The basic lease form (form 25-1 in this chapter) contains the minimal terms necessary for a lease. Although the form could be used as written in appropriate circumstances, its primary purpose is as a drafting tool, a core lease from which to draft for the particular situation. This lease has been adapted for use in various circumstances. Form 25-5 is a residential lease form derived from the basic lease form but containing the necessary modifications to convert the basic lease into a residential lease. The basic lease has also been adapted for use as a retail lease (form 25-2), an office lease (form 25-3), an industrial lease (form 25-6), and a manufactured-home community lease (form 25-11).
A lease is a conveyance of real property for a designated period of time with a reversionary interest in the lessor. Over time, the newer concepts of contract law have crept into use with the older property law, and the lease has become a hybrid of a conveyance and a contract between the landlord and the tenant. The landlord-tenant relationship is governed by title 8 of the Texas Property Code as well as by other statutes and a large body of case law. Title 8 of the Texas Property Code is divided into four chapters: chapter 91 (Provisions Generally Applicable to Landlords and Tenants), chapter 92 (Residential Tenancies), chapter 93 (Commercial Tenancies), and chapter 94 (Manufactured Home Tenancies).
If the term of the lease is more than one year, the lease is unenforceable unless it is in writing and signed by the party to be charged with its covenants. ; . Certain provisions of the Property Code require that the lease be signed by both parties for the lease to serve as an exception to the statutory provisions. See, e.g., . An assignment of a lease that is subject to the statute of frauds must also comply with the statute of frauds. Other provisions of the Property Code may not be waived by the lease. See, e.g., . Manufactured-home community leases must be in writing and signed by both the landlord and the tenant. .
§ 25.1:3Caution: Property Description
As a general rule a lease that is subject to the statute of frauds must contain, within itself or by reference to some other existing writing, the means or data by which the premises to be leased may be identified with reasonable certainty. Hebisen v. Nassau Development Co., 754 S.W.2d 345, 351 (Tex. App.—Houston [14th Dist.] 1988, writ denied), overruled on other grounds by Formosa Plastics Corp. v. Presidio Engineers & Contractors, Inc., 960 S.W.2d 41 (Tex. 1998). The rule for leases is derived from the general rule for sales and conveyance of real estate. See, e.g., Pick v. Bartel, 659 S.W.2d 636, 637 (Tex. 1983); Morrow v. Shotwell, 477 S.W.2d 538, 539 (Tex. 1972). A manufactured-home community lease agreement must contain the address or number of the manufactured-home lot. .
If the lease agreement that is subject to the statute of frauds contains no adequate description of the leased premises, it is unenforceable. If the leased premises are identified only by a suite number or a diagram on an attached exhibit, such as a schematic of an undesignated floor of the building or project of which the leased premises are a part, the lease may be unenforceable. Sometimes the schematic of the undesignated floor shows a certain section by crosshatches, but if there is no metes-and-bounds or lot and block number from a plat description of the entire project there is no legal description of the leased premises. See, e.g., River Road Neighborhood Ass’n v. South Texas Sports, 720 S.W.2d 551 (Tex. App.—San Antonio 1986, writ dism’d); Lubel v. J.H. Uptmore & Associates, 680 S.W.2d 518 (Tex. App.—San Antonio 1984, no writ). There is an exception where a street address or a commonly known name may be a sufficient property description if there is no confusion. Apex Financial Corp. v. Garza, 155 S.W.3d 230, 237 (Tex. App.—Dallas 2004, pet. denied); TLC Hospitality, LLC v. Pillar Income Asset Management, Inc., 570 S.W.3d 749, 767 (Tex. App.—Tyler 2018, pet. denied). The best practice is to use a lot and block number from a plat map or a metes-and-bounds description.
§ 25.1:4Cautions: Risk Allocation
Indemnities and Waivers: The indemnity provisions of the multitenant building or project lease forms are designed to protect the respective parties from their own ordinary negligence (but not gross negligence or willful misconduct) on a geographic basis; that is, the tenant indemnifies the landlord for any damage or injury occurring within the premises, whether or not the ordinary negligence of the landlord is a cause of the damage or injury, and the landlord indemnifies the tenant for any damage or injury occurring within the common areas, whether or not the ordinary negligence of the tenant is a cause of the damage or injury. The waiver of subrogation provision contained in the multitenant building or project lease forms releases both parties from liability for property damage and loss of revenues up to the limits of the property insurance coverages required to be carried under the lease, notwithstanding the ordinary negligence of the party causing the property damage or loss of revenues. The indemnity and waiver provisions are designed to comply with the two-pronged “fair notice doctrine” under Texas case law: (1) the “express negligence rule” set forth in Ethyl Corp. v. Daniel Construction Co., 725 S.W.2d 705 (Tex. 1987), and (2) the “conspicuousness rule” enunciated in Dresser Industries, Inc. v. Page Petroleum, Inc., 853 S.W.2d 505 (Tex. 1993).
Insurance: It is critical that the parties consult with their insurance professionals to determine the exact insurance coverages to be included on the insurance addendum incorporated into the lease form or, if applicable, the separate insurance addendum (forms 25-35 and 25-36 in this chapter) and that the attorneys tailor the indemnity and casualty provisions in response to the actual insurance policies that will be carried by the parties.
Rebuilding Obligations: The restoration obligations of the parties after a casualty are tied to the description of “Tenant’s Rebuilding Obligations” contained in the Basic Terms of the lease. The tenant is expected to restore those leasehold improvements described in “Tenant’s Rebuilding Obligations” in addition to replacing its personal property (including inventory, furniture, trade fixtures, and equipment). Because the tenant should carry property insurance to cover its restoration obligations, a detailed description is imperative. See clauses 25-13-8, 25-13-9, and 25-13-10. The landlord’s restoration obligations are defined in terms of the portions of the premises that the tenant is not required to rebuild.
For example, the tenant may be receiving the space in shell condition and be responsible for the initial construction of all leasehold improvements. The parties may decide that the tenant will restore all of the leasehold improvements inside the shell if the premises are destroyed. At the other extreme, the tenant may be receiving the premises with existing leasehold improvements, and the parties may decide that the landlord should restore all leasehold improvements after a casualty. Obviously the possibilities are infinite and depend on the economic underpinnings of the transaction as well as the relative sophistication of the parties. However, the question must be asked at the outset of the transaction so that both parties are clear about the allocation of the risk for restoration and that adequate property insurance is obtained.
See chapter 17 in this manual for more information on risk allocation.
§ 25.1:5Fair Credit Reporting Act
The Fair Credit Reporting Act, , applies to landlords who use consumer reports in screening prospective tenants. If the landlord takes adverse action based in whole or in part on a consumer report, the landlord is required to provide the prospective tenant with a notice of adverse action meeting the requirements of section 1681m of the Act. . A consumer report includes a credit report from a credit bureau or from a tenant-screening service. See . Adverse action includes a denial of the application or a requirement for a deposit, a higher deposit, or higher rent than would have been required of other tenants. See .
Landlords who furnish information regarding a tenant to a credit reporting agency must comply with the duties set out in section 1681s–2 of the Act, including the duty to furnish correct information, to correct and update information, and to investigate disputed information. See .
The lease forms in this chapter provide that a lease will terminate if, as a result of condemnation or conveyance in lieu thereof, the premises cannot be used for the purposes provided by the lease. They also provide that the tenant is not entitled to any proceeds from the condemnation except for relocation benefits or awards that are available to the tenant but that do not reduce the award or proceeds payable to the landlord. The federal government provides relocation benefits, moving expenses, and similar payments to persons relocated as a result of condemnation under the federal Uniform Relocation Assistance and Real Property Acquisition Policies Act of 1970, . The state of Texas and local governments are authorized to provide similar payments as part of the cost of acquisition of the real property. See . Under Texas law, however, if a lease provides that the lease terminates on condemnation, the tenant is not entitled to any condemnation proceeds because the tenant no longer has a compensable leasehold interest. Motiva Enterprises, LLC v. McCrabb, 248 S.W.3d 211 (Tex. App.—Houston [1st Dist.] 2007, pet. denied). Consequently, it is possible that a condemnor could find that a tenant who is not a party to the condemnation proceeding is not eligible for relocation or other benefits or awards.
§ 25.2General Instructions for Completing Forms
For information about completing the forms generally, see chapter 3 in this manual. In most forms, the information that the attorney must provide is listed at the beginning of the form. Of course the attorney may add other specific provisions and references to exhibits and riders at the end of the form.
For general information about designation of parties, see section 3.10. Information relevant to some conveyances, such as those involving homestead property, is not relevant to a lease and need not be included with the party designations.
§ 25.3General Considerations for Retail Lease
The retail lease, form 25-2 in this chapter, is an adaptation of the basic lease including provisions tailored to leasing retail space in a shopping center. The modifications deal with the specifics associated with a typical retail business operation, including provisions concerning trade name, description of the shopping center, payment of percentage rental, and pass-through of common area maintenance charges. To provide for payment of percentage rental, a definition of gross sales is added, as is a covenant for operating a business within the premises so as to maximize gross sales. The definition of “gross sales” used in this lease is basic, and the attorney should consider whether some amendment or amplification is appropriate for the situation at hand. Other specific provisions apply to the landlord and the tenant concerning various operational and maintenance issues. The attorney may desire to include more specific provisions dealing with such matters as parking and sign-age, which may be proper subjects for inclusion in the rules and regulations exhibit. In this lease, the percentage rent is due on the tenth of the month, rather than the first, to give the tenant time to close its books for the previous month and to compute percentage rent.
§ 25.4General Considerations for Office Lease
The office lease, form 25-3 in this chapter, is an adaptation of the basic lease containing specific provisions tailored to a commercial office tenancy. The variations are provisions for passing through operating expenses, a fairly common practice in leasing office space; for parking rights; and for rights to use common areas. The lease is also more specific about the services required to be provided by the landlord, again with a view toward comporting with what is typical industry practice. Form 25-4 provides a rider for parking facilities.
§ 25.5General Considerations for Residential Lease
The residential lease, form 25-5 in this chapter, is an adaptation of the basic lease tailored to a residential tenancy. The form is designed for simple residential tenancies such as a lease of a home or a townhouse unit. It is not particularly suited for use with a multifamily project with on-site management. It varies from the basic lease in providing specific provisions relating to residential occupancy, such as the landlord’s duty to maintain the premises to comply with applicable law.
§ 25.5:1Rent Payment by Check and Late Fee
If the landlord wants to require payment by check or other traceable means of payment, a residential lease must state so in writing. . This clause appears as paragraph B.1.l. in the “Tenant’s Obligations” section of the residential lease but may be omitted if the parties desire. See form 25-5 in this chapter. If the landlord collects a fee for late payment of rent, notice of the fee must be included in the lease and the fee must be reasonable. .
§ 25.5:2Right to Terminate Residential Leases in Certain Circumstances
Residential tenants have special statutory rights to terminate leases under certain circumstances.
A tenant may terminate his rights and obligations under a residential lease, vacate the residence, and avoid liability for future rent (1) if the tenant or an occupant of the dwelling unit is a victim of family violence or (2) if the tenant is a victim of sexual assault or the parent or guardian of a victim of sexual assault, indecency with a child, sexual performance by a child, continual sexual abuse of a child, or any attempt to commit any of the foregoing offenses under section 21.02 of the Texas Penal Code. The Texas Property Code imposes specific prerequisites, documentation, and deadlines for a tenant to exercise these statutory rights of early termination. , . The Property Code requires specific language in the residential lease advising the tenant of these remedies. For circumstances involving family violence, the relevant statutorily provided lease provision reads, “Tenants may have special statutory rights to terminate the lease early in certain situations involving family violence or a military deployment or transfer.” See . For circumstances involving sexual violence, the relevant statutorily provided lease provision reads, “Tenants may have special statutory rights to terminate the lease early in certain situations involving certain sexual offenses or stalking.” See . Paragraph D.22. of the residential lease, form 25-5 in this chapter, combines these two advisories. If the advisories are not in the residential lease, the tenant, if he follows the procedural requirements, may not only terminate the lease and avoid paying future rent, but will also not be liable for delinquent unpaid rent.
If a tenant who is the sole occupant of a dwelling dies before the expiration of the lease, a representative of the estate of the tenant may terminate the tenant’s rights and obligations under the lease, vacate the residence, and avoid liability for future rent. .
A tenant who is a servicemember or dependent of a servicemember similarly may terminate a lease, vacate the dwelling, and avoid liability for future rent if the tenant enters the military service after executing a residential lease or, if the tenant was a servicemember at the time of execution, the tenant receives orders for a permanent change of station or deployment with a military unit for a period of ninety days or more. . The relevant statutorily provided lease provision reads, “Tenants may have special statutory rights to terminate the lease early in certain situations involving family violence or a military deployment or transfer.” See . Specific notice and delivery requirements are set forth in the statute. The right to terminate in the case of family violence may not be waived, but the right of a servicemember or a dependent may be waived in certain circumstances specified in the Property Code. Additionally, if the residential lease form does not contain a specific notice provision, the vacating tenant may also avoid liability for delinquent unpaid rent. Form 25-5 contains this provision.
Form 25-5 also contains the required provisions regarding landlord liabilities and tenant remedies for repair of conditions that materially affect the physical health and safety of an ordinary tenant as authorized by Property Code sections 92.056–.0563. requires a lease to “contain language in underlined or bold print that informs the tenant of the remedies available under this section [§ 92.056] and Section 92.0561.” If these provisions or substantially equivalent language is not in the lease, the tenant who terminates a lease under these sections is released from all liability for any delinquent, unpaid rent owed to the landlord by the tenant on the effective date of the lease termination. See , .
Property Code section 92.0135 requires a specific notice of floodplain. See section 25.5:3 below and form 25-38 in this chapter. If a landlord violates section 92.0135 and a tenant suffers a substantial loss or damage to the tenant’s personal property as a result of flooding, the tenant may terminate the lease by giving a written notice of termination to the landlord not later than the thirtieth day after the date the loss or damage occurred. . A tenant suffers a substantial loss or damage to personal property if the total cost of repairs to or replacement of the personal property is 50 percent or more of the personal property’s market value on the date the flooding occurred. Termination of the lease is effective when the tenant surrenders possession of the dwelling.
§ 25.5:3Notice for Dwelling Located in Floodplain
At or before the execution of a lease, a landlord must provide a written notice to a tenant in a separate written document that provides certain information about residential dwellings in floodplains, whether or not the dwelling is actually located in a floodplain. See form 25-38 in this chapter.
§ 25.5:4Security Deposit in Residential Lease
A landlord is liable for failure to return a residential tenant’s security deposit within thirty days after the date the tenant surrenders possession of the premises and provides a forwarding address to the landlord or landlord’s agent. . A landlord may offer the tenant an option to pay a fee in lieu of a security deposit. . If a landlord retains all or part of the security deposit, the landlord must provide the tenant with an itemized list of deductions. . There is a presumption of bad faith on the part of the landlord if the security deposit is not returned to the tenant or if the landlord fails to provide the tenant with an itemized list of deductions on or before sixty days after the date the tenant surrenders possession. . See also –.111. The lease forms in this chapter have an agreement by the landlord to return the security deposit within thirty days.
§ 25.5:5Caution: Residential Lease
Texas Property Code provisions and case law applicable to residential tenancies vary in significant ways from the law applicable to commercial tenancies. The attorney should carefully review chapter 92 of the Property Code. No attempt has been made to cover all aspects of or duties relating to a residential situation. For example, a residential landlord has a duty to install smoke alarms. See . The liability of a guarantor of a residential lease is subject to certain limitations. See . A residential landlord is subject to restrictions on the right to lock out a tenant for nonpayment of rent that are not applicable to the commercial landlord. Compare , with . Also, the law concerning interruptions of utilities in residential tenancies differs from that for commercial tenancies. Compare , , , with .
§ 25.6General Considerations for Industrial Lease
The industrial lease, form 25-6 in this chapter, is an adaptation of the basic lease including clauses necessary to convert the basic lease to an industrial lease. The industrial lease has more similarities to the retail lease than other lease forms minus, of course, percentage rental, covenant of continuous operations, and common area maintenance provisions. The main additions to the industrial lease deal with the tenant’s obligation to pay for industrial waste introduced into the sanitary sewer system; to maintain dilution tanks, grease traps, and so forth; and to share in the joint maintenance of rail services, if any. Attorneys using the industrial lease as a drafting form might also consider using the asbestos disclosure notice, form 25-31, particularly if the building was constructed before 1981.
§ 25.7General Considerations for Hunting, Agricultural, and Grazing Leases
The hunting lease, form 25-7 in this chapter, is an adaptation of the basic lease tailored for the use of agricultural land for hunting. There is a technical distinction between a hunting lease, which is a license or profit à prendre, and a lease that conveys an interest in real property. See Digby v. Hatley, 574 S.W.2d 186 (Tex. App.—San Antonio 1978, no writ). In most transactions this distinction is not significant, and the form uses the common term lease rather than draw attention to the distinction. This form applies to the surface only. If improvements on the premises are to be available for the tenant’s use, additions must be made to describe and provide for that use.
The agricultural lease, form 25-8, is an adaptation of the basic lease for growing crops. The rent clause is different, and the obligations of the tenant and the landlord have been modified slightly to take into account this different use.
The grazing lease, form 25-9, is an adaptation of the basic lease for grazing. It differs only slightly from the basic lease.
The agricultural lease and the grazing lease both contain clauses granting a contractual landlord’s lien in the tenant’s crops and livestock located on the leased premises. Complete perfection of a security interest in farm products requires compliance with both article 9 of the Texas Business and Commerce Code and the federal Food Security Act of 1985. See section 9.7:2 and accompanying forms in chapter 9 in this manual.
§ 25.7:1Instructions for Completing Hunting Lease
A list of persons authorized to hunt on the premises should be contained in an exhibit to the hunting lease. This list may be specific (for example, “Bob Smith, Ed Jones”) or more general (for example, “Martha Stuart and four guests” or “six guns”).
§ 25.7:2Caution: Hunting Lease
There are many laws that regulate the taking of game and the recreational use of land of which parties to hunting leases should be aware. As with the other forms in the manual, no attempt has been made to reiterate the duties imposed by statute and case law. In particular, the attorney should carefully review Texas Parks and Wildlife Code chapter 43, subchapter D, which governs hunting lease licenses. For a general discussion of this topic, see the articles cited in section 25.14 below. See also section 2.150 in this manual referring to chapter 75 of the Texas Civil Practice and Remedies Code.
§ 25.8General Considerations for Manufactured-Home Community Lease
The manufactured-home community lease, form 25-11 in this chapter, is an adaptation of the basic lease tailored to a manufactured-home community tenancy. It varies from the basic lease by providing specific provisions necessitated by the enactment of Texas Property Code chapter 94. Chapter 94 governs the landlord-tenant relationship in manufactured-home communities in which four or more lots are offered for lease for the purpose of the tenant’s placing on the landlord’s property a manufactured home that is not owned by the landlord. . See also . This legislation regulates the form and content of the lease agreement (), security deposits (), the landlord’s warranty of suitability and duty to maintain and repair (), and other aspects of the landlord-tenant relationship in manufactured-home community tenancies.
§ 25.8:1Disclosures at Time of Application
At the time a landlord receives an application from a prospective tenant of a lot in a manufactured-home community, the landlord must provide a copy of the proposed lease, the rules of the manufactured-home community, and a separate statutory notice of the tenant’s legal right to a six-month initial lease term and sixty days’ notice of nonrenewal or, in the case of a change in land use of the manufactured-home community, 180 days’ notice of nonrenewal. . Form 25-12 in this chapter gives the statutorily required notice.
§ 25.8:2Manufactured-Home Community Rules
Manufactured-home communities may adopt written rules, which are considered part of the lease agreement, establishing the policies and regulations of the manufactured-home community, including regulations relating to use, occupancy, quiet enjoyment, and health, safety, and welfare of tenants of the manufactured-home community. .
Unless the manufactured-home community lease requires payment of rent by check or other traceable means, a landlord must accept and give receipts for cash rental payments. . A clause requiring payment of rent by traceable means appears as paragraph B.1.m. of the manufactured-home community lease (form 25-11 in this chapter) but may be omitted if the parties desire.
§ 25.8:4Disclosure of Ownership and Management
The landlord must disclose the name and address of the record title holder of the leased lot in the manufactured-home community and the names and addresses of any off-site property managers. . The disclosure may be contained in the lease agreement, in the rules, in a notice continuously posted in the community or the manager’s office, or in writing, delivered within seven days of the landlord’s receipt of a written request for the information. .
§ 25.8:5Minimum Initial Lease Term
Manufactured-home community landlords are required to offer prospective tenants an initial lease term of at least six months, but the parties may agree to a shorter or longer initial lease term if requested by the tenant. .
§ 25.8:6Landlord’s Notice to Vacate or Offer to Renew
Manufactured-home community landlords are required to provide a tenant with a notice to vacate the leased premises or an offer to renew the lease at least sixty days before the expiration of the lease. . If the landlord offers to renew the lease, the renewal offer must notify the tenant of any changes in the current lease terms and include a statement notifying the tenant that the tenant’s failure to timely reject the renewal offer will result in the automatic renewal of the lease as modified by the terms contained in the landlord’s renewal offer beginning on the first day after the expiration of the current lease. . To avoid the automatic renewal of the lease as modified by the terms contained in the renewal offer, the tenant must notify the landlord not later than the thirtieth day before the date the current lease term expires that the tenant rejects the landlord’s renewal offer and intends to vacate the leased premises on expiration of the current lease term. . This statutory provision is a noted departure from the well-established common-law principle that silence does not bind a party to a contract.
Regardless of the term of a manufactured-home community lease, a landlord must give a tenant at least sixty days’ prior written notice if the landlord is not going to renew the lease or, in the case of a change in land use, 180 days’ notice of nonrenewal. , .
§ 25.8:8Landlord’s Maintenance Obligations
A manufactured-home community landlord is required to maintain all common areas, utility lines not maintained by a public utility or political subdivision, roads, mailboxes, and garbage collection and to repair or remedy any condition materially affecting the physical health and safety of an ordinary tenant of the manufactured-home community. . The landlord must make a diligent effort to repair or remedy such a condition after a written request specifying the condition to be repaired is given to the landlord by a tenant who is not delinquent in the payment of rent at the time the notice is given. . A manufactured-home community landlord has no duty to maintain or repair a condition present in or on a tenant’s manufactured home. .
Unlike with other types of tenancies, a manufactured-home community landlord may prevent a tenant from entering the tenant’s manufactured-home lot, evict a tenant, or require removal of the tenant’s manufactured home from the lot only after obtaining a writ of possession. . The writ of possession cannot issue before the expiration of thirty days after the date of the judgment granting possession if the tenant has paid the rent due for that thirty-day period. .
§ 25.8:10Caution: Manufactured-Home Community Lease
The Texas Property Code provisions applicable to manufactured-home community tenancies vary in significant ways from the law applicable to either residential or commercial tenancies. The attorney should carefully review chapter 94 of the Property Code because the rights, duties, and liabilities of the parties under chapter 94 cannot be waived. See . No attempt has been made in this manual to cover all aspects of or duties relating to the landlord-tenant relationship in a manufactured-home community. Appropriate modifications are required if the attorney elects to use the manufactured-home community lease for transactions not governed by chapter 94.
§ 25.9General Considerations for Commercial Lease
Commercial leases are considered by the legislature to be quite different from residential leases and manufactured-home community leases. Chapter 92 of the Texas Property Code contains the statutes concerned with residential leases, and chapter 94 contains the statutes concerned with manufactured-home community leases, whereas chapter 93 deals with commercial leases. Chapters 92 and 94 impart an air of legislative protectionism for the residential tenant, with numerous restrictions on the landlord; chapter 93 has a more laissez-faire policy and allows the parties to contract as they see fit. The drafter using the Texas Real Estate Forms Manual should be aware of these three Property Code chapters (as well as chapter 91, which deals with all tenancies) and should realize that the numerous legislative restrictions on a residential or manufactured-home community landlord do not apply to a commercial landlord.
§ 25.9:1Broker Lien in Commercial Lease
The Broker’s and Appraiser’s Lien on Commercial Real Estate Act, chapter 62 of the Texas Property Code, gives brokers a lien by reason of the sale or lease of real property. Section 62.021 sets forth the prerequisites for a broker to acquire a lien. See . Section 62.021 gives the broker a lien against the landlord’s property for the commission on the lease if—
1.the broker earned the commission (pursuant to a written commission agreement (see )), and
2.the broker recorded a notice of the lien (see ).
. The commission agreement must disclose the right of the broker to claim a lien. .
Section 62.022(b)(2) automatically waives the broker’s lien in a commercial lease if the broker’s commission agreement is included as a provision in the lease. . For this reason, the drafter may wish to include the real estate commission rider, form 25-32 in this chapter, as part of the lease. The drafter, however, should be careful to consider what effect renewal options might have on the real estate commission rider.
§ 25.9:2Security Deposit in Commercial Lease
A landlord is liable for failure to return a tenant’s security deposit within sixty days after the date the tenant surrenders possession of the premises and provides a forwarding address to the landlord or landlord’s agent. . If a landlord retains all or part of the security deposit, the landlord must provide the tenant with an itemized list of deductions. . There is a presumption of bad faith on the part of the landlord if the security deposit is not returned to the tenant or if the landlord fails to provide the tenant with an itemized list of deductions on or before sixty days after the date the tenant surrenders possession. . See also . The lease forms in this chapter have an agreement by the landlord to return the security deposit within sixty days.
§ 25.9:3Assessment of Charges in Commercial Lease
Texas Property Code section 93.012 deals with assessment of charges by a commercial landlord against a commercial tenant. Section 93.012(a) reads as follows:
A landlord may not assess a charge, excluding a charge for rent or physical damage to the leased premises, to a tenant unless the amount of the charge or the method by which the charge is to be computed is stated in the lease, an exhibit or attachment that is part of the lease, or an amendment to the lease.
. Most commercial landlords assess charges against the tenant on a regular basis for things such as extra keys; overtime heating, ventilating, and air conditioning; proportionate utilities and taxes; proportionate common-area expenses; and estimated operating expenses. Because requires either the amount of the charge or the method by which the charge is to be computed to be stated in the lease, the drafter may wish to add language covering most of the expected expenses to be assessed and a statement that the charge to be assessed will be the landlord’s actual cost. The lease forms in this chapter provide for assessment of charges to the tenant, but the method by which the charge is calculated is stated (for example, “Tenant’s pro rata share” of utility charges, common-area maintenance, taxes and insurance, and so forth). However, commercial landlords who assess to tenants charges other than rent for which the amount or method of computation is not specified in the lease, should be aware of section 93.012 of the Property Code.
§ 25.9:4Implied Warranty of Suitability in a Commercial Lease
In a commercial lease, a landlord warrants that the property is suitable for the tenant’s intended commercial purpose. Davidow v. Inwood North Professional Group—Phase 1, 747 S.W.2d 373 (Tex. 1988). This implied warranty exists separately and apart from any obligation the landlord may have under the lease. As a matter of law, the implied warranty is limited only by specific terms in the parties’ commercial lease whereby a tenant expressly agrees to repair certain defects. Inwood, 747 S.W.2d at 377. The parties may agree to waive this implied warranty. Gym-N-I Playgrounds, Inc. v. Snider, 220 S.W.3d 905 (Tex. 2007).
§ 25.9:5Doctrine of Independent Covenants; Tenant’s Right to Terminate for Landlord’s Material Breach
At common law, the lease was traditionally regarded a conveyance of an interest in land, and once the landlord delivered possession of the premises, the tenant had a duty to pay rent as long as possession continued. All lease covenants at common law were thus considered independent because the tenant, being in possession of everything entitled to under the lease, had to pay rent no matter what lease covenant the landlord breached. The Texas Supreme Court held in Rohrmoos Venture v. UTSW DVA Healthcare, LLP, 578 S.W.3d 469 (Tex. 2018), that the concept of independent covenants was antiquated and unworkable in a modern lease setting and no longer indicative of the contemporary relationship between a landlord and tenant. As a result, the court also held that a commercial tenant has the right to terminate its lease because of a material breach by the landlord.
§ 25.10Environmental Considerations for Leases
Attorneys drafting leases should be aware of environmental statutes dealing with hazardous materials and waste, such as the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA), as amended by the Superfund Amendments and Reauthorization Act of 1986 (SARA), ; the Resource Conservation Recovery Act (RCRA), as amended by the Hazardous and Solid Waste Amendments of 1984 and the Land Disposal Program Flexibility Act of 1996, ; and the Toxic Substances Control Act, . These environmental statutes, along with similar state statutes, may impose cleanup costs at the termination of a lease term on the “owner” or “operator” (landlord or tenant) of the “facility” (leased premises).
Landlords must provide tenants of residential property constructed before 1978 with a “Lead Warning Statement.” , . See section 2.153 in this manual. The disclosure form appears as form 25-30 in this chapter.
Federal law requires building and facility owners (landlords) to notify tenants of public and commercial buildings of the presence, location, and quantity of asbestos-containing materials or presumed asbestos-containing materials in tenant-occupied areas. This notice must be either in writing or in a personal communication before any demolition, construction, alteration, repair, maintenance, or renovation of structures, substrates, or portions thereof. See , . See form 25-31 for the disclosure.
Additional clauses that may be useful in lease transactions, such as arbitration, landlord’s lien subordination, and expansion rights, appear in form 25-13 in this chapter.
§ 25.11:1Subordination of Landlord’s Lien
If the tenant’s lender requires a first lien over the statutory landlord’s lien found in chapter 54 of the Texas Property Code and the security interest granted in the lease, insert clause 25-13-1 in this chapter. Form 25-24 (landlord’s lien waiver) also may be used for this purpose. Form 25-18 (subordination of landlord’s lien) may be used to authorize removal of secured property in the event of tenant’s default as borrower.
In a commercial lease, there is frequently a provision for adjusting the base rent. The landlord and tenant may agree to scheduled, specific, periodic increases or to adjustments based on the Consumer Price Index; in the latter case, the attorney may insert the inflation adjustment clause found at 25-13-2 in this chapter.
If the landlord wants to grant the tenant the right to lease additional space, insert clause 25-13-4 in this chapter and attach the expansion space rider at form 25-14.
If the landlord wants to grant the tenant the right to extend the lease term, insert clause 25-13-5 in this chapter and attach the extension option rider at form 25-15.
§ 25.11:5Tenant’s Right to Protest Appraised Value
If a property owner does not file a valuation protest, a tenant who is contractually obligated to reimburse the owner for property taxes is entitled to pursue an administrative protest before the appraisal review board. . A property owner is required to send a tenant obligated to pay taxes a copy of any notice of the appraised value of the property not later than the tenth day after the property owner receives the notice. The requirement to provide notice of appraised value does not apply if the property owner and the tenant agree in the lease to waive the requirement or agree that the tenant will not protest the appraised value of the property. . A tenant contractually obligated to reimburse a landlord for taxes imposed on the property may also appeal an appraisal review board order determining a protest brought by the tenant. . The statutory language is fairly vague, but it seems apparent that any tenant who, pursuant to its lease, is obligated to reimburse a landlord for real property taxes is entitled to exercise these rights and in so doing may request the appraisal review board to issue subpoenas to the landlord to provide relevant information and documentation regarding value. This, in turn, may require the landlord to disclose information, such as the rent roll for the property, that the landlord may wish to keep confidential. In addition, multitenant situations could result in unwieldy protests. The landlord who wishes to avoid these possibilities should consider including in the lease a provision like clause 25-13-6 in this chapter.
Chapter 171 of the Tax Code applies the Texas “margin tax” to most businesses, including limited partnerships previously exempt from the franchise tax. General partnerships, sole proprietorships, and businesses that do not meet the annual revenue minimum continue to be exempt. Landlords and tenants might negotiate any of the following treatments of the margin tax: (1) an express carve-out of the margin tax from real property taxes (tenant position), (2) reliance on the landlord’s general right to pass through the margin tax as a tax imposed in lieu of real property taxes (landlord position), or (3) the landlord’s right to pass through the margin tax as a tax in lieu of real estate taxes, but limiting the pass-through amount based on a formula or a cap (compromise position).
Additional forms that may be useful in lease transactions, such as an assignment, guaranty, and tenant estoppel certificate, are found at forms 25-16 through 25-22 in this chapter.
§ 25.12:1Subordination, Attornment, and Nondisturbance Agreement
If the landlord’s lender requires a first or prior lien on the landlord’s estate and a lease has been executed, use the subordination, attornment, and nondisturbance agreement at form 25-16 in this chapter to subordinate the lease but still protect the tenant’s rights following a foreclosure.
§ 25.12:2Tenant’s Subordination to Deed-of-Trust Lien
A lender may require that an existing lease be subordinated to its new lien. Foreclosure of the lien will then extinguish the lease. Form 25-17 in this chapter may be used to subordinate the lease.
§ 25.12:3Tenant’s Acceptance Letter
If the landlord requires the tenant to acknowledge that the premises are satisfactory, especially if the lease requires any improvements as a condition to the beginning of the lease, use the tenant’s acceptance letter at form 25-20 in this chapter. It is recommended that this form be used to establish the commencement date with certainty.
§ 25.12:4Landlord’s Lien Waiver
By using form 25-24 in this chapter, the owner of real property waives statutory and contractual landlord’s liens on any of the lessee’s personal property subject to the security interests of a third-party lender. Clause 25-13-1 also may be used for this purpose.
The lockout notice, form 25-27 in this chapter, is to be posted at the premises. See . It is for use with commercial leases only. Do not use it with residential leases, which are governed by .
§ 25.12:6Notice of Change of Locks
Form 25-28 in this chapter is used if the lease does not contain language superseding . The letter is to be given by the owner or property manager and is for use with commercial leases only. Do not use it for residential leases. See .
§ 25.12:7Tenant Improvements Rider to Lease or Work Letter
Form 25-29 in this chapter may be used with the basic lease, the retail lease, the office lease, or the industrial lease if the parties wish to provide for construction of tenant improvements to the leased premises. The work letter provides a general outline for a description of the work and the allocation of responsibility for preparation of plans, performance of work, and payment of any allowances or other amounts by the landlord. The form also requires the contractor to maintain insurance and sets out the effect of construction delays on the commencement date of the lease.
§ 25.12:8Lead-Based Paint Hazards Disclosure
Form 25-30 in this chapter is based on the sample disclosure format for target housing rentals and leases issued by the Environmental Protection Agency and the Department of Housing and Urban Development. See 61 Fed. Reg. 9074 (1996); see also . The rule does not require the use of any specific format as long as all the required elements are included in the disclosure. See section 2.153 in this manual for additional information.
Form 25-31 in this chapter is for disclosure of asbestos-containing material or presumed asbestos-containing material by commercial building or facility owners. The Occupational Safety and Health Administration rules require commercial building or facility owners to notify tenants of the presence of asbestos-containing materials or, if the building was constructed before 1981, of presumed asbestos-containing materials. See , . The rules do not require the use of any specific format.
§ 25.12:10Modification of Lease
The modification of lease, form 25-33 in this chapter, is used to document changes to the lease during the lease term.
§ 25.12:11Termination of Lease
The termination of lease, form 25-34 in this chapter, is used if the parties agree to terminate the lease before the end of the lease term.
§ 25.13Common Issues—Renewable Energy—Wind and Solar Leases
The number of leases, easements, and sales agreements for renewable energy projects is growing. Most of Texas is suitable for solar renewable energy projects, and federal tax benefits have been made available to encourage renewable energy development. A key to identifying a viable site is the site’s proximity to a transmission line that has capacity to transport the electrical energy generated by the project.
The acquisition of a site by lease, easement, or purchase for a renewable energy project (wind, solar, battery, or other) will involve a landowner (and the landowner’s lawyer). The following commentary and list of issues and questions can serve as a guide to the necessary discussions between the lawyer and the landowner or the project developer for the documentation evidencing the transaction.
A lawyer new to site acquisition for a renewable energy transaction will first need to understand that the site acquisition will be an early element of a complex transaction. The developer of the project will need to not only arrange the acquisition of the site of the project (which may be accomplished by purchase, easement, or lease) but also arrange for the delivery of the generated electricity and payment for it, acquire equipment for the generation, obtain necessary permits from regulatory authorities, arrange with the operator of the electric grid into which the electricity will flow, and complete many other endeavors necessary to bring the project to reality. The project will likely require a complex “capital stack” of financing involving multiple contributors to the funds needed to develop the project. This section serves as an overview of the documentation of the site acquisition aspect of a renewable energy project and the complexities of the other facets of the project that are reflected in the site acquisition documentation.
Because of the nature of these projects, the landowner and the lawyer for the landowner can expect a long “feasibility” or “due diligence” period. If the project on the site is found to be viable, there will be a construction period followed by an operation period. At the end of the operation period, energy production equipment and associated improvements must be removed and the site restored to its previous condition (or approximation thereof) during a restoration period. Arrangements must be provided for securing the future duties of restoration.
The documentation of the first part of this process, referred to as the land control agreement, provides for the developer’s acquisition of the site by lease, easement, or purchase, as well as the performance by the developer of feasibility activities (and limitations on those activities) during the feasibility part of the project timeline. Site acquisition is usually structured as an option, in that the documentation usually provides that the developer may terminate the land control agreement if the use of the owner’s property is not suitable or is not economical for developing the renewable energy project. If there is satisfactory completion of the due diligence activities justifying the expenditure of the capital to build the project and bring it into operation, the provisions of the land control agreement allowing for construction and then for operation will become effective, usually with a requirement of notice to the landowner that the land control agreement has moved from the feasibility phase to the construction and operation phases.
Because of the long feasibility period of this kind of transaction and the multiple contingencies involved in the decision to construct the project, the commentary below is divided into two parts. The first part addresses the period of land control and the feasibility investigation by the developer. The second part addresses the terms of the land control agreement that are effective after the feasibility period, including during construction and the long-term operation of the project.
While some provisions of the land control agreement will be similar to contracts to purchase or sell real property or to grant an easement, a ground lease, or a commercial lease, the use of these similar provisions may be different from other real estate transactions.
The issues addressed below assume that the land control agreement is a lease which may contain easement rights, including for roads and power lines necessary to connect the project to an electric grid.
Parties
Landowner: Carefully identify the owner of title. Consider homestead rights, life estates and remaindermen, any tenancies existing, and future interests. Prior mineral reservations of interests in the property and lienholders will be addressed by the developer through curative actions during the feasibility period, which may require the landowner’s assistance and cooperation.
Lessee or developer (renewable energy project): Carefully identify the legal entity that will be the lessee. Consider whether any of the following may limit or prohibit the transaction:
1.Review limits on ownership by some foreign nationals. See ; ; .
2.Consider whether reporting requirements under the Committee on Foreign Investment in the United States (CFIUS) regulations apply.
3.Consider whether any other reporting requirements might apply, such as the Agricultural Foreign Investment Disclosure Act requiring reporting at federal level.
4.Is the lessee using additional tracts for the project? Is the lessee itself a developer/operator of projects, or is it aggregating lands to sell as a project to another developer/operator?
Land Description: Typically, the lease will use the legal description from the vesting deed for the property, to the extent that it is available before execution of the lease. Consider whether it is necessary to conduct a survey to refine the legal description of the leased area. If so, a developer should agree to pay for the survey for its project. Consider a provision for an amendment of the legal description after a survey is approved by the parties and a corresponding amendment to the memorandum of the lease is recorded in the county records to reflect the change of the legal description.
Initial Lease Considerations: Additional initial considerations for the lease include the following:
1.Will this lease encompass all of the owner’s contiguous property, or will some of the owner’s land not be included in the lease? What might the landowner need to reserve, for example, in the way of land area, access, and utility routes? The land will need insurable access, so if the land does not abut a public road, the developer will need an additional easement for access from the landowner or an adjoining landowner. If access to a public road is not available, the developer will need access rights from an adjoining tract.
2.Will the landowner reserve interests in the leased land for surface uses (such as cattle grazing, farming, or hunting) or subsurface uses (such as mineral development or groundwater extraction)? Consider cooperation provisions to allow joint use of the surface between the renewable energy project and reserved uses during the feasibility period.
3.Will the acquisition be one of surface rights only or other estates as well?
4.The lease may provide that portions of the leased area might be released by the developer during the feasibility period. Should the landowner consider what configurations of released lands might be beneficial or detrimental to the use of the remaining land?
5.Will the developer want to drill a well for production of water for use on-site for its project and sanitary disposal facilities (usually septic fields) related to office or other uses? Should there be limitations on the amount of water drawn from such a well to protect water availability for the remaining property of the landowner, if any? A developer will expect to be responsible for filing with and obtaining permits from any underground water district that has jurisdiction of the area, along with payment for the application and any associated fees.
6.Will the developer need access roads across the property? When will these be determined? Can the landowner share the benefits and use of such roads? Are fences or cattle guards required along such roads, and who pays to install and maintain those?
7.Will the developer need electrical conduit or pole line paths? Should any parts of power lines be required to be located underground? When will these be determined?
8.Will the developer need an electrical substation site, or a battery power storage site, in addition to the solar field or wind generator locations?
9.Which party has the right or obligation to fence off the uses from cattle or to separate other uses of the land from the project and to maintain any fences, gates, and cattle guards?
10.Finally, the land subject to the lease needs to be the land required for construction and operational periods, which might include sites for a building for administration and metering activities and equipment, “lay down yards” for storage of supplies and spares, a site for a transformer station, or a site for a battery energy storage facility, in addition to the use of the land for the facilities that generate energy and transmit that power to the grid.
Ownership and Land Title: The developer will want extensive representations about ownership of the land and any outstanding leases or other interests, encumbrances, and environmental conditions affecting the land before it starts the due diligence efforts and incurs expenses.
Title investigation, survey matters, and allocation of costs of title curative work need to be considered and agreed upon. Typically, the developer agrees to take on the cost of reviewing and clearing the title and obtaining the survey. That said, the developer will need the landowner’s cooperation in obtaining necessary and desirable curative documents for the property, such as nondisturbance agreements regarding landowner mortgages.
The parties will also need to determine if other title interests need to be addressed, such as the following:
•If there are any outstanding mineral rights or leases, a surface use agreement with the mineral rights owner or an accommodation agreement with a mineral lessee may be required. To the extent the landowner owns subsurface minerals, the developer will require a statement in the land control document waiving surface rights of the leased area.
•If there is an existing lien on the property, a subordination, nondisturbance, and attornment agreement with the lienholder may be required.
•Consider whether other parties have an ownership interest or contingent interest in the land, such as a life estate, that needs to be addressed.
•Consider spousal issues and homestead issues. If a landowner is married, the developer will typically require a spousal waiver of rights. The spousal waiver may be embedded in the lease or may be a separate agreement. The waiver typically provides that the spouse waives rights to the property and acknowledges the lease.
•Consider whether there are existing agreements or other contractual arrangements binding on the use of the land, such as an agreement related to a conservation reserve program of the Department of Agriculture. It is important that landowners disclose these types of agreements to the developer. Developers may pay for the costs associated with terminating such agreements.
•Consider whether agricultural leases and uses may need to be amended or terminated to allow for the project.
Rent and Other Considerations During Feasibility Period: The landowner should consider whether the payment of rent is monthly, quarterly, or annually. If the developer is leasing additional parcels, will the developer agree to a “most favored nations” clause to adjust the rent to match the best deal signed with other adjacent landowners? During the feasibility period, rent is typically calculated on an acre basis for each year of the period.
The lease may also address crop damages from due diligence work on-site. If it does, a method of calculation related to the damages should be included.
Land Use and Limitations During Feasibility Period: Uses of the property by the developer can be limited during this period, but there will need to be access for studies, and permission to discuss the property for certain local permits, if needed.
The developer will want the ability to conduct geological investigations of the property. Thus, the lease should specify what may be done and who gets copies of reports.
The developer will also want the ability to perform environmental investigations of the property. The lease should specify what may be done and who gets copies of reports. Consider what obligations to report to regulatory agencies are created if environmental conditions are found and whether these can be limited.
The lease may also cover what happens if there is damage to the property and may include indemnity obligations for damages or injuries caused by the developer during feasibility studies.
Finally, the lease should address the developer’s obligation to comply with the rights of agricultural tenants and others during feasibility activities.
Reserved Land Uses: Consider what activities on the property by the owner are permitted and what activities might be limited during the feasibility period. Consider coordination between the developer and the landowner during hunting seasons and requiring advance notice before the developer enters onto the property during the feasibility period.
Regulatory Matters and Cooperation of Parties: Consider which regulatory matters need to be accomplished, who will be responsible for accomplishing them, and who will bear the costs.
•Will a new plat or other local land use regulatory approvals be required? Which party will be responsible for preparing these submittals, and which party will bear the costs?
•What filings will need to be made by the developer, and will the developer provide copies to the landowner?
•Are filings disclosing possible foreign ownership of interests in the land or in the owner of the energy project required, and if they are, when should they be made?
•Will the developer seek property tax abatement agreements from local cities or counties? If so, what degree of cooperation is needed from the landowner to obtain the benefits, and what burdens will be imposed on the land in connection with the agreements?
Feasibility Period Term and Extensions: A developer may expect to obtain rights to extend the feasibility period if its investigations are not completed. Consider milestones related to the progress of the project as conditions to the extension of the feasibility period. The lease should specify the required timing for delivery of notices of those extensions. Consider whether the minimum rent should be adjusted during an extension.
Other Feasibility Period Considerations:The developer will want unlimited discretion to either terminate the lease during the feasibility period or continue the lease after the end of the feasibility period, and the landowner should consider having any contingency rights to terminate the arrangement on the occurrence or failure to occur of any particular event.
§ 25.13:3Construction and Operation Period
If the developer determines that its planned project will be viable and that it wishes to proceed with construction and operation of the project on the property, other considerations come into play before the execution of the lease and should be addressed in it.
Future Changes of Landowner: The lease should address potential future assignment of ownership interests in the land and the lease by the landowner and whether there should be any limitations. The developer should request that its consent be obtained before assignment, as assigning the lease separate from the fee interest in the property would create issues for the developer on an ongoing basis.
The lease should address ownership of the land by multiple parties, even if there’s presently only one landowner, in case the land becomes owned by multiple parties in the future. It should include arrangements for the developer to pay the rent to a single person or entity, and if the land is or becomes owned by more than one party, for that single entity or person to be responsible for distributing the rent to the appropriate parties. The lease should address who or what level of agreement needs or would need to be obtained among multiple owners to modify the lease or other arrangements, to declare defaults, or to resolve controversies. The developer will typically want every property owner to sign or join the lease, even if they took ownership of the property subject to the lease.
Future Changes in Developer: The lessee may transfer the lessee’s interest into the construction and development entity during or after the feasibility period before construction starts. That entity may have a complex “capital stack” of interests for financing the project. Consider what is needed to anticipate that occurrence. Likely the landowner will be required to execute estoppel certificates indicating the status of the lease at several points in the process and to several different entities that may be providing capital by equity contribution, tax benefits financing, and other injections of capital into the “capital stack.”
Rent or Royalty: Rent could be calculated by acre, by kilowatt-hours generated, or by percentage of income from power sales similar to an arrangement for a retail lease. The lease might contain a minimum amount of fixed rent. Consider whether the lease should include annual recalculation of rent to account for inflation. The lease should specify the timing of rent payments. There may be a request from the developer for a single place for payment and a single payee.
Any tax benefits that stem from the project must stay with the developer as they are used to finance the project. Typically, the owner of the land cannot claim benefits for tax incentives.
Consider other types of benefits, such as the ability to sell carbon credits. At the time of lease execution, the parties may not know what kinds of benefits might arise from this kind of lease in the future.
If the developer is leasing adjacent and neighboring properties in the area, should the landowner get the benefit of a “most favored nations” clause to get advantage of higher rents paid to other nearby landowners?
If rent is to be calculated not on acreage and time, but on a more complicated formula involving the energy generated or the receipts from sale of the energy by the developer, the lease will need audit rights for the landowner. Note that royalty payments are typically reserved for wind farms. Solar and battery projects do not lend themselves to being compatible with royalty payments.
Term, Extensions, and Early Termination: The usual term for these leases is twenty-five to thirty years, and extension and early termination rights are usually included in the lease.
The right of the developer to terminate the lease at any time if the project becomes nonviable should be anticipated. Considerations include whether this option should be allowed for only part of the leased land and not all of it and what limitations the lease should contain on the right to terminate. For example, what should happen if the developer needs a power line right-of-way across the land to carry power from another site for which the developer pays lower rents and the developer desires to terminate the lease for all but the power line area?
The right of the developer to extend the term of the lease should also be anticipated and may be conditioned on a particular amount of rent paid in the past. The option to extend will likely, at a minimum, require no existing default under the lease.
Uses of Leased Property by Developer: The lease should include details on what uses of the property by the developer are permissible.
1.Construction and operation of the renewable energy equipment will be permitted.
2.The lease may permit the developer to use water, gravel, caliche, and similar materials from the land for construction, operation, and maintenance.
3.The lease may include provisions prohibiting renewable energy uses on the property other than those of the developer. There may be a prohibition of the landowner’s use of its adjacent lands in a manner that might impact sunlight on solar panels or wind energy to generators, such as in connection with trees along fence lines.
4.There may be a need for a provision similar to a “go dark” provision in retail leases to allow the landowner to terminate the lease if there is slowdown or end of operations of the energy project, so that the landowner may make alternative arrangements with another power producer to protect the income stream.
Reserved Uses to Landowner: The lease should include details on what uses of the property by the landowner are permissible.
1.Hunting might be permitted with wind developments but would likely not be permissible for solar developments.
2.The lease might permit mineral or water development by the landowner, together with allowing for locations for those uses and roads and other needed facilities to allow such development.
3.Farming and ranching by the landowner might be permitted.
4.The lease may contain provisions reserving rights in connection with, or imposing restrictions on, the development of adjacent lands owned by the landowner that are not subject to the lease.
Confidentiality Covenant: Expect to see confidentiality provisions for both the landowner and the developer. The provisions should make exceptions for disclosure to legal and financial advisors, and the developer will need the right to disclose information to governmental agencies that process permits and tax incentive arrangements.
Payment and Allocation of Taxes: The lease should clarify the allocation and payment of taxes. During the feasibility period, the landowner will likely be required to pay all of the taxes. Once construction and operation of the project begins, whether the developer should pay all of the ad valorem taxes on the land and improvements depends on the resource type (wind, solar, or battery) and how much land is still usable by the landowner.
Consider arrangements for notices of renditions, coordination of tax protests, selection of tax counsel, and payment for both taxes and counsel.
Consider whether the lease should include arrangements to compensate the landowner for the loss of the “ag valuation” for several years at the end of the term.
Consider which party pays the “rollback taxes” once the change of use occurs.
Insurance and Indemnities: The developer should carry throughout the term of the lease a broad form of property damage and personal injury insurance naming the landowner as an additional insured. The required insurance may need to be altered during the term to reflect best operating practices in the future.
The landowner should receive the benefit of a broad indemnity clause for all events on the property after commencement of construction and during the operations period, but there will likely be carveouts for the landowner’s negligence or gross negligence, willful misconduct, and fraud, as well as possible carveouts related to other actions of the landowner.
Security of the site upon commencement of construction and during operations should be the sole burden of the developer.
Removal of Generators or Solar Panels and Facilities at End of Term: Texas has statutory provisions requiring removal of energy generation facilities at the end of the term. See (Wind), (Solar). Consider additional contractual protections of the landowner to verify that financial resources will be available to perform the removal and remediation obligations, such as the following:
1.The lease should specify the timing of removal. It may be before or after the lease term ends. Consider granting a license to the developer during the restoration period.
2.The fiscal security benefiting the landowner for the costs of removal is usually in the form of a bond or letter of credit, the amount of which is to be reassessed periodically.
3.Consider whether there should be a guarantee of removal by a parent entity of the developer.
4.The lease may specify rental payments during the term of removal activities if removal is not done before the end of the lease term. Consider possible incremental increases of rentals during the restoration period as an incentive for the developer to complete the remediation work.
5.Consider whether the landowner should have options to retain in place some of the facilities or improvements such as roads, buildings, electric lines, or wells and specify any options decided on in the lease.
Nuisance and Tort Liability or Claims: The lease may contain waivers by the landowner of claims for nuisance, such as “flicker damages” from shadows of fan blades and glare from solar panel reflections, if the landowner continues to own and operate adjacent property.
Consider how to handle defense against nuisance and other claims by third parties, including who defends and who pays for any damage awards. The developer should typically bear this burden.
Environmental Impacts and Ongoing Monitoring Obligations and Costs: Consider including provisions about obligations to monitor the project for environmental impacts and provide reports about the same to the landowner. The lease may include provisions about defense against claims of environmental damages, including which party selects counsel and which party pays for claims.
The developer should make a covenant to comply with all applicable legal obligations of ownership of the land and operations on the land. This should include all obligations for dealing with any hazardous materials or substances brought onto the land by the developer or its contractors.
Bankruptcy: The lease should contain provisions dealing with a potential bankruptcy of the landowner, including defense against lease termination or alteration in a confirmed plan, if possible.
The lease should include provisions for protecting the landowner against the alteration of any obligations of any third party providing assurances of site remediation, if the lease is terminated in a bankruptcy of the developer.
Financing of Interests: Consider including provisions protecting the landowner’s ability to finance its ownership of, and operations on, the land, similar to arrangements for financing land that is subject to a ground lease.
The developer will require language in the lease enabling the developer to finance the project, such as an express acknowledgment of the ability to pledge the developer’s leasehold interest in connection with the financing, a requirement for the landowner to recognize the developer’s lender’s interests, rights of lenders to cure, and other provisions that may be similar to a lessee’s finance provisions of a ground lease. There is likely to be a secondary source of money for the development, such as federal tax credits. Consider whether such structure will necessitate additional requirements in the lease.
Recording of Memorandum of Lease: The developer will want to record a memorandum of the lease.
Title Insurance: The developer and its financing parties, if any, will require title insurance. The developer will pay for these policies.
Condemnation: The developer will seek to participate in condemnation proceedings and request that the landowner provide notice to the developer. For the condemnation award, the developer will seek a portion of the award for the value of its rights under the lease and the value of the facilities.
Covenant of Future Cooperation: A renewable energy lease is a long-term agreement, and the developer will require the landowner’s participation for a successful project. The developer will request that the landowner cooperate by executing any amendments, estoppel certificates, or other documents.
Property Included in Larger Project: The amount of rent might be adjusted if the property is uniquely beneficial to the energy project due to its location next to a substation or because it is adjacent to a power grid line.
Default and Remedies: Defaults by the developer will require notice and an opportunity to cure, with extended cure periods for nonfinancial defaults for which curative actions are undertaken promptly and continued diligently. The lease will include shorter periods to cure financial defaults than for nonfinancial defaults.
The lease will likely include the obligation that default notices be sent to the parties’ lenders and also possibly to investors in the developer’s project. These parties will also likely have rights to cure defaults. Developers will be sensitive to alteration of lender protections, as this could affect their ability to finance the project.
Consider whether there should be requirements for multiple notices, including the number of notices, as well as requirements about sending copies of notices to counsel, lienholders, and other involved parties.
The developer will likely insist on limitations on the types of defaults for which the landowner can terminate the lease. Consider whether these limitations might include a limitation permitting termination only for monetary defaults or only when the project is not in operation.
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