty-four (24) hours after deposit with the United States Postal Service, postage prepaid,

addressed to that party at its designated address. The designated address of a party shall be the

address of that party shown at the beginning of this Agreement or such other address as that

party, from time to time, may specify by notice to the other party.

B-2

COMMERCIAL REAL ESTATE LEASES

CONFERENCE, OCTOBER 2 AND 3, 2008

Robert Bornhoft of Quarles & Brady Speaker 5: 19

13. This Agreement is executed and delivered to Lender at the request of Lessor for

the purpose of inducing Lender to provide or continue loan accommodations to Lessor, and with

the understanding that Lender is relying upon the certifications, representations and agreements

contained herein.

IN WITNESS WHEREOF, these presents are executed as of the _____ day of

______________, 200__.

________________________________________

[ADD ACKNOWLEDGEMENTS (OPTIONAL) AND EXHIBITS]

LESSEE

B-3

COMMERCIAL REAL ESTATE LEASES

CONFERENCE, OCTOBER 2 AND 3, 2008

Robert Bornhoft of Quarles & Brady Speaker 5: 20

EXHIBIT C

[LIEN WAIVER FORM]

LANDLORD WAIVER

To induce _____________________, whose address is __________________________

(hereinafter called "Lender"), to grant and/or continue financial accommodations to

__________________________, a(n) _____________ corporation, whose address is

______________________________ (hereinafter called "Debtor"), the undersigned covenants

and agrees as follows:

1. Debtor has executed a Security Agreement dated as of _____________, 20___,

(hereinafter called the "Security Agreement"), granting to Lender a security interest in that

property of Debtor described in the Security Agreement and on Schedule "A" attached hereto

and made a part hereof (hereinafter called the "Collateral"). The Collateral is located on the real

property described on Schedule "B" attached hereto (hereinafter called the "Real Property"),

which is owned by the undersigned or in which the undersigned has or claims a lien or interest.

2. The undersigned hereby consents to the Security Agreement and to all liens,

security interests and rights of Lender in the Collateral arising from the Security Agreement and

waives and releases all rights of levy for rent and all liens, security interests, claims, rights and

demands of every kind against the Collateral.

3. The undersigned hereby grants permission to Lender, its officers, agents and

employees, to enter, at any time, the Real Property or any other premises where the Collateral

may be found for the purpose of removing the Collateral from the Real Property or conducting

one or more sales of the Collateral on the Real Property. The rights granted to Lender in this

Agreement will continue until a reasonable time (but not less than fifteen (15) days) after Lender

receives notice in writing from the undersigned that Debtor is no longer in lawful possession of

the Real Property. If Lender enters onto the Real Property and removes the Collateral, Lender

agrees with the undersigned not to remove any Collateral in such a way that the Real Property is

damaged, without either repairing any such damage or promptly reimbursing Landlord for the

cost of repair.

4. The Collateral shall at all times be personal property, shall not constitute fixtures

or be part of the Real Property and shall not be subject to distraint or execution by the

undersigned or to any claim of the undersigned.

5. The undersigned shall notify any purchaser of the Real Property, and any

subsequent mortgagee or other encumbrance holder or claimant, of the existence of this

Waiver/Release Agreement, which shall be binding upon the executors, administrators,

successors, assigns and transferees of the undersigned and shall inure to the benefit of the

successors and assigns of Lender.

C-1

COMMERCIAL REAL ESTATE LEASES

CONFERENCE, OCTOBER 2 AND 3, 2008

Robert Bornhoft of Quarles & Brady Speaker 5: 21

6. In the event of any default under its lease or agreement with Debtor, then prior to:

(i) terminating its lease or agreement with Debtor, (ii) incurring any attorneys' fees, or (iii)

incurring any other expenses which it would, but for this provision, charge Debtor, the

undersigned shall notify Lender in writing at the above address of such default and allow Lender

30 days after receipt of such notice to remedy any such default on behalf of Debtor; provided,

however, that if the default cannot reasonably be remedied within that 30-day period, the

undersigned shall not terminate its lease or agreement with Debtor or incur any attorneys' fees or

other expenses so long as Lender shall commence to remedy the default within that 30-day

period and thereafter diligently prosecute the remedy to completion.

IN WITNESS WHEREOF, the undersigned has executed this Agreement this _____ day

of ____________________, 20___.

__________________________________________

Address:

__________________________________________

[ADD ACKNOWLEDGEMENTS (OPTIONAL) AND EXHIBITS]

C-2

COMMERCIAL REAL ESTATE LEASES

CONFERENCE, OCTOBER 2 AND 3, 2008

L A W S E M I N A R S I N T E R N A T I O N A L

A Comprehensive Two-Day Conference on

Commercial Real Estate Leases

Practical information on negotiating and enforcing commercial leases

October 2 and 3, 2008

Phoenix, AZ

Negotiating Key Lease Provisions and Making

the Deal Happen

James B. Connor, Esq.

Gallagher & Kennedy, P.A.

Phoenix, AZ

Jay D. Wiley, Esq.

Snell & Wilmer LLP

Phoenix, AZ

James B. Connor of Gallagher & Kennedy, P.A.

Jay D. Wiley of Snell & Wilmer LLP

Speaker 6: 1

Speaker 7: 1

LEASE PROVISIONS

ISSUES AND DISCUSSION POINTS

I. GOALS & OBJECTIVES

A. Cash Flow

B. Risk Allocation

C. Clearly Define Obligations

II.

LEASE TYPES – EXAMPLES:

A. Long-Term Ground Lease

B. Triple Net Industrial Lease

C. Multi-Tenant Office/Retail Lease

D. “Big Box” Retail Lease

E. Residential Lease

F. Agricultural Lease

III.

LANDLORD PERSPECTIVE

A. Rent

1. Rent Commencement Date

2. Unconditional, continuous obligation

3. Calculation; area, rate, adjustments

4. Renewal rate

B. Delivery of Premises

1. Condition

2. Work letter – Landlord obligations

3. Tenant improvements – allowances, time periods

4. Project features

James B. Connor of Gallagher & Kennedy, P.A.

Jay D. Wiley of Snell & Wilmer LLP

Speaker 6: 2

Speaker 7: 2

5. Landlord “escape clauses”

C. Operating Expenses; Common Area Maintenance; Expense Stops (Triple

Net)

1. Fixed vs. variable costs

2. Allocation methodology – vacant vs. occupied; gross-up

3. Exclusions; caps; opt-out

4. Audit rights

5. Services; HVAC

6. Capital improvements

7. Cost savings devices; tax appeals

D. Casualty/Condemnation

1. Control over process and proceeds; lender issues

2. Obligation to rebuild vs. terminate

3. Value of leasehold interest

4. Limit of Landlord’s obligation to proceeds received

E. Assignment/Sublease by Tenant

1. No release

2. Discretion to approve/recapture

3. Capture of additional consideration

4. To existing tenants/occupants

5. Change of control

F. Permitted Use; Exclusives

1. Other than retail

2. Retail

3. Compliance with laws, covenants

-2-

James B. Connor of Gallagher & Kennedy, P.A.

Jay D. Wiley of Snell & Wilmer LLP

Speaker 6: 3

Speaker 7: 3

4. Remedy if exclusive right is breached

G. Exculpation of Landlord; Automatic Release

1. SPE’s; securitized financing

2. Limit to property

3. Waiver of rights under law

H. Control of Common Area

1. Parking areas; service drives

2. Revenue, reserved, unreserved, visitor

I. Remedies – Landlord

1. Arizona Landlord Tenant Act

2. UCC Financing Statement

3. Notice and cure rights – Landlord and Tenant

4. Rent acceleration

J. Remedies – Tenant

1. Abatement; self-help

2. Termination

3. Judgment

K. Lender Issues

1. SNDA

2. Rights to cure/notice

3. Lock Box; no amendment of lease

4. Financial statements

5. Estoppels

L. Representations and Warranties

1. Landlord – title, codes, construction, environmental

-3-

James B. Connor of Gallagher & Kennedy, P.A.

Jay D. Wiley of Snell & Wilmer LLP

Speaker 6: 4

Speaker 7: 4

2. Tenant – authority, existence

M. Guaranties

1. Critical to underwriting

2. Unconditional, continuous

N. Insurance

1. Right to change scope and amount

2. Waiver of subrogation

O. Hazardous Materials/Liability

1. Tenant culpable

2. Preexisting; compromise

3. Base line assessment; audit rights

P. Signs

1. Control and recapture

2. Building; pylon/monument

3. Cost recapture

Q. Alterations

1. Approval rights

2. Obligation to recover/restore

R. Quiet Enjoyment

S. Indemnity

1. Consequential, insurance limits

T. Repair and Maintenance

U. Retail Specific

1. Opening/operating covenant

2. Exclusives

-4-

James B. Connor of Gallagher & Kennedy, P.A.

Jay D. Wiley of Snell & Wilmer LLP

Speaker 6: 5

Speaker 7: 5

3. Percentage rent/radius clauses/sales

4. Co-Tenancy

5. Development control – no build areas – parking ratios

IV.

TENANT PERSPECTIVE

A. Doctrine of Independent Covenants

1. Landlord covenant/conditions provisions

2. Reciprocity is not the solution

B. Landlord Default Clauses.

1. Create remedies in addition to damage and specific performance

lawsuits

2. Termination rights

3. Cure rights

4. Constructive eviction

5. Failure of Landlord to complete TIs in a timely manner

6. Liquidated damage clauses

C. Assignment of Landlord’s Interest

1. Release of Landlord

2. Assumption by Buyer

D. Options and Rights of First Refusal

1. Adjacent space

2. Future vacant spaces

3. Schedule of other leases

4. Rental rate and TI Allowances

E. SNDAs

1. Current lender

-5-

James B. Connor of Gallagher & Kennedy, P.A.

Jay D. Wiley of Snell & Wilmer LLP

Speaker 6: 6

Speaker 7: 6

2. Future lenders

3. Tenant improvement obligations

4. Non-disturbance vs. assumption

5. Subordination conditional

F. Renewal Rights

1. Rental rate

2. Tenant improvement allowances and refurbishing allowances

G. Early Termination and Contraction Rights

1. Full

2. Partial

3. Termination payments

(a)

(b)

Fee

Unamortized commissions and tenant improvements costs

4. Interference with Operations

(a)

(b)

Legal restrictions

Physical restrictions

H. Assignment and Subleasing of Tenant’s Interest

1. Responses to restrictions sought to be imposed by Landlord:

(a)

(b)

(c)

Identity of assignee

Rental adjustments

Landlord recapture rights

2. Release

I. Estoppel Certificates

1. Knowledge limitations

-6-

James B. Connor of Gallagher & Kennedy, P.A.

Jay D. Wiley of Snell & Wilmer LLP

Speaker 6: 7

Speaker 7: 7

2. Limit scope of obligation to default, acceptance of premises and

rental obligation

J. Mortgagee Protection Clauses

K. Limitation on Landlord Liability

L. Limitation on Operation and Maintenance Costs

1. Types

2. Limits on increases

3. Capital expenditures and relationship to initial term of lease

4. Audit rights

M. Parking Spaces

N. Rules and Regulations

O. Reasonableness Clauses

P. Compliance by Landlord with CC&Rs and Applicable Law

Q. Use of Common Areas

1. Continuance

2. Interference

3. Landlord’s rights clause

R. Covenant of Quiet Enjoyment and Scope Thereof

1. Title

2. Do not limit to acts of landlord

-7-

James B. Connor of Gallagher & Kennedy, P.A.

Jay D. Wiley of Snell & Wilmer LLP

Speaker 6: 8

Speaker 7: 8

S. Indemnities

T. Landlord’s Insurance Obligations and Waiver of Subrogation

U. Security

V. Signage and Building Directories

W. Retail: Catalog and Internet Sales

X. Use Restrictions

1. Scope

2. Effect on assignments and subleases

-8-

L A W S E M I N A R S I N T E R N A T I O N A L

A Comprehensive Two-Day Conference on

Commercial Real Estate Leases

Practical information on negotiating and enforcing commercial leases

October 2 and 3, 2008

Phoenix, AZ

Customizing the ADR Clause in the Lease

Robert Dauber, Esq.

Arizona State Univ.

Tempe, AZ

Robert Dauber of Arizona State Univ. Speaker 8: 1

CONFERENCE ON

COMMERCIAL REAL ESTATE LEASES

October 2, 2008

Phoenix, Arizona

Customizing the ADR Clause

In Commercial Leases

Professor Bob Dauber

Sandra Day O’Connor College of Law

Arizona State University

Robert Dauber of Arizona State Univ. Speaker 8: 2

STEPS TO CUSTOMIZING AN ADR CLAUSE

1. Identify your client’s most highly anticipated disputes.

Each process does not fit every dispute. For example, consider the

situation where the parties are several years into a positive landlord/tenant

relationship, but the tenant has breached the agreement due to changed

circumstances. Faced with the option of terminating their relationship or

restructuring their agreement, an ADR clause that forces the parties into

binding arbitration that terminates their relationship may not be preferable.

The parties may, instead, need a facilitative mediation process involving a

third party neutral that is trained to help the parties understand each others’

underlying interests and create a solution that would maximize mutual gain

and preserve their relationship.

On the other hand, what if the dispute involves the tenant and landlord

failing to agree on the amount of a rental adjustment based on a formula

specified in the lease? If this were the most highly anticipated type of

dispute, the drafter of the agreement may not be doing either party any

favors by forcing them to participate in a facilitative mediation process. It is

more likely they need an efficient way to determine how the underlying data

should be applied to the terms of the lease. Thus, the parties may be better

served through a neutral evaluation process utilizing a qualified third party

expert.

The first step of customizing the dispute resolution clause in a

commercial lease should include some analysis of who the parties are and

what problems in the performance and enforcement of the lease are they

most likely to experience.

Robert Dauber of Arizona State Univ. Speaker 8: 3

2. Consult your menu of ADR options.

The variety of dispute resolution processes are limited only by the

imagination of the lawyers drafting the agreement. There are a few types of

processes that are well known to many people in the commercial leasing

field. These processes can and should be modified, adapted and merged to

fit the clients’ needs.

Bilateral negotiations. Some parties may benefit by having a clause

that requires negotiations between specified individuals (or people

with specified positions or at designated levels of authority) as a precondition

to any further processing of a dispute. Typically, bilateral

negotiations appear as a first-step in a multi-step ADR clause.

Mediation is sometimes defined as facilitated negotiation. The role of

the third party neutral (“mediator”) is not to weigh evidence and

decide who is right or wrong, but to help the parties develop their own

resolution. In a facilitative model of mediation, the mediator might

ask questions and offer comments to help the parties clarify the

factual background of the dispute, see things from each others’

perspectives, articulate their underlying interests, or create options

that would satisfy their interests. In an evaluative model of

mediation, the parties expect the mediator to add information, such as

the mediator’s evaluation of their respective positions or her

prediction of what might happen in a lawsuit. The mediator then

helps the parties use the information to advance their negotiations.

The best mediators know how and when to use both models

effectively.

Arbitration is an adjudicatory process designed by the parties or their

designated service provider. The role of the arbitrator(s) is to consider

information presented by the parties to the dispute and render a

decision concerning the parties’ respective rights and obligations.

Arbitration may be binding, in which case it may take on the same

force and effect of a judicial decision, or it may be non-binding, so

that the parties may use the decision as they see fit to further their

negotiations.

Robert Dauber of Arizona State Univ. Speaker 8: 4

Neutral Evaluation is a process designed to help the parties resolve

their dispute by adding information from the perspective of a neutral

third party. The issue addressed by the evaluator might be a narrow

question of fact or opinion (such as the value of an asset or the

calculation of economic loss) or a complete evaluation of the parties’

respective legal positions (in which case, neutral evaluation is similar

to non-binding arbitration). Often, the parties select or pre-designate

an evaluator with specific expertise.

Hybrid or Multi-Step Processes are becoming more common as

lawyers and business people recognize the value of different

processes. A “hybrid” ADR clause typically modifies standard

processes (such as “baseball arbitration,” where the arbitrator’s

decision is limited to the resolutions proposed by the parties) or

combines components of processes (such as “med-arb,” in which the

neutral is empowered to render a decision if the parties are unable to

reach agreement during their mediation). A “multi-step” ADR clause

calls for different processes to be used sequentially if needed (such as

negotiations followed by mediation followed by adjudication).

Robert Dauber of Arizona State Univ. Speaker 8: 5

3. Select your neutral

What are the qualifications you are looking for in a third-party

neutral? Often, subject-matter expertise is critical to the success of the

process, so the neutral may need to be an auditor, an engineer, an architect,

or a lawyer, depending on the type of disputing anticipated and the type of

process selected. Parties may prefer a panel of neutrals (such as the typical 3

person arbitrator panel, where each party selects one arbitrator and the two

selected individuals choose the third member of the panel). Often, drafters

delegate the job of selecting the neutral to a third-party service provider,

such as JAMS or AAA or CPR.

Robert Dauber of Arizona State Univ. Speaker 8: 6

4. Design your process

One of the greatest benefits of ADR is the ability to custom design a

process that suits your client’s needs, rather than be left with the default

process of litigation under the statutes and rules of civil procedure.

Numerous issues can be considered in designing the process. The following

is a list of some of the issues that should be addressed when designing an

adjudicatory process.

Scope of issues subject to ADR (all encompassing, broad with

exceptions, or only specific issues or disputes)

Choice of law or governing norms to be applied (such as a

professional code)

Location and timing of process

How each party provides notice of its position

How information should be exchanged (might involve informal

voluntary disclosure of specified information, application of the

formal rules of discovery, or something in between)

Who must attend the process

How information will be communicated to the third party neutral (can

range from the representatives’ informal summaries to adoption of a

jurisdiction’s rules of evidence)

How costs of the process will be allocated

The relief available from the neutral

The relief available from the court at or after the conclusion of ADR

Many service providers offer alternative sets of rules for disputes in

different areas (such as construction, employment, commercial, etc.).

While these may be helpful, they often do not maximize the potential

benefit a custom-designed ADR process might offer the parties to a

commercial lease.

Robert Dauber of Arizona State Univ. Speaker 8: 7

Examples of Generic Arbitration Clauses

AAA

Any controversy or claim arising out of or relating to this contract, or the breach thereof,

shall be settled by arbitration administered by the American Arbitration Association, in

accordance with its Commercial [or other] Arbitration Rules [including the Optional

Rules for Emergency Measures of Protection], and judgment on the award entered by the

arbitrator(s) may be entered in any court having jurisdiction thereof.

5.10 Arbitration. Any disputes between the parties hereto shall be resolved by

arbitration in The City of Phoenix in accordance with the Commercial Arbitration Rules

(Expedited Procedures) of the American Arbitration Association or its successor.

JAMS

10. Disputes:

(a) Any dispute, claim or controversy arising out of or relating to this Agreement

or the breach, termination, enforcement, interpretation or validity thereof, including the

determination of the scope or applicability of this agreement to arbitrate, shall be

determined by arbitration in Phoenix, Arizona, before an arbitrator. At the option of the

first to commence an arbitration, the arbitration shall be administered either by JAMS

pursuant to its Streamlined Arbitration Rules and Procedures, or by the American

Arbitration Association pursuant to its rules of Commercial Arbitration. Judgment on the

Award may be entered in any court having jurisdiction. This clause shall not preclude

parties from seeking provisional remedies in aid of arbitration from a court of appropriate

jurisdiction.

(b) Allocation of Fees and Costs: The arbitrator may, in the Award, allocate all or

part of the costs of the arbitration, including the fees of the arbitrator and the reasonable

attorneys’ fees of the prevailing party.

Robert Dauber of Arizona State Univ. Speaker 8: 8

Examples of ADR Clauses in Leases From Other Jurisdictions

Texas

5.25 Dispute Resolution Provisions. If at any time there is a dispute between Lessor and

Lessee regarding this Lease and the performance hereunder, the parties will, within 10

days following mailing of written notice of a dispute, engage in face-to-face negotiations

in an attempt to resolve the dispute and shall, upon failing to negotiate a resolution,

choose a mutually agreeable third party neutral, who shall mediate the dispute between

the parties. The mediator shall be a person qualified under the Texas Alternative Dispute

Resolution Procedures Act and shall be appointed by a state district judge or the

American Arbitration Association if the parties are unable to agree upon a qualified

person. Mediation shall be non-binding and shall be confidential. The parties shall refrain

from court proceedings during the mediation process insofar as they can do so without

prejudicing their legal rights. The parties shall participate in good faith in accordance

with the recommendations of the mediator and shall follow the procedures for mediation

as suggested by the mediator. All expenses of mediation except expenses of the

individual parties, shall be shared equally by the parties. Each party shall be represented

in the mediation by a person with authority to settle the dispute. If the parties are unable

to resolve the dispute in mediation, then the default remedy provisions of Paragraphs 5.13

and 5.14 above* shall be applicable. In no case shall the provisions of this Paragraph

delay any other time periods set forth in this Lease except by the written agreement of the

parties.

____________________________

*[The default remedy provisions are as follows:]

5.13 Default of Lessee. If Lessee fails to pay rentals or other charges hereunder or otherwise fails

to perform its obligations hereunder and this failure is not cured within 30 days after written notice

from Lessor to Lessee of such failure, then Lessee is in default, and Lessor may terminate this

Lease and may enter and take possession of Premises, and will have the remedies now or

hereafter provided by law for recovery of rent, repossession of Premises and damages

occasioned by Lessee's default. The dispute resolution provisions of Paragraph 5.25 will apply in

the event of default by Lessee.

5.14 Default of Lessor. If Lessor fails to perform any of the obligations imposed upon Lessor by

this Lease or by law, and this failure is not cured within 30 days after written notice from Lessee,

then Lessor is in default and Lessee may terminate this Lease, and Lessee will have the

remedies now or hereafter provided by law for recovery of damages occasioned by Lessor's

default. The dispute resolution provisions of Paragraph 5.25 will apply in the event of default by

Lessor. In lieu of a formal declaration of termination for default as provided above, and in "special

cases," Lessee may withhold payment of rent from Lessor until Lessor's default has been cured.

"Special Cases" include situations wherein the violations of this Lease create an emergency

situation and threaten Lessee's ability to use the Premises for State purposes. Lessee may

correct all or any part of Lessor's violations and offset the cost of corrective actions against

rentals. These extraordinary remedies will only be undertaken in the best interest of the State

when a relocation following termination would be disruptive to Lessee and detrimental to its

statutory functions.

Robert Dauber of Arizona State Univ. Speaker 8: 9

Ohio

47. ALTERNATIVE DISPUTE RESOLUTION– In the event of an irreconcilable dispute

among the parties to this agreement or if litigation is brought in any state or federal court,

relating to, arising out of or concerning the lease, addendum or landlord-tenant

relationship, the parties hereby agree and covenant with each other to waive and give up

the right to a jury trial and to submit all manner of causes of action, controversies,

differences, claims or demands whatsoever, whether of fact or of law or both, to be

resolved at the request of any party through a two-step dispute resolution process

administered by Judicial Alternatives of Ohio, Inc. (J.A.O.) or its successor, or

comparable service as followed: 1) mediation before a retired judge or justice from the

J.A.O. panel followed, if necessary, and 2) by a trial on order of reference conducted by a

retired judge or justice from the panel of Judicial Alternatives of Ohio, Inc. or its

successor, or comparable service appointed pursuant to the provisions of Ohio Revised

Code Section 2701.10 or any amendment, addition or successor section thereto to try,

determine and adjudicate the case in its entirety. The parties intend this reference

agreement to be specifically enforceable in accordance with said section. In the event

either party should petition J.A.O. for temporary or preliminary injunctive relief pursuant

to Rule 65 of the Ohio Rules of Civil Procedure, a retired judge shall be selected from the

J.A.O. panel, by the J.A.O. without agreement of the parties as to the selection of the

judge and the parties specifically waive their right to mediation prior to adjudication of

such request for relief under Rule 65 of the Ohio Rules of Civil Procedure. Should the

provision be ruled invalid then the parties agree to be bound by the Federal Arbitration

Act and proceed with arbitration in accordance with the rules of Judicial Alternatives of

Ohio, Inc. and its successor, or comparable service. If the parties are unable to agree upon

a member of the panel to act as a judge then one shall be appointed by the Presiding

Judge of the Common Pleas Court of the county wherein the hearing is to be held. The

parties further agree to assume full responsibility for providing facilities, equipment, and

personnel reasonably needed by the retired judge during his/her consideration of the

action or proceeding and to pay in advance, to the retired judge, the estimated reasonable

fees and costs of the trial or proceeding, as may be specified in advance by the retired

judge in accordance with his/her customary fee schedule. The parties shall initially share

equally, by paying their proportionate amount of the estimated fees and costs of the

retired judge. Failure of any party to make such a fee deposit shall result in a forfeiture by

the non-depositing party of the right to prosecute or defend the cause(s) of action with is

(are) the subject of the reference, but shall not otherwise serve to abate, stay or suspend

the reference proceeding.

48. RESTITUTION OF PREMISES– In the event of Tenants’ nonpayment of rent,

Landlord shall nevertheless have the right to exercise its remedies pursuant to R.C.

Chapter 1923 for restitution of the premises

L A W S E M I N A R S I N T E R N A T I O N A L

A Comprehensive Two-Day Conference on

Commercial Real Estate Leases

Practical information on negotiating and enforcing commercial leases

October 2 and 3, 2008

Phoenix, AZ

Insurance Considerations for Commercial Leases

Joshua D. Rogers, Esq.

Kunz, Plitt, Hyland, Demlong & Kleifield

Phoenix, AZ

Joshua D. Rogers of Kunz, Plitt, Hyland, Demlong & Kleifield Speaker 9: 1

INSURANCE CONSIDERATIONS FOR COMMERCIAL LEASES:

DRAFTING AND NEGOTIATING LEASES TO ADDRESS ISSUES OF INSURANCE, WAIVERS,

INDEMNITIES, EXCULPATION CLAUSES AND SUBROGATION WAIVERS AND EVALUATING

HOW THOSE PROVISIONS RELATE TO EACH OTHER

By Joshua D. Rogers

Kunz Plitt Hyland Demlong & Kleifield

I. INSURANCE PROVISIONS

The two primary risks faced by the parties to a commercial lease include property

damage and liability to third parties. Accordingly, both the landlord and the tenant must

ensure that 1) the property covered by the lease, 2) the parties to the lease, and 3) the

parties’ interest in the property, are kept fully insured at all times.

Where there is no agreement between the two parties to the contrary, each may

insure their separate interest in the property. Under those circumstances, neither party

can make a claim to the insurance procured by the other on its separate interest in the

property. Similarly, unless there is an agreement otherwise, neither the landlord nor the

tenant needs to procure insurance for the benefit of the other and has the right to keep the

proceeds of any insurance that it separately procures.

Having said this, the better and common practice is to include specific insurance

provisions within the body of the lease. The insurance provisions typically included in a

lease are designed to protect the interest of the landlord and the tenant in the property and

to ensure that neither party is exposed to personal liability due to any occurrence in or

around the property. Insurance is therefore an extremely important necessity for each

party to the lease and the specific responsibilities of the respective parties to the lease

with regard to insurance should therefore be expressly included within the lease itself.

A. Types of Insurance

1. Property/casualty insurance

Property/casualty insurance policies are “first party” policies. In other words,

property insurance requires insurers to pay benefits directly to policyholders for losses to

the policyholders’ own property. Previously, there were there were three types of

insurance coverage falling within the broad category of property/casualty insurance: (1)

fire insurance, which insures against damage from fire and lightning; (2) fire and

extended coverage insurance, which insures against damages not only by fire and

lightning but also any damage caused by windstorms, hail, explosion, riot, and damage

by aircraft or vehicles, and (3) an "all risk" policy. However, the standard form of

property insurance coverage form used today is known as the Building and Personal

Property Coverage Form (“BPP”). This form permits a business owner to cover in one

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Joshua D. Rogers of Kunz, Plitt, Hyland, Demlong & Kleifield Speaker 9: 2

policy the buildings, fixtures, machinery and equipment, as well as the personal property

used in business and the personal property of others for which the business owner is

responsible. Coverage also can be extended to insure newly acquired or constructed

property, valuable papers and records, property temporarily off the business premises,

and outdoor property such as fences, signs, and antennas. The Building and Personal

Property Coverage Form also comes in three variations, the Basic Form, the Broad Form,

and the Special Form, with the Special Form providing the broadest coverage of the three

types, covering everything unless excluded.

Property may be insured under a property policy using one of three separate

values: 1) actual cash value, 2) replacement cost, or 3) stated value. Generally, recovery

is on an actual cash value unless the policy is endorsed otherwise. However, even if

replacement cost is specified by endorsement, this value is nevertheless still subject to the

policy limits.

2. Liability insurance

Liability insurance policies are “third-party” policies. In other words, liability

policies provide coverage for amounts a policyholder must pay to third-parties for injury

to the third-party or damage to the third-party’s property. One of the primary concerns of

both the landlord and the tenant is the possibility that someone will be injured or killed on

the property, which may result in either the landlord or the tenant, or possibly both, being

exposed to significant liability. As will be discussed subsequently, the indemnification

provisions in the lease, in which one party agrees to hold the other party harmless in the

event of any such loss, may provide some protection against any such liability to one of

the parties. However, these provisions may have little or no value if the indemnifying

party does not have a significant net worth or available assets. Liability insurance is

therefore viewed as the primary means by which the parties protect themselves from a

loss arising from a death or injury on the property.

In most commercial leases, all or a significant portion of the risk of liability is

passed on to the tenant. This can be accomplished in one of three ways: (1) the tenant is

required to maintain specific insurance coverage, (2) the landlord maintains the coverage

and the tenant reimburses the landlord for all or a significant portion of the cost of the

insurance, or (3) the landlord and tenant each maintain certain insurance coverage which

provides protection for the other party as an additional insured or a named insured.

The relevant liability insurance coverage is called commercial general liability

insurance (“CGL”). A CGL policy provides coverage for claims being made against the

insured which fall within the policy insuring agreement unless they are otherwise

excluded under the terms of the policy. CGL policies insure against liability arising out

of bodily injury or property damage, as well as personal injury, which includes specified

risks such as false imprisonment, wrongful eviction, and defamation claims. The policy

also provides coverage against the insured's being required to defend the claim or pay any

award on behalf of the insured in excess of any deductible amount. The amount of the

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Joshua D. Rogers of Kunz, Plitt, Hyland, Demlong & Kleifield Speaker 9: 3

coverage is generally provided on a per occurrence basis with a maximum aggregate

limit.

3. Rent and business interruption insurance

Lenders typically require landlords to carry rental interruption insurance. Rental

interruption insurance covers the actual rent the landlord was due from the tenant.

Landlords correspondingly often require tenants to obtain business interruption insurance,

which insures the tenant's lost earnings or profits, i.e., the funds with which the tenant

pays the rent. Such insurance is usually obtained for a reasonably long period of time.

Whereas lenders and landlords will often seek to require 18 months to 2 years of

coverage, tenants will seek to limit the length of the coverage to 1 year due to the

expense.

4. Flood Insurance

Coverage for damages caused by flood is excluded under property insurance

policies. However, flood insurance is available under the National Flood Insurance

Program pursuant to the National Flood Insurance Reform Act of 1994 (the "1994 Act"),

which imposed on lenders and purchasers in the secondary market the responsibility for

compliance with the National Flood Insurance Act of 1968 (the "Act") and the Flood

Disaster Protection Act of 1973.

5. Terrorism insurance

The events of September 11, 2001 have dramatically changed the

landscape of the insurance industry. Immediately following the attacks, many insurance

companies began inserting express terrorism exclusions into policies in order to preclude

coverage for such events. At the same time however, lenders and landlords also began

revising mortgage and lease agreements to require the provision of such insurance. A

few insurance companies agreed to provide such coverage but at a rate which was

effectively cost prohibitive. In order to resolve this conundrum, the Terrorism Risk

Insurance Act ("TRIA"), 15 USCA 6701, was enacted by Congress, requiring insurers

continue to make terrorism insurance available to their insureds. The TRIA provides a

federal backstop for insurance losses up to approximately $100 billion a year resulting

from acts of terror, and requires insurers to make terrorism coverage available on

substantially the same terms as coverage for other perils.

6. Self-insurance

Self-insurance typically exists where a large corporation with a substantial net

worth is prepared to accept the risk that it will be required to pay the cost of any loss out

of its own assets. Self-insurance can be utilized in relation to both property insurance and

liability insurance. Where it is the tenant seeking to be self-insurance, the risk to the

landlord and the mortgagee is that the tenant will not have the financial capacity to pay

for the cost of restoring the property or the liability loss. Self-insurance is therefore more

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Joshua D. Rogers of Kunz, Plitt, Hyland, Demlong & Kleifield Speaker 9: 4

problematic for the landlord in relation to liability insurance than it is in relation to

property insurance. The evaluation of the risk in relation to property insurance is

significantly more predictable than potential liability claims. Therefore, tangible factors

such as the financial status of the company proposing to be self-insured can provide a

certain level of comfort for the landlord and/or mortgagee in relation to property

insurance. In contrast, the unpredictability of a liability loss can effectively render the

financial size or strength of a tenant meaningless for purposes of evaluating selfinsurance.

Accordingly, neither a landlord nor a mortgagee will permit a tenant to self-insure

unless they are both convinced that the tenant's net worth is so large and safe that even if

the tenant is called on to reconstruct several locations and pay several liability claims, the

tenant will still have the ability to meet these demands.

B. Considerations in Drafting Insurance Provisions

1. Financial stability of insurer

One consideration in negotiating the terms of the insurance provision in the lease

which has become important is the financial strength of the insurance carrier. The

landlord and the tenant typically insist that the insurance company used by whichever

party is a financially stable company. There are a number of rating guides to the

financial stability of insurance companies, but the one usually utilized is A.M. Best. The

Best Rating system has two components: 1) an alphabetical rating called the Best rating,

which is a quantitative and qualitative evaluation of the company, and 2) a rating of the

insurer’s financial strength based on roman numerals which is called the Financial Size

Category. The lease will typically provide the minimum strength of the insurer making

reference to both the Best Rating and the Financial Size Category. This provides the

parties with the assurance that, in the event of a casualty, they will be able to rely on

receiving the insurance they thought they had on the property.

2. Policy limits

The parties must also consider the amount of insurance being carried and the

deductible on the insurance policy. With regard to property/casualty insurance, the

amount of the insurance necessary depends on the total value of the property, the

improvements constructed thereon, and the furniture, fixtures, inventory, and equipment

used in conjunction with the improvements. The number and complexity of factors

utilized to determine the value can make it difficult to quantify with any certainty the

amount of insurance needed on a property/casualty policy. Because the amount of

insurance required could significantly increase the costs of the party required to maintain

the insurance, it is important for the landlord and the tenant to discuss their insurance

needs and the property's requirements prior to setting the standards to be followed under

the terms of the lease.

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Joshua D. Rogers of Kunz, Plitt, Hyland, Demlong & Kleifield Speaker 9: 5

3. Deductibles

Insurance policies often contain deductible amounts, i.e., the initial cost of the

loss not covered by the insurer. A higher deductible is often preferable to the party

required to maintain the insurance under the lease because this results in a lower premium

being charged to the policy. In contrast, a higher deductible is a concern for the other

party to the lease because the higher the deductible the more the party maintaining the

insurance will be obligated to contribute to the cost of the loss. If the party responsible

for the deductible does not have the financial capacity to pay the deductible amount in the

event of a loss, this can potentially an unnecessarily shift the risk to the other party.

4. Effect of co-insured provisions

The parties to a lease must also consider the effect of co-insurance provisions

contained within an insurance policy. Co-insurance provisions relate to the percentage of

insurable value or cost against which the insurance policy insures. Insurers wish to

ensure that the insureds are carrying sufficient property insurance in order to adequately

restore the damaged property. Co-insurance provisions are therefore included in order to

require that the stated amount of insurance is equal to a percentage of the property’s

actual value. Specifically, if the property is not insured for a substantial portion of its

value (typically 80 to 90 per cent) and suffers a casualty loss, the insurance company will

pay for only the percentage of the loss the amount of insurance carried bears to the

overall loss. Because the insured will have to pay the difference, the co-insurance

provision encourages insured and the parties to the lease generally to ensure the property

is adequately insured and not to otherwise inadequately value the property.

5. Mortgagee considerations

Because the purchase of commercial properties are often financed by mortgages,

in addition to the landlord and tenant, the mortgagee will also be particularly concerned

as to the adequacy of the insurance required under the lease. In accordance, the mortgage

will generally contain conditions for the kinds and amounts of coverage the mortgagee

believes adequate to provide it with the protections it feels warranted by its investment in

the property. The owner/landlord/mortgagor should seek to make certain that the

conditions the mortgagee have established in the mortgage agreement are followed in the

terms of the lease.

6. Miscellaneous considerations

In addition to the above considerations, the following issues are often addressed

within the provisions of the lease:

a. addition of the landlord to all relevant insurance policies;

b. the provision of certificates of insurance or other proof of

issuance of the policies by the tenant;

Page 5 of 7

Joshua D. Rogers of Kunz, Plitt, Hyland, Demlong & Kleifield Speaker 9: 6

c. advance notice of cancellation, amendment or non-renewal

of the policy;

d. the right of the landlord to pay the premium or buy the

policy and be reimbursed from the tenant in the event the tenant fails to do

so;

e. the tenant's failure to obtain the required insurance as a

default under the terms of the lease;

f. insurance to be obtained from an insurer that is admitted or

licensed to write insurance in the State in which the property is located;

g. policy limits applying on a per location basis rather than for

all the tenant’s locations;

h. the right to increase the amount and type of insurance; and

i. preclusion of special exclusions in the policies.

II.

WAIVER, EXCULPATION AND INDEMNIFICATION

Waiver, exculpation and indemnification fit hand-in-hand with the purposes of the

insurance provisions in the lease. Because a landlord is not in possession or control of

the property during the lease term, a landlord generally wants to ensure that it will not be

responsible for any damage, injuries, or deaths that occur at the property due to the

tenant's use or occupancy of the property during the lease term. Similarly, if the tenant is

leasing only a portion of the property, it does not want to be subject to liability for

anything that occurs on other portions of the property it is not actually

leasing/controlling. The desire by each party to be indemnified for those events which

are not its responsibility can become quite complex due to the different parties who could

have responsibility for various portions of the property. In some leases, the tenant is

responsible for events that occur inside the building, while the landlord is responsible for

injuries or damages that occur in the parking or other common areas. However, the

understanding of the parties as to their respective responsibilities in the event of death,

damage, or injury should be described in the lease.

Typically, the landlord and the tenant attempt to limit their liability under the

lease pursuant to indemnification and exculpation clauses included in the lease and which

formalize the party's agreement as to who will be responsible for any liability arising

from or at the property during the lease term. In an indemnification provision, one party

agrees to be responsible for any injury, damage, or death that occurs on the property

regardless of who is at fault.

Page 6 of 7

Joshua D. Rogers of Kunz, Plitt, Hyland, Demlong & Kleifield Speaker 9: 7

An exculpation clause is a provision in which one party waives any personal

liability against the other party regardless of the cause. The effect of an exculpation

clause is one party to the lease waiving any liability against the other or limiting that

party's potential liability to its interest in the property. Exculpation clauses are often

employed in leases in a way in which the party agrees that, in the event it commences a

lawsuit, it will not seek a judgment against the other party. In other words, the party

(often the tenant) agrees in the lease that irrespective of what happens at the property or

what the other party does or fails to do, there will be no claim against it based on personal

liability and that no claim which arises will be pursued against the party. The exculpation

clause in a lease is intended to avoid any liability that would be imposed by law,

providing an extra measure of protection for the party who really does not have control

over the property during the term of the lease.

III.

SUBROGATION WAIVERS

Subrogation is the act by which the insurer is placed in the position of the insured

after a loss. Subrogation occurs when the insurer has paid the claim and the insurer wants

to effectively stand in the shoes of the insured and proceed against the third party who

was responsible for the loss that led to the claim. Where the insurer has paid a claim to

an insured and the insured has a claim against a third-party for causing the loss, the

insurer, rather than the insured, has the right to pursue those claims because the insured

has already been compensated. Otherwise, the insured would receive a windfall by being

able to recover twice for the same loss.

Waiver of subrogation provisions are often included within the terms of a lease.

Pursuant to such provisions, insureds effectively waive the common law subrogation

rights of the insurer, as discussed above. Because the loss is often caused by the tenant,

who controls the property during the lease term, the waiver typically operates to prevent a

landlord’s insurer from suing tenants.

Page 7 of 7

L A W S E M I N A R S I N T E R N A T I O N A L

A Comprehensive Two-Day Conference on

Commercial Real Estate Leases

Practical information on negotiating and enforcing commercial leases

October 2 and 3, 2008

Phoenix, AZ

Condemnation: Resolving the Potential Conflicts

Between Landlord and Tenant

Gary L. Birnbaum, Esq.

Mariscal, Weeks, McIntyre & Friedlander, P.A.

Phoenix, AZ

Gary L. Birnbaum of Mariscal, Weeks, McIntyre & Friedlander, P.A. Speaker 10: 1

CONDEMNATION OF LEASED PROPERTY:

DIVIDING THE PIE BETWEEN LANDLORD AND TENANT

Gary L. Birnbaum

What happens when a duly authorized condemning authority seeks to

acquire, by use of the power of eminent domain, leased real property? Does the

just compensation award belong to the landlord (lessor), the owner of the

underlying fee, or to the tenant (lessee), the party with the right to undisturbed

possession of the property? If the just compensation payment is to be divided

between the lessor and the lessee, what is the theoretical (and mathematical)

basis for the division?

The answers to these questions are not complex. The valuation of

fractional interests in leased land (improved or unimproved) is founded upon real

property principles familiar to all attorneys. It is in the application of these

principles that the analysis often goes astray.

I. The “Bundle of Rights”

We begin our analysis with the most fundamental of property law

principles. Real property involves a so-called “bundle of rights.” Collectively, all

of the sticks in the bundle comprise the fee title. While there may be many

fractional interests (e.g., easements, mortgages), a common situation involves

only two fractional interests -- the owner of the property and his or her tenant.

In this situation, the owner is appropriately referred to as the “lessor” (or

landlord) and the holder of the possessory interest for a limited time is called the

“lessee” (or tenant). In appraisal jargon, the fractional interest of the lessor is

called the “leased fee;” the interest of the lessee is referred to as the “leasehold”

estate.

II.

Constitutionally Protected Property Interests

The leased fee and the leasehold estate are constitutionally protected

property interests. The United States Supreme Court (among other courts) has

observed that the term “property” (as used in the Takings Clause of the Fifth

Mr. Birnbaum is the Managing Director of Mariscal, Weeks, McIntyre & Friedlander, P.A. in

Phoenix, Arizona. He also serves as Associate Dean for Graduate Studies and Program

Development at the Sandra Day O’Connor College of Law at Arizona State University where he

teaches courses on real estate valuation and private property rights. Among other achievements,

Mr. Birnbaum is a contributing author of Nichols on Eminent Domain and has been elected a

Fellow of the American College of Trial Lawyers.

Gary L. Birnbaum of Mariscal, Weeks, McIntyre & Friedlander, P.A. Speaker 10: 2

Amendment to the United States Constitution) includes both the real property

interest referred to as “a fee simple,” as well as the interest known as “estate or

tenancy for years.” In short, the Takings Clause “is addressed to every sort of

interest the citizen may possess.” United States v. General Motors Corp., 323

U.S. 373, 378 (1945). If the fractional interest constitutes “property,” then its

acquisition by the government requires the payment of just compensation to the

interest owner. Alamo Land & Cattle Co., Inc. v. Arizona, 424 U.S. 295, 303

(1976). “Just compensation” refers to the fair market value of the interest

condemned.

III.

The Nature of the Two Real Property Interests

The “leased fee” consists of both the right to receive rents during the term

of the lease and the value of the reversion (residual ownership of the property)

upon termination or expiration of the lease. The “leasehold’ represents the right

to occupy and use the property during the term of the lease and during any

available option or extension periods.

Algebraically, the foundational valuation principle may thus be stated as

follows:

Value of the leased Value of the Value of the

fee + leasehold = fee simple

(landlord’s interest) (tenant’s interest) estate

Of course, if any two of the three variables in this equation are known, the

missing variable may be readily computed.

IV.

Leasehold Advantages and Disadvantages

In common parlance, a lease can be a “good” lease, a “bad” lease, or a

“market” lease. If a lease is at market rate, it has no fair market value. Because

other similar properties of equal utility are theoretically available, the economic

principle of substitution informs that no other market participant would pay the

lessee to assume this lease, and that the lessor would not pay anyone to relieve

it of the burdens associated with the lease.

On the other hand, not all leases are “market” leases. If the contract

(lease) rent is below the prevailing (and projected) market rate, than the lessee

has a “leasehold advantage.” In contrast, if the contract rent exceeds the market

rent, then the lease has a “leasehold disadvantage.”

V. Computing the Value of the Leasehold

In light of these observations, computation of the value of the leasehold

estate is neither difficult to understand nor mathematically challenging. If the

lease is a “market lease,” the leasehold estate has no fair market value. If the

Gary L. Birnbaum of Mariscal, Weeks, McIntyre & Friedlander, P.A. Speaker 10: 3

lease is advantageous to the lessee, the leasehold advantage (the value of the

leasehold) may be computed as follows:

Leasehold = PV (market rent – x Number of rental

advantage contract rent) periods remaining

under the lease

In other words, the value of a leasehold interest is equal to the present value of

the monthly (or other periodic) savings when the lease rate is compared to the

market rate, computed over the remaining term of the lease. The term would

generally include the period of any option or extension right likely to be

exercised.

The computation is essentially identical when there is a “leasehold

disadvantage.” If the contract rent exceeds the market rent, then each month the

lessee suffers a loss when the lease payment is compared to market rent.

Computed over the term of the lease and then discounted to present value, the

result will be a leasehold disadvantage or, stated differently, a negative leasehold

value. In sum, the value of a leasehold may be positive, negative, or zero, but it

is rarely difficult to compute if the lease agreement is available and market rents

are ascertainable.

VI.

Computing the Value of the Leased Fee

Appraisal instructors often exhibit diabolical glee when they observe

attorneys and others unfamiliar with leasehold valuation techniques struggling to

determine the value of the lessor’s interest (leased fee) under a lease. The

uninitiated often engage in a wholly unnecessary exercise in mathematical

gymnastics in an effort to compute the present value of the leased fee interest.

First, they project current lease rates to the expiration date of the lease. Then,

they capitalize the future income flow to derive a future value. Then, they

discount the future value to a present value. Finally, they add the residual value

thus determined to the present value of all rental payments to be received during

the term of the lease. The result is, of course, the present value of the leased

fee, but so many judgments have been injected into the equation (e.g., terminal

capitalization rate, lease period discount rate, residual value discount rate) that

the reliability of the mathematical result is at best somewhat suspect.

There may be times when such an approach is required. More often,

however, simple algebra is the answer.

Recall the three-variable equation set forth in Section 3. The value of the

fee simple estate can invariably be estimated using common appraisal

approaches (sales comparison approach). The value (positive, negative, or zero)

Gary L. Birnbaum of Mariscal, Weeks, McIntyre & Friedlander, P.A. Speaker 10: 4

of the leasehold may be computed in the manner outlined in Section 5. The fair

market value of the leased fee (lessor’s interest) is then simply:

Leased fee value = Fee simple - Leasehold value

value

If there is no leasehold advantage or disadvantage (i.e., in the case of a market

lease), the value of the leased fee (lessor’s interest) is equal to the fee simple

value. If there is a leasehold disadvantage (negative leasehold value), the value

of the leased fee may actually exceed the value of the fee! This is not a

surprising result, since the lessor will have the right to residual ownership of the

property and the right to receive above-market rents during the lease term.

VII.

Dividing the Pie

In a condemnation case then, in the absence of a contract provision

mandating a different result, the lessor is entitled to receive the fair market value

of the leased fee and the lessee is entitled to receive the value of the leasehold

estate. Thus, the pie is divided.

Must the sum of the leased fee and the leasehold always equal the value

of the fee? In theory, yes. In practice, there is one anomaly.

Suppose, for example, a lessee has a lease with a substantial negative

value (leasehold disadvantage). Hypothetically, let us assume that the fee value

of a rental property is $500,000 and that the leasehold disadvantage is $200,000.

What is the value of the leased fee?

Leased fee = Fee value - Leasehold ($-200,000)

($500,000)

Leased fee = $700,000

However, in a condemnation action, the lessee can never receive less

than zero dollars for the property interest condemned. In other words, you never

have to pay the government for taking your property interest regardless of its

(negative) value. Accordingly, in the hypothetical illustration, unless precluded by

the relevant statutory scheme, the lessee will receive nothing, the lessor will

argue for $700,000 (the leased fee value), and the condemning authority will

protest that in no event should it ever be required to pay more than the fee

simple value of the property condemned.

VIII.

Condemnation Provisions in Leases

Gary L. Birnbaum of Mariscal, Weeks, McIntyre & Friedlander, P.A. Speaker 10: 5

The foregoing discussion explains the division of the condemnation/just

compensation award in the absence of a controlling lease provision. In fact, no

lease should ever be executed without a detailed provision defining the rights of

the lessor and lessee in three distinct circumstances: a total taking, a substantial

partial taking, and an insubstantial partial taking that allows continued, beneficial

occupancy by the lessee.

Moreover, even the most adhesive leases may provide protection for one

party (usually, the lessee) beyond that provided by the law in the absence of a

controlling lease provision. Assume, for example, that a shopping center tenant

installs $100,000 in fixtures only to find the entire property condemned one year

later. Absent a written lease provision, either (i) the fixtures would be deemed

personal property removable by the tenant; or (ii) the fixtures would be deemed

part of the real estate. If the lease provided that all condemnation compensation

was the property of the lessor (a common provision), the lessee would likely

receive nothing for the leasehold and nothing for the relatively new fixtures. An

alternative lease provision might allow the lessee to recover the unamortized

portion of the fixtures value from the compensation award, even though it

provided for no other compensation for the leasehold estate.

IX.

Conclusion

Every lease should include an eminent domain provision defining the

relative rights of the lessor and the lessee in the event of condemnation.

Nevertheless, understanding how the respective interests of the lessor and the

lessee are viewed and valued in the absence of such a clause may assist real

estate attorneys in the drafting process and help you to explain to your client why

those two pages of “boilerplate” are essential to his or her protection.

Gary L. Birnbaum of Mariscal, Weeks, McIntyre & Friedlander, P.A. Speaker 10: 6

Additional Materials

THE APPRAISAL OF REAL ESTATE 475-79 (12th ed. Appraisal Institute 2001).

R. Duvall & D. Black, Dividing the Pie: Compensating Landlords and Tenants in

Takings of Leased Real Property, THE APPRAISAL JOURNAL, January 2001, at 1.

Annotation, Eminent Domain: Measure and Elements of Lessee’s Compensation

for Condemnor’s Taking or Damaging of Leasehold, 17 A.L.R. 4TH 337 (1982).

V. Goldberg, et al., Bargaining in the Shadow of Eminent Domain: Valuing and

Apportioning Condemnation Awards Between Landlord and Tenant, 34 U.C.L.A.

L. REV. 1083 (1987).

J. Zitter, Annotation, Validity, Construction and Effect of Statute or Lease

Provision Expressly Governing Rights and Compensation of Lessee Upon

Condemnation of Leased Property, 22 A.L.R. 5TH 327 (1994).

L A W S E M I N A R S I N T E R N A T I O N A L

A Comprehensive Two-Day Conference on

Commercial Real Estate Leases

Practical information on negotiating and enforcing commercial leases

October 2 and 3, 2008

Phoenix, AZ

Emerging Issues in Environmental Law:

Concerns and Remedies

Rhett B. Larson, Esq.

Gallagher & Kennedy, P.A.

Phoenix, AZ

Rhett B. Larson of Gallagher & Kennedy, P.A. Speaker 11a: 1

EMERGING ISSUES IN

ENVIRONMENTAL LAW

Concerns and Remedies in

Commercial Leases

Rhett B. Larson, Esq.

Gallagher & Kennedy, P.A.

OVERVIEW

ß Superfund Liability and

Protection

ti

ß Permitting Issues (NFA

Letters)

ß Indoor Air Toxicity

ß Stormwater

Management

Rhett B. Larson of Gallagher & Kennedy, P.A. Speaker 11a: 2

SUPERFUND LIABILITY

ß CERCLA and WQARF

Overview

ß Important Supreme Court

Case Law – Aviall and

Atlantic Research

ß Superfund Case Law on

Commercial Leases –

Commander Oil and

Bestfoods

ß Superfund Liability

Transfer Cases –

Coy/Superior Team

Superfund Liability Protection

ß

Secured Creditor Exemption

Not an “owner”, “operator” or “arranger”

Act of God/Act of War

Third-Party Defense

ALL APPROPRIATE INQUIRIES

Innocent Landowner

Bona Fide Prospective Purchaser

Contiguous Property Owner

Rhett B. Larson of Gallagher & Kennedy, P.A. Speaker 11a: 3

ALL APPROPRIATE INQUIRIES

ß AAI – often referred to as Phase I Environmental

Site Assessment

ß Prior to November 2006, no definitive regulatory

standard – default standard was ASTM 1527-00

ß As of November 2006, AAI regulatory standard in

effect, with ASTM 1527-05 meeting that regulatory

standard

ß AAI also necessary to receive Brownfields

redevelopment grants

ß Often required by lenders

Phase I ESA Reports

ß Environmental

Professional

Qualifications

ß Records Review /

Interviews / Site

Reconnaissance

ß User vs. EP

Responsibilities

ß Data Gaps

ß Scope of Protection

ß Shelf Life

Rhett B. Larson of Gallagher & Kennedy, P.A. Speaker 11a: 4

Environmental Due Diligence Tips

ß Alternatives to Phase I ESA

ß Expand scope of records review (APP

facilities, VRP applicants, etc.)

ß Additional Background Checks

(environmental crimes, suits, OSHA

inspections, etc.)

ß Build in flexibility on length of due diligence

period in case Phase II is necessary (can

take weeks to months)

PERMITTING ISSUES

ß

Common Permitting Schemes Applicable at

Commercial Sites:

APP

AZPDES Point Source/Stormwater

Dredge & Fill Permits

UIC/UST

Air Permits

Hazardous Waste TSDF Permits

Rhett B. Larson of Gallagher & Kennedy, P.A. Speaker 11a: 5

Permit Closure and NOV Response

ß Clean Closure Requirements

ß No Further Action Letters

ß Monitored Natural Attenuation

ß Designated Environmental Use Restrictions

(DEURS)

INDOOR AIR TOXICITY

ß Asbestos Issues in

Demolitions

ß OSHA Regulations

ß Toxic Mold and Tort

Litigation

ß Vapor Intrusion

Rhett B. Larson of Gallagher & Kennedy, P.A. Speaker 11a: 6

Clean Water Act in Arizona

ß Jurisdiction extends

only to “navigable

waters” – defined as

“waters of the United

States”

ß SWANCC and

Rapanos

ß Clean Water

Restoration Act Bill

Introduction to NPDES/AZPDES

Permit Programs

ß NPDES – Federal Clean

Water Act (33 U.S.C.

1342)

ß Prohibits discharge of

pollutants from point

sources to navigable

waters absent a permit

ensuring compliance with

water quality standards

Rhett B. Larson of Gallagher & Kennedy, P.A. Speaker 11a: 7

Introduction to NPDES/AZPDES

Permit Programs (cont.)

ß Arizona has primacy to

administer the NPDES

program.

ß Key components to

AZPDES statute

ß Historic Properties and

Endangered Species

ß Defenders of Wildlife v.

EPA

Who Needs a Permit?

ß

Stormwater permit requirements

apply broadly

“Stormwater discharge

associated with industrial

activity”

Municipal separate storm sewer

systems (MS4s)

Construction activities

Any activity ADEQ determines

contributes to a violation of

water quality standards or is a

significant contributor of

pollutants to a navigable water

ß Do I need a stormwater

permit?

Rhett B. Larson of Gallagher & Kennedy, P.A. Speaker 11a: 8

PERMIT OPTIONS

ß Full Containment/No Exposure

ß Individual Stormwater Permits

ß General Stormwater Permits

1. Construction

2. MS4

3. Multi-Sector Industrial

4. De Minimus

“NO EXPOSURE”

ß Both state and federal

stormwater t regulations

allow for facilities to

avoid permit

requirement if the

facility can

demonstrate “no

exposure”. 40 CFR

122.26 and A.A.C.

R18-9-A902(H).

Rhett B. Larson of Gallagher & Kennedy, P.A. Speaker 11a: 9

Individual Permits

ß Necessary if the facility will not qualify for a

general permit

ß ADEQ/EPA may require an individual permit even

if the facility qualifies for a general permit if they

determine the facility is contributing to a violation

of a water quality standard or is a significant

contributor of pollutants to waters of the United

States

IMPAIRED WATERS

ß Friends of Pinto Creek

ß Increased Monitoring

Requirements

ß “Outstanding Arizona

Waters”

Rhett B. Larson of Gallagher & Kennedy, P.A. Speaker 11a: 10

Construction General Permit

ß Covers stormwater

discharges from

construction activities

disturbing over one acre of

land. (40 C.F.R>

122.26(b) and A.A.C. R18-

9-A902(B))

ß “Whoa Nellie Bucket”

ß SWPPPs and NOI

ß Permit Waivers

Multi-Sector General Permit

ß EPA’s multi-sector general permit (MSGP) was

reissued October 30, 2000 and expired on

October 30, 2005. It has been administratively

extended on both a federal state level pending

issuance of replacement permit. Those originally

permitted under the MSGP may continue to

operate, but the MSGP is not available to new

dischargers until reissued.

ß ADEQ has not yet issued an equivalent multisector

permit for the AZPDES program.

Rhett B. Larson of Gallagher & Kennedy, P.A. Speaker 11a: 11

MSGP Continued

ß Authorizes stormwater discharges

associated with industrial activity and certain

non-stormwater discharges

ß Does not authorize certain discharges

ß NOI and SWPPP

ß Low Priority it Enforcement

ADEQ Efforts to Adopt Multi-Sector

Stormwater Permit

ß Proposed changes in

2001; released draft

permit in 2004

ß ADEQ has stated it will

not issue a multi-sector

permit until after

issuance of the federal

MSGP

Rhett B. Larson of Gallagher & Kennedy, P.A. Speaker 11a: 12

EPA’s Draft MSGP

ß EPA issued a revised draft of the MSGP on

December 1, 2005, and accepted comments

until February 16, 2006.

ß Issues included expanded benchmark

requirements and permit’s mandatory BMP

approach

Timing of Permits – Individual

ß Apply for permit 180 days before discharge if

industrial; i if construction, ti must apply 90 days

before construction begins.

ß ADEQ publishes all draft permits for 30-day public

comment period (may be extended or have public

hearing)

ß EPA has thirty t days to object to final permit

ß Effective for a term of not more than five years

Rhett B. Larson of Gallagher & Kennedy, P.A. Speaker 11a: 13

Timing of Permits - MSGP

ß MSGP is currently

unavailable

ß Applicants seeking permit

coverage for activities that

would otherwise be

authorized under MSGP

must seek individual

permit coverage until a

new MSGP is issued.

Timing of Permits – Construction

General Permit

ß New projects must submit NOIs at least two days prior to commencing

construction

ß

Operators of ongoing projects must submit NOIs within 90 days of the

effective date of the Construction General Permit (February 28, 2003).

ß Discharges may begin two days after ADEQ’s receipt of the NOI.

ß Discharges to impaired or unique waters require submittal of the site’s

SWPPP concurrently with submittal of the NOI. Discharges may then

begin 32 days following ADEQ’s receipt of the NOI/SWPPP (assuming

no objections).

ß Current construction general permit will expire February 28, 2008.

Rhett B. Larson of Gallagher & Kennedy, P.A. Speaker 11a: 14

Process for Obtaining Permits

ß All permits, whether

individual id or general,

must go through public

notice and comment

and through review

and approval by the

EPA

Process for Obtaining a Permit:

Individual Permits

ß Administratively extended Large MS4 Permits

ß Individual Permit required if “Limitations of

Coverage” section of a general permit will not

allow the facility’s discharge

ß File Forms 1 and 2F. If facility will discharge

mixed process wastewater/stormwater, it must file

Form 2D. Existing industrial facilities that

discharge combined stormwater/wastewater must

file Form 2C

ß Comply with 40 CFR 122.21 (except (a) through

(e) and (1)) and 40 CFR 122.26(c)(1)

Rhett B. Larson of Gallagher & Kennedy, P.A. Speaker 11a: 15

Process for Obtaining Permit:

MSGP

ß No longer available until new permit is

issued

ß MSGP-2000 NOI Requirements

ß Arizona MSGP will likely not require

certification of compliance with NHPA or

ESA

Process for Obtaining Permit:

Construction General Permit

ß NOI Requirements

ß Proximity to unique or

impaired water

ß Authorization is not

valid if operator

submitted an

incomplete or

inaccurate NOI

Rhett B. Larson of Gallagher & Kennedy, P.A. Speaker 11b: 1

COMMERCIAL LEASES - EMERGING ISSUES IN ENVIRONMENTAL LAW

Rhett Larson, Esq.

Gallagher & Kennedy, P.A.

Businesses of all types have become increasingly sensitive to environmental

issues. As the scope of regulatory authority in environmental matters expands, and as the

importance of environmental stewardship grows in the public conscience (and therefore

in business public relations), virtually no type of industry has been left untouched by the

complicated realm of environmental regulation and all of its associated pitfalls.

Environmental compliance, therefore, becomes a critical consideration in any commercial

lease transaction. Consider the following real life scenarios:

1. A tenant leased property where a previous tenant had operated a dry cleaning

business. Later, federal and state agencies bring an enforcement action against

the current tenant for reimbursement of cleanup costs associated with dry cleaning

chemical contamination of the groundwater.

2. A landlord evicts a tenant only to discover later that the tenant had leaking PCBcontaminated

transformers on the property, and that the tenant is no longer

financially viable. Federal enforcement actions leave the landlord footing the bill

for expensive remediation costs.

3. The tenant of an industrial facility begins dumping hazardous chemicals down its

sinks, which lead to a septic system. Federal agencies bring enforcement actions

against the landlord for violating federal law prohibiting introducing such

chemicals into a septic system.

This article briefly addresses only a few of the potential environmental regulatory

issues which can impact the negotiation of a commercial lease, the marketing of

commercial property for lease, and the relationship between landlord and tenant in

complying with environmental regulations under a commercial lease. In particular, this

article will address common issues associated with environmental liability in connection

with commercial leases, and recommended environmental due diligence and lease

provisions intended to manage both landlord and tenant environmental liabilities.

I. SUPERFUND AND ENVIRONMENTAL DUE DILIGENCE

The environmental regulatory scheme most familiar to developers is Superfund.

Both the federal and state governments have Superfund statutes. The U.S. Environmental

Protection Agency (“EPA”) oversees the federal Superfund statute – the Comprehensive

Environmental Response, Compensation, and Liability Act (“CERCLA”). 42 U.S.C. §

9601 et seq. The Arizona Department of Environmental Quality oversees the state

Superfund statute – the Water Quality Assurance Revolving Fund (“WQARF”). A.R.S. §

49-281 et seq.

Rhett B. Larson of Gallagher & Kennedy, P.A. Speaker 11b: 2

Both CERCLA and WQARF create funds used to finance the remediation of

contaminated properties. Both CERCLA and WQARF apply only to releases of

“hazardous substances” (a broadly defined term which includes many substances).

Under CERCLA Section 107(a), an owner/landlord is strictly liable for response

costs with only very limited exceptions. Mere ownership of property on which the

release occurs triggers liability, regardless of any control over the disposal activities.

Thus, CERCLA section 107(a)(1) makes the current owner liable and section 107(a)(2)

makes the owner at the time of the release of pollutants liable.

Pursuant to Section 107 of CERCLA, persons considered responsible for releases

of “hazardous substances” into the environment include: (1) current owners or operators

of a facility; (2) past owners or operators of a facility; (3) arrangers; and (4) transporters. 1

42 U.S.C. § 9607(a)(1)-(4). CERCLA defines “facility” to include “any site or area

where a hazardous substance has been deposited, stored, disposed of, or placed, or

otherwise come to be located.” 42 U.S.C. § 9601(9).

In CERCLA Section 107 actions, a responsible party is jointly and severally liable

for response costs to the plaintiff unless it can demonstrate that the harm is divisible. See

Bethlehem Iron Works, Inc. v. Lewis Indus., Inc., 891 F. Supp. 221, 223 (E.D. Pa. 1995)

(citations omitted). However, in actions between responsible parties (i.e., contribution

claims) under Section 113 of CERCLA, liability is several only. See The Pinal Creek

Group v. Newmont Mining Corp., 118 F.3d 1298, 1301 (9 th Cir. 1997). Additionally, a

potentially responsible party (“PRP”) may only assert a Section 113 claim for

contribution once that PRP has been sued or has otherwise resolved its CERCLA liability

to the government. See Cooper Indust. v. Aviall Services, Inc., 125 S. Ct. 577 (2004).

A. CERCLA Liability for Landlords and Tenants

Courts have found lessees of facilities to be responsible as “owners” for purposes

of CERCLA liability. See United States v. Union Corp., 259 F. Supp. 2d 356, 394 E.D.

Pa. 2003). Courts typically look to the amount of control a lessee maintains over a

facility to determine whether the lessee is an “owner.” United States v. A & N Cleaners,

788 F. Supp. 1317, 1333 (S.D.N.Y. 1992) (finding that lessee who, among other things,

was responsible for keeping facility in good condition and complying with all

governmental rules was an owner pursuant to CERCLA). Courts have held that a

“controlling” lessee should not escape CERCLA liability if the lessee is a person

responsible for hazardous conditions. United States v. South Carolina Recycling, 653 F.

Supp. 984, 1003 (D.S.C. 1984). But see Commander Oil Corp. v. Barlo Equipment

Corp., 215 F.3d 321, 331 (2d Cir. 2000) (a lessee is not an “owner” under CERCLA

merely because it exercises control over the facility).

1 Similarly, under the Arizona Water Quality Assurance Revolving Fund (“WQARF”), persons liable for

releases of hazardous substances include, without limitation, the person that owned or operated the

facility a) when the hazardous substance was placed at the facility, b) when the hazardous substance was

located in or on the facility but before the release, or c) during the time of the release. A.R.S. §

49-283(A).

Rhett B. Larson of Gallagher & Kennedy, P.A. Speaker 11b: 3

The court in Commander Oil held that whether a lessee is an owner for purposes

of CERCLA depends on the lessee’s status as a de facto owner of the property. 215 F.3d

at 331. The sine qua non of such de facto ownership is the degree of control exercised by

the lessee over the CERCLA site. Delaney v. Town of Carmel, 55 F. Supp. 2d 237, 258

(S.D.N.Y. 1999) (“The owner of a leasehold interest in a CERCLA facility may be liable

as an owner of that facility, as long as the lessee exercised sufficient site control to place

it in the shoes of the owners.”); see also United States v. Monsanto Co., 858 F.2d 160 (4 th

Cir. 1988). Factors the court in Commander Oil deemed relevant in determining whether

a lessee’s control over a facility amounted to “ownership” for purposes of CERCLA

include: (1) whether the lease is for an extensive term and does not provide rights to the

lessor as to how the property is used; (2) whether the lease cannot be terminated by the

owner before it expires by its own terms; (3) whether the lessee has the right to sublet all

or some of the property without notifying the owner; (4) whether the lessee is responsible

for payment of taxes, insurance, and operational costs; and (5) whether the lessee is

responsible for making structural and other repairs to the property. Id. at 330-31. Where

lessees possess the requisite degree of control over a CERCLA site, they may be

considered liable “owners” of CERCLA facilities. Id. at 330.

The Commander Oil court also noted that “lessees may frequently be liable as

operators” under CERCLA. Id. at 329. Indeed, it is well established that lessees of

facilities are often “operators” of such facilities liable for response costs under CERCLA.

See TIC Investment Corp., 68 F.3d 1082 (8 th Cir. 1995); A & N Cleaners, 788 F. Supp. at

1331. When determining operator liability, courts typically look to the “the degree of

control” that the lessee is able to exert over the activity which directly results in the

release of hazardous substances. United States v. Kayser-Roth Corp., 272 F.3d 89, 94 (1 st

Cir. 2001). Mere authority to control the activities of the facility (e.g., parent control

over a subsidiary) is insufficient to establish operator liability – “operator liability

requires active involvement in the affairs” of the polluting facility. United States v.

Bestfoods, 524 U.S. 51, 67 (1998).

Furthermore, a landlord or a tenant could be held liable not only as “owners” or

“operators”, but also as “arrangers.” “Any person who by contract, agreement, or

otherwise arranged for disposal or treatment, or arranged with a transporter for the

transport for disposal or treatment, of hazardous substances owned or possessed by

such person, by any other party or entity, at any facility... owned or operated by

another party or entity and containing such hazardous substances.” 42 U.S.C. §

9607(a)(3). Thus, by the clear terms of the statute, any person who affirmatively

provides for the disposal or treatment of hazardous substances will be liable for a

subsequent release of such hazardous substances. What is less clear, however, are the

circumstances under which a person who arranges to send hazardous substances to a

facility, ostensibly for a purpose other than their disposal or treatment, may be deemed

to have implicitly arranged for "disposal" or "treatment" at the facility, and thus be

held liable for the resultant cleanup costs. When confronted with such scenarios, courts

have reached somewhat divergent conclusions regarding the type of "arrangement" that

will subject a person to CERCLA liability. See, e.g., Florida Power & Light Co. v.

Rhett B. Larson of Gallagher & Kennedy, P.A. Speaker 11b: 4

Allis Chalmers Corp., 893 F.2d 1313 (11 th Cir. 1990); see also Catellus Dev. Corp. v.

United States, 34 F.3d 748 (9 th Cir. 1994).

B. CERCLA Defenses

Despite the apparent broad applicability of CERCLA liability, the statute does

provide, under Section 107(b), certain limited defenses, including for contamination

resulting from acts of God or acts of war, contamination caused by third-parties, and a set

of defenses based upon proper due diligence: (i) the innocent landowner defense; (ii) the

bona fide prospective purchaser defense; and (iii) the contiguous property owner

defender.

Defenses based on releases caused by an act of God or an act of war will

generally not be available. While not quite as limited, the “third-party” defense also will

provide CERCLA liability protection only in the rare instance where the release was

caused by a third-party with whom the land owner had no contractual or other

relationship. The “third-party” defense dictates that there shall be no liability for a

person otherwise liable where the release and resulting damages:

[W]ere caused solely by . . . an act or omission

of a third party other than an employee or agent

of the defendant, or than one whose act or

omission occurs in connection with a

contractual relationship, existing directly or

indirectly, with the defendant . . . if the

defendant establishes by a preponderance of

evidence that (a) he exercised due care with

respect to the hazardous substance . . . in light of

all relevant facts and circumstances, and (b) he

took precautions against foreseeable acts or

omissions of any such third party and the

consequences that could foreseeably result from

such acts or omissions.

The more significant, and generally more applicable, defenses are those based on

conducting “all appropriate inquiries” (“AAI”). Essentially, a landowner, prospective

purchaser, or contiguous property owner can conduct AAI to demonstrate that it did not

cause the contamination. When EPA initially published the AAI amendment to

CERCLA in 2002, it had only an interim standard for conducting AAI (the ASTM 1527-

00) standard. Environmental professionals (“EPs”) performed a review of documents,

interviewed relevant parties, and inspected the property, and produced a Phase I

Environmental Site Assessment (“ESA”) report. Property owners would then rely on the

ESA report for CERCLA liability protection.

In 2005, EPA finalized its AAI rules, setting forth the requirements for Phase I

reports must meet to provide CERCLA liability protection. 40 C.F.R. Part 312.

Rhett B. Larson of Gallagher & Kennedy, P.A. Speaker 11b: 5

Concurrently, EPA stated that Phase Is performed in accordance with the new ASTM

1527-05 standard would satisfy the new AAI regulatory requirements. The new AAI

rules went into effect on November 1, 2006.

The new AAI rules require (a) reconnaissance of the subject site, (b) interviews

with owners of the site, (c) review of the site's historical documents, and (d) review of

government documents on the site (including environmental clean-up liens). The AAI

report must also consider (i) commonly known information about the site; (ii) the degree

of obviousness of contamination; (iii) any specialized knowledge of the owner/operator;

and (iv) the relationship between the purchase price and the fair market value of the

property. The ESA report must be prepared as a joint effort between the owner/operator

and an EP, who certifies the report. The report is then used as evidence that "all

appropriate inquiries" were completed in a defense against a claim of CERCLA liability.

Note that AAI standards do not include Phase II site assessment requirements,

such as sampling. A Phase II ESA is performed only if the Phase I identified “recognized

environmental conditions” (“RECs”) which suggest that addition sampling and analysis

are needed in order to determine the scope, cost and timeline for remediation, if

necessary. Under AAI, sampling may be conducted to develop information to address

data gaps, but is not required.

The new AAI rules have changed the way Phase I ESAs are conducted in many

ways, from the qualifications of the EP to the shelf life for which the ESA report remains

a viable basis for CERCLA liability protection. The new AAI standard increases the cost

of Phase I Site Assessments to owners/operators, purchasers, and lenders. The cost of

performing a compliant Phase I, as opposed to a Phase I under the interim standard, is

$300 to $500 more expensive (around $2,500 total). Additionally, the shortened shelflife

and requirements for information updates discussed above increase the overall cost.

Additionally, the time to perform a compliant Phase I will be roughly three weeks

longer than under the interim standard (almost a month turnaround time). This is due to

the increased scope of documents to be searched. Also, those formerly relied upon to

perform Phase I assessments may no longer qualify as EPs. Finally, the new AAI

standard places a greater onus on owners/operators to provide information, in particular

regarding their specialized knowledge and the purchase price vs. fair market value. The

shortened shelf-life of the Phase I and the requirements for updates also imposes an

additional informational burden on owners/operators going forward.

The following is a summary of the most significant changes from the interim

standard to the new AAI rule:

1. Definition of Environmental Professional.

The EP must (i) be a licensed PE, PG or have some other license or certification

from the state, tribe, or territory and 3 years full-time relevant experience; (ii) have a

bachelors of science degree and 5 years of full-time relevant experience; or (iii) have 10

Rhett B. Larson of Gallagher & Kennedy, P.A. Speaker 11b: 6

years of full-time relevant experience. This rule is a much narrower definition of EP than

under the interim Phase I standard. Also, while the EP does not have to perform all of the

elements of AAI, the EP must certify that the report is correct, and any employees of the

EP must work under the EP's supervision.

2. Interviews

Under the new AAI standard, interviews with the current owner of the property

are mandatory (the interim standard required only a "reasonable attempt"). Interviews

with past owners and occupants must be conducted as necessary to achieve the objectives

and performance factors in 40 C.F.R. § 312.20 (such interviews were not required under

the interim standard). Additionally, interviews with neighboring or nearby property

owners are mandatory if the subject site is an abandoned property.

3. Government and Historical Records

All federal, state, tribal and local records must be reviewed (the interim standard

required only federal and state). The new AAI standard requires review of all documents

until the property was first improved or used for any purpose (the interim standard

required review until the first obvious development or 1940, whichever was earlier). The

EP must explain in the report why the review went back as far as it did and no further.

Also, the new standard has no requirement on who performs these searches (the interim

standard required the owner/operator to perform these searches and then report to the

EP). The new standard also includes within the scope of the search all liens filed or

recorded under federal, state, tribal or local law (the interim standard included only those

"reasonably ascertainable land title records.").

4. Site Inspection

The new AAI standard requires a visual inspection of the subject site and

adjoining property, with a limited exemption if the subject site cannot be visually

inspected (the interim standard had no such exemption, and had no requirement for visual

inspection of adjoining properties). Inspections of adjoining property may be done from

public right-of-ways - there is no requirement to access the adjoining property.

5. Contaminants of Concern

The new standard applies to all CERCLA hazardous substances for those seeking

a CERCLA defense. The new standard applies to all CERCLA hazardous substances,

pollutants, contaminants, petroleum/petroleum products and controlled substances if the

party is seeking a Brownfield Grant. Note that the ASTM 1527-05 Standard applies to all

CERCLA hazardous substances and petroleum products.

6. Responsibilities of Owner/Occupant vs. EP

Rhett B. Larson of Gallagher & Kennedy, P.A. Speaker 11b: 7

The EP must perform (i) the visual inspection; (ii) interviews; and (iii) reviews of

historical and government records. Either the EP or the owner/operator must (i) perform

the search for environmental cleanup liens; (ii) consider the "specialized knowledge" of

the owner/operator; and (iii) consider the relationship between the purchase price to the

fair market value of the property if it were not contaminated. Both the EP and the

owner/operator must (i) consider "commonly known" information about the site; and (ii)

consider "the degree of obviousness of contamination."

7. Documentation of Data Gaps

Any lack of or inability to obtain any required information or perform according

to required practices despite good faith efforts by the EP or the owner/operator must be

identified in the report and the EP must comment on the significance of such data gaps in

reaching its overall findings in the report.

8. Shelf Life

The time for performing a Phase I begins when the property is acquired. The

Phase I must be current to within one year. Additionally, the following portions of the

Phase I must be updated within 180 days: (i) interviews; (ii) search for environmental

cleanup liens; (iii) review of government records; (iv) site inspection; and (v) the

declaration and signature of the EP. The interim standard allowed purchasers to rely on

past Phase I reports without requirements for updates.

C. Contribution Claims under CERCLA

In addition to the defenses described above, CERCLA provides a party with the

option to seek contribution (or statutory indemnification) for Superfund liability costs

from other responsible parties. 42 U.S.C. 9607(a)(4)(B). Under that provision, parties

expending funds to remediate site contamination may recover its costs from the other

PRPs. This right of contribution arises from 42 U.S.C. § 9613(f), which allows a person

liable under CERCLA to recover those costs for remediation associated with the acts or

omissions of other responsible parties. The allocation is made “using such equitable

factors as the court determines are appropriate”, including contractual indemnification

provisions (discussed in more detail below). CERCLA § 113(f)

A particularly important issue for purposes of this article is whether a part held

strictly liable as an owner under CERCLA may have a right to indemnification or

contribution from the actual polluter, who is often a tenant. In Bedford Affiliates v. Sills,

the court barred a PRP from obtaining statutory indemnification, but allowing statutory

contribution. 156 F.3d 416 (2d Cir. 1998). In Bedford, the lessee released hazardous

substances during the term of its lease. The owner was unaware of the release until after

the lessee assigned its lease to a third party. Subsequently, the owner terminated the

lease. The owner incurred substantial expenses in connection with Superfund

enforcement actions from the state and attempted to recoup its costs from its former

lessee. The court held that CERCLA provide two means for a party having resolved it

Rhett B. Larson of Gallagher & Kennedy, P.A. Speaker 11b: 8

Superfund liability to recoup some or all of its remediation costs: (i) a cost recovery

action under CERCLA § 107; and (ii) a contribution action under CERCLA § 113. The

court held that the owner cannot pursue a § 107 claim (i.e., complete indemnification)

against its former lessee because its very ownership of the land imbued the owner with

PRP status. It viewed the landlord and the tenant as PRPs. Thus, one of them, as a

statutory joint tortfeasor, cannot recover 100% of its cleanup costs from another similarly

situated party. However, the court read § 113 to allow one PRP to seek contribution from

another for its share of response costs exceeding the claimant's equitable share of the

aggregate expenditure.

An understanding of two recent U.S. Supreme Court cases is essential in

understanding contribution claims and CERCLA statutory indemnification. The first,

Cooper Industries, Inc. v. Aviall, decided in 2004, held that the right of contribution

under CERCLA § 113(f)(1) is available only to PRPs who have been subject to

government “civil actions” under § 106 or § 107(a) of CERCLA (i.e., where a suit by the

government has been decided or settled). Federal courts have recognized that a § 107(a)

civil action by a state against a PRP, filed in conjunction with the lodging and entry of a

consent decree settling such claim, qualifies as a “civil action” as that phrase is used in §

113(f)(1) and affords the PRP CERCLA contribution rights.

Federal courts generally hold that, in order to qualify for contribution rights under

CERCLA § 113(f)(3)(B), a party must establish: (1) that it has resolved its CERCLA

liability to the United States or a state and (2) that the resolution of that liability occurred

in an administrative or judicially approved settlement. No court in the Tenth Circuit has

discussed the circumstances under which an AOC or bankruptcy settlement agreement

with a state agency either resolves a party’s CERCLA liability or qualifies as an

“administrative settlement” for the purposes of § 113(f)(3)(B). Federal courts that have

considered these issues are divided regarding whether an AOC, entered into under state

law, qualifies as an administrative settlement that resolves a party’s CERCLA liability for

the purposes of § 113(f)(3)(B).

Under the majority view, a state agency is without power to resolve a party's

CERCLA liability in the absence of a delegation of authority from EPA pursuant to

CERCLA § 104(d)(1)(A). See, e.g., Niagara Mohawk Power Corp. v. Consolidated Rail

Corp, 436 F. Supp. 2d 398 (N.D.N.Y. 2006); see also City of Waukesha v. Viacom Int’l,

Inc., 404 F. Supp. 2d 1112 (E.D. Wisc. 2005). Most courts following this approach also

hold that a consent order with a state agency does not qualify as an "administrative

settlement" resolving a party’s CERCLA liability for the purposes of § 113(f)(3)(B)

unless it complies with CERCLA's settlement procedures.

Under the minority approach, neither a cooperative agreement with EPA nor

compliance with CERCLA's settlement procedures is necessary for an AOC to resolve a

party’s CERCLA liability for the purposes of § 113(f)(3)(B). See, e.g., Seneca Meadows,

Inc. v. ECI Liquidating, Inc., 427 F. Supp. 2d 284 (W.D.N.Y. 2006). Rather, an

administrative order with the state will generally qualify as an “administrative

settlement” resolving a party’s CERCLA liability where: (1) such order expressly

resolves the party’s CERCLA liability to the state; and (2) the state does not reserve the

Rhett B. Larson of Gallagher & Kennedy, P.A. Speaker 11b: 9

right to take additional action against the party in relation to the underlying

contamination.

The second recent and essential U.S. Supreme Court case is United States v.

Atlantic Research Corp. 127 S.Ct. 2331 (2007). In Atlantic Research, the Court held

that a PRP that has voluntarily incurred cleanup costs may recover such costs from other

PRPs under § 107(a) of CERCLA. However, the Court declined to address whether

cleanup costs that are incurred involuntarily by a PRP pursuant to an administrative order

or consent decree “are recoverable under § 113(f), § 107(a), or both.” The Tenth Circuit

has not addressed this issue. However, at least one federal circuit has interpreted Atlantic

Research as providing all PRPs who incur cleanup costs with a cause of action under §

107(a), even where such costs are incurred involuntarily pursuant to an AOC. See ITT

Indust., Inc. v. Borgwarner, Inc., 506 f.3d 452 (6 th Cir. 2007) (Holding that, after Atlantic

Research, a PRP has a valid claim for cost recovery under § 107(a) for cleanup expenses

incurred pursuant to an administrative order on consent with EPA). While the language

of § 107(a) and the Atlantic Research decision seem to indicate that involuntarilyincurred

cleanup costs are recoverable in § 107(a) cost-recovery actions, there is a risk

that courts will narrowly interpret Atlantic Research to limit recovery of cleanup costs

under § 107(a) to costs that are “voluntarily” incurred.

D. Contractual Indemnification under CERCLA

In addition to contribution claims providing statutory indemnification (or

contribution) opportunities for cleanup costs incurred by PRPs, CERCLA directly, but

somewhat ambiguously, address contractual indemnification. The statute states:

No indemnification, hold harmless, or similar

agreement or conveyance shall be effective to

transfer from the owner or operator of any vessel or

facility or from any person who may be liable for a

release or threat of release under this section, to any

other person the liability imposed under this section.

Nothing in this subsection shall bar any agreement

to insure, hold harmless, or indemnify a party to

such agreement for any liability under this section.

CERCLA Section 107(e)

Courts have interpreted this provision to preclude a PRP from foisting its strict,

joint-and-several liability completely onto another, and thus avoid liability under a

government enforcement action. However, courts have also interpreted CERCLA to

allow a subsequent contractual indemnification claim against another PRP to recover

costs associated with the enforcement action. See Fina v. ARCO, 200 F.3d 266 (5 th Cir.

2000); see also C.P. Chemicals, Inc. v. Exide Corporation, 14 F.3d 594 (1993). In other

words, no contract can stop EPA from holding a party strictly and completely liable

under CERCLA, but a properly drawn CERCLA indemnification provision can allow a

party liable under CERCLA to recover its cleanup costs from its indemnitor.

Rhett B. Larson of Gallagher & Kennedy, P.A. Speaker 11b: 10

Courts will construe contractual Superfund indemnification provisions strictly

against the indemnitee. The Bedford Affiliates court construed the contractual

indemnification that the sublessee had given the lessee. 156 F.3d 416 (2d Cir. 1998). The

sublease provided that the sublessee became obligated to “forever indemnify and save

harmless [the sublessor] for and against any and all liability, penalties, damages,

expenses and judgments arising from injury . . . [to the site], occasioned wholly or in part

by [the sublessee].” The Second Circuit found this broad indemnification language

sufficient to warrant the sublessee's indemnification of the lessee. Importantly, it was the

sublessee's activities which caused the contamination.

In Commander Oil Corp., the Second Circuit again interpreted the viability of a

Superfund contractual indemnity clause. 215 F.3d at 331. The lease contained

indemnification language which provided:

Tenant hereby agrees to defend, indemnify, and hold

Landlord harmless from and against any and all claims,

losses, liabilities, liens, damages and expenses

(including, without limitation, cleanup costs and

reasonable attorneys' fees) arising directly or indirectly

from, out of, or by reason of an Environmental Law or

an Environmental Event affecting Tenant, its operations

of the premises. Such indemnification shall only

include all claims . . . [and] . . . losses . . . incurred

during the Term or after the expiration or earlier

termination of the Term if such claims, losses etc. are

the result of Tenant's actions or omissions during the

Term.

The court concluded that the language of the lease was insufficient to demonstrate

a clear intent by the parties to allocate environmental liabilities. The court further held

that, because indemnification agreements are strictly construed and courts may not find a

duty to indemnify absent manifestation of clear and unmistakable intent, the language of

the indemnification provisions was ambiguous as a matter of law. Accordingly the

Second Circuit remanded the case to the district court to allow the parties to offer

extrinsic evidence bearing on their intent to defend and indemnify against Superfund

claims.

Landlords and tenants will continue to confront the draconian specter of unlimited

Superfund liability posed by state and federal environmental law. The environmental

ramifications of a commercial lease must therefore be carefully considered throughout

negotiation and the executory period of the agreement. Unlike the simple outright sale of

property, the lease relationship provides an ongoing relationship which could aggravate

or mitigation the risks associated with environmental liabilities, depending on the

wariness of the parties. As such, caution in commercial lease transactions extends

Rhett B. Larson of Gallagher & Kennedy, P.A. Speaker 11b: 11

beyond the simple due diligence and Phase I reports of property transfers, and instead

requires vigilance throughout the term of the lease.

E. Helpful Tips in Environmental Due Diligence and Lease Negotiation

It is impossible, with so many pitfalls and the breadth of environmental

regulation, to completely avoid risks associated with environmental liability in a

commercial lease transaction. However, the landlord and tenant can define, limit, and

manage environmental liability concerns to provide some degree of comfort. The process

for such an approach must begin at the moment the parties sit at the negotiation table, and

extend through the life of the lease. The following are several tips to consider in the

negotiation, and due diligence, and maintenance of a commercial lease.

Establish a Baseline. While the crafting of environmental compliance and

indemnification provision in the lease is obviously critical, those efforts are often

frustrated without an understanding of the environmental condition of the property at the

time of the transaction. Establishing an environmental baseline is an extremely sound

investment for a tenant attempting to defend against discharges occurring prior to its

lease term and discovered after termination of the lease. Not only may this satisfy AAI

for CERCLA defense purposes (assuming the parties conduct a compliant Phase I ESA),

but the establishment of baseline condition often proves invaluable in establishing that

portion of the third party defense which requires that a third party be the “sole cause” of

contamination. The parties should also perform a subsequent environmental audit at the

termination of the lease to determine the level of compliance.

Using Cost-Effective Resources. While only a Phase I complying with AAI (and

preferably ASTM 1527-05) strictures can provide the comfort of CERCLA liability

defense, other resources can allow parties to a commercial lease to evaluate the

environmental condition of the property without the expense of a Phase I, and thereby

determine whether a full AAI-compliance Phase I is even advisable. There are

commercial services that, for a few hundred dollars, will gather information from various

existing environmental databases to provide an idea of the historical uses of hazardous

materials at and around the site. Such reports provide no AAI protection, but can be

invaluable in making the initial determination of whether the lease the property, and

whether the property poses risks sufficient to make a full Phase I worth the expense.

Landlord's Duty to Investigate the Tenant. Landlords should always thoroughly

investigate a potential tenant. The landlord should know the kind of business the tenant

operates and the kinds of materials it will bring on site. The landlord should know the

types of environmental permits the tenant requires in order to do business, and the

landlord should be aware of submittals made by the tenant under those permit. The

landlord should perform a background check to know the tenant’s past environmental

compliance record, including a review of enforcement actions, civil penalties, suits, and

environmental crimes charges. The tenant should be familiar with the tenant’s

environmental compliance officer. Together with an environmental attorney and possibly

Rhett B. Larson of Gallagher & Kennedy, P.A. Speaker 11b: 12

consultant, the landlord should develop a questionnaire regarding the tenant's operations

to be incorporated into the lease agreement itself.

Tenant's Duty to Investigate the Landlord. Similarly, the tenant should

investigate the landlord beyond simply conducting a Phase I. If the leased premises form

only a part of a larger commercial or industrial facility, the tenant should investigate the

condition of the surrounding property as well, and the environmental compliance of its

fellow tenants, if any.

Escape/Notice Clauses. Landlords should negotiate a provision which gives it the

option to declare a breach of the lease and evict the tenant upon the occurrence of

incidents threatening or constituting a release of hazardous substances. Such incidents

amounting to a breach could include the receipt of a notice of violation (“NOV”),

evidence of sloppy operations, or loss of, or failure to maintain, environmental operating

permits. A landlord should also include a complementary provision requiring that the

tenant provide notice to the landlord upon service of an NOV, the commencement of

enforcement actions, the service of a PRP demand, or the loss of environmental permits.

A landlord should retain the right to enter the premises and perform any action necessary

to prevent or remediate contamination or correct the condition giving rise to the NOV.

Similarly, the tenant should negotiate a provision allowing it to void the lease and

abandon the premises where the landlord and/or other tenants in the same facility become

subject to environmental response actions. The tenant could consider negotiating a

similar notice provision requiring reciprocal disclosure from the landlord.

Use Restriction. A well-drafted environmental use restriction can provide

comfort to landlords by serving two important purposes. First, a use restriction will

prohibit, or limit, the use or storage of hazardous materials on the leased premises.

Second, a use restriction will regulate the tenant's ability to assign the lease to third

parties who might undertake prohibited activities. This is a particularly important

consideration because certain jurisdictions limit the landlord's discretion to contractually

prohibit assignment or sublease. Courts, however, generally favor recording an

environmental use restriction. Many states, including Arizona, have special requirements

associated with recording environmental use restrictions, especially where engineering

controls would require maintenance of equipment necessitating a demonstration of

financial assurance. Tenants also may benefit from use restrictions, because those

restrictions will apply to cotenants and prevent migrating contamination from adjacent

property under the same ownership.

Further Investigations Beyond a Phase I. The EP performing the Phase I may

recommend further investigation (called a “Phase II”) where RECs suggest cleanup

expenses will be required. If the Phase I suggests historic operations at the site have

resulted in soil or groundwater contamination, the Phase II should include soil and

groundwater sampling. The tenant should negotiate access in case such sampling is

required. The landlord should ensure that it can split samples with the tenant and perform

its own analysis. Failure to follow up on identified RECs can limit liability protection

under AAI (because of a failure to comply with continuing obligations), and can result in

Rhett B. Larson of Gallagher & Kennedy, P.A. Speaker 11b: 13

toxic tort liability (for example, where soil and groundwater contamination result in

vapor intrusion causing health impacts on the premises).

A word of caution: Appropriate sampling for vapor intrusion and corresponding

safe levels of contaminants in indoor air are issues being hotly debated at the federal,

state, and local levels. So taking samples to determine impacts to indoor air may not

provide a definitive answer. Still, sampling may make sense to either assist in providing a

level of comfort to prospective tenants or to rule out prospective locations from further

leases until properly remediated.

Information regarding the condition of soil and groundwater underlying a leased

facility is an important factor in deciding (i) whether to enter into a long-term agreement;

(ii) the uses to which the premises may be put (i.e., arsenic levels in soil may preclude a

day care center, but not a industrial facility); and (iii) how to negotiate the terms of the

lease if adverse conditions are found that are capable of being mitigated at a reasonable

cost. Often, the inexpensive alternatives to a Phase discussed above, or the Phase I ESA

itself, will be adequate to make these types of determinations. However, there are

instances where tenants may need to know more about the property and surrounding sites.

In those instances, obtaining environmental samples can provide information that will

avoid undue delay in development or unexpected costs.

Remediation Responsibilities and Indemnification. Should a release occur during

the term of the lease, governmental agencies will look to both the landlord and tenant to

correct the situation. Landlords should therefore be able to require tenants to fund the

cleanup costs associated with the tenant’s releases. The landlord should, however, retain

some oversight over the cleanup process, as the landlord will bear CERCLA liability as

an owner in any event. Specifically, the landlord will want to retain the right to

participate in the defense, negotiation, or settlement or satisfaction of any governmental

or private third party claim. To strengthen the tenant's obligation to be responsible for

any contamination it has caused, the landlord will want to require the inclusion of an

specific environmental indemnification provision and/or require the tenant to maintain a

certain level of environmental liability insurance to minimize the landlord’s risk.

Inspection/Investigation During Lease. Additionally, during the term of the lease

agreement itself, the landlord is well advised to exercise its inspection option. Optimally,

periodic environmental audits should be performed, but that is an expensive proposition.

Another viable alternative is to engage a consultant to visit the premises to inspect for

visible signs of noncompliance (e.g., the existence of any leaking drums, distressed

vegetation, or sloppy operations). The landlord should also exercise its right to review not

only existing environmental permits, but also evidence of their renewal. As a general

proposition, responding to incidents of contamination becomes more expensive as time

goes on. To the extent a landlord can discover and address an incident in its incipient

stages, the landlord provides itself with additional options.

L A W S E M I N A R S I N T E R N A T I O N A L

A Comprehensive Two-Day Conference on

Commercial Real Estate Leases

Practical information on negotiating and enforcing commercial leases

October 2 and 3, 2008

Phoenix, AZ

Urban Redevelopment: Special Issues for

Leasing in Mixed-Use Developments

Thomas C. Arendt, Esq.

Arendt Law Group PLC

Phoenix, AZ

Thomas C. Arendt of Arendt Law Group PLC Speaker 12: 1

LAW SEMINARS INTERNATIONAL

2008 COMMERCIAL REAL ESTATE LEASES CONFERENCE

PHOENIX, ARIZONA

URBAN REDEVELOPMENT:

SPECIAL ISSUES FOR LEASING IN MIXED-USE DEVELOPMENTS

THURSDAY, OCTOBER 2, 2008

4:15PM – 5:00PM

Tom Arendt

5009 East Washington, Suite 125

Phoenix, Arizona 85034

(602) 244-1400

Thomas C. Arendt of Arendt Law Group PLC Speaker 12: 2

URBAN REDEVELOPMENT:

SPECIAL ISSUES FOR LEASING IN MIXED-USE DEVELOPMENTS

I. Urban Mixed-Use Projects.

A. Defining a Mixed-Use Project.

1. Power Centers/Regional Malls lead to open air Lifestyle Center experiments.

2. First Lifestyle Center appeared in 1987 in Tennessee.

3. Lifestyle. Open air approach including special events; significant

national/regional retailer presence; meaningful restaurant/entertainment

component.

4. Lifestyle/Mixed-Use becomes vertical in an urban location.

B. Parties in a Mixed-Use Project.

1. Retail.

2. Restaurant/Entertainment.

3. Residential (hotel).

4. Office (Retail/Business).

5. Governmental Authorities.

6. Local Businesses.

7. Developer.

8. Association(s).

9. Lenders (?).

C. Retail.

1. Anchored Projects – Anchorless Projects.

2. "Big Boxes"/National Tenants.

3. "Sweethearts" – hot retailers (recapture from others on sales volume).

4. Visibility/protected areas still applicable.

5. Mixed-use density requires reservation of rights of access (non default).

6. Mixed-use synergy requires landlord self help (default).

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Thomas C. Arendt of Arendt Law Group PLC Speaker 12: 3

II.

D. Restaurant/Entertainment.

1. Definition of leased premises needs to include exterior components with vested

right (GLA for "CAM" charges).

E. Residential.

1. Antithesis: Entertainment. Discuss parking hogs. Advertisements versus reality

of living with mixed occupants.

2. As a practical matter, residential owners will be the last ones to the table after the

commercial and retail owners/occupants have drafted and controlled the

transaction documentation.

3. Although the residential occupants are last to the table, Developer sensitivity is

required by Arizona Department of Real Estate requirements with respect to

residential sales including Public Report matters including committed amenities.

4. The attempted isolation of construction defect claims to residential components

need to be thought about and possibly addressed.

F. Office.

1. Entertainment's extended use adversely affects the operating or "CAM" charges.

2. Exclusive parking protection (nested).

G. Government.

1. Open Space/Public Areas.

2. The "Streetscape" including perimeter (in ROW) is a major (even primary)

component of a mixed-use/lifestyle center. Ordinances and the like need to

accommodate zoning. Possible for two or more zoning uses in same building, for

example.

3. Increased density concerns. Transportation system concerns.

4. Zoning/Entitlement variances do not equal building code/life-safety variances.

H. Local Businesses.

1. Recapture clauses.

Common Area Maintenance Charges ("CAM")/Assessments.

A. Starting Point. Mixed-use project costs are supposed to be lower than a traditional

enclosed mall.

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Thomas C. Arendt of Arendt Law Group PLC Speaker 12: 4

1. Historically, when boiled down to its essence - anchors focused on HVAC,

parking and lighting "CAM" charges assuming taxes and insurance are paid

separately outside of CAM.

2. Traditional anchors supposedly have relatively less or allegedly at least

diminished power in a mixed-use project to create an opportunity for a more level

playing field for CAM charges.

3. Important point: By its very nature a mixed-use project has an integrated,

symbiotic relationship among all the various components and users. It is

imperative that the first-class nature of the project be maintained including,

specifically, capital repairs and capital improvements which traditionally big box

users/national tenants ignored, rejected or pushed on to others as to the cost factor

(and try to control absolutely by site plan approval). The traditional model of

national tenants refusing to participate in capital repairs and capital improvements

including remodeling over the life of a long term lease is a significant issue to

address for the success and sustainability of a mixed-use project.

B. Various CAM Formulas.

1. Historically driven by bargaining power.

2. "Streetscape" CAM charges (pedestrian walks, events) are foreign to anchor

tenants with a background in enclosed mall: HVAC; parking fields; lighting and

landscaping of parking areas.

3. Creation of CAM "Pools" to try to fairly allocate charges among groups of uses –

retail, anchor retail, residential, office. Typically rough justice based on areas of

primary use.

C. Pass through or Fixed CAM.

1. Pass Through CAM/Prorata Share.

i. Traditional method. Each occupant pays prorata share by use of some

fraction:

Premises Area

Project Area

(Total CAM Costs) = Tenant's Share

ii.

Historically the denominator was suspect within a regional mall with

anchors and perhaps in a power center.

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Thomas C. Arendt of Arendt Law Group PLC Speaker 12: 5

2. Fixed CAM.

i. Audit Fatigue. National developers pioneered primarily in regional malls.

ii. Predictable costs for Tenant.

3. Capital Improvements/Sinking Funds. Capital Improvements are critical to the

long term success of a mixed-use project.

4. Landlord defines CAM expenses as broadly as possible including capital

improvements/repairs and sinking funds.

5. Anchor Tenants can obviously alter this formula, including capital improvements,

roof and administration fees. Traditional list of endless carveouts does not work

well in the context of a mixed-use project. Deficiency comes out of the

developer's profit then out of association with anticipated results.

6. CAM Caps. One method to reduce the tension of long lists and long exceptions

or exclusions.

i. 1 st Lease Year CAM Cap. Bring the estimated CAM cap forward from

deal's letter of intent.

ii. Continuing CAM Cap. For certain expenses, those expenses will be

"capped" each lease year, typically by the lesser of (i) actual cost increase

of a line item or more commonly the aggregate CAM amount and (ii) a

cap amount. The second component - (ii) - can be a percentage (e.g. 3%)

or a consumer price increase (CPI), or some combination.

iii. Tenant protection through a cap can be cumulative or non-cumulative

from lease year to lease year.

iv. Caps are typically limited to costs for which the developer has some

degree of cost control. Therefore, uncontrollable expenses should not be

capped. Examples include:

a. Utilities.

b. Insurance (treated separately in many cases).

c. Security.

d. [Taxes, if in "CAM", but taxes usually treated separately.]

v. Typically the traditional CAM charges - even if controlled or capped - are

still subject to tenant audit rights.

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Thomas C. Arendt of Arendt Law Group PLC Speaker 12: 6

7. Additional Fixed CAM matters.

i. May be more popular than prorata share for mixed-use projects. Because

these are fixed amounts, they are often now called occupancy charges.

ii. Per square foot of building area; no fractions involved.

iii. Variations. Periodic resets of amount; Uncontrollable Expenses still may

be applicable.

iv. Landlord needs to have good information going into a multiple year

commitment. Developer exits if does not work.

v. Tenant still wants 1 st class language for project.

8. A mixed-use facility may actually be ripe for a CAM regime whereby certain

occupants have a fixed CAM, other occupants have a variable CAM, some

occupants are subject to a larger or smaller list of expenses establishing a CAM

pool, and some occupants should be protected by an annual cap in charges

because of the nature of their occupancy.

D. Special Mixed-Use Project Expenses.

1. Promotional Events (Streetscape); marketing, websites; urban promotional

districts.

III. Parking.

A. In allocating and monitoring parking, the Developer is faced with competing interests

for the always limited amount of parking, and those stakeholders many times have a

diametrically opposed agenda. Residential components must by necessity be

segregated (nested) from the general commercial/retail parking components.

B. Parking Structures.

C. Dedicated Parking/Flex Parking – more than one user so tension.

D. Paid Parking.

E. Validated Parking.

F. Valet Parking.

G. Management Agreement.

H. Delivery/Street/Docks. Control and right to use.

IV. Theme.

A. Developer control still needed.

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Thomas C. Arendt of Arendt Law Group PLC Speaker 12: 7

B. Diluted by the existence of – and ultimately lost to – Association(s).

V. Cotenancy/Exclusives/Prohibited Uses – Traditional Tools are applied.

A. It is common to draft the use restrictions to create the opposite result of actually

protecting the commercial uses of the non-residential components of the project. In

other words, the typical negative covenants on use are adjusted to create (hopefully) a

protected property right in favor of the commercial users with respect to residential

occupant claims, such as noxious use/noise.

B. Repurchase Rights (see rebuilding, infra).

C. Relocation Rights.

D. Continuous Operation/Recapture Rights: Go Dark; violation of store hours; low

sales.

VI. Signage.

A. Master Sign Plan.

B. Municipal Ordinances on signs. Signs are not on the occupant's building in many

instances. Many times on even a different building. Sign ordinances may not allow.

C. Anchor Tenant signage/national trade dress.

VII. Development Issues.

A. Ordinances/Building Codes.

1. Ordinances are probably more important than other laws in many instances.

2. The building codes may require a different standard of development and

construction for multiple types of uses contained within the mixed-use project,

many times on top of each other in the same structure.

B. Variances.

1. As set forth above, zoning/entitlement variances versus attempting a variance of

building code life-safety matter. Life/safety generally cannot be waived.

C. Plat/Subdivision Laws.

1. Probable assemblage.

2. Abandonment of streets and cul de sacs.

3. Interior lot lines – extinguish in many ways.

4. Uniform easements needed for services.

5. Control over streets – roadbed versus air rights/encroachments/subterranean.

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Thomas C. Arendt of Arendt Law Group PLC Speaker 12: 8

6. Sidewalks – encroachment into City ROW and Public Utility Easements (PUE's)

may require significant municipal waivers or agreements/hearings.

7. Subterranean interests.

8. Traffic signals.

9. Plan grant/reservations in plat in advance.

10. Plan on additional plats in project. Reserve replatting adjustments to Developer

in the Declaration.

11. Vertical subdivisions/airspace parcels.

a. Generally speaking subdivision and platting focus on horizontal

(residential) development. Issues of turning subdivision laws on their side

for vertical development.

b. Condominium statutes have same bias to residential concept. "Airspace"

condominiums are not as simple as name implies.

12. Subdivision instead of by vertical subdivision by multiple condominium(s).

13. Utility providers need to bend their forms.

D. Open Spaces.

1. "Public Forum" issues on open areas re: 1 st Amendment. Retailers do not like.

2. Special events issues in Public Forum areas. Exclusion of general public. Event

permits.

3. For liability purposes deem the developer and municipality to be public or private

owner in A.R.S. Section 33-1551 for true public spaces.

4. Cancellation provision based on conflict of interest provisions in A.R.S. Section

38-511.

E. Vertical Development.

1. Residential Component. Strong desire to isolate the residential component versus

integration of improvements into other parts of the project. Architect versus

retailers versus lawyer.

F. Master Declarations.

1. If a condominium is not used for the ownership of a project, then the tool of

choice seems to be the use of various types of easements, exclusive and nonexclusive,

to create an integrated mixed-use project.

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Thomas C. Arendt of Arendt Law Group PLC Speaker 12: 9

a. Non-exclusive easements can be used as an analog to common elements in

a condominium whereby all comers are entitled to use in common a

particular aspect of the project, subject to any imposed restrictions or

conditions.

b. Exclusive easements can be analogs to limited common elements, so as to

reserve certain aspects of the mixed-use project to only certain users or

occupants (e.g., a specific entry feature to a residential lobby or a truck

dock, for example).

2. In gross or personal Developer rights reserved under the Declaration.

3. Air Rights/Rooftops.

4. Easements and Types of Easement.

a. Utility Easements – Narrow or grant more specific utility easements.

Approval by Developer of utility providers/vendors.

b. Public Art Easements.

c. Support Easements/Excavation Easements – Vertical and horizontal/lateral

support.

d. Developer right to exclude parts of project from easements or variances

from easements.

e. Developer self help easement.

f. Parking Area/Garage Easements/Vehicular Ingress/Egress – Support

easements.

g. Construction Easements – Cranes, scaffolding, fences.

h. Staging Area Easements – Remodeling in future. Rebuilding casualty.

i. Surface Drainage/Landscaping.

j. Signage Easements - different buildings.

k. Encroachment Easements into Common Area – canopies; streetscape;

outdoor patios and seating; activities; kiosks.

l. Residential – lighting/floodlights.

m. Easement controlling building skin. It is important that the

Developer/declarant be able to control the actual exterior skin or facade of

all components of a mixed-use project. Theme review and approval rights

00009825.1 8

Thomas C. Arendt of Arendt Law Group PLC Speaker 12: 10

are probably insufficient. The commercial developer component must

have some control over the exterior parts of the residential portion of the

mixed-use project.

5. First Amendment Issues – National Retailers – revocation of easements as a

remedy.

6. Reserve Declarant right to amend.

a. Limits may apply. See La Esperanza Townhome Association, Inc. v. Title

Security Agency of Arizona 142 Ariz. 235, 689 P.2d 178 (App. 1984).

7. Special Events.

8. Impact of any Development Agreement with Government.

9. The right to supplemental declaration should be reserved in the master declarant

to deal with one-off issues that arise primarily with national tenants. Common for

national tenants to end up with a supplemental or "tract" declaration for a portion

of a mixed-use project to deal with their particular concerns.

VIII. Associations.

A. Management of Common Areas.

1. Governmental Authorities may require a Master Association for common

area/element maintenance and operations.

B. Less is more on residential governance participation. Generally speaking apparent

priority to protect retail/commercial interest in governance documents.

C. A primary concern is a direct enforcement by a residential owner (e.g., a

condominium unit owner) of rights and obligations under the various mixed-use

project documents such as a Declaration. Under general legal principles such an

owner should have enforcement rights as holding a record interest in the project.

Many times developers (and retailers) attempt to reduce or eliminate such direct

enforcement rights through language in a master declaration or condominium

documents.

IX. Insurance.

A. As a starting point is there any way to properly insure a building and its core

components owned by more than one party by other than a casualty policy covering

the entire building?

00009825.1 9

Thomas C. Arendt of Arendt Law Group PLC Speaker 12: 11

B. Insurable interests can be complicated.

C. Loss Payee(s) can be more complicated.

D. Insurance Trusts or Insurance Depository for common improvements.

E. Note that condominium statutes can affect the rebuilding process specifically for a

material casualty. The Developer may want an optional reacquisition right to acquire

a condominium component if that condominium association/ownership elects not to

participate in rebuilding. In dealing with a purchase right from a condominium,

special rules may be applicable. See A.R.S. Section 33-1228.C and .D.

F. Also, in dealing with condominiums, certain requirements are applicable with respect

to rebuilding obligations. See A.R.S. Section 33-1253.

X. Redevelopment.

A. Extremely cumbersome to address in the master Declaration.

B. "Conduit" Mortgages/REMIC. Significant loan modifications.

C. Recapture; relocation clauses.

D. Recapture clauses for casualty redevelopment.

XI. Websites.

A. Trademarks et. al.

B. Project Trademarks/Occupant Trademarks - permission.

C. Limit non-Developer websites.

00009825.1 10

L A W S E M I N A R S I N T E R N A T I O N A L

A Comprehensive Two-Day Conference on

Commercial Real Estate Leases

Practical information on negotiating and enforcing commercial leases

October 2 and 3, 2008

Phoenix, AZ

Ethical Considerations in Commercial

Transactions

Lynda C. Shely, Esq.

The Shely Firm PC

Scottsdale, AZ

Lynda C. Shely of The Shely Firm PC Speaker 13: 1

Ethical Considerations in Commercial Real Estate Transactions

Law Seminars International

October 3, 2008

By Lynda C. Shely

Lynda@Shelylaw.com

I. Who is the Client?

A. Not Necessarily the Person Paying Your Fees

People may think that they are your client, even when you have no intention of

representing them. Particularly in corporate representations where you believe that you

are representing only the entity, specify this so that the constituents of the entity company

do not mistakenly believe that they too are your clients. Also in any representation where

either someone else is paying the legal fees for a client or you will have regular contact

with a third party (family member, friend, etc.) to assist in a representation, specify who

is and is not a client.

Amended Rule 1.8(f) requires that whenever someone other than the client is paying the

legal fees, you MUST: 1) disclose this to the client, 2) explain that your independent

professional judgment cannot be affected by the payor, and 3) that no confidential

information about the representation will be conveyed to the payor without the client’s

consent. This should be a separate clause in the engagement letter that you go over in

detail with the client, so they understand everyone’s obligations.

B. Prospective Clients

Every time you talk with someone, in-person, by phone, or by email, they might be

considered a client……

This actually is not a new standard but it is codified as New Rule 1.18. See Foulke v.

Knuck, 162 Ariz. 517, 784 P.2d 723 (App. 1989)(the fact that a consultation with the

lawyer was brief does not negate a conclusion that an attorney-client relationship was

formed.).

The New Rule provides:

ER 1.18.

Duties to Prospective Client

(a) A person who discusses with a lawyer the possibility of forming a clientlawyer

relationship with respect to a matter is a prospective client.

Lynda C. Shely of The Shely Firm PC Speaker 13: 2

(b) Even when no client-lawyer relationship ensues, a lawyer who has had

discussions with a prospective client shall not use or reveal information learned in

the consultation, except as ER 1.6 would permit and ER 1.9 would permit with

respect to information of a former client.

materially adverse to those of a prospective client in the same or a substantially

related matter if the lawyer received information from the prospective client that

could be significantly harmful to that person in the matter, except as provided in

paragraph (d). If a lawyer is disqualified from representation under this

paragraph, no lawyer in a firm with which that lawyer is associated may

knowingly undertake or continue representation in such a matter, except as

provided in paragraph (d).

(d) Representation is permissible if both the affected client and the

prospective client have given informed consent, confirmed in writing, or:

(1) the disqualified lawyer is timely screened from any participation in the

matter and is apportioned no part of the fee therefrom; and

(2) written notice is promptly given to the prospective client.

What Doesn’t Constitute a Client Consultation:

1. Brief discussions where you advise someone that you do not handle certain

practice areas and decline the representation.

2. Brief discussions where no highly sensitive information is conveyed and the only

information that is communicated is done so with the express understanding that

is being transmitted simply to check for conflicts.

3. Consultations where the prospective “client” was intentionally attempting to

conflict the lawyer and did not have a reasonable expectation of retaining the

lawyer. Comment [4] to ER 1.18.

4. Information unilaterally sent to the lawyer by a person, as long as the lawyer did

not solicit the contact. Comment [2] to ER 1.18.

Checklist to Avoid Inadvertent Clients:

1. Confirm that your website has a disclaimer and warning about sending emails

directly to the firm – caution that it does not establish an attorney/client

relationship and they should not transmit confidential information.

Lynda C. Shely of The Shely Firm PC Speaker 13: 3

2. If you use paper intake forms for new clients, add a disclaimer that the disclosure

of the information on the form is necessary to check for conflicts and does not

establish an attorney/client relationship.

3. Train staff, including receptionist, paralegals, secretaries and anyone else who has

contact with prospective clients about what they can and cannot say to a nonclient.

4. Send “non-engagement” letters whenever you decide that you don’t want to take

on a representation.

While this last suggestion may appear burdensome, it is crucial to avoid

misunderstandings; send “no thank you” letters to those individuals who consult with you

but you decide they are not an appropriate match with your firm. Make sure that the “I

am not your lawyer” letter specifies to these individuals that while you will maintain the

confidentiality of the information discussed, your schedule does not permit taking on

their matter and they should consult with an attorney as soon as possible.

Suggestion: Create a separate category in your computerized contacts database for just

“prospective clients” that notes who met with the person, on what date, and the subject

matter. That contact then must be “calendared” for a follow-up within a week with

either an engagement letter or a non-engagement letter. If the prospective client is

declined, the contact category should be changed from “prospective” to “declined

prospective clients.”

Lynda C. Shely of The Shely Firm PC Speaker 13: 4

Non-retention Letter

Dear :

Thank you for contacting [firm] regarding your legal matter. Unfortunately, due to our

current schedules, we will not be able to represent you. I have returned to you all

documents that you provided to us to review. As you know, our review of these materials

to determine whether or not our firm could assist you did not establish an attorney/client

relationship with you.

You should consult with another attorney immediately to determine whether there are any

filing deadlines for your legal matter.

I wish you all the best.

Note that this letter does not state any specific time deadlines, nor does it give any further

advice. Check with your malpractice carrier regarding whether it does or does not

approve of including specific dates in such letters.

In order to comply with ER 1.18, Prospective Clients, the firm will need to log into its

conflict database the names and other intake information about this matter, note the date

of the consultation and who met with/spoke with the client. All information conveyed in

initial consults must be treated as confidential, even though no attorney/client

relationship is established. If an opposing party seeks to retain the firm on the same or

substantially related matter, the lawyers who spoke with this prospective client must be

screened from the new matter.

Lynda C. Shely of The Shely Firm PC Speaker 13: 5

C. Constituents at a Business Entity

When representing an entity it is crucial that the constituents of the entity (officers,

directors, employees) understand that the lawyer’s duties are to the company, not the

individual constituents. ER 1.13 was amended in 2004 to clarify what a lawyer must and

may do if she determines that a constituent is doing something that is a violation of law

or a violation of a duty to the company:

(a) A lawyer employed or retained by an organization represents the organization

acting through its duly authorized constituents.

(b) If a lawyer for an organization knows that an officer, employee or other person

associated with the organization is engaged in action, intends to act or refuses to act

in a matter related to the representation that is a violation of a legal obligation to the

organization, or a violation of law that reasonably might be imputed to the

organization, and that is likely to result in substantial injury to the organization, the

lawyer shall proceed as is reasonably necessary in the best interest of the

organization. Unless the lawyer reasonably believes that it is not necessary in the

best interest of the organization to do so, the lawyer shall refer the matter to higher

authority in the organization, including, if warranted by the circumstances, to the

highest authority that can act on behalf of the organization as determined by

applicable law.

(1) despite the lawyer's efforts in accordance with paragraph (b) the highest authority

that can act on behalf of the organization insists upon or fails to address in a timely

and appropriate manner an action or refusal to act, that is clearly a violation of law,

and

(2) the lawyer reasonably believes that the violation is reasonably certain to result in

substantial injury to the organization, then the lawyer may reveal information relating

to the representation whether or not Rule 1.6 permits such disclosure, but only if and

to the extent the lawyer reasonably believes necessary to prevent substantial injury to

the organization.

(d) Paragraph (c) shall not apply with respect to information relating to a lawyer's

representation of an organization to investigate an alleged violation of law, or to

defend the organization or an officer, employee or other constituent associated with

the organization against a claim arising out of an alleged violation of law.

(e) A lawyer who reasonably believes that he or she has been discharged because of

the lawyer's actions taken pursuant to paragraphs (b) or (c), or who withdraws under

Lynda C. Shely of The Shely Firm PC Speaker 13: 6

circumstances that require or permit the lawyer to take action under either of those

paragraphs, shall proceed as the lawyer reasonably believes necessary to assure that

the organization's highest authority is informed of the lawyer's discharge or

withdrawal.

(f) In dealing with an organization's directors, officers, employees, members,

shareholders or other constituents, a lawyer shall explain the identity of the client

when the lawyer knows or reasonably should know that the organization's interests

are adverse to those of the constituents with whom the lawyer is dealing.

(g) A lawyer representing an organization may also represent any of its directors,

officers, employees, members, shareholders or other constituents, subject to the

provisions of ER 1.7. If the organization's consent to the dual representation is

required by ER 1.7, the consent shall be given by an appropriate official of the

organization other than the individual who is to be represented, or by the

shareholders.

Lynda C. Shely of The Shely Firm PC Speaker 13: 7

“I Am not your Lawyer” Letter

Dear Jane:

It was good to meet you yesterday. You and Joe are going to start a new business,

tentatively called “Real Estate Investments-R-Us” It will probably be a corporation in

which the two of you, and others invest capital to purchase real property for development

in Maricopa County. The purpose of this letter is to confirm our conversation yesterday,

during which I informed you that this firm will be representing Joe and the new company.

We do not represent you personally. You will need to consult with your own lawyer on

issues relating to your participation in this matter.

We understand that you will be the COO of the new company. We expect to have much

contact with you in that role. Please understand, however, that even though we will be

speaking with you on regular basis about company legal matters, you personally, will not

be our client. Any information that you share with us will be communicated to the

company, as we feel necessary to represent the company.

Thank you very much, and we look forward to working with you.

Very truly yours,

Lynda Lawyer

I, Jane__________________, have reviewed this letter and understand that XYZ Law

Firm does not represent me personally in the formation of Real Estate Investments-R-Us

or in XYZ’s continued representation of Real Estate Investments-R-Us.

_______________________

____________________

date

signature

This letter is crucial to send to any individuals with whom the lawyer will speak with on

behalf of representing a client, such as a corporation, an estate-planning matter for a

friend/family member, or investors in a business.

Lynda C. Shely of The Shely Firm PC Speaker 13: 8

II.

Conflicts of Interest in Transactions

The most common conflict scenarios in real estate transactions are having current clients

involved on both sides of the transaction – or subsidiaries or affiliates of clients on both

sides of the transaction. Most of these types of conflicts will be waivable with

appropriate written disclosures to all affected clients. But the first step is determining if

there are any clients, affiliates, or client constituents (investors, officers, directors, board

members) involved in the proposed transaction. The following summarizes the steps

necessary for checking for conflicts, determining if there is a waivable conflict, and

ultimately how to write the conflict waiver.

A. Conflict Checks – When and Who

No matter the size of the firm or the sophistication of the system, every firm must have a

conflict checking system. This can be as simple as a rolodex with names of clients and

opposing parties or you can invest in one of the many software systems designed

specifically to check for conflicts. Whatever the system, the most important rule is that

the system must be used by everyone - all the time. Depending upon the practice areas of

the firm, the system should include the following names:

clients, relatives/subsidiaries, and aliases.

primary contact persons at entity clients.

opposing parties and opposing counsel.

all close family members of lawyers and staff who work at other law firms, legal

departments, government agencies, and client offices.

expert witnesses.

Investors in client entities

non-parties at fault.

former clients.

prospective clients.

Individuals, entities, and insurance companies paying clients’ legal fees.

** Train staff to re-run a conflict check every time a new party, a non-party at fault, new

counsel, or new expert/key fact witness is added to a proceeding. Also re-run conflict

checks when entity clients have changes in management or ownership.

Conflict systems can become unwieldy if too much information is entered in a

disorganized manner. Confirm, regularly that: 1) categories of information still make

sense (e.g., prospective clients, expert witnesses, etc.); 2) one lawyer and one staff person

are responsible for reviewing and maintaining the system; and 3) that new conflict checks

are run every time a new party/investor/participant is added to a matter or at least once a

year.

Lynda C. Shely of The Shely Firm PC Speaker 13: 9

1. Does a Conflict Exist?

The short checklist of things to consider in determining whether a conflict exists for a

new matter include:

Does the firm currently represent the opposing party (or a subsidiary, parent, or

affiliated entity) in another matter?

Does the firm currently represent anyone who appears on the list of names above?

Did the firm previously represent anyone on the list?

Will the firm’s representation of current client be materially limited in any way

because of the firm’s duties to a current or former client or because of a lawyer’s

personal interests?

Is there more than one client being represented in the matter?

Does the transaction personally involve a lawyer or a lawyer’s family members?

If the answer to any of those questions is “yes,” then the new potential matter needs to be

reviewed to decide whether the conflict is waivable. Some conflicts are not waivable and

thus the representation would need to be declined. For instance, a firm cannot represent

one client against another in litigation where the firm is representing both sides. Nor

should the firm represent both sides to a disputed transaction.

Current Client Conflicts

The general conflict of interest Rule 1.7, provides:

(a) Except as provided in paragraph (b), a lawyer shall not represent a client if

the representation involves a concurrent conflict of interest. A concurrent conflict

of interest exists if:

(1) the representation of one client will be directly adverse to another

client; or

(2) there is a significant risk that the representation of one or more

clients will be materially limited by the lawyer’s responsibilities to another

client, a former client or a third person or by a personal interest of the

lawyer.

(b) Notwithstanding the existence of a concurrent conflict of interest under

paragraph (a), a lawyer may represent a client if each affected client gives

informed consent, confirmed in writing, and:

Lynda C. Shely of The Shely Firm PC Speaker 13: 10

(1) the lawyer reasonably believes that the lawyer will be able to

provide competent and diligent representation to each affected client;

(2) the representation is not prohibited by law; and

(3) the representation does not involve the assertion of a claim by one

client against another client represented by the lawyer in the same

litigation or other proceeding before a tribunal.

Paragraph (a) sets forth when a conflict may exist and paragraph (b) explains when and

how you may request a waiver of such conflicts.

Former Client Conflicts

Remember too that former clients may cause conflicts of interest – even if it is not the

same transaction. You can’t 1) sue a former client on the same or a substantially related

matter; or 2) use ANY information you learned from the former client against them in a

subsequent matter.

ER 1.9 sets forth the details:

(a) A lawyer who has formerly represented a client in a matter shall not

thereafter represent another person in the same or a substantially related matter in

which that person’s interests are materially adverse to the interests of the former

client unless the former client gives informed consent, confirmed in writing.

(b) A lawyer shall not knowingly represent a person in the same or a

substantially related matter in which a firm with which the lawyer formerly was

associated had previously represented a client:

(1) whose interests are materially adverse to that person; and

(2) about whom the lawyer had acquired information protected by ERs

1.6 and 1.9(c) that is material to the matter;

unless the former client gives informed consent, confirmed in writing.

thereafter:

(1) use information relating to the representation to the disadvantage

of the former client except as these Rules would permit or require with

respect to a client, or when the information has become

generally known; or

Lynda C. Shely of The Shely Firm PC Speaker 13: 11

(2) reveal information relating to the representation except as these Rules would

permit or require with respect to a client.

2. Is the Conflict Waivable?

While ER 1.7 does not require a conflict waiver to be signed by the clients, the firm

should obtain client signatures on such important documents. A conflict waiver is now

called an “informed consent” under the amended Rules. NOTE: Calendar whenever

waivers are sent to clients to assure that you receive back a signed copy of the waiver.

ER 1.8(a), which regulates business transactions between clients and lawyers, does

require a client signature.

**Practice Reminder: Waivers/Informed Consents must be in writing.

If a “waivable” conflict arises, an effective conflict waiver must obtain the client(s)’

“informed consent” to the waiver. ER 1.0 defines “informed consent” as:

(e) “Informed consent” denotes the agreement by a person to a proposed

course of conduct after the lawyer has communicated adequate information and

explanation about the material risks of and reasonably available alternatives to the

proposed course of conduct.

B. What Goes Into an “Informed Consent” Waiver?

There is no “one-size-fits-all” waiver letter. Comment [6] to ER 1.0 explains what is

necessary to obtain client(s)’ informed consent:

Ordinarily, this will require communication that includes a disclosure of the facts

and circumstances giving rise to the situation, any explanation reasonably

necessary to inform the client or other person of the material advantages and

disadvantages of the proposed course of conduct and a discussion of the client’s

or other person’s options and alternatives. In some circumstances it may be

appropriate for a lawyer to advise a client or other person to seek the advice of

other counsel. A lawyer need not inform a client or other person of facts or

implications already known to the client or other person; nevertheless, a lawyer

who does not personally inform the client or other person assumes the risk that the

client or other person is inadequately informed and the consent is invalid. In

determining whether the information and explanation provided are reasonably

adequate, relevant factors include whether the client or other person is

Lynda C. Shely of The Shely Firm PC Speaker 13: 12

experienced in legal matters generally and in making decisions of the type

involved, and whether the client or other person is independently represented by

other counsel in giving the consent. Normally, such persons need less

information and explanation than others, and generally a client or other person

who is independently represented by other counsel in giving the consent should be

assumed to have given informed consent.

This means that according to the Ethical Rules, you must send a letter to the affected

clients and inform them about:

1) the nature of the potential conflict and facts giving rise to the possible conflict;

2) potential risks and benefits associated with agreeing to waive a conflict;

3) the alternatives available to agreeing to the waiver; and

4) (preferably – although not required by ER 1.7), have the client(s) sign the waiver.

Such “informed consent” letters also may suggest that the clients have independent

counsel review the waiver, although this is not required for basic waivers. The State Bar

particularly likes to see such statements in waiver letters.

Lynda C. Shely of The Shely Firm PC Speaker 13: 13

III. Common Reasons for a Bar Charge in Transactions

A. Current clients – joint representations

Whenever a firm represents two or more clients in the same matter, the lawyers must

discuss potential conflicts, what will happen if an actual conflict arises (and give

examples), how information will be shared among the joint clients, how fees will be paid

for the representation, and whether independent counsel should be retained. Also, review

the recent Arizona Ethics Opinion 07-04 that discusses some of these topics in more

detail.

1. Who is/Are the Clients and What is the Scope of Representation

Always explain exactly who is and is not the client. If you are representing corporation

and primary investor/CEO – say so in the fee agreement. If corporation is only paying

your legal fees to represent CEO, CEO must be advised that pursuant to Ethical Rule

1.8(f), the company does not get to control the representation or know anything about the

representation unless CEO consents.

2. What is the Potential Conflict and What Happens If there is a Conflict

There is always a potential conflict when representing joint clients – tell them that – in

writing. Also, in order to obtain the joint clients’ “informed consent to waive the

potential client,” the lawyer must identify what the potential conflicts are, what will

happen if the conflict arises, and what are the benefits of waiving the conflict at this time.

For instance, in a litigated matter, the joint clients’ positions appear to be aligned at the

beginning of the representation but they disagree on settlement or the facts change to

suggest some cross-liability, a conflict may arise that would require that the lawyer

withdraw. Tell them that.

Lawyers also must discuss the issue of sharing confidential information among co-clients.

The following is a form clause that may be used in joint representation letters to discuss

this issue:

Shared Information. In the ordinary one-lawyer/one-client relationship,

information given to the lawyer by the client in confidence as part of the

representation may be considered privileged or confidential information (i.e., the

lawyer may not disclose that information to any other person without the client’s

consent as required by law). That privilege also exists in the context of a joint

representation, but there is an added factor. The privilege extends to protect the

confidences of the entire group from disclosure to any person who is not a

member of the group. However, information that any of you provides to me in

connection with this joint representation is available to all of the other Clients.

There will be no confidences among us regarding the work I do for you. In other

Lynda C. Shely of The Shely Firm PC Speaker 13: 14

words, if I receive information from or about one of you or about the matter that I

believe the others should have in order to make decisions regarding the subject of

the representation, I will share that information with them or with the whole

group.

If at any time one of you declines to provide material information to the whole

group, I may be required to withdraw from representing all of you. I will take my

direction from the group as a whole as it reaches its consensus on various issues.

If the three of you disagree on an issue, I will ask you to resolve your differences

among yourselves without my assistance. Although I perceive it to be unlikely, in

the event circumstances arise that make it impossible for me to continue to

simultaneously represent all of you, you understand that I might have to withdraw

from my representation of all of you.

3. Who is Responsible for the Fees?

Finally in joint representations, discuss who is responsible for the firm’s fees and

what happens if one of the responsible clients fails to remain current on their bills.

B. Business deals with clients and other bad ideas

Ethical Rule 1.8 lists several prohibited (or seriously restricted) transactions with clients.

The most common Bar charge, reason for disbarment, and reason for a malpractice suit,

is doing business with a client. ER 1.8(a) has VERY STRICT requirements if you are

engaging in any business transaction with a client:

(a) A lawyer shall not enter into a business transaction with a client or

knowingly acquire an ownership, possessory, security or other pecuniary interest

adverse to a client unless:

(1) the transaction and terms on which the lawyer acquires the interest

are fair and reasonable to the client and are fully disclosed and transmitted

in writing a manner that can be reasonably understood by the client;

(2) the client is advised in writing of the desirability of seeking and is

given a reasonable opportunity to seek the advice of independent legal

counsel on the transaction; and

(3) the client gives informed consent, in a writing signed by the client,

to the essential terms of the transaction and the lawyer’s role in the

transaction, including whether the lawyer is representing the client in the

transaction.

Lynda C. Shely of The Shely Firm PC Speaker 13: 15

Even if the transaction is the client’s idea, even if the transaction is a great opportunity

for the client, and even if the client has separate counsel, you still may be suspended or

disbarred if you fail to comply with the three elements listed above. Whenever a lawyer

invests in a client’s real estate deal, or takes a partial stock option or ownership interest in

the deal in lieu of fees – that is a business transaction. If you materially change the terms

of the fee agreement after you already entered into the attorney/client relationship and fee

agreement, that is a business transaction. Be very very careful with this issue.

Note too that many malpractice carriers will not cover your legal services if you have

more than an insignificant investment in a client company/project.

L A W S E M I N A R S I N T E R N A T I O N A L

A Comprehensive Two-Day Conference on

Commercial Real Estate Leases

Practical information on negotiating and enforcing commercial leases

October 2 and 3, 2008

Phoenix, AZ

Special Issues for Leases on State Lands and

Indian Reservations

Michael P. Ripp, Esq.

Ryley Carlock & Applewhite PA

Phoenix, AZ

Don J. Miner, Esq.

Fennemore Craig, P.C.

Phoenix, AZ

Michael P. Ripp of Ryley Carlock & Applewhite PA Speaker 14: 1

COMMERCIAL LEASES OF ARIZONA STATE TRUST LANDS

Michael P. Ripp

Ryley Carlock & Applewhite

Approximately 9.2 million surface acres (roughly 13% of the total land ownership

in Arizona) and 9 million subsurface acres of school trust lands are scattered throughout

Arizona. While most of these lands are located in rural areas, more than 1 million acres

are located in or adjacent to areas experiencing urban growth, and approximately 2.3

million acres of trust land are held in a “checkerboard” pattern. 1 Trust land is not public

land, and the legal mandate that all uses of the trust land must benefit the beneficiaries of

the trust distinguishes the management of trust land from the management of public land,

such as parks or national forests. 2

The Arizona State Land Department (“ASLD”) is charged with responsibility for

administering the trust lands in Arizona, but is also constrained by a number of

sometimes conflicting legal duties. This article presents an overview of commercial

leases of trust land, including how to obtain and maintain a commercial lease from the

ASLD and other legal issues of concern to trust land lessees. It also notes important

limitations that federal law and the Arizona Constitution and statutes impose on the

ASLD’s discretion in dealing with leases of trust land and offers some insight as to how

1 Trust Lands in the American West (Lincoln Institute of Land Policy and Sonoran Institute), p. 61,

available at http://www.trustland.org/publications/trustlands.cfm (as of August 23, 2008). “Checkerboard”

ownership in Arizona commonly occurs due to the railroad land grants many years ago. Following the

acquisition of what are now the Western U.S. states from Mexico as part of the Treaty of Guadalupe

Hidalgo, and the 1848 discovery of gold at Sutter’s Mill and the ensuing California Gold Rush, federal

government policy favored the settlement of the West as quickly as possible, especially to avoid losing a

logistical link with California during the heightening of tensions that would ultimately lead to the Civil

War. The only means of transportation available to link the East with the West at the time was the railroad,

but the massive investment of capital needed to build a transcontinental railroad was beyond the capacity of

the private rail companies then in existence, and the anticipated lengthy payback period was not appealing

to their banks. Given that a direct subsidy of a railroad was constitutionally suspect, the scheme generally

used in the railroad land grants (including those made to the Southern Pacific, Atchison Topeka & Santa

Fe, and Texas Pacific in Arizona) was a “checkerboard” pattern, in which the federal government conveyed

alternating sections (typically the odd-numbered sections) to the railroad company, generally reserving

mineral rights therein (except for coal and iron, which the railroads needed to operate) and retained

ownership of the remaining sections. In some areas of the country, the strip of checkerboarded sections

could extend more than fifty miles on each side of the railroad tracks. The U.S. government believed that

the land it retained would, following the building of the railroad tracks, be more valuable and more

marketable than the entire land without the railroad, and that this checkerboard ownership scheme would

provide the railroad with incentive to lay tracks quickly and responsibly so that it could sell the land it had

received from the government to generate more cash for additional rail-building.

2 While public use of trust land is not prohibited, it is regulated to ensure protection of the land and

reimbursement to the beneficiaries for its use. See Creation of State Land Department on the ASLD’s

website at http://www.land.state.az.us/history.htm.

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Michael P. Ripp of Ryley Carlock & Applewhite PA Speaker 14: 2

the ASLD has attempted to update its policies and procedures in dealing with trust land

while remaining within the legal parameters imposed upon it. 3

What are trust lands and where did they come from?

The General Land Ordinance of 1785, in addition to establishing the rectangular

survey system that would be used for future surveys of the public domain land, also

provided for the first reservations of lands for the new states, reserving Section 16 near

the middle of every 36 square mile township for the maintenance of public schools within

the township. The Ordinance of 1787 (commonly known as the Norwest Ordinance)

provided that, after survey and settlement, new regions would be organized by an act of

Congress into U.S. Territories, and that when the population of a Territory reached

60,000, the Territory could petition Congress for admission to the Union. If the petition

was granted, Congress would then pass an enabling act for the new state. 4

When Arizona became a state, it received a grant from Congress of Sections 2,

16, 32 and 36 in every township for “the support of common schools”. 5 In addition to the

common school grant, Arizona also received specific grants of more than 2 million

additional acres for a number of other public institutions. 6 Congress also allowed states

3 As the seminar for which this article has been prepared addresses commercial leases of real property, this

article will not attempt to give substantive treatment to (a) purchases of trust lands from the ASLD, (b)

rights of way or special use permits from the ASLD, or (c) leases falling outside the ASLD’s commercial

lease classification, such as agricultural, grazing and mineral leases. However, some of those topics may

be mentioned in passing.

4 Trust Lands in the American West, note 1 above, p. 7. The enabling act would authorize a constitutional

convention in the new state, with the constitution subject to a popular referendum in the Territory. If

successful, the constitution would be sent to Congress for ratification, and after ratification the state would

be admitted. Id. At the time of admission, the state would receive land grants from the federal government

conveying title to its reserved school lands, as well as additional land grants to support other public

institutions. Thereafter, it became apparent to Congress that, while the rectangular system of surveying had

mathematical appeal for purposes of surveys and administering chains of title, population centers in the

Western states tended to develop around natural, economic and military features, without regard for

artificial township boundaries. As a result, local governments did not always exist in a township to manage

the grant lands and, if they did exist, they often lacked resources to administer the grant lands. Many grant

lands were not located near existing population centers, and therefore could not be used to provide

meaningful support for schools in a given township, and sometimes the lands were simply given to teachers

in lieu of a salary. Congress therefore gradually shifted away from township-centered land administration

and, beginning with Michigan in 1849, granted the lands directly to the state to be administered for the

support of the schools statewide. See State Trust Lands in the West – Fiduciary Duty in a Changing

Landscape (P. Culp, A. Laurenzi and C. Tuell), pp. 5-6.

5 See New Mexico-Arizona Enabling Act, 36 Stat. 557 [hereinafter called the “Enabling Act”], § 24 (1910).

While each of the initial 14 public domain states received a Section 16 reservation, beginning with the

admission of California in 1850, Congress begin to grant two sections (16 and 36) to each state, which was

increased to four sections with the admission of Utah in 1896, recognizing that, unlike the flat rich

farmlands in the Midwest and South, the steeper, more arid lands in the western U.S. had little value for

agriculture and would likely require a larger quantity of land to produce the necessary revenues to support

the schools. See Trust Lands in the American West, note 1 above, pp. 8-9.

6 These supplemental grants included 200,000 acres for university purposes; 100,000 acres for legislative,

executive and judicial public buildings; 100,000 acres for penitentiaries; 100,000 acres for insane asylums;

100,000 acres for schools and asylums for the deaf, dumb and blind; 50,000 acres for miners’ hospitals;

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Michael P. Ripp of Ryley Carlock & Applewhite PA Speaker 14: 3

to select in lieu lands (also called indemnity lands) from elsewhere in the public domain

when their reserved sections in a given township were already occupied or reserved by

private homesteaders, railroad grantees or various federal lands. By the time Arizona

became a state in 1912, an enormous amount of public domain land had been granted to

the Southern Pacific Railroad in a checkerboard pattern across the northern part of the

state, and much of the remainder of the state was reserved for national forests, national

parks, military reservations and federal Indian reservations. As a result, Arizona took

only a small amount of its overall grant in the form of reserved sections, and the majority

was taken as in lieu selections that allowed it to aggregate its holdings in larger,

contiguous blocks of land. 7

Beginning with Ohio in 1803, virtually every state admitted to the Union received

substantial grants of reserved lands from the federal government. 8 Congress had initially

200,000 acres for “normal schools”; 100,000 acres for charitable, penal and reformatory institutions;

150,000 acres for agricultural and mechanical colleges; 150,000 acres for a school of mines; 100,000 acres

for military institutes; and 1,000,000 acres for the payment of county bonds (after those bonds were repaid,

most of the latter grant passed to the Arizona common schools trust). See Enabling Act § 25. The common

schools are by far the largest trust land beneficiary, credited with approximately 8.1 million acres of the 9.2

million surface acres in the trust. See Land Grant & Designation of Beneficiaries on the ASLD’s website

at http://www.land.state.az.us/history.htm for the current acreages held for the various beneficiaries.

The revenues generated by the trust lands are classified as either permanent (including revenues from sales

of trust land, the sale of most natural products, such as sand, gravel and water, and royalties earned from

mining and mineral extraction activities) or expendable (including a formula distribution from the

permanent fund and revenues from lease rentals, interest earned on deferred land sale payments financed

through the ASLD and other renewable types of uses). Permanent revenues are deposited into a separate

permanent fund for the appropriate beneficiary for long-term investment, and expendable revenues are

made immediately available for use by the trust beneficiaries. See Ariz. Const. Art. X, § 7; State Trust

Land Revenues and the Classroom Site Fund on the ASLD’s website at http://www.land.state.az.us/

education.htm; and Permanent Fund Revenue and Expendable Revenue on the ASLD’s website at

http://www.land.state.az.us/revenue.htm.

7 Trust Lands in the American West, note 1 above, p. 62, fn 2. These large blocks of land are much more

economical to manage over the long term than tracts scattered throughout the state, and, as urban areas

have grown, many of the once remote parcels are now in the path of urban development. While most

Arizona trust lands are currently usable only for livestock grazing purposes, the ASLD now controls more

than 30% of the available urban development land in Maricopa County, and holds much of it in large,

contiguous blocks that are well suited to master-planned communities and urban open space. Id. at p. 11.

Nearly all of the most valuable urban trust lands along the northern border of the Phoenix Metro area and in

north and west Tucson are common schools trust lands. See Locations and Uses of State Trust Land on the

ASLD’s website at http://www.land.state.az.us/history.htm. As the State was precluded by federal law

from acquiring mineral lands, and as homesteaders had already acquired most of the potential agricultural

lands, the State initially focused on choosing the best grazing lands. Most of the trust land chosen by the

State Selection Board from 1915 to 1960 was in central and southeastern Arizona and in the checkerboard

land area along the railroad (see note 1 above) across north-central Arizona. As agriculture developed,

later selections were made in the irrigated areas in the Harquahala Valley and the Gila River Valley, and

the final selections concentrated on commercial and agricultural lands along the Colorado River. Arizona’s

land selections were finally completed in 1982. Land exchanges from 1935 to 1985 relocated most of the

school section lands out of the western deserts and into areas closer to Phoenix and Tucson and into better

grazing areas in areas such as western Yavapai County. See Methods of Land Acquisition on the ASLD’s

website at http://www.land.state. az.us.history.htm.

8 The three exceptions were: (a) Maine, which was created out of lands ceded by Massachusetts as part of

the Missouri Compromise of 1820 (trading Maine’s admission as a free state in exchange for Missouri’s

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Michael P. Ripp of Ryley Carlock & Applewhite PA Speaker 14: 4

anticipated that grant lands would be leased, rather than sold, to generate revenues, but

the leasing experience of the early states proved to be a failure and, in 1827, Ohio

requested authority to sell its grant lands. Congress thereafter retroactively granted such

authority to all states and included authority to sell grant lands in all new grants.

However, Congress provided the new states with little or no guidance as to how to

manage their grant lands and, as a result, most of the early states rushed to sell their grant

lands in the frenzy of frontier land disposals. As a result, much of the early grant land

and its potential benefits were lost to incompetence, corruption and lack of direction,

providing few lasting benefits to the public schools. 9

In light of Congressional concerns with the problems that the earlier states

encountered in dealing with their grant lands, Arizona and New Mexico, as among the

last states admitted to the Union, were saddled with the most restrictive and detailed

Enabling Act of the Western states with regard to the management, leasing and

disposition of their trust lands. Their Enabling Act required the grant lands to be held in

trust and disposed of only in the manner specified in the Enabling Act, and provided that

any disposition of trust lands or monies or resources derived therefrom in a manner

contrary to the Enabling Act provisions is deemed a breach of trust and is null and void. 10

Arizona’s Enabling Act (as amended in 1936 and 1951) includes a number of

detailed restrictions on trust land dispositions. Among other things, the Enabling Act:

(a) prohibits any mortgage or encumbrance of trust lands; (b) subject only to a few

enumerated exceptions (including leases of ten years or less and mineral/hydrocarbon

leases), provides that trust lands and the natural products of trust lands may only be sold

or leased to the “highest and best bidder” at a public auction; (c) requires that, before

being offered, all lands and leases must be appraised at their “true value,” and cannot be

disposed of for less than the appraised value; and (d) establishes minimum standards for

the conduct of auctions, including notice, advertising and location requirements. 11 The

Arizona Constitution reiterates the Enabling Act requirements and imposes additional

restrictions. 12

Who administers Arizona’s trust lands?

In Arizona, trust lands are managed by the ASLD under the direction of the State

Land Commissioner, who is appointed by the Governor. While the ASLD has other

responsibilities, its primary focus is the administration of state trust lands, and nearly

admission as a slave state); (b) Texas, which was annexed as an existing sovereign government in 1848

following the end of the Mexican-American War; and (c) West Virginia, which was carved out of the then

existing state of Virginia, and admitted as a free state in the midst of the Civil War. See Trust Lands in the

American West, note 1 above, p. 7.

9 Id. at p. 12.

10 See Enabling Act § 28. See also Ariz. Const. Art. X, § 8.

11 See Enabling Act § 28.

12 See Ariz. Const. Art. X.

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Michael P. Ripp of Ryley Carlock & Applewhite PA Speaker 14: 5

75% of its budget is dedicated to the administration of trust lands. 13 The Commissioner

has authority to administer trust lands except for (i) in lieu land selection, which is

governed by a Selection Board comprised of the State Treasurer, Governor and Attorney

General; 14 and (ii) land sales and commercial leases, which must be approved by the

Board of Appeals (a five-member board selected by the Governor and confirmed by the

Senate). 15 The Commissioner also cooperates with two advisory committees that provide

advice on urban planning and conservation issues. 16

What are the ASLD’s responsibilities with respect to trust lands?

The primary mission of the ASLD is to earn money for Arizona’s public schools,

but it is also responsible for the conservation and stewardship of trust lands. The courts

have held that the ASLD’s trust responsibilities, as the most restrictive of the Western

states, include the following:

1. Public auctions and competitive bidding are required for all sales

of trust land, even when the buyer is a governmental body. 17

2. Lease provisions allowing for future decreases in rental rates if real

estate conditions render the lease “uneconomic” violate the mandate to sell or

lease trust land to the highest bidder. 18

3. Exchanges of trust lands, although permitted in the Enabling Act

and Arizona statutes, constitute “sales” without public auction, which violate the

Arizona Constitution. 19

4. The Commissioner cannot reject a conservation group’s

application to lease grazing lands for conservation and restoration purposes

without considering whether the offer is in the best interest of the trust. 20

13 See Trust Lands in the American West, note 1 above, p. 64.

14 See A.R.S. § 37-202. The Selection Board designated which of the selected lands were assigned to each

specific trust beneficiary, as well as the distribution of all Central Arizona Project water allocated for the

benefit of trust lands. See A.R.S. § 37-202.E, -F.

15 See A.R.S. § 37-214.B. See the ASLD’s website at http://www.land.state.az.us/divisions/board.htm for a

listing of the current Board of Appeals members.

16 See Trust Lands in the American West, note 1 above, p. 64.

17 See Arizona State Land Dept. v. Superior Court in and for Cochise, 633 P.2d 330 (Ariz. 1981); City of

Sierra Vista v. Babbitt, 633 P.2d 333 (Ariz. 1981); Gladden Farms, Inc. v. State, 633 P.2d 325 (Ariz.

1981).

18 See Campana v. Arizona State Land Dept., 860 P.2d 1341 (Ariz. 1993).

19 See Fain Land & Cattle Co. v. Hassell, 790 P.2d 242 (Ariz. 1990).

20 See Forest Guardians v. Wells, 34 P.3d 364 (Ariz. 2001).

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Michael P. Ripp of Ryley Carlock & Applewhite PA Speaker 14: 6

5. The “best interest of the trust” does not require blind adherence to

the goal of maximizing revenue at the expense of stewardship or the cost of

contracting with an irresponsible lessee. 21

6. The ASLD has no obligation to renew any existing lease of trust

lands. 22 7. The ASLD must receive the true value for any right-of-way across

trust lands, and actual monetary compensation payable for the right-of-way

cannot be diminished by the amount of any enhancement of value that the rightof-way

might bring to the remaining trust land. 23

Does the ASLD really occupy a “trust” relationship with respect to trust lands?

Most of the courts that have considered the issue have held that the federal grants

of school trust lands (especially the grants to the more recent states) create an actual and

enforceable trust and, when the documents that created the trust (i.e., the enabling act, the

state constitution and the state statutes) are silent, common law fiduciary principles that

govern the administration of private trusts apply. As a result, federal grant land

management is subject to most of the concepts that apply to private trusts - but a number

of public land management and common law charitable trust principles also apply. This

combination of governing principles from different legal sources creates a unique and

complex type of trust relationship. 24

For example, a private trustee’s common law duty of undivided loyalty to trust

beneficiaries requires that trust assets not be diverted to benefit others at the expense of

the trust beneficiaries without compensation, and requires the trustee to deal impartially

with trust beneficiaries. However, as the school trusts are somewhat indefinite

(benefiting the “common schools”) and perpetual, most of the beneficiaries of the trust

are unknown (most have not yet been born) and their financial needs are unknown.

Therefore, a grant land trust manager must consider not only the amount of the benefit to

the trust, but the timing and sustainability of those benefits as well, so as to provide

proper benefits to future beneficiaries as well as current ones.

A grant land trust manager must take a longer term view of what is required to

protect the trust corpus, with a view toward protecting trust property from not only shortterm

risks (the primary goal of a private trustee), but also long-term risks such as inflation

and the loss of the underlying productivity of the trust land, which may reduce revenues

21 See Jeffries v. Hassell, 3 P.3d 1071 (Ariz. 1999).

22 See Havasu Heights Ranch & Dev. Corp. v. Desert Valley Wood, 807 P.2d 1119 (Ariz. 1990).

23 See Lassen v. Arizona ex rel. Arizona Highway Dept., 385 U.S. 458 (1967).

24 Much of the discussion in this section recaps and summarizes observations presented in greater detail in

The Federally Granted Trusts: What Makes Them Unique (Washington State Department of Natural

Resources), p. 1, available at http://www.wslca.org/AssociationInfo/fedtrusts.htm (as of August 16, 2008),

and State Trust Lands in the West – Fiduciary Duty in a Changing Landscape (P. Culp, A. Laurenzi and C.

Tuell), pp. 17-23.

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Michael P. Ripp of Ryley Carlock & Applewhite PA Speaker 14: 7

to future beneficiaries. A private trustee’s duty to make the trust property productive and

provide benefits to the named beneficiaries can be at odds with a grant land trust

manager’s duties to not only current beneficiaries, but to future generations of

beneficiaries.

A private trustee’s common law duty to diversify trust investments to distribute

the risk of loss is more difficult to achieve in a school trust land setting, as the federal

grants were made in a single asset class - land. However, the investments representing

the permanent fund into which trust revenues are deposited can and should be diversified.

A private trustee’s duty to follow directions given to it by the settlor presents a

significant difference between a private trustee and a public trust manager, and the

visibility of public management presents a trust manager of grant lands with one of its

greatest management challenges not faced by private trustees. School trust lands are

often thought of and characterized as public lands (in fact, most of Arizona’s trust land

provisions are found in A.R.S. Title 37, which is entitled “Public Lands”). Government

officials, such as the ASLD, must balance their duty to act fairly and openly to the extent

possible when they deal with the public with their responsibilities to the trust

beneficiaries. Trust land managers must generally consider the fiscal impact on local

communities of proposed development approvals affecting state trust lands, provide

public notice of trust-related decisions, hold public hearings and accept public comment,

maintain all materials relating to trust administration as public records subject to

inspection (including by economic competitors), produce annual public reports, and

conduct trust-related management activities under the direction of legislative

appropriations; a private trustee does not face the same impediments. Groups other than

technical trust beneficiaries (including education-related groups, lessees, developers,

conservationists, taxpayers and the general public) may also have standing to challenge

actions taken by a trust land manager.

Trust land managers in the western U.S. and the courts continue to struggle to

define the nature of the trust relationship created with respect to the federal grant lands

and to determine, for example, the propriety of management for long-term sustainability

and conservation in a framework that may place primary emphasis on short-term revenue.

How does the ASLD manage the leasing of trust lands under its control?

Arizona has retained a larger percentage of its original federal land grant (87%)

than any of the other 22 states that received school trust land grants. 25 The Enabling Act

and the Arizona Constitution generally require trust lands to be leased to the “highest and

best bidder” at a public auction. 26 However, most leases that are issued in Arizona

actually fall within certain exceptions to the public auction requirements, including: (a)

leases of ten years or less for grazing, agricultural, commercial and domestic purposes;

and (b) leases of 20 years or less for mineral purposes or production of oil, gas and other

25 See State Trust Land at a Glance on the ASLD’s website at http://www.land.state.az.us/news/

ataglance.htm.

26 See Enabling Act § 28; Ariz. Const. Art. X, § 3.

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Michael P. Ripp of Ryley Carlock & Applewhite PA Speaker 14: 8

hydrocarbon substances. 27 Almost all grazing and agricultural leases of trust lands are

issued and administered as short-term leases (ten years or less) that can be granted upon

application. 28

Commercial leases are issued for ten to 99 year lease terms, and must be issued at

public auction to the “highest and best bidder.” 29 Lease rates are generally required to

be at the appraised fair market rental value of the land, subject to annual adjustment (or

periodic adjustment at least every five years, in the case of longer term leases). 30

Arizona’s Growing Smarter Act 31 requires the adoption and periodic update of

general plans in each city and town and comprehensive plans in each county. It also

created a corresponding framework for the planning of trust lands, requiring the ASLD to

prepare and periodically update conceptual plans for urban trust land that will be

integrated into the general and comprehensive plans of cities, towns and counties. The

Act also requires the ASLD, in consultation with city, town and county planning

authorities, to prepare five-year disposition plans identifying trust lands to be masterplanned,

zoned, sold, leased or classified for conservation purposes over the next five

years. 32 The Act requires the State Land Commissioner to make a series of

determinations before considering urban trust lands for planning and disposition. 33

27 Id.

28 Grazing leases are the most prevalent type of lease affecting Arizona trust lands (they affect nearly 8.4

million acres, or 92% of trust lands). See State Trust Land at a Glance, note 25 above. In December of

each year, at least one year prior to the expiration of the grazing lease, the ASLD publishes notice of the

expiring lease in a newspaper of general circulation and posts the notice on the ASLD website, among

other places. See A.R.S. §37-281.01.B. Between one year and 270 days prior to the expiration of the lease,

a conflicting application may be filed, and after considering all applications for a short-term lease, the

ASLD will award the lease to the party that the ASLD considers to have the “best right and equity to the

lease.” See A.R.S. § 37-284. An existing lessee in good standing under its lease may also have a

“preferred right of renewal” under A.R.S. § 37-291 allowing it to obtain a new short-term lease by

matching the highest bid. An existing lessee in good standing under its lease may also have a preferred

right under A.R.S. § 37-290 to lease land that is reclassified by the ASLD for a term not longer than ten

years. The Enabling Act and A.R.S. § 37-322.01 also require purchasers or subsequent lessees to pay prior

lessees for improvements made by the prior lessees. Some commercial leases are also administered under a

similar short-term leasing program.

29 See A.R.S. § 37-281.02.A. The ASLD uses the commercial lease classification as a “catch-all” category

for uses that do not fall within another specified category, such as agricultural, grazing, home site or

minerals. See A.R.S. § 37-101(3).

30 See A.R.S. § 37-281.02.F. The market value of a grazing lease is established by the Grazing Land

Valuation Commission. See A.R.S. § 37-285.

31 H.B. 2361 (1998). The provisions of the Growing Smarter Act of 1998 affected a number of sections of

the Arizona Revised Statutes, including 9-461.05, 9-461.06, 9-462.01, 9-462.04, 11-806, 11-821, 11-822,

11-824, 11-829, 37-236.01, 37-239, 37-258.01, 37-331.02, 37-331.03, 41-511.05, 41-511.23 and 41-1314.

The Growing Smarter Act was amended by the Growing Smarter Plus Act of 2000.

32 See Trust Lands in the American West, note 1 above, p.70; A.R.S. § 37-331.03.

33 The Commissioner must determine: (a) that the trust lands adjoin existing developed lands within or

adjacent to the corporate boundaries of a city or town; (b) if the trust lands are located in areas where

development is appropriate, development will be beneficial to the trust and development of the trust lands

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Michael P. Ripp of Ryley Carlock & Applewhite PA Speaker 14: 9

The ASLD has created an integrated Geographic Information Systems (GIS)

database containing information regarding relative land valuations, transportation and

infrastructure availability, the physical suitability of lands for development and other

factors, which is used to measure the relative suitability of trust land parcels for

development, regulatory and legal limitations such as endangered species presence and

permitting limitations, physical attributes such as high slopes and one hundred year

floodplains, locational attributes such as proximity to existing transportation, water,

sewer and electric infrastructure, and the financial information related to the relative

valuation of the land, to “rank” each trust parcel based on a weighted point system.

From that ranking, the highest suitability parcels are re-evaluated based on market

analyses and more detailed evaluations of development suitability, and the highestscoring

parcels from that re-evaluation are targeted for planning and disposition by the

ASLD, with master plans for the targeted parcels being prepared by the ASLD or by

planning permittees selected through an RFP process. 34 This approach focuses the

ASLD’s limited resources for real estate dispositions on the most valuable and most

easily accomplished development opportunities, rather than simply responding to

development proposals from outside parties whose interests may differ from those of the

trust. Proposals that are identified by outside parties are first screened through the

ASLD’s disposition ranking system, and will not be considered if they do not rank as

highly as the parcels that are the ASLD’s then current priorities unless the outside parties

can increase the objective ranking enough for their proposals to be considered (by

agreeing to bring infrastructure to the parcel, resolving a major regulatory constraint that

had lowered the parcel’s ranking, and the like). 35

This discussion does not purport to cover the wide range of situations and critical

land planning issues that a proposed lessee of commercial trust land, particularly urban

trust land, may face, and it will be important for the lessee to coordinate its project with

the ASLD staff. 36

will not promote urban sprawl or leapfrog development; (c) the ASLD has considered the development’s

proximity to and compatibility with existing developments, land uses and local jurisdictions; (d) the trust

lands have the quality and quantity of water needed for urban development; (e) the ASLD has fully

cooperated with local planning authorities, the classification for development is consistent with local

development policies, and local development policies have been taken into consideration; (f) the ASLD has

considered the proximity of the trust lands to public facilities and the impact of development on those

facilities; (g) the ASLD has considered the natural and artificial features of the trust land, including

floodplains, geologic instabilities, natural areas, wildlife habitat, airport influence zones, potentially

hazardous conditions, and historic and archaeological sites and structures; and (h) the ASLD has considered

the timing of development, impacts to existing leases and the available resources for planning. A.R.S.

§ 37-332.E.

34 See Trust Lands in the American West, note 1 above, p. 70.

35 Id.

36 The ASLD continues to struggle to reconcile its revenue maximization goal with its conservation and

stewardship responsibilities. One tool the voters and the Legislature had attempted to give the ASLD was

the Arizona Preserve Initiative (H.B. 2555 (1996), codified at A.R.S. §§ 37-311 through 37-317), which

allowed a state or local government, business, state land lessee or citizen group to petition the State Land

Commissioner to reclassify state trust lands in or around urban areas as “suitable for conservation

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Michael P. Ripp of Ryley Carlock & Applewhite PA Speaker 14: 10

How does one get a commercial lease from the ASLD?

The ASLD typically sells trust lands that are intended for residential purposes and

leases trust lands that are intended for commercial uses. 37 State trust lands may be leased

for a variety of commercial purposes, including retail, industrial and other uses. Both

short-term (ten years or less) and long-term (more than ten years, up to 99 years) leases

are initiated by completing an application for a commercial lease and filing it with the

ASLD. 38

The formal application to the ASLD should include: (1) the legal description;

(2) a conceptual plan, if development is intended and improvements are anticipated

(however, a separate application to place improvements must generally be submitted to

the ASLD after the lease is obtained and prior to any grading or construction); (3) if the

land in question is not already classified as commercial, a petition for reclassification for

commercial purposes; and (4) depending on the location of the land and the type of lease

requested, a land survey, archeological survey and/or appraisal. 39 A potential lessee must

participate in a preliminary application conference with the ASLD’s Real Estate Division

staff before filing a long-term lease application. 40 The ASLD will review the lessee’s

proposal taking into consideration the compatibility with surrounding uses, local zoning,

hydrology, geology, archeology and economic factors. 41 All leases must be approved by

the ASLD’s Board of Appeals, which meets once a month. Upon final approval, an

auction date is set. According to the ASLD, processing time for a commercial lease may

be six months to two years. 42

All trust land transactions must comport with the ASLD’s responsibility to assure

the highest and best use of the land in order to maximize revenues to the trust

purposes.” If the land was reclassified, the Commissioner could adopt a plan that allowed the land to be

withdrawn from sale or lease for three to five years to allow prospective lessees or purchasers time to raise

funds. The trust lands could then be leased or sold at auction for conservation purposes. A 1998

amendment to the API also provided for a $220 million public-private matching grant program to assist

with the lease or purchase of trust lands for conservation. This program was challenged as unconstitutional

in 2003 by an activist group called People for the West on the basis that the ASLD’s requirement that the

land be subjected to a conservation easement made the land unattractive to other potential bidders and

therefore did not ensure that the trust land would be sold the highest and best bidder. The Commissioner

has suspended this program.

37 See Applying to Purchase or Lease State Trust Land on the ASLD’s website at http://www.land.state.

az.us/programs/realestate/sections/sales.htm.

38

Application forms and instructions, respectively, can be found on the ASLD’s website at

http://www.land.state.az.us/programs/realestate.htm and http://www.land.state.az.us/divisions/

realestate.htm.

39 See Purchase and Commercial Lease Procedures and Fees on the ASLD’s website (note 37 above).

40 See Applying to Purchase or Lease State Trust Land on the ASLD’s website (note 37 above).

41 See Evaluation Criteria on the ASLD’s website at http://www.land.state.az.us/programs/realestate/

sections/comml_leasing.htm.

42 See Commercial Lease Procedures on the ASLD’s website (note 41 above).

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Michael P. Ripp of Ryley Carlock & Applewhite PA Speaker 14: 11

beneficiaries. 43 The terms, conditions and rents applicable to long-term leases are

established before the lease is auctioned (the appraised fair market rental value of the

land constitutes the minimum bid at the auction), and may include such items as

percentage rent, if appropriate. The ASLD will prepare an auction notice and publish it

once a week for ten consecutive weeks in two publications. 44 Maricopa County trust land

auctions are held at the ASLD’s offices (1616 West Adams, Phoenix) and auctions of

trust lands located in other counties are conducted at the county courthouses in those

counties. 45 Short-term commercial leases (ten years or less) do not need to be auctioned.

What types of unique provisions typically appear in an ASLD commercial lease?

Commercial leases with the ASLD typically include the following provisions:

Permitted use. The permitted use provision may defer to applicable ordinances,

or it may refer to an “Approved Zoning” obtained in connection with the establishment of

an Approved Parcel Development Plan coordinated through the ASLD. The ASLD

typically reserves mineral rights and the right to enter upon the parcel to explore for or

extract minerals (see A.R.S. § 37-287), and allows the lessee a right to “reasonable

compensation” for any damages resulting from the exercise of those reserved rights.

Easements. The ASLD often agrees to make land available for roadway, access,

utility and drainage easements as may be identified and requested by the lessee from time

to time, but cautions that Arizona law may require that some of those easements be

purchased from the ASLD.

Construction of improvements. An ASLD commercial lease typically allows the

lessee to construct Improvements (which are permanent in character) and/or Removable

Improvements (which are not permanent in character), as permitted by applicable zoning

ordinances or the Approved Zoning obtained for the parcel. The lease may require the

lessee to submit an Application to Place Improvement (available on the ASLD’s website)

to the ASLD and obtain the ASLD’s approval, or may permit the lessee to construct

Improvements consistent with the Approved Parcel Development Plan without the need

to file a separate application. If a city is taking the lead in approving development, the

lessee generally must provide the ASLD with a copy of the site plan approved by the city,

and the ASLD will agree that its written approval of the site plan constitutes its

permission to construct the improvements depicted therein. The lessee must typically file

annual sworn statements describing any improvements placed on the premises during the

43 See Long-Term Leases on the ASLD’s website (note 41 above). The ASLD’s website cautions that it is

mandated by federal law and the Arizona Constitution to generate revenue for the trust beneficiaries, and

requires that all trust land lease transactions be in accordance with that responsibility and be in the best

interest of the trust; it further cautions that the trust cannot subsidize any purpose, no matter how

meritorious, at the expense of its beneficiaries. Id.

44 See Purchase and Commercial Lease Procedures and Fees on the ASLD’s website (note 37 above).

Also see Enabling Act § 28; Ariz. Const. Art. X, § 3.

45 See About the Auction Process on the ASLD’s website at http://www.land.state.az.us/programs/

realestate/auctions.htm.

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Michael P. Ripp of Ryley Carlock & Applewhite PA Speaker 14: 12

prior lease year and the value of those improvements. All improvements constructed by

the lessee continue to be the property of the lessee or its successor in interest, and the

owner of the Improvements and Removable Improvements is typically entitled to any

casualty insurance or condemnation proceeds resulting from the destruction or taking of

the Improvements or Removable Improvements. The Arizona Constitution and statutes

allow a lessee who makes permitted improvements to the land to obtain reimbursement

for at least a portion of the cost or value of improvements (typically from a subsequent

lessee). 46 The lease typically specifies the manner in which the reimbursement obligation

is calculated and the period over which the improvements are to be amortized, and

disallows a right to reimbursement for improvements that are dedicated or otherwise

committed or transferred to public use.

Assignments and subleases. The lessee typically has the right, without the

ASLD’s approval, to assign or encumber its leasehold interest for the purpose of

obtaining financing, but must normally obtain the ASLD’s prior written approval of other

assignments and subleases.

Leasehold mortgages. The lessee is typically allowed to create a “Permitted

Mortgage” of its leasehold interest if the mortgage is filed with the ASLD and the

mortgage expressly permits the disposition and application of condemnation awards in

the manner required by the lease. A leasehold mortgagee holding a Permitted Mortgage

normally receives the following benefits: (i) notices of lessee defaults and the right to

cure those defaults within the lessee’s cure period (normally 30 days after receipt of a

notice of default for non-payment of rent and 45 days for non-monetary defaults); (ii) a

continuing cure period if the leasehold mortgagee files with the ASLD a notice of its

intent to foreclose and commences a foreclosure action within certain time periods;

(iii) the ASLD’s agreement not to cancel the lease or take other action by reason of the

lessee’s default until the resolution of any foreclosure action; (iv) the right to receive an

assignment of the lease from the ASLD if the lessee rejects the lease in a bankruptcy

proceeding; (v) the rights to receive notices of any arbitration or legal proceedings under

the lease and to intervene in those proceedings; and (vi) the right to approve a consensual

termination or modification of the lease.

Cancellation. The ASLD is permitted to cancel the lease within three years of

execution, without penalty, if any person significantly involved in negotiating the lease

on behalf of the ASLD becomes an employee or consultant of any other party to the lease

while the lease is in effect. 47

Mandatory arbitration. The parties agree to mandatory arbitration under A.R.S.

§ 12-133.

46 See Ariz. Const. Art. X, § 10; A.R.S. §§ 37-321, -322, -322.01, -322.02.

47 See A.R.S. § 38-511.A. If cancellation occurs under this provision, a mortgagee of a lease for a term

longer than 10 years continues to have its rights under A.R.S. § 37-289 to notice, cure, hearing and appeal.

See A.R.S. § 38-511.B.

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Michael P. Ripp of Ryley Carlock & Applewhite PA Speaker 14: 13

What other ASLD lease concepts should a commercial lessee be familiar with?

Property taxes. Lessees from the ASLD are generally exempt from paying

property taxes on the land, but improvements are subject to taxation by the local taxing

authority. 48

Reclassification. The ASLD may cancel a lease upon a reclassification of the

land, either by application for reclassification or upon the ASLD’s initiative. 49 The lessee

at the time of reclassification has a preferred right to lease the reclassified land at the

reappraised rental. 50

Improvements. Any improvements placed on the land by the lessee, but not

approved in advance by the ASLD, are forfeited to the ASLD upon expiration or

cancellation of the lease, and the lessee is liable to the ASLD for damage to the land

caused by the unauthorized improvements and for demolition, removal and restoration

expenses incurred by the ASLD. 51 However, the lessee is entitled to reimbursement for

authorized improvements from the subsequent lessee or purchaser of the property. 52

Preferred right to renew lease. The lessee has a preferred right to renew the lease

for a term not to exceed ten years at a reappraised rental. 53 Not later than 90 days before

the expiration of the lease, the ASLD must notify the lessee by mail of the pending

expiration and send a copy of the notice to any registered mortgagees or other lienholders

by certified mail. 54 However, if the ASLD determines that the continued leasing of the

land to the lessee is not in the best interest of the state trust, the lease will not be

renewed. 55

48 See Benefits of Commercial Leasing on the ASLD’s website (note 37 above). Also see A.R.S.

§ 37-322.03.A.

49

See A.R.S. § 37-290.A. Such a reclassification may also occur upon approval of a development or

secondary plan for urban land that the State Land Commissioner has designated as suitable for a

development plan under A.R.S. § 37-334. See A.R.S. § 37-335.A.

50 See A.R.S. § 37-290.B. An existing lessee also has a preferred right to lease urban land following a

reclassification under A.R.S. § 37-335. The preferred right to lease the reclassified urban land is not

transferable and can be exercised only by the existing lessee. See A.R.S. § 37-335.C.

51 See A.R.S. § 37-321.A.

52 See A.R.S. § 37-322.02.A. A lessee of urban land whose lease is canceled due to reclassification under

A.R.S. § 37-335 may receive reimbursement for non-removable improvements under A.R.S. § 37-322.01

and to receive reasonable compensation for damages sustained by reason of the cancellation of the lease

under A.R.S. § 37-335.01.

53 See Ariz. Const. Art. X, § 10; A.R.S. § 37-291.A.

54 See A.R.S. § 37-291.C.

55 See A.R.S. § 37-291.B.

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Michael P. Ripp of Ryley Carlock & Applewhite PA Speaker 14: 14

Lessees and their counsel must consult the applicable Arizona statutes and heavily

involve the ASLD in the planning of a commercial project on state trust land, especially

in urban areas, as the requirements associated with such projects can vary substantially

and may require considerable collaboration with both ASLD staff and city or county

officials.

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Don J. Miner of Fennemore Craig, P.C. Speaker 15: 1

COMMERCIAL REAL ESTATE LEASES

PRACTICAL INFORMATION ON NEGOTIATING AND

ENFORCING COMMERCIAL LEASES

October 2 & 3, 2008

Wyndham Phoenix Hotel in Phoenix, AZ

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Don J. Miner of Fennemore Craig, P.C. Speaker 15: 2

Ground Leases of Native American Lands

Presented by: Don J. Miner

Cowritten by: Don J. Miner and Sarah Kubiak,

FENNEMORE CRAIG

3003 N. Central Avenue

Suite 2600

Phoenix, AZ 85012

These materials consider some of the unique aspects of ground leasing on Native

American lands for commercial development.

A. Unique Nature of Native American Lands

Native American tribal property ownership is a form of common ownership not

analogous to tenancy in common or other collective forms of ownership known to

American private property law. Tribal property interests are generally held in common

for the benefit of all living members of the particular Native American community. Two

main forms of tribal property ownership include:

1. Tribal Trust Land: Tribal trust land is land held in trust by the

federal government for the beneficial ownership of the tribe. The land may be located

within or outside the boundaries of a reservation. The Secretary of the Interior, through

the Bureau of Indian Affairs (“BIA”), has been delegated responsibility for

administration and management of approximately 55.7 million acres of land held in trust

by the United States for Native Americans.

2. Allotments: Allotments consist of parcels of land that either the

federal government holds in trust for individual tribal members ("trust" allotments) or

tribal members hold in fee subject to a statutory restriction on alienation ("restricted"

allotments). Many allotments remain within the boundaries of reservations. For

example, the Gila River Indian Reservation includes approximately 97,438 acres of

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Don J. Miner of Fennemore Craig, P.C. Speaker 15: 3

allotted lands and the Salt River Reservation includes approximately 25,158 acres of

allotted lands.

The following principles are central to Native American lands:

1. A Native American nation possesses powers of a sovereign state

and enjoys a government-to-government relationship with the United States. These

powers of a sovereign state include the principle of tribal sovereign immunity. The

handling of this principle in agreements with Native American tribes significantly affects

rights, remedies and obligations of the parties as well as enforceability of an agreement

for Native American lands.

2. Native American tribes constitute separate governmental

authorities with regulatory powers.

3. State or local authority in Native American affairs is quite limited.

State and local regulation of the use of Native American property is generally prohibited.

4. State law may apply to leases of Native American lands and

disputes arising therefrom only if the lease expressly so provides.

B. Ground Leasing of Native American Lands

Due to the inalienability of most Native American lands, ground leases have been

critical for development. Leasing of Native American lands is allowed by statute upon

approval by the BIA. Ground leases have allowed many tribes to lease tribal lands for an

extended term to tenants who develop and construct improvements upon these properties.

A ground lease is usually a long-term land lease (usually 45 to 99 years) that

typically involves commercial property. Improvements built by the tenant usually revert

to the landlord at expiration or termination of the ground lease. Because the tenant’s

ownership of the improvements and possessory interest in the land are “leasehold

estates,” his rights end upon termination or cancellation of the lease.

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Don J. Miner of Fennemore Craig, P.C. Speaker 15: 4

C. Special Issues Relating to Leases of Native American Lands

Aside from the issues that normally arise as a result of the special nature of

ground leases, the leasing of Native American lands imposes additional issues to

consider, including:

a. Timing of negotiating the lease. Negotiating leases for Native

American lands may take substantially more time because of the number of landowners

and because of additional layers of governmental agency review and approval.

Identifying and obtaining landowner signatures may take considerable time and require

particular expertise.

b

approved by the BIA.

Federal government approval required: Generally, leases must be

c. Restraints of Alienation & Length of the Lease Term. The length

of the term of the ground lease on Indian lands is governed by statute. The duration of

commercial ground leases is generally limited to a maximum of 50 years. Through

special congressional legislation, specific tribes are exempt from the 50 year restriction

and may enter into leases for a term "not to exceed 99 years" (e.g. Salt River, Pima-

Maricopa, San Carlos Apache Reservation, Yavapai-Prescott, Gila River Reservation).

d. Waiver of sovereign immunity; dispute resolution. Tribes possess

common law immunity from suit similar to that traditionally enjoyed by sovereign

powers. Generally, absent an express and unequivocal waiver of immunity by the tribe or

Congress, a Native American tribe cannot be sued in federal, state or tribal courts. A

contractual waiver should identify the tribe waiving immunity, expressly waive sovereign

immunity and specifically designate a forum that will have jurisdiction over disputes

arising from the lease agreement.

e. Arbitration: Some tribes do not want a lease agreement to be

governed by state law nor do they want to submit to state courts. Dispute resolution by

arbitration governed by federal law and procedures is often used to resolve disputes

where arbitration can be utilized. Some tribes, such as the Salt River Pima-Maricopa

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Don J. Miner of Fennemore Craig, P.C. Speaker 15: 5

Community, have lobbied for and obtained an amendment to the U.S. Code that expressly

permits a lease to contain an arbitration clause. To ensure that a choice to arbitrate

disputes is enforceable, a lease should contain a clear and unequivocal waiver by the

Indian tribe of its sovereign immunity from suit in federal or Arizona courts or Congress

must have otherwise waived its sovereign immunity.

f. Applicable Law: Leases of Indian lands are subject to federal laws

of general applicability. Tribal laws also generally apply to land under the jurisdiction of

the tribe. If the parties prefer to have state law apply to lease disputes or define the

remedies available to the parties, the lease must specifically provide for state law to apply

and Indian landowners must have expressly agreed to the application of state law.

g. Protecting Tax Advantages. Tribes have the power to tax except

when limited by federal law. The power to tax is an essential part of tribal sovereignty.

Tribes and states have concurrent authority to tax with respect to some non-Indian

activity within Indian country boundaries. This could give rise to a potential of multiple

taxation and parties may want to consider this potential issue.

h. Financing. When negotiating a ground lease, a tenant will want to

ensure that the lease terms allow for the leasehold estate to be one that a lender will be

willing to finance. Many tenants would like for a landlord to allow his fee interest in the

land to be subjected to the tenant’s mortgage on the land and building. Such an

arrangement is not possible with tribal lands. Thus, in negotiating a ground lease, it is

critical that a tenant keep a lender’s interests in mind and adequately provide for them.

Lenders typically want to see certain provisions in ground leases, including: (i) a

right to notice and ample opportunity to cure in favor of mortgagee, (ii) a lease term

significantly more lengthy than the loan term; (iii) mortgagee having the legal right to

exercise options to extend the lease, (iv) increases in the base rent limited so as not to

impact the project’s ability to pay debt service, (v) a right to assign in connection with

financing, including leasehold mortgages, foreclosure sale and refinancing, (vi) ability of

lessee to sell or transfer the leasehold estate, (vii) liberal ability to lease space in the

improvements to occupancy subtenants, (viii) right to cause the lease to be assigned to

4

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Don J. Miner of Fennemore Craig, P.C. Speaker 15: 6

the mortgagee in the event of lessee default; (ix) right to cause a new lease to be entered

into directly between landlord and lender in the event of tenant default (in lieu of

potential lease termination) (x) provisions that lease will not be amended or terminated

without consent of mortgagee, (xi) a provision by which a ground lease will not be

terminated as long as the lender does what it is reasonably able to cure the default after

failure of the tenant so to do, and (xii) provisions to obtain lessor estoppel certificates.

i. Subleasing & Assignment. Subleasing, assignment, amendment or

encumbrance of any lease may only be made upon the approval of the BIA. The BIA

allows a ground lease to contain a provision authorizing sublease the premises, in whole

or in part, without further approval.

j. Rent. Since the lessee owns the improvements, the rental to be

paid is typically based only on the fair market rental value of the land, exclusive of

improvements, development or the contribution value of improvements. The BIA

requires leases to be at present fair annual rental, subject to certain exceptions.

k. Permitting Process/Pre-Construction. The special circumstances of

Native American lands and tribal sovereignty may lead to uncertainties regarding

jurisdiction, zoning and use limitations and construction permits. Many tribes employ

their own land use and permitting procedures, but some do not. Developers will need to

ensure that lessor and proper authorities, including the tribes, are appropriately involved

in the process.

l. Other Issues may include:

(i) Whether an unincorporated association created as a tribal

enterprise to develop and manage the Indian community’s real property has a distinct

legal status and the ability to enter into contracts or hold property.

(ii) Whether a sufficient number of the allottees holding

particular Native American lands have properly executed a lease.

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Don J. Miner of Fennemore Craig, P.C. Speaker 15: 7

(iii) Compliance with applicable tribal law for business and

other activities conducted on reservations.

(iv) Recognition of and compliance with employment

preference obligations that many tribes seek from non-Indian businesses operating on

tribal lands.

Development on Native American lands can present significant

opportunity for those aware of and equipped to deal with the unique issues arising from

the nature of these lands.

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Don J. Miner of Fennemore Craig, P.C. Speaker 15: 8

Issues Relating to Leases on Native American Reservations

Presented by: Don J. Miner

Cowritten by: Don J. Miner, Sarah Kubiak,

and Almira Torralba

II.

SCOPE OF MATERIALS

These materials will focus on the unique nature of Native American lands and

issues that arise within the context of leasing land on Native American reservations for

commercial development. Readers should bear in mind that the materials presented

herein reflect only the viewpoints of the authors and are not intended as and may not be

construed as legal advice or an opinion binding upon the authors or their firm. For legal

advice, readers should consult with a qualified lawyer on the particular matter with which

they may be confronted.

III.

INTRODUCTION

In a foundational decision, Chief Justice John Marshall stated: "The condition of

the Indians in relation to the United States in perhaps unlike that of any other two people

in existence… marked by peculiar and cardinal distinctions which exist nowhere else."

Cherokee Nation v. Georgia, 30 U.S. 1, 16 (1831). This statement is a useful lens for

considering the many issues that arise in connection with development and leasing on

Native American lands. For example, unlike the common law property regime, which

presumes individual ownership interests and alienability of property, tribal land is

collectively owned and unalienable; while the regulation of real property is typically the

domain of the state, the field of the regulation of tribal land is almost exclusively

occupied by the federal government. In addition, the principal of tribal sovereign

immunity and the handling of this principal in agreements with tribes significantly affect

the remedies, enforcements and obligations on Native American lands.

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Don J. Miner of Fennemore Craig, P.C. Speaker 15: 9

The following principles are central to all aspects of Native American law 1 :

1. An Indian nation possesses powers of a sovereign state and

enjoys a government-to-government relationship with the United States.

2. The federal government has broad authority to regulate Indian

affairs, subject to constitutional constraints.

3. State authority in Indian affairs is limited.

4. Native American tribes constitute separate governmental

authorities with regulatory authority.

IV.

SOURCES

Researching a Native American law issue may require consulting a broad variety

of sources including: the United States Constitution, principles of international law,

treaties with individual Native American tribes, federal statutes and regulations,

executive orders, and judicial opinions. It is important to keep in mind that each tribe has

a unique relationship with the United States government. Laws that affect one tribe may

not necessarily affect all tribes. See, e.g., 25 U.S.C. § 416(a) ("Any contract, including a

lease, affecting land within the Salt River Pima-Maricopa Indian Reservation may

contain a provision for the binding arbitration of disputes arising out of such contract.")

Sources that pertain to leasing tribal property include the following:

1. 25 U.S.C. § 415 et seq. (Indian Long-Term Leasing Act)

2. 25 CFR § 162 et seq. (Indians, Leases and Permits)

3. Each tribe’s constitution, codes and ordinances. Tribal codes and

ordinances often function much like a municipality or a county.

4. Case law of federal courts, especially the Supreme Court.

1 The general principals outlined above are identified in COHEN'S HANDBOOK OF FEDERAL INDIAN

LAW (2005), 1 - 3. Chapter 4 of COHEN'S ("Indian Tribal Governments") provides a detailed discussion

of Indian tribal governments and their relationship to and interaction with federal and state governments.

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Don J. Miner of Fennemore Craig, P.C. Speaker 15: 10

V. NATURE OF PROPERTY RIGHTS

Tribal property is a form of ownership in common that is not analogous to

tenancy in common or other collective forms of ownership know to Anglo-American

private property law. COHEN'S, 966. An individual tribal owner has no alienable or

inheritable interest in the communal holding. Id. Tribal property interests are held in

common for the benefit of all living members of the tribe. Id.

1. Tribal Trust Land: Tribal trust land is land held in trust by the

federal government for the beneficial ownership of the tribe. 2 The land may be located

within or outside the boundaries of the reservation. The Bureau of Indian Affairs (BIA)

has been delegated the responsibility for the administration and management of 55.7

million acres of land held in trust by the United States for Native Americans, Indian

tribes, and Alaska Natives. 3

2. Allotments: Allotments consist of parcels of land that either the

federal government holds in trust for individual tribal members ("trust" allotments) or

tribal members hold in fee subject to a statutory restriction on alienation ("restricted"

allotment). 4 Many allotments remain within the boundaries of reservations. For

example, the Gila River Indian Reservation includes 97,438 acres of allotted lands and

the Salt River Reservation includes 25,158 acres of allotted lands. 5

3. Other land interests that may be located within a reservation

include: tribal fee lands, fee lands held by non-Indians, federal public lands, or county

and state lands.

2 The federal government's control over Indian lands was first described by the Supreme Court in Johnson

v. M'Intosh. 21 U.S. (8 Wheat.) 543 (1823). In this decision, the Supreme Court held that private citizen

could not directly purchase land from Native Americans and that based on longstanding practices of

European colonization, the United States had acquired exclusive title to all of the American lands, subject

only to the Native American rights of use and occupancy.

3 The BIA has broad regulatory power over Indian affairs. 25 USC §§ 2, 9, 13.

4 The allotment process began with passage of the Indian General Allotment Act (Dawes Act). Ch. 119, 24

Stat. 388 (1887). This Act initiated the privatization of Indian land by removing ownership and control of

land from the tribes, dividing it into fragmented parcels, and conveying the partitions to individual Native

Americans in trust. Kathleen R. Guzman, Give or Take an Acre: Property Norms and the Indian Land

Consolidation Act, 85 Iowa L. Rev. 595 (2000).

5 Indian Reservations: A State and Federal Handbook (1986), complied by the Confederation of American

Indians provides information on land status of most federally recognized tribes in the United States.

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Don J. Miner of Fennemore Craig, P.C. Speaker 15: 11

VI.

JURISDICTION

Determining the limits of tribal authority can be difficult. Not all Native

American property is located within the geographical boundaries of a reservation and

some property within a reservation may be individually owned in fee. The term "Indian

country" has evolved over time to refer to "the territory set aside for the operation of

special rules allocating governmental power among Indian tribes, the federal

governmental, and the states." COHEN'S, 135. The term was formally defined by

Congress in a federal criminal statute. See 18 U.S.C § 1151. Even though this definition

by its terms applies to specific sections of a criminal statute, the Supreme Court has also

employed this term to determine the geographical reach of the supremacy of tribal law in

certain civil contexts. See AMERICAN INDIAN LAW DESKBOOK (1998, 2nd Ed.),

36-37. Courts have defined Indian country broadly to include formal and informal

reservations, dependant Indian communities and Indian allotments, whether restricted or

held in trust by the United States.

The state of Arizona has limited regulatory authority over tribal lands within the

state. The Arizona-New Mexico Enabling Act, by which Congress allowed Arizona to

enter the United States, provides as follows:

That the people inhabiting said proposed State do agree and declare that

they forever disclaim all right and title to unappropriated and ungranted

public lands lying within the boundaries thereof and to all lands lying

within said boundaries owned or held by any Indian or Indian tribe, the

right or title to which shall have been acquired through or from the United

States or any prior sovereignty, and that until the title of such Indian or

Indian tribe shall have been extinguished, the same shall be and remain

subject to the disposition and under the absolute jurisdiction and control of

the Congress of the United States;

Act of June 20, 1910, c. 310, 36 U.S. Stat. 557, 568-579, § 20. See also, Ariz. Const. art.

XX, § 4 (same language as above). However, the state does have limited regulatory

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Don J. Miner of Fennemore Craig, P.C. Speaker 15: 12

authority over activities of non-Indians in Indian country. See, Mountain Apache Tribe v.

Bracker, 448 U.S. 136 (1980).

While a full discussion of jurisdiction issues is beyond the scope of this

presentation, within the context of leasing trust and restricted lands, this issue has been

constrained by federal legislation.

1. State and local regulation of the use of Native American property

is expressly prohibited. 25 CFR §1.4(a) states in pertinent part:

"[N]one of the laws, ordinances, codes, resolutions, rules or other

regulations of any State or political subdivision thereof limiting,

zoning or otherwise governing, regulating, or controlling the use or

development of any real or personal property… shall be applicable

to any such property leased… that is held in trust by the United

States or is subject to a restriction against alienation imposed by

the United States."

2. State law may apply to lease disputes, if the lease so provides.

25 CFR 162.109.

VII.

LONG TERM LEASING OF NATIVE AMERICAN LAND

Due to the inalienability of Native American lands, ground leases have been

critical in allowing for the development of such lands. Leasing of Native American

lands, whether tribally or individually owned, is allowed by statute upon approval by the

Secretary of the Interior. 25 U.S.C. § 415(a), 25 C.F.R. § 162.604(a). Ground leases

have allowed the Bureau of Indian Affairs and Tribal Councils to lease tribal lands for an

extended term to a tenant who intends to develop the property by constructing

improvements or renovating existing improvements on the land.

A. Ground Lease

Black's Law Dictionary defines a ground lease as "a long-term (usually 99 year)

lease of land only; such a lease typically involves commercial property, and any

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Don J. Miner of Fennemore Craig, P.C. Speaker 15: 13

improvements built by the tenant usually revert to the landlord." (8th ed. 2004). Ground

leases differ from the typical commercial leases in that they are typically for much longer

terms, the lessee constructs its own improvements, and the tenant usually needs mortgage

loan financing secured by the improvements.

A distinguishing characteristic of a ground lease is that while the landlord holds

fee title and a reversionary interest upon expiration of the lease in the land, the tenant

owns the equity in the improvements. Further, because the tenant’s ownership of the

improvements and possessory interest in the land are “leasehold estates,” his rights end

upon termination or cancellation of the lease. Thus, when the lease ends, the landlord

will obtain full ownership and possession of the land and the real property improvements

installed on the land by the tenant.

Aside from the natural expiration of the lease term, the tenant’s right to

possession may be terminated in a number of circumstances and for a variety of reasons,

including without limitation, failure to exercise an option to renew, defaulting on the rent

without completion of a cure, defaulting on other, non-monetary obligations without

completion of a cure, damage or destruction without rebuilding, and condemnation.

B. Special Issues

Aside from the issues that normally arise as a result of the special nature of

ground leases, the added complexities of leasing Native American lands lead to an

additional layer of issues a tenant or developer will have to consider before entering into

a ground lease on Native American lands.

1. Identifying the Landlord and Negotiating the Lease.

Negotiating the leases for Native American land may take substantially more time

than a typical ground lease because of the number of landowners involved and because

of the additional layers of governmental agency review and approval.

a. Problem of Fractionation: Since the Dawes Act,

ownership of allottees land has become increasingly fractionated. Lands allotted to

individual Native American have passed from generation to generation. Because of

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the restraints on alienation and the application of intestacy laws to the land interests

of deceased property owners (wills are not commonly used by Native Americans),

the size of land interests are continually diminished as they are divided among

heirs. For example, a land parcel of 160 acres once owned three generations or so

ago by a single Native American head of a family may now have more than 70

owners with each individual beneficiary having an undivided fractional interest in

the parcel. 6 Identifying signatories and gathering signatures may take a

considerable amount of time. For example, one joint venture's lease of 160 acres of

land from the Salt River Pima-Maricopa Indian Community involved 200 families

in the community. Sheila Muto, Development Increases at Indian Reservations,

Wall Street Journal (October 11, 2004).

b. Government approval required: Generally, all leases

must be approved by Secretary of the Interior. 25 U.S.C. § 415(a). Among other

things, the Secretary must consider "the effect on the environment of the uses to

which the leased lands will be subject" before approving a lease under §415.

2. Restraints of Alienation & Length of the Lease Term

The length of the term of the ground lease on trust or restricted Indian lands is

governed by statute. 25 U.S.C. § 415. ''Trust or restricted lands'' means lands, title to

which is held by the United States in trust for one or more Native Americans, a tribe, or

lands title to which is held by one or more Native Americans or a tribe subject to a

restriction by the United States against alienation. 25 U.S.C. §2201(4). Restricted lands

cannot be sold by any individual or tribe and lease terms are regulated by federal statute

and applicable federal case authority.

6 Beginning with the passage of the Indian Land Consolidation Act of 1983, the federal government has

been trying to reduce the problem of fractionation by consolidating individual Indian land ownership

interests into tribal ownership. 25 USC §§ 2201 – 2219. Since its passage, the ILCA has been amended

several times and provision of the ILCA have been struck down by the Supreme Court as unconstitutional

takings without just compensation. In 2004, Congress enacted the most recent amendments to the ILCA

(The American Indian Probate Reform Act of 2004, Pub. L. No. 108 – 374, 118 Stat. 1773 (2204)).

Among other things, the legislation provides a clearer method to pass individual Indian land ownership

from one generation to the next by creating a uniform federal Indian probate code.

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Don J. Miner of Fennemore Craig, P.C. Speaker 15: 15

a. 25 U.S.C. § 415(a) regulates leases for general

business purposes, such as commercial development. This section applies to "[a]ny

restricted Native American lands, whether tribally, or individually owned…" and

provides that restricted land may be leased by the Indian owners for "public,

religious, educational, recreational, residential, or business purposes.." for limited

durations of time. The duration of such leases is generally limited to a maximum of

50 years. Id.

(i)

Initial lease term "not to exceed 25 years". Id.

(ii) Lease may include provisions authorizing renewal

for "one additional term not to exceed 25 years". Id (emphasis added).

(iii) Specific tribes are exempt from the 25 year

restriction and may enter into leases for a term "not to exceed 99 years" (e.g. Salt River,

Pima- Maricopa, San Carlos Apache Reservation, Yavapai-Prescott, Gila River

Reservation). Id.

(iv) With respect to lands for which the lease term may

extend for up to 99 years, however, if the initial lease term extends for more than 74

years, it may not be renewed. Id.

3. Tribal Sovereignty & Dispute Resolution

a. Waiver of Immunity Required: Tribes possess

common law immunity from suit similar to that traditionally enjoyed by sovereign

powers. Santa Clara Pueblo v. Martinez, 436 U.S. 49, 58 (1978). Absent an

express and unequivocal waiver of immunity by the tribe or Congress, a Native

American Indian tribe cannot be sued in federal, state or tribal courts. Id. Under

certain circumstances, a Native American tribe may be deemed to have waived its

sovereign immunity from suit in state courts by both agreeing in a lease or

agreement to submit certain claims to arbitration and also by including a choice of

law provision designating which court shall have jurisdiction over the proceedings

and enforcement of the award. C & L Enterprises v. Citizen Band Potawatomi

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Indian Tribe of Oklahoma, 532 U.S. 411 (2001). Some tribes, such as the Salt

River Pima-Maricopa Community, have lobbied for and obtained a congressional

amendment to the U.S. Code that expressly provides that a lease agreement may

contain an arbitration clause. 25 U.S.C. § 416(a) ("Any contract, including a lease,

affecting land within the Salt River Pima-Maricopa Indian Reservation may contain

a provision for the binding arbitration of disputes arising out of such contract."). If

given the opportunity to draft or negotiate a contractual waiver of sovereign

immunity, do not rely an implied waiver of sovereign immunity. A valid

contractual waiver should identify the tribe waiving immunity, expressly waive

sovereign immunity and specifically designate a forum that will have jurisdiction

over disputes arising from the lease agreement.

b. Arbitration: Some tribes do not want a lease

agreement to be governed by state law nor do they want to submit to state courts.

Dispute resolution by arbitration governed by federal law and procedures is often

used to resolve disputes where arbitration can be utilized. To ensure that arbitration

proceedings provided for are enforceable, the lease should contain a clear and

unequivocal waiver by the Indian tribe of its sovereign immunity from suit in

federal or Arizona courts or Congress must have otherwise waived its sovereign

immunity. Santa Clara Pueblo, 436 U.S. at 58.

c. Enforcement of Arbitration: United States District

Courts have jurisdiction over disputes arising under the Constitution, laws or

treaties of the United States. 28 U.S.C. § 1331. Binding arbitration provisions may

be enforceable in federal courts under the Federal Arbitration Act, 9 U.S.C. § 1, et.

seq.. If a party fails to arbitrate under an agreement with a binding arbitration

provision, the opposing party may petition any United States District Court that

would otherwise have jurisdiction under the agreement to compel arbitration. 9

U.S.C. § 4. As long as the binding arbitration provision is in writing and the

dispute arises out of the agreement, a sufficient provision should be valid and

enforceable under federal law. 9 U.S.C. § 2.

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Don J. Miner of Fennemore Craig, P.C. Speaker 15: 17

d. Applicable Law: Leases of Indian lands are subject to

federal laws of general applicability. 25 C.F.R. § 162.109(a). Tribal laws also

generally apply to land under the jurisdiction of the tribe enacting such laws. 25

C.F.R. § 162.109(b). If the tenant would prefer to have state law apply to lease

disputes or define the remedies available to the Indian landowners in the event of a

lease violation by the tenant, the lease must specifically provide for state law to

apply and Indian landowners must have expressly agreed to the application of state

law. 25 C.F.R. § 162.109(c). It is important to note that even if a lease may

provide for lease disputes to be resolved in tribal court or any other court of

competent jurisdiction, or through arbitration or some other alternative dispute

resolution method, the United States Bureau of Indian Affairs “may not be bound

by decisions made in such forums” but “will defer to ongoing proceedings, as

appropriate, in deciding whether to exercise any of the remedies available.” 25

C.F.R. § 162.612(c).

4. Protecting Tax Advantages

Tribes have the power to tax except when limited by federal law. COHEN'S, 714.

The power to tax is an essential part of tribal sovereignty. Lessees who have

challenged the tribal authority to tax have failed. See, e.g., Kerr-McGee Corp. v.

Navajo Tribe, 471 U.S. 195 (1985). Tribes and states have concurrent authority to tax

with respect to some non-Indian activity within Indian country boundaries. See, e.g.,

Cotton Petroleum Corp. v. New Mexico, 490 U.S. 163 (1989). This gives rise to the

problem of multiple taxation in which the state and tribe both tax the same activity or

property. Therefore, the lease should clearly allocate the parties responsibilities with

respect to taxes.

5. Financing

When negotiating a ground lease, a tenant will want to ensure that the lease terms

allow for the leasehold estate to be one that a lender will be willing to finance. Most

tenants would like for a landlord to allow his fee interest in the land to be subjected to the

tenant’s mortgage on the land and building for purposes of financing the project. Such an

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Don J. Miner of Fennemore Craig, P.C. Speaker 15: 18

arrangement is not possible with tribal lands. Thus, in negotiating a ground lease, it

becomes critical that the tenant keep a lender’s interests in mind and provide adequately

for them if he would like to obtain financing.

From the lender’s perspective a leasehold mortgage contains additional risks.

Upon foreclosure of a leasehold mortgage, the lender becomes the tenant under the

ground lease and does not acquire any other interest in the fee. Thus, upon foreclosure,

the lender will be required to pay the rent and comply with the terms and conditions of

the ground lease. However, there is also a risk that the landlord will choose to simply

cancel the lease upon tenant’s default, thereby resulting in the lender’s loss of collateral.

In light of this risk, a lender will want to see certain provisions in the ground

lease. Some of the important provisions to a lender will include: (i) the mortgagee

having the legal right to exercise options to extend the lease, (ii) increases in the base rent

must be limited so as not to impact the project’s ability to pay debt service, (iii) the right

to assign in connection with financing, including leasehold mortgages, foreclosure sale

and refinancing, (iv) reasonable ability of the tenant to sell or transfer the leasehold

estate, (v) ability to lease space in the improvements for occupancy by rent-paying

subtenants, (vi) right to assign the lease to the lender in the event of tenant default

(instead of automatic termination of the lease), (vii) a provision that the lease will not be

amended or voluntarily terminated without the consent of the leasehold mortgagee, and

(viii) a provision by which a ground lease will not be terminated as long as the lender

cures default after the failure of the tenant so to do.

Subleasing, assignment, amendment or encumbrance of any lease may only be

made upon the approval of the Secretary of the Interior. 25 C.F.R. § 162.610(a). Thus,

the tenant may want the provisions important to a lender to be included in the original

ground lease submitted to the Secretary for his approval so as to prevent having to obtain

subsequent approvals for amendments.

6. Subleasing & Assignment

The Secretary allows a ground lease to contain a provision authorizing the lessee

to sublease the premises, in whole or in part, without further approval. 25 C.F.R. §

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Don J. Miner of Fennemore Craig, P.C. Speaker 15: 19

162.610(b). Including provisions for subleasing and sub-subleasing is important given

the length of time it may take to obtain federal and tribal approval of subleases.

With the Secretary’s consent, the lease may also contain provisions authorizing

the lessee to encumber his leasehold interest in the premises for the purpose of borrowing

capital for the development and improvement of the leased premises. 25 C.F.R. §

162.610(c). The encumbrance instrument, however, will need to be approved by the

Secretary. Id.

In the event that the tenant defaults and the lender has to take the place of the

tenant, the Secretary will allow the lender to assign the leasehold without the Secretary’s

approval or the consent of the other parties to the lease, provided, however, that the

assignee accepts and agrees in writing to be bound by the terms and conditions of the

ground lease. 25 C.F.R. § 162.610(c).

7. Rent

Since the tenant owns the improvements on the property, the rental fee to be paid

is typically only based on the fair market rental value of the land, exclusive of

improvements or development required by the contract or the contribution value of the

improvements. Aside from a minimum annual rent or base rent, the Native American

tribe may also require an additional rent over and above the minimum annual rent. One

typical calculation for the additional rent is a sum equal to the difference between the

minimum annual rent and a previously-determined percentage of the gross receipts of the

businesses operated on the leased lands.

The Secretary mandates that all leases must be at the present fair annual rental,

subject to certain exceptions. 25 C.F.R. § 162.604.

8. Renewal Term

Leases on Native American lands sometimes require periodic review, sometimes

at not less than 5-year intervals, of the “equities” involved. The Secretary of the Interior

requires these reviews to “give consideration to the economic conditions at the time,

exclusive of improvements or development required by the contract or the contribution

value of such improvements.” 25 C.F.R. § 162.607.

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Don J. Miner of Fennemore Craig, P.C. Speaker 15: 20

9. Permitting Process/Pre-Construction

The special circumstance of the Native American lands and tribal sovereignty

may lead to uncertainties regarding jurisdiction. It may not be apparent whether city or

county ordinances apply to tribal lands. This becomes an issue that a tenant/developer

will have to deal with during the pre-construction phase. The developer will have to

ensure that the landlord, in this case the tribes and the Secretary, are involved in the

permitting process. In addition, the developer will also have to determine which

governmental authorities have jurisdiction over the leased lands.

10. Surety Bonds

The tribe or the Secretary may require a lessee to provide a surety bond in an

amount that will reasonably assure performance of the contractual obligations under the

lease. A bond may be used to guarantee a year’s rental, the estimated construction cost of

any improvements to be placed on the lease lands, or to insure compliance with

additional contractual obligations.

C. Other Issues:

1. Whether an unincorporated association created as a tribal

enterprise to develop and manage the Indian community’s real property has a distinct

legal status and the ability to enter into contracts or hold property.

2. Whether a sufficient number of the allottees holding particular

Native American lands have property executed a lease agreement or related document.

3. Compliance with applicable tribal law for business and other

activities conducted on reservations or Native American lands.

4. Recognition and compliance with employment performance

obligations that many tribes seek to impose upon non-Indian business operating on

tribal lands.

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Don J. Miner of Fennemore Craig, P.C. Speaker 15: 21

TABLE OF CONTENTS

TO

ISSUES RELATING TO LEASES ON

NATIVE AMERICAN RESERVATIONS

Page

I. SCOPE OF MATERIALS ..................................................................................... 1

II. INTRODUCTION ................................................................................................. 1

III. SOURCES.............................................................................................................. 2

IV. NATURE OF PROPERTY RIGHTS .................................................................... 3

V. JURISDICTION .................................................................................................... 4

VI. LONG TERM LEASING OF NATIVE AMERICAN LAND .............................. 5

A. Ground Lease ............................................................................................. 5

B. Special Issues ............................................................................................. 6

1. Identifying the Landlord and Negotiating the Lease ..................... 6

2. Restraints of Alienation & Length of the Lease Term ................... 7

3. Tribal Sovereignty & Dispute Resolution ...................................... 8

4. Protecting Tax Advantages .......................................................... 10

5. Financing...................................................................................... 10

6. Subleasing & Assignment ............................................................ 11

7. Rent .............................................................................................. 12

8. Renewal Term .............................................................................. 12

9. Permitting Process/Pre-Construction ........................................... 13

10. Surety Bonds ................................................................................ 13

C. Other Issues:............................................................................................. 13

2109976.1/99500.031 -i-

L A W S E M I N A R S I N T E R N A T I O N A L

A Comprehensive Two-Day Conference on

Commercial Real Estate Leases

Practical information on negotiating and enforcing commercial leases

October 2 and 3, 2008

Phoenix, AZ

Special Issues for Shopping Centers

Judi Butterworth

De Rito Partners, Inc.

Phoenix, AZ

Karen Solheim

Solheim Research

Santa Monica, CA

Judi Butterworth of De Rito Partners, Inc. Speaker 16a: 1

Judi Butterworth of De Rito Partners, Inc. Speaker 16a: 2

Judi Butterworth of De Rito Partners, Inc. Speaker 16b: 1

DE RITO PARTNERS, INC.

presented by

Judi Butterworth

Principal

Law Seminars International

Commercial Real Estate Leases

Friday, October 3, 2008

Judi Butterworth of De Rito Partners, Inc. Speaker 16b: 2

Judi Butterworth of De Rito Partners, Inc. Speaker 16b: 3

Judi Butterworth of De Rito Partners, Inc. Speaker 16b: 4

Judi Butterworth of De Rito Partners, Inc. Speaker 16b: 5

Judi Butterworth of De Rito Partners, Inc. Speaker 16b: 6

Judi Butterworth of De Rito Partners, Inc. Speaker 16b: 7

CHALLENGES

• Procure New Major Tenant(s)

• Reduced rent for second generation tenants/pro

forma issues

• Condition of immediate trade area

• Existing tenant restrictions and exclusions

• Construction surprises

• Tenant improvement dollars

• Zoning

• City processes

• Timing

• Financing

Judi Butterworth of De Rito Partners, Inc. Speaker 16b: 8

Judi Butterworth of De Rito Partners, Inc. Speaker 16b: 9

Judi Butterworth of De Rito Partners, Inc. Speaker 16b: 10

Judi Butterworth of De Rito Partners, Inc. Speaker 16b: 11

LEASE ISSUES

• Lease terms

• Options

• CAM & management expenses

• Right to relocate

• Use clause and exclusives

• Co-tenancy requirements

Judi Butterworth of De Rito Partners, Inc. Speaker 16b: 12

DE RITO PARTNERS, INC.

Karen Solheim of Solheim Research Speaker 17: 1

HOW WE GOT TO WHERE WE ARE: SHOPPING CENTERS WITHOUT ROOFS

Today there is much discussion of a “new” and exciting type of shopping center: the

roof-less lifestyle center. In order to understand this concept, it is necessary to put it into

perspective. Today, I will provide that perspective by reviewing the history of major

destination shopping centers.

My comments will apply specifically to those shopping destinations that focus on

retailers who sell what is often called “comparison shoppers goods” or “DSTM, i.e.

department store type merchandise”. These stores, and the shopping centers, offer a

wide range of goods, including:

o

clothes,

shoes,

cosmetics,

dishes and housewares,

furniture,

jewelry,

books,

electronics and music.

You may have heard the term GAFO in news reports, as this is the Census Bureau’s

name for this category of merchandise. These are the stores that make up the majority

of space in our larger shopping centers. My comments will focus on these types of

shopping centers.

FIRST – WHAT IS A MALL”?

We have to start with croquet. What does croquet have to do with shopping malls?

According to NotAMall.com, the word "mall" is derived from the name of the lawn game

that ultimately became known as croquet.

An early version of a lawn bowling game evolved in France sometime during the 14th

century and became known as "Paille-Maille" (ball-mallet). The game was picked up by

the Scottish in the 16th century and was reportedly brought to London in 1604 by James

I (the king formerly known as James IV of Scotland) when his paille-maille equipment,

and his golf clubs, came with him.

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Karen Solheim of Solheim Research Speaker 17: 2

Then, in the 17th century, Charles II and members of his court played the game in

London's St. James Park. The name of the game evolved to the English version "Pall-

Mall". A nearby London street that runs between Buckingham Palace and Trafalgar

Square became known as the "Mall" where major public parades and events take place.

The term "mall" gradually became a generic name for a public gathering place, often a

pedestrian-friendly area lined with shops offering goods for sale.

The original “malls”, therefore, were open-air like the Washington Mall in our nation’s

Capitol. You probably remember a number of downtown re-development projects called

“malls”.

With time, the usage has changed to apply to enclosed centers.

BEGINNINGS – SHOPPING PROVIDED BY RESIDENTIAL BUILDERS

For perhaps 3,000 years or more, merchants offering GAFO goods for sale grouped

themselves into marketplaces where they could sell next door to other merchants. In

America, downtowns became the center of retailing. While the stores of Manhattan were

probably best known, every major US city had a retailing downtown.

Then, in 1922, a residential builder got into the business of providing retailing. J.C.

Nichols of Kansas City, Missouri opened the first planned business district away from

downtown. Called Country Club Plaza, this shopping district was intended to serve the

needs of the new residents of his large-scale residential development. Country Club

Plaza offered a number of firsts, among them:

o

unified architecture,

automobile-oriented center, with paved and lighted parking lots,

managed and operated as a single unit,

first to be called a “shopping center”,

percentage rents, used for the first time, and

longest life of any shopping center in the world – it is still in business.

Nine years later, another residential developer, Hugh Prather, developed Highland Park

Shopping Village in Dallas, Texas. This project was also built to serve the needs of the

residents of the surrounding Highland Park residential community. The most unique

feature of this center was its inward-facing buildings, built on a single site. As such, it

was not bisected by public streets like Country Club Plaza.

SECOND ERA OF SHOPPING OUTSIDE OF DOWNTOWN

In the 1930’s and 1940’s, Sears Roebuck & Co. and Montgomery Ward opened large

freestanding stores away from the center of big cities. While these were often just one

department store all alone, they accustomed shoppers to such features as night-time

shopping and on-site parking.

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Karen Solheim of Solheim Research Speaker 17: 3

By the 1950’s, the fashion department stores awakened to the value of following their

shoppers to the emerging suburbs. Many of these fashion department stores were very

large by today’s standards, intended to be a second downtown store.

In 1951, Northgate opened in the Seattle area. Anchored by a large Bon Marche, this

shopping center had shops lining a 44-foot wide pedestrian open air walkway, called a

mall. In today’s parlance, this was two strip centers facing each other. Northgate Mall

was the first to use the term “mall” for a shopping center.

Other such centers opened in the early 1950’s in suburban Los Angeles, Boston, and

other communities.

The layout was improved with the opening by Northland Center in suburban Detroit,

Michigan. Built by the Hudson Department Store Company and designed by Victor

Gruen, this center clustered smaller shops around a large Hudson’s Department Store.

The center also was the first to offer parking on all sides and central air conditioning and

heating for the shops.

The big leap forward was the opening of Southdale Center in Edina, Minnesota, a

suburb of Minneapolis. Built by the Dayton Department Store Company, designed by

Victor Gruen, and opened in 1956, Southdale was the nation’s first modern enclosed

regional shopping center. This two level center offered an astonishing number of firsts,

including:

o

major center with (two) competing department stores,

climate-controlled interior (75 degrees), specifically to create comfortable

shopping environment,

sloping ring road that lead some shoppers to enter on the first floor and others to

the second,

low balconies, to allow for better sight lines to the stores,

animal signs in the large parking lots, all the way around the center, to aid

shoppers in finding their cars,

service truck access points at the basement level, to separate them from

shoppers.

Gruen designed a central atrium, for shoppers to linger and enjoy food and beverages,

comfortable in the climate-controlled environment. His vision was the gathering place of

an European city centre, almost another downtown. And, most of the stores in

Southdale were second branches of the stores from downtown Minneapolis.

Two years after Southdale opened, Phoenix’s first suburban shopping center, Park

Central, opened on Central Avenue, north of downtown. This center was open air with

shops on both sides of the central “mall”. Over time, the most of the stores departed,

leading this property to become the office complex it is today.

By 1961, Phoenix had its first enclosed suburban shopping center, Chris-Town Mall.

When it opened with Korrick’s, JCPenney, and Montgomery Ward, Chris-Town was the

largest enclosed mall between Houston and Los Angeles.

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Karen Solheim of Solheim Research Speaker 17: 4

TRADITIONAL FASHION SHOPPING CENTERS PROLIFERATE

For the next 20 years there was an explosion of shopping center development, including

both enclosed and open air centers. Among the well-known open air centers are:

o Biltmore Fashion Center in Phoenix (1963),

o Original Scottsdale Fashion Square (1961),

o Fashion Island Center in Newport Beach (1967),

o Fashion Valley Center also in San Diego (1969),

o Horton Plaza, San Diego (1985).

Following his work on Southdale, Victor Gruen turned to Southern California. In 1967

the Victor Gruen-designed, enclosed first phase of South Coast Plaza opened. This

phase had two very moderate anchors, May Company department store and Sears.

ICSC data shows that there were 7,600 centers in the United States in 1964. By 1972,

the number of centers reached 13,174. Many of these were traditional regional

shopping centers with department store anchors.

In the 1960’s, Phoenix saw eight new centers open; 5 were enclosed and 3 open air. All

3 new centers opened in the 1970’s in Phoenix were enclosed centers.

Nationwide, there were another new 16,000 shopping centers built in the 1980’s. Many

were of the regional mall type. Most notable about this period is the emergence of the

“superregional center”. This type of center is similar to the two or three department store

center of the previous decade, with one exception: it is bigger (larger than 800,000

square feet in size), offering more department stores, small shops, and more parking.

With so much space to lease, these centers often contained more non-GAFO stores;

uses such as food and restaurants, movie theaters, etc. became part of the centers.

Architecturally, the superregional often looked much like its smaller sister.

Along with the proliferation of shopping centers, major anchor stores, principally

department stores also expanded, at first by building new and then by acquisition, as the

goal seemed to be to locate in each major market and every major center of each.

Name changes occurred with regularity. One of the interesting, and oldest, name

changes in Phoenix was the change of The Boston Store to Diamond’s, to honor the

store’s 50 th anniversary in 1947. Some of the other Phoenix-area anchor changes

included:

o

the purchase of Korrick’s by The Broadway,

the purchase of Diamond’s by Dillard’s,

the purchase of Goldwater’s by Associated Dry Goods and renamed Robinsons

the purchase of Robinsons by May Department Stores and renaming of the

stores to Robinsons-May,

the purchase of May Department Stores by Macy’s, and corresponding

renaming of those stores.

4

Karen Solheim of Solheim Research Speaker 17: 5

Following rapid development of new centers in the 1980’s, shopping center developers

pulled back in the early 1990’s. According to data from the International Council of

Shopping Centers (ICSC), new center development declined 70% from 1989 to 1993.

Financial reasons were the principal causes, especially the Savings and Loan crisis.

In 1993, many of the privately held, family-run shopping center development companies

transitioned into publically traded REITs (real estate investment trusts).

EMERGENCE OF SPECIALTY CENTERS

FESTIVAL MARKETPLACE

The first center of its type, Faneuil Hall Marketplace, in Boston, Massachusetts, was

developed in 1976. Called a “festival marketplace”, Faneuil Hall Marketplace focused on

offering food and specialty goods, targeted to both locals and visitors. This type of

project has been built in a number of waterfront areas in an attempt to revive retailing

there. Baltimore, New York, Seattle, Salem, MA, San Diego, and New Orleans are

among the cities where festival marketplace projects have been built. Success has been

mixed.

VERTICAL CENTERS

Water Tower Place opened in 1976 on North Michigan Avenue in Chicago. With eight

levels, this center was conceived as a solution to developing in areas of limited space

but very strong retail demand. Initially moderately successful, today it is very successful

and has been joined by a hotel.

Manhattan Mall, a former Gimbel’s facility in Manhattan, is another vertical center.

When JCPenney opens in 2009, it is expected to emerge as an important retail location.

Strong vertical centers are few in number today. Several downtowns have tried, but

success is elusive.

OUTLET CENTERS

Outlet centers have existed for factory over-stocks almost since there were factories.

However, the first multi-tenant outlet center opened in Reading, Pennsylvania in 1974.

The first enclosed outlet center was built by Belz enterprises in 1985 in Memphis,

Tennessee. While these developments attracted sales, the format of outlet center took

its biggest leap with the development of “The Mills” concept, first opened in Memphis by

Western Development (became Mills Corporation). The Mills projects combined the

features of a shopping center with outlets, off-price (Marshalls), and low-price retailers.

Sizes of “The Mills” reached 2 million square feet, at Sawgrass Mills in Sunrise, Florida.

In 1990, there were 183 factory outlet malls. Today the ICSC estimates that there are

312 outlet centers in the US.

5

Karen Solheim of Solheim Research Speaker 17: 6

The success for these centers depends not only on consumer demand but also on the

availability of goods to sell. The addition of off-price retailers has expanded the range of

potential stores for these projects.

ENTERTAINMENT CENTERS

This segment of center began with the concept of bringing multi-screen theaters and a

proliferation of eating places to a visitor destination. The stakes were significantly raised

when Mall of America opened in Bloomington, Minnesota (Minneapolis suburb) in 1992

with 2.5 million square feet of retail space and an entire amusement park in the center.

With a total size of 4.2 million square acres, it is the United States’ biggest center. Mall

of America is the sister center of the 5.5 million acre West Edmonton Mall, in Alberta,

Canada.

These projects are unique and able to attract shoppers from great distances, across

multiple states.

LIFESTYLE CENTERS

A comparatively small shopping center developer, Poag & McEwen, created the lifestyle

center, when they created The Shops of Saddle Creek in Germantown, Tennessee.

Opened in 1987, The Shops of Saddle Creek contained 150,000 square feet of mostly

women’s apparel shops and no major anchor stores. This center contained a cluster of

upscale stores that liked to locate near one another in open-air environments, including

Chico’s, Coldwater Creek, J. Jill, J. Crew, Talbots, Williams-Sonoma, Coach, Banana

Republic, Ann Taylor Loft, White House/ Black Market.

Since Saddle Creek, many developers have gotten into this type of project. Sizes have

gotten much bigger and department stores are being added. By 2005, Poag & McEwen

had opened a 700,000 square foot lifestyle center anchored by Macy’s, Dick’s Sporting

Goods, Best Buy, Barnes & Noble, and others.

On the extremely large size range, Victoria Gardens is a 1.5 millions square feet open

air center in suburban Los Angeles. This center promoted itself as a lifestyle center

even though it contained two fashion department stores (Macy’s and Robinsons-May),

JCPenney, theaters, a community “cultural” center. (It recently expanded, added a Bass

Pro sporting goods store, and now positions itself as a mixed use project.)

In Phoenix, Kierland Commons is an excellent example of a lifestyle center. It is midsized,

with a retail area of approximately 440,000 square feet. Kierland’s first phase

opened in 2000, and all retailing was open by 2005.

Today, the term “lifestyle center” has been used in so many different ways that it has

become something almost amorphous. Just about the only commonality is the open air

format. For example, the term “lifestyle” is used for an outdoor expansion at many

enclosed shopping centers. Often called a “lifestyle wing” or a “lifestyle tail”, these

expansions are attempts to do both, offer climate-controlled shopping and an open air

environment.

6

Karen Solheim of Solheim Research Speaker 17: 7

Therefore, I will define a lifestyle center for purpose of this discussion. A lifestyle center

has these characteristics:

o

open air shopping environment,

a specific collection of stores selling better women’s apparel, including Chico’s,

Coldwater Creek, J. Jill, Talbots, Ann Taylor, J. Crew, Williams-Sonoma, Banana

Republic, etc.

book superstores, such as Barnes and Noble or Borders,

Apple computer stores,

upscale housewares stores, such as Crate & Barrel, Williams-Sonoma, Pottery

Barn,

top quality food and restaurants, especially sit-down,

streets with cars flowing through the property, and often parking right in front of

the stores. (Cars are sometimes relegated to spaces behind the retailing.)

Probably the best known lifestyle center is The Grove, in Los Angeles. The Grove is a

575,000 square foot outdoor center anchored by Nordstrom, Pacific Theaters Multiplex,

and Barnes and Noble. It opened in 2002 and features traditional shop interiors and a

range of exterior architectural styles and fountains designed evoke European Plazas and

courtyards. Like Southdale, The Grove positions itself to suggest to the shopper that

this is the city center.

CONCLUSIONS

Can we expect to see the roof come off our enclosed malls? Not frequently; this has to

be market driven. How about many more lifestyle centers similar to The Grove? Not

likely, because their appeal is their uniqueness, the “new and improved – no crime” city

center. However, there is a place for this format, and Kierland Commons is one of the

best types of locations.

7

L A W S E M I N A R S I N T E R N A T I O N A L

A Comprehensive Two-Day Conference on

Commercial Real Estate Leases

Practical information on negotiating and enforcing commercial leases

October 2 and 3, 2008

Phoenix, AZ

Quick Takes on Special Lease Situations

Mindy Korth

CB Richard Ellis

Phoenix, AZ

Spencer W. Cashdan, Esq.

Mariscal, Weeks, McIntyre & Friedlander, P.A.

Phoenix, AZ

Clare H. Abel, Esq.

Burch & Cracchiolo PA

Phoenix, AZ

Robert F. Buckley

Grubb & Ellis

Phoenix, AZ

R. Craig Coppola, CRE SIOR

Lee & Associates

Phoenix, AZ

Mindy Korth of CB Richard Ellis Speaker 18: 1

Mindy Korth of CB Richard Ellis Speaker 18: 2

Mindy Korth of CB Richard Ellis Speaker 18: 3

Mindy Korth of CB Richard Ellis Speaker 18: 4

Spencer W. Cashdan of Mariscal, Weeks, McIntyre & Friedlander, P.A. Speaker 19: 1

SHOPPING CENTER LEASE AGREEMENT .............................................................................................

FUNDAMENTAL LEASE PROVISIONS ....................................................................................................

1. PREMISES AND COMMON AREA ...............................................................................................

1.1 Lease of Premises ................................................................................................................

1.2 Rights to Use Common Area ................................................................................................

2. TERM ..............................................................................................................................................

2.1 Commencement and Duration of Term ................................................................................

2.2 Landlord’s Work and Tenant’s Work ...................................................................................

2.3 Measurement of Premises .....................................................................................................

2.4 Delivery Conditions; Timing of Delivery; Delivery Date ....................................................

2.5 Early Entry ............................................................................................................................

2.6 Certificate of Commencement ..............................................................................................

2.7 Renewal Periods ...................................................................................................................

3. RENT ..............................................................................................................................................

3.1 Base Rent ..............................................................................................................................

3.2 Floor Area Adjustment .........................................................................................................

3.3 Time and Place of Payments .................................................................................................

3.4 Late Charge ...........................................................................................................................

3.5 Excise Taxes; Rent Tax ........................................................................................................

3.6 Gross Sales Report ................................................................................................................

4. SHOPPING CENTER BUILDING AND IMPROVEMENTS .........................................................

4.1 Buildings ...............................................................................................................................

4.2 Parking and Drive Areas .......................................................................................................

4.3 Height Restrictions ...............................................................................................................

4.4 Interference with Operation ..................................................................................................

5. COMMON AREA .............................................................................................................................

5.1 Manner and Period of Operation ...........................................................................................

5.2 Restrictions on Use of Common Area ..................................................................................

5.3 Free Access ...........................................................................................................................

5.4 Parking Areas ........................................................................................................................

5.5 No Build Area .......................................................................................................................

5.6 Interference with Others .......................................................................................................

5.7 Tenant’s Proportionate Share ................................................................................................

5.8 Common Area Costs .............................................................................................................

Spencer W. Cashdan of Mariscal, Weeks, McIntyre & Friedlander, P.A. Speaker 19: 2

5.9 Estimated Payments and Annual Adjustments .....................................................................

5.10 Audit Rights ..........................................................................................................................

6. MAINTENANCE ..............................................................................................................................

6.1 Landlord’s Obligations .........................................................................................................

6.2 Assignment of Warranties.....................................................................................................

6.3 Tenant’s Obligations .............................................................................................................

6.4 Self-Help Rights ...................................................................................................................

6.5 Surrender ...............................................................................................................................

7. INSURANCE .....................................................................................................................................

7.1 Property Insurance ................................................................................................................

7.2 Liability Insurance ................................................................................................................

7.3 Deductibles and Other Coverages .........................................................................................

7.4 Reimbursement of Insurance Costs ......................................................................................

7.5 General ..................................................................................................................................

7.6 Waiver of Subrogation ..........................................................................................................

7.7 Tenant’s Proportionate Share ................................................................................................

7.8 Audit Rights ..........................................................................................................................

7.9 Self-Insurance .......................................................................................................................

8. INDEMNITY .....................................................................................................................................

8.1 Tenant Indemnity ..................................................................................................................

8.2. Landlord Indemnity ..............................................................................................................

9. ALTERATIONS OF TENANT’S BUILDING .................................................................................

9.1 Alterations by Tenant ............................................................................................................

9.2 Alterations by Landlord ........................................................................................................

10. UTILITIES .........................................................................................................................................

10.1 Utilities .................................................................................................................................

10.2 Selection of Service Providers ..............................................................................................

10.3 Interruption ...........................................................................................................................

11. REAL PROPRERTY TAXES ...........................................................................................................

11.1 Definition; Exclusions ..........................................................................................................

11.2 Tenant’s Pro Rata Share .......................................................................................................

11.3 Contest ..................................................................................................................................

11.4 Copies of Bills and Notices...................................................................................................

11.5 Change in Tax Plan ...............................................................................................................

Spencer W. Cashdan of Mariscal, Weeks, McIntyre & Friedlander, P.A. Speaker 19: 3

11.6 Separate Assessment .............................................................................................................

12. SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT .............................................

12.1 Conditions of Subordination .................................................................................................

12.2 Form of Subordination ..........................................................................................................

12.3 Further Agreements ..............................................................................................................

12.4 Security Interests ...................................................................................................................

12.5 Fees .......................................................................................................................................

13. ASSIGNMENT AND SUBLETTING ..............................................................................................

13.1 General ..................................................................................................................................

13.2 Permitted Transfers ...............................................................................................................

13.3 Recapture ..............................................................................................................................

13.4 Rental Adjustment ................................................................................................................

13.5 Continuing Liability ..............................................................................................................

13.6 Fees .......................................................................................................................................

14. COVENANTS, REPRESENTATIONS AND WARRANTIES ........................................................

14.1 Quiet Enjoyment ...................................................................................................................

14.2 Authority ...............................................................................................................................

14.3 Environmental .......................................................................................................................

14.4 Declarations ..........................................................................................................................

14.5 Zoning ...................................................................................................................................

14.6 Remedies for Breach .............................................................................................................

15. ENVIRONMENTAL .........................................................................................................................

15.1 Tenant’s Obligations .............................................................................................................

15.2 Landlord’s Obligations .........................................................................................................

16. SIGNAGE ..........................................................................................................................................

16.1 Building Signage ...................................................................................................................

16.2 Interior Signs .........................................................................................................................

16.3 Pylon/Monument Signage .....................................................................................................

16.4 Alterations of Signage ..........................................................................................................

16.5 Sign Criteria ..........................................................................................................................

16.6 Temporary Signs ...................................................................................................................

17. TENANT’S DEFAULT .....................................................................................................................

17.1 Default; Notice and Grace ....................................................................................................

17.2 Bankruptcy and Insolvency ..................................................................................................

Spencer W. Cashdan of Mariscal, Weeks, McIntyre & Friedlander, P.A. Speaker 19: 4

17.3 Landlord’s Remedies ............................................................................................................

17.4 No Cross-Defaults .................................................................................................................

17.5 Limitation on Termination ....................................................................................................

17.6 Attorneys’ Fees .....................................................................................................................

18. LANDLORD’S DEFAULT ...............................................................................................................

18.1 Default; Notice and Grace ....................................................................................................

18.2 Tenant’s Remedies ................................................................................................................

18.3 Mortgagee Protection ............................................................................................................

18.4 Limitation of Landlord’s Liability ........................................................................................

18.5 Attorneys’ Fees .....................................................................................................................

19. USE AND OPERATION ...................................................................................................................

19.1 Permitted Use ........................................................................................................................

19.2 Restricted Uses .....................................................................................................................

19.3 Exclusive Uses ......................................................................................................................

19.4 Opening Covenant ................................................................................................................

19.5 Operating Covenant ..............................................................................................................

19.6 Go Dark/Recapture ...............................................................................................................

19.7 Opening Co-Tenancy ............................................................................................................

19.8 Ongoing Co-Tenancy ............................................................................................................

20. DAMAGE OR DESTRUCTION .......................................................................................................

20.1 Insured Losses .......................................................................................................................

20.2 Uninsured Losses ..................................................................................................................

20.3 Termination ...........................................................................................................................

20.4 Abatement and Tolling .........................................................................................................

20.5 Insurance Proceeds ...............................................................................................................

20.6 Waiver ...................................................................................................................................

20.7 Tenant Repair ........................................................................................................................

21. EMINENT DOMAIN ........................................................................................................................

21.1 Total Taking ..........................................................................................................................

21.2 Partial Taking ........................................................................................................................

21.3 Landlord Right to Terminate ................................................................................................

21.4 Tenant Right to Terminate ....................................................................................................

21.5 Award ...................................................................................................................................

21.6 Waiver ...................................................................................................................................

Spencer W. Cashdan of Mariscal, Weeks, McIntyre & Friedlander, P.A. Speaker 19: 5

22. NOTICES ...........................................................................................................................................

23. GENERAL .........................................................................................................................................

23.1 Tenant’s Trade Fixtures; Removable Personal Property ......................................................

23.2 Force Majeure .......................................................................................................................

23.3 Interest Rate; Usary ..............................................................................................................

23.4 Memorandum or Short Form of Lease ..................................................................................

23.5 Estoppel Certificates .............................................................................................................

23.6 End of Term; Holding Over ..................................................................................................

23.7 Choice of Law .......................................................................................................................

23.8 Litigation ...............................................................................................................................

23.9 Mechanics’ Liens ..................................................................................................................

23.10 Real Estate Commissions ......................................................................................................

23.11 Partnerships ...........................................................................................................................

23.12 Merchant’s Association ........................................................................................................

23.13 Time of the Essence ..............................................................................................................

23.14 No Offer ................................................................................................................................

23.15 Successors and Assigns; Third Party Beneficiaries ..............................................................

23.16 Entire Agreement; Waiver ....................................................................................................

23.17 Construction of Lease; Severability ......................................................................................

23.18 Counterparts ..........................................................................................................................

23.19 Exhibits .................................................................................................................................

23.20 Binding Effect; Conditions Precedent ..................................................................................

23.21 No Other Tenancies ..............................................................................................................

23.22 No Waiver .............................................................................................................................

23.23 Waiver of Redemption ..........................................................................................................

23.24 No Merger .............................................................................................................................

23.25 Disclaimer .............................................................................................................................

23.26 Consents and Approvals .......................................................................................................

23.27 Brokerage Disclosure ............................................................................................................

24. ARBITRATION ................................................................................................................................

Clare H. Abel of Burch & Cracchiolo PA Speaker 20: 1

Commercial Real Estate Leases

(Liquor License Issues)

Page 1 of 5

I. Restrictions on Retail Liquor Licensing Based Upon Proximity to

Church or School

A. A.R.S. Section 4-207 prohibits issuing a liquor license within 300 feet of

church or school.

1. Church - Definition [4-207(D)]

a. Design - looks like a church.

b. Regular services.

c. Primary use.

d. Reasonable person would conclude it is a church.

Practice note: Landlords should include a provision in leases of public

assembly spaces that limits subleases and agreements for

long-term or primary use or occupancy of the leased space by

a religious organization for religious education or services.)

2. Church - Distance = 300 horizontal feet

a. Distance for a church is measured building wall to building

wall of the two closest points (whether or not there is a door

in the wall of the church or the licensed business).

Practice note: If the church has a school, as defined below, operating on its

property the distance is measured according to the distance

standards for schools.

3. School - Definition

a. Public or private school

b. Any kindergarten program or any grade one through twelve.

Clare H. Abel, Esq.

Burch & Cracchiolo, P.A.

702 East Osborn Road, Suite 110

Phoenix, Arizona 85014

Direct line: 602.234.9920

Direct fax: 602.343-7920

Email:

CHAbel@bcattorneys.com

Clare H. Abel of Burch & Cracchiolo PA Speaker 20: 2

4. School - distance = 300 horizontal feet

Page 2 of 5

a. Distance for a school is measured building wall to building

wall or fence recreational area.

Practice note: Landlords and their agents should be careful to investigate

whether a prospective child care tenant currently operates or

plans to add a kindergarten program.

B. Exceptions to Distance Requirements/A.R.S. 4-207(B).

1. Restaurant license (Series 12)

a. On-sale retail; nontransferable.

b. Approved floor plan.

c. Not less than 40% of revenue from sale of food.

d. Food service must be available until at least 10 PM.

2. Special Event License/Temporary (Series 15)

a. On-sale, nontransferable.

b. Charitable, civic, fraternal, political or religious organization.

c. No more than 10 days per year.

d. Qualifying organization must receive at least 25% of the

revenue from the event.

3. Hotel-Motel License w/Restaurant (Series 11)

a. On-sale, non-transferable

b. Same criteria as the Series 12 Restaurant License.

c. Mini-bars allowed in guest rooms if locked with key or card

entry only.

d. Mini-bar key cannot be given to a guest during the hours of 2

AM to 6 AM Mon-Sat and 2 AM to 10 AM Sun.

4. Government License (Series 05 )

a. On-sale, nontransferable.

b. Governmental entity.

Clare H. Abel, Esq.

Burch & Cracchiolo, P.A.

702 East Osborn Road, Suite 110

Phoenix, Arizona 85014

Direct line: 602.234.9920

Direct fax: 602.343-7920

Email:

CHAbel@bcattorneys.com

Clare H. Abel of Burch & Cracchiolo PA Speaker 20: 3

5. Fenced playing area of a golf course.

Page 3 of 5

C. Continuation Rules.

1. Transferable licenses issued prior to initiation of church or school

may remain only if:

a. License must be validly issued before the church or school

arrives. (Having an application pending isn’t enough.)

b. License must remain in full force and effect (Lapses or

termination of license - cannot revive it.)

2. Person transfer allowed within the same licensed premises.

a. Typically applies to: Liquor Store (Series 9), Bar (Series 6),

Beer-Wine Bar (Series 7).

3. Nontransferable licenses issued prior to initiation of church or school

may remain only if:

a. License must be validly issued before the church or school

arrives. [Having an application pending isn’t enough. It

primarily applies to Clubs (Series 14), Micro-breweries (Series

3) and Beer/wine Stores (Series 10). Remember that in any

case, the licenses listed in 4-207(B) don’t have to worry about

the distance requirement.]

b. License must remain in full force and effect (Lapse or

termination of license - cannot revive it.)

4. Upgraded Licenses.

a. Further exception exists if a person has a nontransferable

license and you want to upgrade it to a transferable license.

Ex. Convenience store has a nontransferable Beer-Wine Store

Clare H. Abel, Esq.

Burch & Cracchiolo, P.A.

702 East Osborn Road, Suite 110

Phoenix, Arizona 85014

Direct line: 602.234.9920

Direct fax: 602.343-7920

Email:

CHAbel@bcattorneys.com

Clare H. Abel of Burch & Cracchiolo PA Speaker 20: 4

Page 4 of 5

(Series 10) license and acquires a transferable Liquor Store

(Series 9) license to use at that site.

5. License must be validly issued before the church or school arrives.

[Having an application pending isn’t enough. Remember that in any

case the licenses listed in 4-207(B) don’t have to worry about the

distance requirement.]

6. License must remain in full force and effect (Lapse or termination of

license - cannot revive it.)

II. Special Events (Series 15)

A. Special Events.

1. These can include fund raising events or galas.

2. Series 15 License is needed where the premises are not otherwise

licensed (such as the courtyard of an office building, common area or

parking area of a retail center).

3. Special Event License/Temporary (Series 15)

a. On-sale, nontransferable.

b. Charitable, civic, fraternal, political or religious organization

c. No more than 10 cumulative days per calendar year.

d. Qualifying organization must receive at least 25% of the

revenue from the event.

4. Requirements.

a. Site plan including location of liquor storage areas, security

measures and available parking.

b. Narrative description of the event and the site plan.

Clare H. Abel, Esq.

Burch & Cracchiolo, P.A.

702 East Osborn Road, Suite 110

Phoenix, Arizona 85014

Direct line: 602.234.9920

Direct fax: 602.343-7920

Email:

CHAbel@bcattorneys.com

Clare H. Abel of Burch & Cracchiolo PA Speaker 20: 5

Page 5 of 5

c. Liquor must be purchased by the organization from an “offsale”

licensee (or it may be donated to the organization by

licensed wholesaler).

III.

Extension of Premises/Patio Permit

A. This is required for any permanent or temporary expansion or extension of

an existing liquor establishment.

1. This permit or process is required for any permanent patio

2. This permit is required for any temporary extension of an existing

liquor establishment ([Ex. Extra serving area at a restaurant or bar for

St. Patrick’s Day or Cinco de Mayo].

3. Requirements.

a. Site plan and floor plan including location of liquor storage

areas, security measures and available parking.

b. Narrative description of the permanent addition or the

temporary addition/event and the site plan.

c. Permit requires local jurisdiction approval.

Clare H. Abel, Esq.

Burch & Cracchiolo, P.A.

702 East Osborn Road, Suite 110

Phoenix, Arizona 85014

Direct line: 602.234.9920

Direct fax: 602.343-7920

Email:

CHAbel@bcattorneys.com

Robert F. Buckley of Grubb & Ellis Speaker 21: 1

Robert F. Buckley of Grubb & Ellis Speaker 21: 2

Robert F. Buckley of Grubb & Ellis Speaker 21: 3

Robert F. Buckley of Grubb & Ellis Speaker 21: 4

Robert F. Buckley of Grubb & Ellis Speaker 21: 5

Robert F. Buckley of Grubb & Ellis Speaker 21: 6

R. Craig Coppola of Lee & Associates Speaker 22: 1

R~ N o t e s ~

R. Craig Coppola of Lee & Associates Speaker 22: 2

R~ N o t e s ~

L A W S E M I N A R S I N T E R N A T I O N A L

A Comprehensive Two-Day Conference on

Commercial Real Estate Leases

Practical information on negotiating and enforcing commercial leases

October 2 and 3, 2008

Phoenix, AZ

Remedies and Enforcement

Bryan A. Albue, Esq.

Fennemore Craig, P.C.

Phoenix, AZ

Scott A. Klundt, Esq.

Quarles & Brady

Phoenix, AZ

C. Taylor Ashworth, Esq.

Stinson Morrison & Hecker LLP

Phoenix, AZ

Donald L. Gaffney, Esq.

Snell & Wilmer LLP

Phoenix, AZ

Thomas J. Salerno, Esq.

Squire Sanders & Dempsey LLP

Phoenix, AZ

Bryan A. Albue of Fennemore Craig, P.C. Speaker 23: 1

R~ N o t e s ~

Bryan A. Albue of Fennemore Craig, P.C. Speaker 23: 2

R~ N o t e s ~

Scott A. Klundt of Quarles & Brady Speaker 24: 1

LANDLORDS' REMEDIES FOR MONETARY BREACHES

OF COMMERCIAL LEASES

The following is an examination of the general legal remedies available to a

commercial landlord when its tenant breaches a lease by failing to pay rent or other

charges due on a lease. In particular, the discussion analyzes: (1) how a landlord obtains

possession of the leased premises following a default; and (2) what damages a landlord

may recover for breach of the lease.

I. OBTAINING POSSESSION OF THE LEASED PREMISES FOLLOWING

DEFAULT.

The landlord's remedies following a default are primarily controlled by the terms

of the lease. The common law remedies available to a landlord may be contracted,

altered, or expanded by the lease terms. In general, however, the landlord has a right to

reenter the premises and take possession by self-help or through a judicial action in

forcible detainer following a default and compliance with all notice or cure periods in the

lease. The landlord may also assert a landlord's lien on the tenant's personal property at

the leased premises.

A. Lockout/Self Help Re-Entry.

In the event of a default, the landlord can re-take possession of the leased

premises by “locking out” the tenant if rent is due and in arrears for five days. A.R.S. §

33-361(A). In the event that all notice and cure periods in the lease have been complied

with, the statute does not require notice to the tenant of a proposed lockout. E.g., Lake v.

Stewart, 117 Ariz. 520, 522, 573 P.2d 920, 922 (1977). In Stewart, the court held that a

landlord is entitled to assert his rights pursuant to A.R.S. § 33-361 “without the giving of

any notice.” Id.; see also Janes v. Country Escrow Serv., 135 Ariz. 231, 660 P.2d 482

(App. 1983) (landlord has a statutory right to seize property without giving notice).

QBACTIVE\99999.99999\2485351.3 1

Scott A. Klundt of Quarles & Brady Speaker 24: 2

However, the common law traditionally required notice for both court action and

initiating a self help remedy. Therefore, a prudent landlord should give notice of a

proposed lockout unless the landlord fears the tenant may abscond with fixtures that are

part of the leased premises or personal property to which the landlord's lien attaches.

(See discussion below.)

The landlord's power of re-entry is limited by materiality standards. In other

words, a landlord cannot “lock-out” because of a trivial breach. Thomas v. Given, 75

Ariz. 68, 71, 251 P.2d 887, 890 (1952) (principles of equity weigh against forfeiture

when “nonpayment was ‘inadvertent and through mistake’”); Foundation Development

Corp. v. Loehmann's, Inc., 163 Ariz. 438, 446, 788 P.2d 1189, 1197 (1990) (“[A]

forfeiture for a trivial or immaterial breach of a commercial lease should not be

enforced”). A monetary default for failure to pay rent will probably always be found to be

material. However, certain non-monetary defaults or failure to pay relatively small

amounts of maintenance charges or taxes may be found to be trivial and, therefore,

insufficient grounds for a lockout.

If the landlord chooses to use self-help remedies, it should be careful to ensure

that its actions do not result in the use of force or a “breach of the peace.” The Arizona

statutes on re-entry and forcible detainer are silent on “breach of the peace.” However,

the courts have held that the applicable statutes were designed to abolish the common law

privilege of landlord self-help recovery by the use of physical force. Olds Bros. Lumber

v. Rushing, 64 Ariz. 199, 206-07, 167 P.2d 394, 398-99 (1946). Therefore, if a lockout

cannot be achieved by completely peaceable means, the landlord should obtain

QBACTIVE\99999.99999\2485351.3 2

Scott A. Klundt of Quarles & Brady Speaker 24: 3

possession through a judicial forcible detainer action. If the tenant objects to the lockout

or threatens to disrupt the lockout, judicial remedies should normally be pursued.

In order to avoid a breach of the peace, most lockouts occur during nonbusiness

hours. After the locks have been changed, the landlord should secure the premises. An

inventory should be taken of all property at the leased site. Property against which the

landlord does not assert a lien should be returned to the tenant. Property against which

the landlord's lien is asserted should be safely stored and subsequently sold, with the

proceeds applied to unpaid rent and charges. (See discussion below.)

Before conducting a lockout, a landlord should consider the risks associated with

this remedy. First, a wrongful lockout or eviction may be considered a breach of the

lease, which may give rise to damages. Country Escrow Serv. v. Janes, 121 Ariz. 511,

513, 591 P.2d 999, 1001 (App. 1979). Second, a tenant may recover for intentional

infliction of emotional distress where the landlord's acts “are so outrageous in character

and so extreme in degree as to go beyond all possible bounds of decency, and to be

regarded [as] atrocious and utterly intolerable in a civilized community.” Id. (citing

Patton v. First Fed. Sav. & Loan Ass'n, 118 Ariz. 473, 578 P.2d 152 (1978). Third, a

wrongful lockout is a trespass which exposes the landlord to both a forcible entry and

detainer action, Gangadean v. Ericson, 17 Ariz. App. 131, 133, 495 P.2d 1338, 1340

(1972), as well as liability for all the damages caused thereby, including potential lost

profits of the tenant's business. Miller v. Condon, 66 Ariz. 34, 39, 182 P.2d 105, 108

(1947). Thus, a landlord should be careful to consider these risks before exercising this

self-help remedy.

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B. Forcible Detainer Actions.

The object of a forcible entry and detainer action (“FED”) is to afford a summary,

speedy, and adequate remedy for obtaining possession of premises withheld by a tenant

in violation of the covenants of his lease. Olds Bros. Lumber, 64 Ariz. at 204-05, 167

P.2d at 397. The right to possession is the only issue that may be litigated in an FED.

A.R.S. § 12-1177. The procedural provisions under which an FED is conducted are set

forth in A.R.S. §§ 12-1171 – 1178.

An FED must be tried not less than five, nor more than thirty, days after

commencement of the action. A.R.S. § 33-361(B). In practice, in the superior court, the

tenant must appear for an initial hearing usually scheduled within a few days of the filing

of the Complaint. If the tenant appears and pleads “not guilty,” a trial will be scheduled

for a later date. If the tenant appears and pleads “guilty,” or fails to appear, a judgment

will be entered in favor of the landlord. However, in justice court, where the tenant

pleads “not guilty,” a trial shall commence immediately pursuant to A.R.S. § 12-1175(C).

The same materiality standard applies in an FED as in a lockout. In other words,

“trivial” defaults may not entitle the landlord to possession. Counterclaims, offsets and

cross complaints are not available as a defense to an FED action; the tenant may assert

only those defenses that would obviate the landlord's right to possession. Gangadean, 17

Ariz. App. at 134, 495 P.2d at 1341. In general, therefore, the tenant is only allowed to

argue that the lease is not in default or that the default is “trivial.”

If the tenant is found guilty of forcible detainer, the landlord is entitled to

immediate possession of the premises, court costs, rent due at date of judgment, damages

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and attorneys' fees. A.R.S. §§ 12-1178(A), 33-361(B). 1

A landlord may recover

damages for accrued rentals as well as subsequently accruing rentals or damages in a

separate action even if the landlord has pursued an FED. A.R.S. § 12-1271. An FED

does not preclude subsequent proceedings between parties. A.R.S. § 12-1178(A); Olds

Bros. Lumber Co., 64 Ariz. at 205, 167 P.2d at 398. However, as discussed below, the

filing of the FED may terminate the lease, In re Bricker, 43 B.R. 344, 346 (Bankr. D.

Ariz. 1984), which may affect the amount of damages the landlord is entitled to collect.

See Lee Dev. Co. v. Papp, 166 Ariz. 471, 477, 803 P.2d 464, 470 (App. 1990).

After a judgment has been entered awarding possession of the premises to the

landlord, the landlord may obtain a writ of restitution to enforce the judgment. A writ of

restitution may be issued on the sixth day after the judgment has been entered. A.R.S. §

12-1178(C). The writ directs the sheriff to seize the leased premises and deliver it to the

landlord. Following the issuance of the writ, the landlord will have to coordinate with the

sheriff on the timing of the eviction.

C. The Landlord's Lien.

A.R.S. §§ 33-361(D) and 33-362(A) grant a landlord a statutory lien on property

of the tenant located on the premises. This lien is for rent only and remains in effect until

the rent is paid. A.R.S. § 33-362; Mason Dry Goods Co. v. Ackel, 30 Ariz. 7, 12, 243 P.

606, 608 (1926). A landlord's lien exists independently of any other possession

proceeding. Dewar v. Hagans, 61 Ariz. 201, 205, 146 P.2d 208, 209 (1944). It attaches

1

“In a forcible entry and detainer action, a court may not award damages other than those specifically

provided by statute.” T.H. Properties v. Sunshine Auto Rental Inc., 151 Ariz. 444, 446, 728 P.2d 663, 665

(App. 1986). However, other charges such as real estate taxes may be recoverable in an FED if the charges

are characterized as “rent” under the terms of the lease agreement. Id.

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at the start of the tenancy or the moment the property is brought onto the premises,

whichever is later. Bates & Springer of Ariz., Inc. v. Friermood, 109 Ariz. 203, 205, 507

P.2d 668, 670 (1973).

A landlord's lien is superior to any subsequent lien on the personal property. Gila

Water Co. v. Int’l Fin. Corp., 13 F.2d 1, 2 (9th Cir. 1926); Dewar, 61 Ariz. at 205, 146

P.2d at 209. However, it is inferior to a U.C.C. Article 9 security interest that was

perfected prior to the time the personal property was brought onto the premises. Ex-Cell-

O Corp. v. Lincor Props., 158 Ariz. 307, 308-09, 762 P.2d 594, 595-96 (App. 1988).

Similarly, property sold in the usual course of business and removed from the premises is

exempt from the landlord's lien. Bates & Springer of Ariz., Inc., 109 Ariz. at 205, 507

P.2d at 670.

Pursuant to A.R.S. § 33-361(D), the landlord has the right to seize as much of the

tenant's property “as is necessary to secure payment of the [unpaid] rent. ” 2

Seizure of

personal property pursuant to the landlord's lien typically occurs in conjunction with a

“lockout” or FED. As with lockouts, however, the seizure of personal property must be

completed without a breach of the peace. In the event that the seizure cannot be

completed peacefully, the landlord should secure possession through judicial action.

A.R.S. § 33-362(B). This can be done in connection with an FED or separately.

The property seized cannot be sold until at least 60 days after its seizure. A.R.S. §

33-361(D). Therefore, the landlord must make arrangements to store the property until it

can be sold. The landlord must ensure that the property is safely stored. If the property is

2

After applying the proceeds from a sale of the property to the delinquent rent, the balance of the

proceeds, if any, “shall be paid to the person entitled thereto.” A.R.S. § 33-1023(A).

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lost, damaged, or stolen due to the landlord's negligence or inattention, the tenant may be

entitled to a credit on the unpaid rent equal to the value of the lost, damaged, or stolen

property.

Pursuant to A.R.S. § 33-1023, the landlord may sell the seized property at public

auction. The landlord must provide the tenant an additional ten days to pay the accrued

rent before noticing a sale. Id. The tenant should also be provided with five days notice

of the actual sale. A.R.S. § 33-1023(B). If the tenant cannot be located, the notice of sale

should be published on two occasions in a local newspaper. Id.

In order to maximize the price received, the landlord should solicit potential

purchasers before the actual sale. In addition, notices of the sale should be published in

appropriate trade journals. In certain cases, the landlord may want to retain a

professional auctioneer to advertise and conduct the sale.

II.

DAMAGES.

A. Introduction.

In addition to obtaining possession of the leased premises and all property to

which the landlord's lien may attach, the landlord may also want to pursue a judicial

action for unpaid rentals or damages for breach of the lease. This section discusses the

remedies available to the landlord both when a lease has been terminated and when the

landlord has chosen not to terminate the lease.

1. Interpretation of the lease.

The first step in analyzing the landlord's potential remedies is to determine if the

lease itself provides any remedies and, if so, whether they are the exclusive remedies

available to the lessor. “[P]arties to a written lease . . . have the right to contract and

change by mutual agreement the usual and ordinary terms of a lease and thereby the usual

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and ordinary rights of the parties.” Camelback Land & Inv. Co. v. Phoenix Entm’t Corp.,

2 Ariz. App. 250, 254, 407 P.2d 791, 795 (1965). “[W]here a lease provides exclusive

remedies to the lessor in the event of a breach by the lessee, the lessor is bound thereby

and cannot go outside the terms of the contract and seek remedies or make claims for

relief against the lessee other than those provided for in the lease.” Id. at 256, 407 P.2d at

797. Therefore, by contractual agreement, the parties to a lease can limit the remedies

available to the landlord to remedies listed in the lease agreement. However, a court will

not hold a landlord to the remedies provided in the lease if the lease expressly states, in

one form or another, that the remedies provided in the lease are “in addition to all other

legal remedies and not in lieu of other remedies.” Roosen v. Schaffer, 127 Ariz. 346,

349, 621 P.2d 33, 36 (App. 1980).

2. When is a lease terminated?

The remedies available to the landlord may depend upon whether the lease has

been terminated. A landlord can terminate a lease in two ways following a monetary

breach by the lessee: 1) by expressly stating the lease is terminated because of the

tenant’s breach, or 2) by committing some act which terminates the lease by operation of

law.

The landlord can terminate a lease by expressly informing the tenant that the

tenancy is terminated due to the tenant’s default. An express termination by the landlord

can also occur when the tenant wishes to end the lease and offers to surrender the leased

premises to the landlord. At this point, the landlord may accept the surrender, which

terminates the lease. Roosen, 127 Ariz. at 349, 621 P.2d at 36.

A landlord can also terminate a lease by certain actions that may or may not have

been intended to terminate the lease. If “the parties to a lease do some act so inconsistent

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with the relationship of landlord and tenant as to imply that they both agree to consider

the lease at an end, and to yield up the estate, a cancellation of the lease under the

principles of estoppel occurs.” Lee Dev. Co. v. Papp, 166 Ariz. 471, 477, 803 P.2d 464,

470 (App. 1990) (citing Riggs v. Murdock, 10 Ariz. App. 248, 458 P.2d 115 (1969)).

“An unqualified retaking of possession of the premises by the landlord is a surrender by

operation of law [which terminates the lease].” Id. The act of retaking possession will

not, however, automatically terminate the lease: “[t]he intent of the landlord in accepting

the abandonment is a question of fact for the trier of fact.” Id. Therefore, the parties to a

lease can contract around this general rule by stating in the lease that a retaking does not

necessarily terminate the lease. Alternatively, the landlord could expressly inform the

tenant, in writing, that the landlord’s re-entry does not terminate the lease.

The United States Bankruptcy Court for the District of Arizona has held that a

lease terminates upon the filing of an FED Complaint. In re Bricker, 43 B.R. 344, 346

(Bankr. D. Ariz. 1984). Bricker does not, however, necessarily stand for the proposition

that a lease is always terminated when an FED is filed. As stated above, the terms of the

lease may provide otherwise. Alternatively, the landlord may be able to avoid

termination by making its intentions to not terminate clearly known to the tenant.

When a landlord files a suit seeking judgment for all rents, past and future, the

lease may also be considered terminated. Wingate v. Gin, 148 Ariz. 289, 293, 714 P.2d

459, 463 (App. 1985). Once again however, the lease may provide that filing such a suit

does not terminate the lease. Tempe Corp. Office Bldg. v. Ariz. Funding Serv., 167 Ariz.

394, 399, 807 P.2d 1130, 1135 (App. 1991).

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B. What Can A Landlord Recover Under A Non-Terminated Lease?

When the landlord sues directly on the lease, it is entitled to recover the unpaid

rentals as they become due. The landlord can recover these unpaid rentals up to the time

of trial and, where the lease so provides, the difference between subsequently accruing

rentals and the fair rental value of the property. Id.

1. Recovery of subsequently accruing rentals.

Arizona law recognizes the enforceability of lease clauses that allow the landlord

to recover rent that would not otherwise become due until a later time. Id.; Wingate v.

Gin, 148 Ariz. 289, 291-93, 714 P.2d 459, 461-63 (App. 1985); Roosen v. Schaffer, 127

Ariz. 346, 349, 621 P.2d 33, 36 (App. 1980). If the lease provides that filing a suit for

future rentals does not terminate the lease, the landlord is entitled to all unpaid rent up to

the time of trial. Tempe, 167 Ariz. at 399, 807 P.2d at 1135. The Tempe court also held

that the general method of calculating damages accruing after trial for a nonterminated

lease is “limited to the difference between the stipulated rental and the fair rental value of

the premises.” Id. at 399 n.2, 807 P.2d at 1135 n.2 (citing Lee Dev. Co. v. Papp, 166

Ariz. 471, 803 P.2d 464 (App. 1990)). Thus, under Arizona law, damages for

subsequently accruing rentals are calculated as stipulated in the lease, but generally

constitute the difference between the stipulated rental and the fair rental value of the

premises.

The future rent calculation provided in Tempe can result in no recovery of

subsequently accruing rentals for the landlord. The court will award no damages if the

fair rental value is greater or equal to the rent stipulated in the contract. Therefore, if the

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filing of a suit for future rentals constitutes a termination, 3 the landlord may desire to wait

until the end of the lease term and sue for all unpaid rentals then due. Even if the lease is

not terminated by filing a suit, the landlord may be better off bringing suit either at the

end of the rental period or at various times throughout the term of the lease. 4

This would

enable the landlord to recover the difference between the rental rate stipulated in the

contract and any rent received from a new tenant, subject to the landlord’s duty to

mitigate damages by attempting to relet the premises at a fair rental rate. Camelback

Land & Inv. Co. v. Phoenix Entm’t Corp., 2 Ariz. App. 250, 407 P.2d 791 (App. 1965).

2. Recovery under an acceleration clause.

An acceleration clause allows a landlord to demand immediate payment of all

rent that will become payable during the entire term of the lease upon a breach by a

lessee. To date, no Arizona court has determined whether such a clause is enforceable.

However, other states have upheld these clauses as valid and enforceable. See, e.g.,

Emrich v. Joyce’s Submarine Sandwiches, Inc., 751 P.2d 651, 652 (Colo. App. 1987);

Sunset Fuel & Eng’g Co. v. Compton, 97 Or. App. 244, 775 P.2d 901 (1989), rev. denied,

308 Or. 466, 781 P.2d 1215 (1989).

The Restatement (Second) of Property also recognizes acceleration

clauses. If the acceleration clause is enforced, the landlord cannot terminate the lease for

3 See discussion infra Section II(C).

4 If the lease is not terminated, “failure . . . to pay each installment would arguably be a series of breaches,

each giving rise to a separate cause of action.” Wheel Estate Corp. v. Webb, 139 Ariz. 506, 508, 679 P.2d

529, 531 (App. 1983). However, this line of reasoning suggests that a landlord has a separate statute of

limitations for each accruing rental payment. Thus, a landlord should not postpone bringing an action for

any individual breach any longer than the six-year statute of limitations would permit. See A.R.S. § 12-

548.

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the tenant’s default that generated the rent acceleration, nor can the landlord terminate the

lease for any other default of the tenant, without reimbursing the tenant for the rent that

has been paid in advance, less any damages the landlord is entitled to collect from the

tenant for such default. Restatement (Second) of Property: Landlord & Tenant § 12.1

cmt. k (1977). If the landlord terminates the lease before the acceleration clause is

enforced, it may not recover rent for the period after the termination. Id. Furthermore, if

the rent acceleration clause does not have a present value discount factor or some similar

mitigation factor, it may be deemed unconscionable. Id. The Restatement cautions that

if the tenant provides adequate security for the payment of rent as it accrues, the

acceleration clause may also be deemed unenforceable. Id.

In Arizona, a landlord has the duty to mitigate its damages. Therefore, recovery

on an acceleration clause may be contingent on the landlord satisfying the duty to attempt

to mitigate damages. See Roosen v. Schaffer, 127 Ariz. 346, 349, 621 P.2d 33, 36 (App.

1980). Allowing the landlord to enforce the acceleration clause, however, presumes the

landlord has unsuccessfully attempted to mitigate damages and may discourage actual

attempts to mitigate after judgment has been entered. Therefore, an Arizona court may

only allow recovery for future rentals due to an acceleration based on the difference

between the agreed upon rent and the rental value of the premises.

C. What Can A Landlord Recover Under A Terminated Lease?

When a lease is terminated, unless otherwise specified in the lease, “[t]he lessor

can recover only the unpaid rent due prior to the termination of the lease.” Roosen, 127

Ariz. at 349, 621 P.2d at 36 (citing Cochise Hotels v. Douglas Hotel Operating Co., 83

Ariz. 40, 316 P.2d 290 (1957); Monaghan v. Barnes, 48 Ariz. 213, 61 P.2d 158 (1936);

Schuldes v. Wubbolding, 15 Ariz. App. 527, 489 P.2d 1229 (1971)). However, even with

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a terminated lease, the landlord can recover, as damages, all future rents due under the

lease less the reasonable rental value of the premises, if the lease so provides. Wingate v.

Gin, 148 Ariz. 289, 293, 714 P.2d 459, 463 (App. 1985). In Wingate, the lease provided

that the landlord could recover damages for rent payments that accrued post-termination.

The lease term at issue stated that:

Landlord may at any time after Tenant’s default elect to terminate this

lease and in addition to any other remedy it may have, it may recover from

tenant all damages . . . including the worth at the time of such termination

of the excess, if any, of the amount of rent and charges equivalent to rent

reserved in this lease for the remainder of the stated term over the then

reasonable rental value of the Premises for the remainder of the stated

term.

Id. The landlord in Wingate chose to invoke this clause and the court found it valid,

holding that the plaintiff “is entitled to recover accrued rents and charges . . . along with

the difference, if any, between the future rents due under the lease and the reasonable

rental value of the premises.” Id. 5

Thus, under Arizona law, a court will award to a

landlord unpaid rent due prior to the termination of the lease, plus any other damages the

lease stipulates the landlord may recover upon a termination.

D. Mitigation Of Damages.

1. In general.

In Arizona, a landlord has an obligation to mitigate damages by reletting the

premises. Tempe, 167 Ariz. at 399, 807 P.2d at 1135. However, the duty to mitigate the

landlord’s damages is not absolute. So long as the efforts to relet are reasonable, they

5 The Wingate court also held that the filing of the lawsuit terminated the lease in that case. However, the

court’s holding was based exclusively upon its interpretation of the lease at issue, and not upon general

principles of law. See Tempe Corp. Office Bldg. v. Ariz. Funding Serv., 167 Ariz. 394, 399, 807 P.2d

1130, 1135 (App. 1991) (“The Wingate court clearly stated that the lease . . . governed the damage

calculation in that case”).

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need not be successful. Stewart Title & Trust of Tucson v. Pribbeno, 129 Ariz. 15, 16,

628 P.2d 52, 53 (App. 1981).

The doctrine of avoidable consequences bars recovery of damages the landlord

could have avoided through reasonable effort, but without undue risk, expense or

humiliation. Coury Bros. Ranches, Inc. v. Ellsworth, 103 Ariz. 515, 520, 446 P.2d 458,

463 (1968). A tenant who asserts the doctrine of avoidable consequences has the burden

of proving that mitigation was probable. Stewart, 129 Ariz. at 16, 628 P.2d at 53. Thus,

if the tenant wishes to assert, for example, that (1) the premises could have been relet

sooner; (2) the premises could have been rented at a higher rate; or (3) the premises could

have been relet, but the landlord failed to do so, the tenant must prove the failure to

mitigate.

2. Reasonableness of the landlord’s effort to mitigate

damages.

As stated above, the landlord’s efforts to relet abandoned premises need be only

reasonable, not heroic. Wingate v. Gin, 148 Ariz. 289, 291, 714 P.2d 459, 461 (App.

1985). Reasonableness will be determined according to the totality of circumstances.

Dushoff v. Phoenix Co., 22 Ariz. App. 445, 449, 528 P.2d 637, 641 (App. 1974). In

Wingate, the court held that the landlord’s failure to place a “For Rent” sign on the

premises was not necessarily unreasonable because (1) the landlord contacted his leasing

agent or realtor, who in turn contacted numerous prospective tenants; (2) the vacancy was

advertised in the local newspaper; (3) the premises were shown to tenants; and (4)

advertising literature of the premises was mailed to potential tenants. Wingate, 148 Ariz.

at 291, 714 P.2d at 461.

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In another case, the Arizona Court of Appeals held that the landlord’s increase in

the rental rate at which he would relet and his failure to relet the premises for almost two

years was reasonable where the landlord (1) cleaned up the premises; (2) contacted his

leasing broker, who advertised the premises as vacant in the newspaper; (3) placed a sign

on the premises; and (4) contacted several leasing brokers trying to generate interest in

the premises. Butler Prods. Co. v. Roush, 153 Ariz. 500, 503-04, 738 P.2d 775, 778-79

(App. 1987). However, in Cochise Hotels, the court held that the landlord failed to use

reasonable efforts to relet when it (1) used the premises for personal benefit; (2) kept all

profits from its use; (3) provided the tenant with no accounting; (4) increased the security

deposit requirement; and (5) tried to sell, rather than relet the premises. Cochise Hotels

v. Douglass Hotel Operating Co., 83 Ariz. 40, 316 P.2d 290 (1957).

3. Practical steps a landlord should take to mitigate the

landlord’s damages.

Based on the existing case law, it is recommend that when a tenant has breached

the lease and the landlord has recovered possession of the premises, at a minimum, the

landlord should do the following:

a. Clean up the leased space. Be prepared to or

actually put any items seized pursuant to the landlord’s lien into storage if

that will make space more attractive to potential tenants;

b. Consider signing a listing agreement with a broker

and inquire about the standard efforts they make to lease space. For

example, one nationally known broker regularly (1) places signs on the

property; (2) makes a presentation on the space to its agents at weekly

meetings; (3) sends quarterly mailings describing the property to outside

brokers and agents in the area; and (4) makes “cold” calls and personal

visits to prospective tenants. These activities are standard among brokers

in the Phoenix area, and therefore they are probably “reasonable” efforts

to relet. Make sure that the broker has keys to the space or that someone

is available to provide access to the space on short notice;

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c. In the alternative, if the landlord decides to relet the

premises itself, it should at least contact agents and brokers about the

availability of the space, encouraging them to contract and secure a

replacement tenant. In addition, the landlord should place a “For Lease”

sign on the premises; show the premises to prospective tenants and keep a

log of all names, dates and important details; advertise the premises as

vacant and keep copies of all advertisements noting dates and publication

names and; make calls or mailings to prospective tenants;

d. If the leased space is a “specialty” space, for example, if it

is equipped for restaurant use, the landlord should also notify a business

broker dealing in that type of business that the space is available;

e. Offer to relet at a fair rental;

f. If the space can be subdivided into smaller spaces, be

willing to accommodate a potential tenant who doesn’t want all of the

vacant space;

g. If there is other vacant space in the building that is not

presently subject to a lease, show that space on an equal basis with the

leased premises. Do not recommend or encourage a potential tenant to

take the vacant space rather than the leased premises simply because a

tenant is “on the hook” for rent for that space; and

h. Keep complete and accurate records as to all efforts,

including communications with agents, brokers, and prospective tenants,

the dates on which those communications occurred, and the results of

those communications.

These guidelines are not exhaustive, but provide a reasonable starting point for a landlord

that wishes to protect its interest. For example, a tenant seeking to defeat a motion for

summary judgment will likely attempt to show that the landlord’s asking price and

reletting efforts were not reasonable. See Wingate, 148 Ariz. at 292, 714 P.2d at 462.

Specifically, such a tenant will likely attempt to prove that the landlord behaved

unreasonably. Thus, any action by the landlord that discourages a prospective tenant

from renting could be offered as evidence by the tenant and could be detrimental to the

landlord’s claim for future rentals. In this context, it would not be unreasonable for the

former tenant to call prospective tenants who viewed the space to testify as witnesses

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Scott A. Klundt of Quarles & Brady Speaker 24: 17

about their dealings with the landlord in attempting to rent the premises. Therefore, in

order to protect its right to recover future rentals, the landlord should, at a minimum,

follow the above-listed guidelines.

III.

CONCLUSION.

The single most important factor in determining the rights of a landlord the

breach of a lease is the express terms of the written lease agreement. The agreed-upon

terms can either expand or contract the common law and statutory rights of both the

landlord and the tenant. They can dictate, among other things, the appropriate procedure

for obtaining possession of the property, for terminating the lease, and for calculating

damages. The lease terms are almost uniformly cited as the controlling authority in any

such dispute. Accordingly, a prudent landlord should always attempt to anticipate the

protections it may need in the event of a default, and incorporate those protections into

the written agreement at the onset of the transaction. An alternate approach will likely

prove costly, time consuming, and lack the certainty that is afforded by a well-drafted

document.

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C. Taylor Ashworth of Stinson Morrison & Hecker LLP Speaker 25: 1

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Thomas J. Salerno of Squire Sanders & Dempsey LLP Speaker 27: 2

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