The UCC does not cover real estate leases. Most of the rules for commercial lease contracts are in Article 2A, which has nearly 80 individual sections. Here we'll look briefly just at some of the main UCC lease rules. Note on lease terminology. Lease contracts involve two parties: 1 the lessor , who owns the leased goods and is making them available for lease, and 2 the lessee , who is leasing the goods for temporary use. The UCC makes an important distinction between leases and secured transactions.
If a business is truly leasing an item, the lessor keeps title to the item, and has the right to repossess the item if the business runs out of money. By contrast, if a business is actually buying an item over time on credit, then it is the business that has title to the item, and if the business runs out of money, other creditors besides the "lessor" may have rights to take the item to satisfy unpaid debts. As stated in the UCC, "A true lease of goods [versus a secured transaction] involves the payment for temporary possession.
Transactions may superficially appear to be lease contracts but in fact are secured transactions. In these situations, "lessors" actually, sellers need to take additional steps to protect their interests in the goods. Most importantly, the seller should file a UCC financing statement with the appropriate government office.
Otherwise, the seller will have fewer rights in the event of the buyer's bankruptcy. For more details, see the Nolo articles on secured transactions. An apparent lease transaction for goods will create a security interest in the goods if the lessee buyer is obligated to make payments on the goods for the entire term of the lease without a right to early termination, and any of the following is true:.
This rule, which appears in UCC Section , may appear somewhat complicated but can be explained with a few short examples. Example 1. Your business signs a three-year "lease" for a very old office machine that only has an additional two-year useful life.
This "lease" is, in fact, a sale on an installment plan, and, per the first listed item above, creates a security interest. Your business signs a two-year "lease" for the same old office machine as in Example 1. The lease can be renewed at the end of the two years, at no additional charge.
This transaction is effectively a sale, and, per the third listed item above, creates a security interest. Example 3.
Your business signs a five-year "lease" for an office machine that gives you an option to become the owner of the machine at the end of the five-year period at no additional charge. Determination of Fair Market Value 6. Baseball Arbitration Method 6. Qualifications of Appraisers 6. Time Limits on Appraiser Selection Process 6. Definition of Fair Market Value 6. Form Provision: Landlord's and Tenant's Wishes 6.
Risk of Recharacterization of Sale-Leaseback 6. Recordation of Option Rights and Title Insurance 6. Assignability of Option 6. Form Provision: Effect of Option on Mortgagees 6. Effect of Rule Against Perpetuities 6. Effect of Landlord's Bankruptcy 6. Right of First Refusal 6. Terms of Right of First Refusal 6. Landlord's Objections to Right of First Refusal 6. Waiver of Tenant's Rights 6. Right of First Offer 1. Terms of Right of First Offer 6.
Effect of Subsequent Modification of Offer 6. Competing Concerns of Landlord and Tenant 7. Public Sector Landlord 7. Leasehold Financing 7.
Elements of Ground Lease Rent Structure 7. Time Period 7. Option Alternative 7. Establishing Construction Period Rent 7. Delays in Construction 7. Form: Force Majeure Delay 7.
Form: Establishing Construction Period Rent 7. Multiphase Development Projects 7. Factors in Establishing Minimum Rent 1. Fair Market Rental Value 7. Anticipated Percentage Rent 7. Commencement of Minimum Rent 7. Rent Credits 7. Minimum Rent Adjustments 7. Fixed Minimum Rent Adjustments 7. Inflation-Related Minimum Rent Adjustments 7. Incremental Adjustments in Percentage Rent Leases 7. Description; Purpose 7.
Freestanding Single-User Ground Lease 7. Development Ground Lease 7. Breakpoints 1. Minimum Rent as Breakpoint 7. Negotiated Breakpoint 7. Other Methods for Determining Percentage Rent 7. Determination of Gross Revenues 7. Exclusions 7. Payment of Percentage Rent 7. Documentation and Audits 7. Form: Percentage Rent 7. Purpose 7. Value Appreciation Rent Issues 7.
Timing a. Sale or Refinance 7. Transfers of Ownership Interests in Tenant Entity 7. Basis for Value Appreciation Rent a. Net Sale Proceeds Formula 7. Net Profit Formula 7. Noncash Proceeds 7. Net Profit Formula Protections 7. Refinancing 7. Subordination of Value Appreciation Rent 7. Form: Value Appreciation Rent 7. Timing 7. Defining Fair Market Rental Value 7. Rent Floor 7. Methodologies 7. Difficulties in Adjusting Minimum and Percentage Rent 7.
Remaining Lease Term 7. Appraisal Process 7. Arbitration 7. Necessity of Security Deposit 1. Factors 7. Tenant's Creditworthiness and Business Experience 7.
Extent of Landlord's Obligations a. Tenant Default 7. Amount 7. Letter of Credit as Alternative Security Arrangement 7. Bankruptcy 7. Return of Security Deposit 7. Form: Security Deposit 7. Common Area Maintenance Costs 7. Other Expense Allocations 1. Taxes 7. Insurance 7. Utilities 7. Title Insurance 7. Miscellaneous Charges 7. Development Ground Lease 1. Tenant Issues 8. Subtenant Uses 8. Lender Requirements 8. Landlord Issues a.
Impact on Rent 8. Impact of Use of Adjoining Property 8. Impact of Financing 8. Freestanding Single-User Ground Lease 1. Tenant Mix 8. Rent 8. Trade Name Restriction 8. Operating Covenants 8. Radius and Exclusive Use Restriction 8. Undesirable Uses 8. Tenant Issues a. Right to Change Use or Close 8. Transfers and Assignments 8. Consent Rights and Conditions 8.
Alter or Construct Improvements 8. Effect of Use Restriction on Landlord's Remedies 8. Overview 9. Potentially Responsible Parties 9. Landlord as "Owner" 9. Tenant as "Owner" 9. Innocent Landowner Defense 9. Contiguous Property Owner Defense 9.
Bona Fide Prospective Purchaser Defense 9. Bona Fide Ground Tenant 9. Applicable Immunities 9. Key Definitions 9. Disclosure of Known Contamination 1. Duty to Disclose 9. Form Provision: Definition of Contamination 9. Disclosure in the Ground Lease a. Form Provision: Remediation of Known Contamination 9. Form Provision: Representations and Warranties 9.
Form Provision: Indemnification 9. Introduction Initial Development Scenarios Importance of Initial Development Provisions Issues Covered Interaction With Other Lease Provisions Mandatory Construction Provisions Permissive Construction Provisions Construction Prerequisites Outside Tenant's Control Scope of Approval Rights Approval of Plans 1.
Parties' Interests in Approval Rights a. Landlord's Interest: Quality of Improvements Tenant's Interest: Minimal Discretionary Approvals Compromise Provisions Procedure for Approval Other Approval Rights 1.
Approval of Tenant's Construction Financing Authority and Responsibility to Obtain Government Approvals Tenant's Right to Grant Easements Standard for Approval 1.
Reasonableness Standard Landlord's Disclaimer of Implied Warranty Approval Problems Dispute Resolution Commencement of Construction and Demolition Early Entry Standards of Construction Compliance With Laws Changes in Construction Plans Insurance Mechanics Liens and Notice of Nonresponsibility Completion of Construction Consequences of Delay Security Arrangements Ownership of Improvements Parties to the Ground Lease Financing Aspects of Ground Leases Financeability or Mortgageability 1.
Risk of Loss of Security Interests of Future Parties Mortgagee Protection Provisions Model Provisions Term Minimum Term Requirements Regulatory Requirements Securitization Refinance Risk Options to Extend Form: Exercise Before Loan Closing Rent Direct Pay by Leasehold Mortgagee Impounds and Reserves for Ground Rent Rent Escalation Provisions a. General Formula Increases Appraisal Increases Subordination of Portion of Increased Rent Use of Caps on Rent Increases Encumbering the Leasehold Interest 1.
Form: Right to Encumber Form: Permitted Leasehold Mortgagees Governmental Agencies as Landlords Multiple Leasehold Mortgages Assignment and Subletting Restrictions on Assignment Form: One-Time Right to Assign Right to Sublet Use Title and Title Insurance 1. Importance of Legal Description Effect of Rights of First Refusal or Offer Leasehold Mortgagee Title Insurance a.
Obtaining Title Insurance Scope of ALTA Mortgagee Right to Cure or Perform Loan Document Provisions Categorization of Defaults Form: Possession of Property to Effect Cure Notice to Leasehold Mortgagee of Tenant's Default a. Form: Notice of Defaults Form: Cure Rights Provision Form: Other Notices to Leasehold Mortgagee Form: Mortgagee Notice to Landlord Bankruptcy 1.
Tenant Bankruptcy Landlord Bankruptcy Form: Obligation of Tenant to Object Precision Industries v Qualitech Form: New Lease on Termination Assignment of Lease as Alternative to New Lease Form: Memorandum of Lease Multiple Mortgagees Casualty and Condemnation 1. Competing Interests Form: Mortgagee Liability Exculpation Provisions Other Mortgagee Issues 1.
Form: Merger Areas of expertise include contract drafting and negotiation, terms of use, business structuring and funding, company and employee policies, general transactional issues as well as licensing and regulatory compliance. His prior experience before entering private practice includes negotiating sales contracts for a Fortune healthcare company, as well as regulatory compliance contracts for a publicly traded dental manufacturer.
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Expanded to estate planning last year. George is a lifelong Houston resident. He graduated from St. He is active in the community serving as past-president of the St. My clients are often small and medium size technology companies, from the "idea" stage to clients who may have raised a round or three of capital and need to clean up a messy cap table. I help with all legal matters related to growth that keep founders up at night - hiring people, allocating equity, dealing with shareholders and investors, client negotiations and early litigation counseling before you need a litigator.
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Many of my clients are international with US based holding companies or presences. My 17 years abroad helps me "translate" between different regimes and even enabling Civil and Common Law lawyers to come together. Sammy Naji focuses his practice on assisting startups and small businesses in their transactional and litigation needs. He has successfully obtained results for clients in breach of contract, securities fraud, common-law fraud, negligence, and commercial lease litigation matters.
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What Is a Lease Agreement? Types of Leases People can lease all manner of property, including items like cars and boats. A few of the most common types of leases include: Commercial lease: Commercial property like offices. Condominium lease: A residential property that shares some building amenities with other tenants. Family member lease: For family members leasing property. Hunting lease: To use private property for hunting.
Lease-to-own lease: Provides the option to purchase the property from the landlord. Month-to-month lease: A type of short-term lease agreement. Parking space lease: To use for parking a vehicle on private property.
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