§ 18.02 Substance of Modifications and the Modification Agreement

• Jurisdiction: United States
• Publication year: 2022

§ 18.02 Substance of Modifications and the Modification Agreement¹

[1]—Basic Principles

If the parties to the commercial lease intend to enter into a written modification of their business relationship, several practical issues arise. First of all, the resolution of the business situation will most likely mirror the circumstances and leverage-testing involved in the initial negotiation and drafting of new leases in many ways. The deal for the modification of the lease can become as complicated as the initial formation, if not more so. In fact, the first issue often considered by the parties and their attorneys is whether or not to terminate the old lease and execute a new one instead of modifying the lease. This decision can develop into an involved analysis. Among the issues which arise are accounting and tax questions, recording priority concerns, lender consent requirements, concerns for updating tenant credit and financial reports, and re-evaluations of guarantors or lease security provisions, and the effect of a modification upon exclusive or restrictive rights.

In structuring the business terms of a lease modification, basic principles of real estate law must be kept in mind and evaluated in light of pressures to keep the transaction as simple as possible. One such issue frequently encountered is when there is a desired change in the demised premises. A lease modification is sometimes attempted when a change in the entire demised premises is desired, such as a move between different floors in an office building. It is believed to be simpler than entering into an entirely new agreement. Even though designated as a modification agreement, however, courts would most likely find such a document to be a new lease. A New York court has held that when the premises are totally substituted, a new lease results.² Two Colorado cases followed this principle in reasoning that since the demise of specific designated premises is a primary characteristic of a lease, the total premises substitution results in a new lease instead of a modification,³ even if the substituted premises are within the same shopping center.⁴ By analogy, the same principle would most likely be applied to the total substitution of space within the same office building.

Note that when negotiating a lease extension or other amendment, it is important to consider other changes that have taken place and should therefore be reflected in the amending document. For instance, the office building measuring standard may have changed, the base year for the lease may have changed as well. These should be reflected in the lease amendment. Any change in ownership of the building, a change in mortgage lenders or an increase in the security deposit to reflect new circumstances will also have to be addressed, as will any commission for a broker if one was involved.⁵ It should also be verified in the amending document that the lease, as amended, is in full force and effect.⁶

If a modification of the existing lease is decided upon, basically the drafter must be careful to pay attention to contract principles in drafting the document. The potential effect of the intended modification provisions on all of the existing lease provisions should be considered, for often one change may affect several lease provisions. The issue of adequate (as opposed to substantial) consideration for the transaction arises, especially if any obligations of a party (most...