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Nonrecourse Provisions

Nonrecourse Provisions

Most landlord form leases contain a nonrecourse provision that limits the landlord’s liability to the tenant under the lease to the landlord’s equity interest in the project / shopping center.  Further, the provision usually states that the landlord will not be held personally liable for any damages.  Recently I negotiated a lease where the nonrecourse provision was particularly restrictive and limited the tenant’s recourse to “an amount which is equal to the lesser of (a) the interest of Landlord in the Project or (b) the equity interest Landlord would have in the Project if the Project were encumbered by third-party debt in an amount equal to eighty percent (80%) of the value of the Project (as such value is determined by Landlord).

First, the tenant must evaluate whether the landlord has any equity in the project to begin with.  In the current real estate environment, it is not unusual for the landlord to be underwater on the project and have no equity.  If that is the case, the effect is that the tenant cannot recover any damages (assuming a nonrecourse provision that limits the tenant’s recourse to the landlord’s equity in the project).  If the landlord has no equity in the project, the tenant may want to require this provision be deleted entirely or that the landlord put up additional security for landlord’s performance under the lease.

Second, a tenant should seek to qualify the nonrecourse provision by including the landlord’s equity in its rents, profits and proceeds from the sale of the project.  (Note that the landlord should counter that such recourse only apply to monies taken out prior to the obtaining of a judgment, so the landlord is not hamstrung and unable to pay its financing payments.)

Third, a tenant should require that the nonrecourse provision not apply to the landlord’s construction requirements or reimbursement for the tenant’s construction.  Alternatively, a tenant can require an escrow to hold the construction funds or reimbursement allowance (as discussed in this blog entry:  https://azleaselaw.wordpress.com/2010/02/22/timing-of-payment-of-ti-allowance-to-tenant/). 

Prior to using any language or concepts from this blog entry, consult with an attorney.

Ryan Rosensteel is a real estate and construction attorney licensed in Arizona.  You can contact him at rrosensteel@rrlawaz.com.


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