Pass-throughs may be assessed at different times (per the lease), and often commercial leases will allow a landlord to retroactively apply assessed charges. Sometimes a landlord will not assess any charges for years, but then choose to. Negotiating the exact provisions is critical to predicting expenses and running a successful operation. The extent of rights to audit is also a negotiable and important issue.
An Estoppel Certificate is a document typically used in performing due diligence prior to the purchase of tenant-occupied property. The purpose is for a lender and purchaser to have written confirmation from tenants of certain terms. Important amongst these are: the rental amount; security deposit; duration of lease; and, as discussed further below, a “subordination” clause.
The subordination clause is used to confirm that the tenants have agreed, in their lease, that their interest is subordinate to future mortgages. Without such confirmation, the tenants’ leases have priority over mortgages that are subsequently obtained. Furthermore, only a tenant whose interest is subordinate to the mortgage can be evicted. A purchaser (and their lender) may be stuck with tenants for an indefinite period without the ability to earn market rental values. A tenant may be locked in for years, and potentially even forever—courts have upheld provisions giving the tenant the right to perpetual renewal of leases.
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First, the liquidated damages cannot be a penalty—the amount specified must be reasonable under the circumstances, and cannot be “designed to substantially exceed the damages suffered, and…to serve as a threat to compel compliance through the imposition of charges bearing little or no relationship to the amount of actual loss.” Utility Consumers’ Action Network, Inc. v. AT&T Broadband, 135 Cal. App. 4th 1023, 1029 (2006); Cal. Civ. Code § 1671(b). A guiding principle is that any number picked cannot be arbitrary, and instead must be based on a reasonable attempt at determining a fair amount of compensation for the breach.
There are further rules if the clause is contained in a contract for the purchase or rental of personal property; a service used primarily for personal, family, or household purposes; or a residential lease. In those cases, a liquidated damages clause is allowed only when “it would be impracticable or extremely difficult to fix the actual damage.” Cal. Civ. Code § 1671(c) and (d).
Every situation is different, and should be evaluated by a qualified attorney. After all, if the clause unenforceable, it won’t save time, and may even ultimately cost more. It is always better to prevent problems before they occur, rather than waiting, and a well-crafted liquidated damages clause can be very effective in doing so.