Protect Yourself if You Sign ‘Marked’ Leases

It is becoming increasingly common, particularly among institutional and other large property owners, to sign “marked” or “redlined” copies of leases. A marked lease is a lease marked up to indicate how it differs from the owner's standard lease form. The markings typically involve striking out deleted text and underscoring added text.

The benefit of a marked lease is that it is very easy for someone to review and analyze the changes made for each specific tenant, says Denver attorney Neil B. Oberfeld, who has used several such leases in the past few months. This is particularly helpful when you are dealing not only with leasing transactions but also multiple property sales transactions and financing transactions, he says. It allows a buyer or lender and its attorney to quickly and effectively review a large number of leases.

However, there is a problem using marked leases: Many people sign marked leases without any explanation in those leases of what the additions and deletions mean, thus creating confusion and misunderstandings.

To prevent such confusion, add a clause to your marked leases that explains why the lease is being signed with underlined and deleted text, advises Oberfeld. This explanatory clause should cover five points to clarify the significance of the markings and help you avoid several pitfalls, he says. With Oberfeld's help, we will give you a Model Lease Clause (see box, at right) that you can use in your marked leases.

Five Points to Cover in Explanatory Clause

An explanatory clause should prevent confusion for the tenant and ensure that a court will not misconstrue the meaning of the deletions and additions. Therefore, when drafting your explanatory clause, make sure that it, like our Model Lease Clause, covers the following five points:

Indicate lease has markings. Indicate that the lease has been prepared to reflect all additions to and deletions from your standard lease form, as negotiated by you and the tenant, says Oberfeld [Clause, par. a].

Point out deletions. Suppose the lease has a clause that states that you will not be liable for any utility interruptions caused by third parties to the tenant's space. The tenant strikes out that clause. You agree to the strike-out as part of the lease negotiation, to get the deal done. And by striking out that clause, you believe that you are merely giving up a protection, not affirmatively agreeing to be liable for those interruptions. However, the tenant later sues you over its utilities being cut off for a week as a result of an accident completely unrelated to you.

The judge examines the lease and asks about the struck-out clause. The tenant argues that by agreeing to the strike-out, you were agreeing to accept some liability for utility interruptions caused by third parties—even though that was not your intention. Now you are in the undesirable position of having to convince the judge that he should not interpret the deletion as your agreement to accept liability for those service interruptions.

To prevent that unwelcome situation from occurring, clarify that any provisions and terms that are stricken are intended to be deletions and not part of the lease, says Oberfeld. Add that the deletions should not be construed as having any binding effect on the parties, he says. That way, the court will not interpret the deletion as somehow creating an agreement between you and the tenant that is the opposite of what you intended, he explains [Clause, par. b].

Point out additions. Indicate that all provisions and terms that are underlined—other than headings, titles, and captions—are intended to be additions to the lease and will form a part of the lease, says Oberfeld [Clause, par. c].

Get tenant's acknowledgment. You need to protect yourself from the possibility that the tenant could later claim that you made it sign the lease before it had the opportunity to review the contents. Therefore, make the tenant acknowledge in the explanatory clause that the tenant had the opportunity to thoroughly review and negotiate the lease, says Oberfeld [Clause, par. d].

Prevent ambiguities from being resolved against you. When a court interprets a lease that has any ambiguities, the court will often resolve the ambiguity against the party that drafted the lease, notes Oberfeld. Because you are drafting the lease, if the lease has ambiguities, a court would favor the tenant's interpretation of the lease over yours. To avoid getting burned in that way, make the tenant acknowledge that any ambiguities in the lease will not be resolved against you as the lease drafter, he advises [Clause, par. d].

Explanatory Clause Streamlines Review Process

Oberfeld says he uses an explanatory clause “all of the time” because it helps to end confusion and streamline the lease review process. He uses it more often in office and industrial settings because office and industrial tenants typically agree to use an owner's lease form. Most big retail tenants use their own lease forms and may not agree to sign a marked-up lease.

In February 2007, Oberfeld put the explanatory clause into an owner's marked leases for spaces rented to a large, high-tech company and a government contractor. In December 2006, he also added the explanatory clause to an owner's marked lease for two entire buildings rented to one tenant. Tenants' attorneys generally like the explanatory clause, Oberfeld explains, because it clearly explains the lease's markings.

CLLI Source

Neil B. Oberfeld, Esq.: Shareholder, Isaacson Rosenbaum P.C., 633 17th St., Ste. 2200, Denver, CO 80202; (303) 292-5656; noberfeld@ir-law.com.