It is not uncommon for airport property leases to run for 30 or more years. When entering into a 30-year lease, it may feel like the tenant has an eternity before having to consider what happens at the end of the lease. As the old adage goes “time flies when you are having fun.” Therefore, tenants should consider what happens at the expiration of the lease when they negotiate and before executing. Whether you are a tenant negotiating a long-term lease or a tenant nearing the expiration of their term, this article provides a checklist for things that you should be considering.
Does the lease provide any options for extension?
Often, airport leases have an initial term that begins either when the lease is fully signed or on another agreed upon date. Leases may be executed months or years before the term commences. The lease term is defined by the number of months or years and provides an expiration date. A lease may also provide an option, allowing the lease to be extended for one or more periods of time.
Assuming your lease has an option, what is the process for exercising that option?
Options usually include notice provisions that require the tenant to notify the landlord that it is exercising the option. It is very important that tenants carefully follow the notice requirements for exercising their option. The requirements may include: a specific time to exercise the option, the notice to be in writing and sent to the airport/landlord at a specific address and may even require a specific method of delivery. Make sure you calendar the deadline to exercise your option and don’t assume that an email to your point of contact will suffice. The option needs to be timely and in the manner specified in the lease. Don’t be surprised that you agreed to make the notification in a window between 12-24 months before the expiration and that you agreed to provide the notice to a specified address by certified mail. Once you follow the process and exercise the option in the manner specified, don’t hesitate to confirm that your landlord has received same and acknowledged receipt. You don’t want to find out it was lost in the mail when your landlord asks to show your leasehold to a prospective tenant six months before the expiration of your lease.
Are there any impediments to exercising your option?
Options may be contingent on the tenant not being in default under the lease. Thus, if you are in technical default under your lease, make sure that you have any default cured before you exercise your option.
An option may also be contingent on the tenant having made certain capital improvements during the initial term or an agreement to make additional capital improvements during the option period. Thus, a tenant should make sure that they have completed the requirements for capital improvements during the initial term and also be prepared and have a plan to make the improvements that will be required during the option period.
Another possible impediment is that your option may not actually be an option but rather an agreement to agree in the future, which may not be an enforceable option. The option provisions of the lease should clearly state how the rent will be calculated during the option period. If your lease does not include a means by which rent during the option period is calculated, it might be an indicator that your option is not really an enforceable option but rather an agreement to agree in the future. In this circumstance, if you cannot reach an agreement with the airport/landlord on the rent for the option period, you may be without a valid and enforceable option. If presented with an action seeking to enforce the option, depending on the jurisdiction, a court may be reluctant to force an agreement.
What happens if you don’t have an option or have exhausted your options, but want to continue to lease your airport property?
The answer and approach differ depending on whether your landlord is a private entity or municipality. If your landlord is a private entity, reach out to your landlord as early as possible and discuss your desire to remain at the airport and work with the landlord to determine if you can reach mutually agreeable terms upon which you can stay at the airport.
If you landlord is a municipality the process is a bit more challenging. Therefore, you need to do your research and develop a strategy before reaching out to your landlord. You should determine what your landlord’s practices are with respect to extensions and/or renewals. First, are there procurement laws that your landlord is required to follow? Is the landlord required to adhere to a competitive bidding process? If so, when will the landlord issue a request for proposal (RFP)? If the landlord is not required to adhere to a competitive bidding process, how has it treated expiring leases for similarly situated tenants when their lease expired? Freedom of Information Act/Public Records Requests can provide you with information on other tenant’s leases on the airfield as well as details relating to how the landlord uses RFPs. Gathering these details will educate you on what you should expect. If the airport is federally obligated and your lease is with the airport sponsor (the entity that was provided the federal funding), you should expect to be treated similarly to others who are similarly situated. The reason is because in accepting the federal funding, the airport sponsor agreed to adhere to certain federal grant obligations, including Federal Grant Assurance 22, Economic Nondiscrimination, which precludes an airport sponsor from discriminating against any tenant and Federal Grant Assurance 23, Exclusive Rights which precludes the airport sponsor from providing any tenant with an exclusive right. Therefore, if your research reveals that the airport sponsor tends to negotiate new leases without a requiring competitive bidding, you should expect that the airport sponsor will similarly negotiate with you. If, however, the airport sponsor usually puts out an RFP for property after the lease expires, you should expect to have to respond to an RFP and compete to continue your lease.
If you find that you must engage in a competitive bidding process, don’t hesitate to remind the landlord of your stellar performance under the prior lease and the benefits that your tenancy brought to the airport and the community in general.
What should you expect if you are surrendering the premises at the end of your lease?
The initial term has expired, the options have been exercised or a conscious decision has been made to not extend the lease, now the premises will need to be surrendered. Provisions and requirements for surrendering the premises at the conclusion of your term vary widely depending on the terms that you negotiated with your landlord at the outset of your lease. You should be particularly mindful of the provisions relating to the condition of the premises at the time of surrender. Commonly, leases require the premises to be in broom swept condition and that all improvements revert to the landlord at the termination of the lease. It is not unusual, however, to see requirements for the premises to be restored to the condition they were in at the start of the lease. What does that mean when you have made significant and substantial improvements to the premises including constructing a hangar that has a significant useful life remaining? Does that mean you will be required to remove the hangar from the premises prior to surrendering? Before you go destroying and removing the improvements, reach out to your landlord and discuss it with them. While your lease may require the improvements to be removed, your landlord may find the improvements useful and ask you to leave them. A landlord retaining improvements constructed by tenant during the lease may require an engineers report demonstrating that the structural integrity and functional utility of the building are satisfactory. Check your lease for this type of provision and be prepared to provide same. It may be a significant cost. Offering an engineering report to a landlord who is reluctant to accept the surrender and is requiring the tenant to remove the improvements may yield a solution that is agreeable to both tenant and landlord.
The end of a lease term can be a confusion and stressful time. Many of the issues can be avoided and minimized by negotiating terms for option periods and surrender at the outset and/or careful planning as your lease nears the end of the term.
Alison L. Squiccimarro is an attorney with the Law Offices of Paul A. Lange, LLC with offices in New York and Connecticut. Squiccimarro's nationwide practice focuses on aviation-related commercial litigation with an emphasis on FAA and DOT regulatory issues, airports, insurance coverage and employment matters. Additionally, Squiccimarro co-chairs the American Bar Association, Forum on Air & Space Law’s Airports Committee.
Amber Eckart, paralegal, regularly assists in the firm’s handling of airport matters and co-authored this article.
