KEY LEASE TERMS TO CONSIDER WHEN REPRESENTING THE TENANT IN A COMMERICAL LEASE TRANSACTION

FizerBeck
Fizer, Beck, Webster, Bentley & Scroggins
a professional corporation
1330 Post Oak Boulevard, Suite 2900
Houston, TX 77056-3022
713-840-7710
www.fizerbeck.com
 

1. INTRODUCTION

1. Commercial Leases in General. Commercial lease agreements are one of the more complex legal documents a lawyer will encounter in his or her practice. A commercial lease includes many separate agreements which, taken alone, are complex in and of themselves. For example, commercial leases usually include a construction contract, a security agreement, a subordination agreement, a release and indemnification agreement, and sometimes includes restrictive covenants, rights of first refusal and other agreements. As one can see, each of these agreements alone could be the subject of extensive negotiation. In a lease, these agreements are mixed in with other difficult issues such as operating expense pass-throughs, landlord services, assignment and subletting, repair and maintenance of the premises, insurance, default and remedies, and other typical lease provisions.

   In spite of the complexity of commercial leases, many clients tend to think of a lease as a rather simple, "standard" document. Often clients do not consult an attorney before signing a landlord's lease form. It is only later, when a problem arises, that an attorney is consulted. Clients are often shocked to find they have signed a landlord form lease which essentially provides (1) that the tenant can occupy the space if the rent is paid (unless the landlord wants the space back for another tenant); (2) that the landlord will try to provide utilities and other services to the premises, but if the landlord fails to do so, the tenant waives all claims against the landlord, waives any right to vacate the space; and (3) that if for some reason the tenant can find an unreleased claim against the landlord, that claim can be satisfied only out of the landlord's interest in the building (which is usually heavily mortgaged). The tenant on the other hand is fully liable, has pledged all its personal property to secure its obligations, and the principal shareholder of the tenant has probably personally guaranteed the lease. Thus, the lease is effectively nonrecourse to the landlord, but full recourse and secured as to the tenant. Obviously, the tenant will find itself in a rather difficult bargaining position in its dispute with the landlord.

2. Representing the Tenant. In many instances, these problems can be dealt with at the "front end" during the lease negotiations. Tenants often have quite a bit of leverage in negotiating lease terms with a landlord.

   One of the most time consuming aspects of tenant representation is explaining the lease and its problems to client and mapping out a strategy for dealing with the landlord. Thus, one of the most difficult problems in representing a tenant-client effectively and efficiently involves the way you communicate with your client. Although each client is different and must be dealt with accordingly, I have found that the most efficient method is to briefly discuss the situation on the telephone with the client to find out if there are any special "deal points" and to gather general information about the transaction. Then I generally go ahead and mark-up the lease and prepare an addendum with special provisions before reviewing the lease with the client. In this way, I can run through my suggested changes and explain them to the client and at the same time give the client my lease comments. This approach seems to save the step of giving lengthy lease comments to the client and then having to essentially repeat that process when discussing the suggested revisions.

3. Scope of Presentation. The primary focus of this presentation is to provide both attorneys and brokers doing tenant representation with a suggested approach to representing commercial tenants in an efficient, yet effective manner. Many commercial leases contain substantially similar landlord provisions. Representing a tenant requires addressing these provisions in a way that achieves some degree of fairness for the tenant. What I have attempted to do in this outline is identify what I consider to be the "Top 10" legal issues facing a tenant in a commercial lease and discuss ways of dealing with those issues. Obviously, there are other issues which will be involved in any given lease. Also, although the problems may be similar, every lease is different and must be studied for all provisions that could affect the tenant-client. However, these Top 10 issues provide a guide book to typical lease negotiating points.

   In addition to the discussion of these Top 10 issues, I have prepared a sample Addendum which contains a number of provisions designed to modify typical landlord oriented provisions found in most commercial leases. This Addendum covers not only my Top 10 list, but also a number of other issues which are not discussed in this outline.

   This outline and the attached Addendum are intended to be general or "generic" in that I have not focused on any particular lease form or type of lease. Commercial leases include office leases, medical leases, warehouse or industrial leases, and retail leases, each of which present a host of special issues unique to that type of lease. All these types of leases, however, include some or most of the issues raised in this paper. Other speakers on this program will deal with some of the unique issues presented by particular types of leases.

2. NEGOTIATING A COMMERCIAL LEASE

1. Lease Negotiations. The dynamics of each lease negotiation are different. Sometimes the attorney gives the suggested revisions back to the client, who then presents the revisions to the landlord; sometimes a broker (or tenant representative) will present the proposed changes; and sometimes the changes will be presented directly to the landlord's attorney. The most common approach seems to be that the client or the client's broker will present the changes to the landlord, and later the landlord's attorney will contact the tenant's attorney regarding the points of disagreement.

   Additionally, there is always the issue of whether you should give generic comments or mark-up the lease and/or attach an addendum. I strongly favor an approach which involves specific requested revisions. This usually takes the form of an addendum combined with limited interlineations where appropriate. This approach allows the tenant's attorney to set the stage with specific requested changes. Moreover, if you can develop a somewhat "standardized" approach by using a form addendum to deal with most of the typical difficult issues, the revision approach will often take less time than dictating a comment letter and then later drafting suggested language for changes or responding to the landlord's own revisions.

   As a lawyer, I prefer to work with a client who is represented by a broker. It is my experience that brokers who know the market can get a lot more out of a landlord than an attorney acting alone. The reason for this is fairly obvious. A broker provides a credible threat of taking the tenant to another project. Also, brokers generally are more knowledgeable than attorneys concerning what sort of concessions landlords are making at any given time, and this helps greatly in the negotiations.

2. The "Top 10" Issues. The Top 10 issues dis-cussed below are not presented in order of importance or in reverse ("Letterman style") order. Rather, I have tried to present them in the order in which these issues typically appear in a lease form. Also, as mentioned above, there are numerous other issues in leases and there are always special "deal" issues unique to every lease negotiation. Therefore, do not regard this Top 10 list as all inclusive.

1. Build-Out of Premises. Many landlords offer "turn-key" construction of leasehold improvements. That is, the landlord provides space planning and construction through architects and contractors selected by the landlord. Some landlords will permit the tenant to engage its own architect and contractor, subject to the landlord's approval. In either case, there is a construction "allowance" which is generally available to the tenant. In a "turn-key" job, the landlord agrees to perform certain specified work with anything above that work being considered an "extra" at the tenant's expense. When the tenant builds out its own space, the landlord will generally pay a specified amount of money toward the construction. It is the tenant's responsibility to bring in the job on budget or pay for any items which exceed the landlord's allowance.

   Most commercial office building leases call for "turn-key" construction, whereas retail and industrial leases may tend toward the tenant having the work done. The tenant may want to have its own construction work done if the tenant believes it can get a better financial deal negotiating with its own contractor or if the tenant has an ongoing relationship with a particular contractor who, for example, has built out other locations for the tenant. However, in most cases tenants will opt for a turn-key job.

   Where the landlord is responsible for the build-out, the tenant will have three primary concerns: (a) getting the most work it can out of the landlord, (b) getting the landlord to stand behind its work with some sort of warranty obligation, and (c) achieving completion by a specified date. Many landlord lease forms provide that the commencement date of the lease may be extended without penalty to the landlord for as long as it takes the landlord to complete the premises. Additionally, many landlord lease forms provide that taking possession by the tenant will be deemed acceptance of the premises by the tenant and will waive any claims against the landlord for defects or delays. The first numbered paragraph in the Addendum is designed to deal with these issues by requiring the landlord to begin and complete construction according to a definite time schedule and allowing the tenant to submit a punch-list after it takes possession and has had a reasonable opportunity to see if the construction was done properly.

2. Operating Expenses. Most commercial leases provide common area maintenance and other operating expenses (such as taxes and insurance) will be passed through to the tenant. In office building leases, where separate utility metering is very rare, utilities are also included in the pass through of expenses. Three types of pass-throughs are commonly used:

1. "Expense Stop." In this type of lease, an amount per square foot is designated as the operating expense component built into the rent. This number is commonly called the "expense stop." The tenant is then required to pay its pro rata share of operating expenses in excess of the designated "expense stop" amount.

2. Base Year. In this type of lease, a calendar year (usually the year the lease is signed or the preceding year) is designated as the "base year." The tenant will be required to pay it pro rata share of operating expenses in excess of the operating expenses for the base year.

3. Net Lease. Under this approach, there is no "stop" or base year; rather, the tenant is required to pay its pro rata share of the actual operating expenses incurred during each lease year.

   Operating expenses are typically estimated by the landlord in advance and are payable by the tenant on a monthly basis along with the base rent. An annual settlement is generally called for with 90-120 days after the end of each year.

   Most landlord lease forms broadly define operating expenses. A tenant, however, will want certain exclusions. The second numbered paragraph of the Addendum contains a listing of common exclusions from operating expenses. This provisions also contains a clause giving the tenant the right to audit and challenge the landlord's operating expense calculations.

   Many landlords will include a "gross-up" clause in the lease. A gross-up clause allows a landlord to calculate operating expenses as if the building were fully occupied even though the building is not fully leased. The purpose of the clause is to allocate all variable operating expenses to the occupied space. For example, if a building is 50% leased and variable operating expenses are $100,000, the tenants will pay only their pro rata share (50%) and thus the landlord will recoup only $50,000 of the actual variable expenses. A gross-up clause will allow the landlord to calculate the variable expenses as if the building were fully leased (i.e., "grossing up" the expenses to $200,000) so that the tenants will pay $100,000, the landlord's actual cost.

   The issues facing a tenant in connection with a gross-up clause are (i) to prevent the gross-up calculation from including nonvariable costs such as taxes and insurance premiums, and (ii) to be sure that the base year or expense stop calculations were made on a consistent basis (i.e., grossed-up if the landlord is using a gross-up clause).

3. Failure of Building Services. As mentioned above, most landlord leases provide little or no remedy for the failure of building services. In fact, many leases waive any right the tenant may otherwise have to vacate or withhold rent if the landlord fails to provide essential services. The tenant may have a possible common law remedy for breach of the implied warranty of suitability. However, this warranty is limited to latent physical or structural defects and does not exist as to matters specifically addressed in the lease. See Davidow v. Inwood North Professional Group-Phase I, 747 S.W.2d 373 (Tex. 1988); and Coleman v. Rotana, Inc., 778 S.W.2d 867 (Tex. App. -Dallas 1989, writ denied). Although not specifically addressed by the courts, this implied warranty is presumably waivable and most landlord leases attempt to waive implied warranties. Therefore, if the landlord fails to provide essential services, under most lease forms the tenant, at best, has a tenuous remedy, and at worst no remedy. Paragraph 3 of the Addendum is designed to deal with this issue and provide a remedy to the tenant if the landlord defaults in this regard. Specifically, paragraph 3 of the Addendum calls for an abatement of rent for a short term interruption of services (3 days or more) and a right of cancellation if the condition continues for 30 days or more. Landlords will typically seek a longer initial period (such as 5 or 7 days) and will seek to carve out a "force majeure" exception for circumstances beyond the control of the Landlord.

   Another potential remedy is self-help. This is provided for in paragraph 4 of the Addendum. Landlords will strenuously resist self-help clauses. Generally speaking, self-help is of little benefit to an office tenant, unless the tenant leases all or a substantial part of the building. However, self-help may be substantial benefit to a retail or industrial tenant who may have separate HVAC systems, roofs (or portions thereof), and other systems or improvements that serve only that tenant. In these situations, a tenant may want to insist on the right of self-help with a corresponding offset against rent as provided for in paragraph 4 of the Addendum.

4. Restoration Following Casualty. A related issue is restoration of the premises following a casualty loss, such as a fire or flood. Most leases provide that if the damage can be repaired in some period of time (usually 120 or 180 days) the lease will continue with a temporary rent abatement and the landlord will restore the premises to the pre-damage condition except for the tenant's own personality or in some cases above building standard improvements. If the damage will take longer to repair, the lease typically gives the landlord the option to terminate the lease or elect to make the repairs, and the tenant must abide by the landlord's decision. The tenant's concerns here are (a) making sure the repair period is reasonable (a shorter period such as 90 days often can be substituted), and (b) if the landlord elects to restore, requiring completion within a set period after which the tenant can terminate the lease if the premises are not completed. Paragraph 5 of the Addendum is designed to deal with some of the issues raised by a casualty loss.

5. Releases, Indemnities and Insurance. This may be the most poorly understood area of commercial leases. An excellent and complete discussion of this area of the law can be found in the 1993 SMU Leases-In-Depth Program in an article by Ed Walts and Timothy Johnson entitled "Risk Management in a General Commercial Lease, Inclusive of Indemnification Exculpatory and Insurance Provisions: A Fair Approach to the Subject." Mr. Walts and Mr. Johnson provide a very complete analysis of this area of the law, far beyond the scope of this outline. The approach taken in this outline is to deal primarily with typical lease clauses in this area. Before dealing with specific clauses, however, it is important to put this area of lease negotiations in its proper context. In this regard, one must differentiate between third-party claims and claims by the landlord or the tenant.

1. Third-Party Claims. The landlord and tenant each are at risk for claims by third parties arising out of the acts of the other party. Such claims could be for personal injury or property damage. In these cases, both the landlord and the tenant will generally be sued. Each party could look to its own insurance. However, claims may exceed insurance limits, policies may have substantial deductibles or a party may be self insured, and claims of this nature will impact future premiums. Therefore, most leases provide that if the acts of the tenant or its invitees caused the loss, the tenant will indemnify the landlord. Such a one-way indemnity is not reasonable or fair to the tenant.

1. The indemnity should be a cross-indemnity, not just one-way from the tenant to the landlord, except possibly in a single-tenant, triple-net lease of a commercial building, where a one-way indemnity may arguably be appropriate.

2. The indemnities should be limited to claims by third-parties and should not cover claims by the landlord or tenant against each other (which would properly be the subject of a release, not an indemnity).

3. The cross indemnities should cover any acts of the indemnifying party that cause loss or damage to the other party, and should not be limited to negligent acts. If the cross indemnities are narrowly drawn to cover only third-party claims arising from the indemnifying party's own acts or omissions, it should not be necessary to exclude the indemnified party's negligence.

4. If you want to expressly cover the other party's own negligence, then the indemnity must expressly and conspicuously state that it covers the negligence of the indemnified party. See Ethyl Corp. v. Daniel Construction Co., 725 S.W.2d 705 (Tex. 1987). This may be appropriate in a single-building triple-net lease where the tenant is carrying liability insurance for both parties.

5. The indemnities should survive the expiration of the lease term.

2. Liability Insurance. The amounts of insurance coverage are dependent on the financial strength of the parties and the nature of the tenant's business. For example, if the tenant is a restaurant, special insurance requirements are presented, such as dram shop or liquor liability insurance. Often the lease will require the tenant to have the landlord named as an additional insured on the tenant's liability insurance policy.

3. Self Insurance. All insurance has a degree of self insurance through deductibles. The extent of self insurance allowed will depend on the financial strength of the parties.

4. Releases and Waivers of Claims by Landlord and Tenant. As discussed above, indemnification should be limited to third-party claims, and claims by the landlord and tenant should be dealt with by releases or waivers of claims. In most leases, it is appropriate for the landlord and tenant to waive claims against each other for damage to their respective property. Each party should be expected to look to its own property insurance for recovery.

1. The waiver generally should extend only to property damage and not personal injury. The argument that each party should look to its own insurance does not apply in the case of personal injuries which are not covered by such insurance.

2. The waiver should not purport to include damage to the property of third-parties, since the landlord and tenant cannot waive claims of third-parties.

3. The waiver should include claims against the other party's employees, agents and contractors.

4. There should be no exception for "negligence," since in almost all cases, the property damage will be the result of someone's negligence. That is, the whole point or purpose of the waiver is to waive claims for property damage caused by negligence.

5. The only exception to mutual waivers will be a "triple-net" lease of an entire building in a lease where the tenant agrees to carry all the property insurance and agrees to rebuild the building in the event of a fire or other casualty.

5. Waiver of Subrogation. A waiver of subrogation is frequently confused with a waiver of claims. A waiver of subrogation can be made only by the insurance company and the landlord and tenant have no power to do so. See Seamless Floors by Ford, Inc. v. Value Line Homes, Inc., 438 S.W.2d 598 (Tex. App. - Ft. Worth 1969, writ ref'd n.r.e.). However, if there is a complete waiver of claims, it is generally not necessary to have a waiver of subrogation in the lease. This is because an insurance company who "steps into the shoes" of a party is bound by a waiver previously made by that party. See Alliance Insurance Company, Inc. v. First Tape, Inc., 713 S.W.2d 718 (Tex. App. - Houston [14th Dist.] 1986, writ ref'd n.r.e.).

6. Notice and Opportunity to Cure. Most landlord lease forms do not provide for notice of default and opportunity to cure in favor of the tenant. Landlords typically will resist notice as to monetary defaults, but most landlords will agree to give notice as to non-monetary defaults. In many situations, however, even a requirement for notice of monetary defaults can be obtained. Some landlords will agree to a "grace period" for late payments (such as five days) in lieu of notice. Paragraph 7 of the Addendum sets forth a sample notice clause.

   Many landlord lease forms contain a remedy which allows the landlord to "accelerate" rents if the tenant defaults. This remedy is unreasonable in a lease where the landlord also recovers possession of the premises. A tenant should try to avoid such an acceleration clause in a lease.

    

7. Subordination of Landlord's Lien. Most landlord lease forms provide for a contractual landlord's lien covering all personal property located in the premises. Additionally, Tex. Prop. Code ' 54.021-54.025 provides for a statutory lien in favor of a commercial landlord. These liens often conflict with a tenant's normal bank financing and equipment acquisition financing. Accordingly, it is desirable to attempt to obtain the landlord's agreement in the lease to subordinate or waive its liens in favor of certain types or classes of lenders, such as a tenant's inventory lender or a lender providing purchase money financing for equipment. Paragraph 8 of the Addendum is designed to require subordination of the landlord's lien in these types of lending situations.

8. Assignment and Subletting. All landlord lease forms prohibit assignment or subletting without the landlord's consent. Many leases also go farther by defining any change in ownership of the tenant as an assignment or subletting. Legitimate concerns for the tenant include (a) corporate re-structuring, such as formation of a subsidiary or related company, (b) transfers by death, gift or divorce, and (c) the sale of the entire company. A tenant will not want to be in default under a lease if a shareholder dies, gets divorced, or gives shares of stock to his or her children. A tenant will not want to be precluded from forming a subsidiary or otherwise reorganizing its business structure because of a lease prohibition. Most importantly, however, if the tenant wants to sell its entire business in a corporate acquisition, the tenant needs to be sure it can transfer its location as well as its other assets to the buyer. I have encountered situations where a landlord has held up a corporate merger or acquisition by attempting to re-negotiate a lease as a condition to granting its consent to an assignment.

   Watch out for leases that provide that if a tenant requests the landlord's consent to an assignment or subletting, the landlord can cancel the lease. Consider asking for the right to withdraw the request if the landlord gives notice that it intends to exercise this right.

    

   Paragraph 9 of the Addendum is an attempt to address some of the issues surrounding assignment and subletting.

9. Compliance with Laws (including Environmental Laws). Most leases provide that the tenant will "comply with all laws" etc. This seemingly innocent provision can be dangerous and should not be "glossed over." Three areas of the law are of particular concern: ADA compliance, local building code compliance, and environmental law compliance.

1. ADA Compliance. A substantive discussion of the Americans with Disabilities Act of 1990 ("ADA") is beyond the scope of this paper and is the subject of another presentation on this program. However, a tenant should be concerned if a lease attempts to allocate solely to the tenant all responsibility for ADA compliance. A reasonable allocation of ADA compliance costs would allocate all common area compliance to the landlord and internal premises compliance to the tenant. Paragraph 15 of the Addendum is an attempt at such an allocation. A related issue is to what extent ADA compliance costs can be charged back to the tenants through the "pass through" of operating expenses. Paragraph 14(b) of the Addendum provides that if the compliance involves a "capital improvement" the costs cannot be passed through to the tenant as a part of the operating expenses of the building.

2. Building Code Compliance. Building code compliance should be handled in the same manner as ADA compliance (and also is covered by paragraph 14 of the Addendum); provided that if the building is one that may require the addition of a fire sprinkler system the lease should specifically address this cost. Normally, a sprinkler system should be regarded as a landlord capital improvement and not a tenant obligation or a "pass through" item. Nevertheless, a broadly worded compliance clause could be read to require the tenant bear this expense.

3. Environmental Laws. Both the landlord and the tenant have an interest in assuring the compliance with environmental laws. Obviously, a tenant will not want to lease premises that may be contaminated. Likewise, a landlord will want to be sure that the tenant does not contaminate the premises or the building. Most lease forms deal only with tenant compliance, but ignore the landlord's obligations. From the tenant's perspective, you should try to avoid environmental indemnities that may require the tenant to be responsible for pre-existing conditions or problems caused by other or former tenants. Paragraph 15(a) of the Addendum addresses these issues.

10. Relocation Clauses. Many landlord lease forms contain a relocation clause which permits the landlord to relocate the tenant within the building. Normally, a tenant will want to simply strike a relocation clause out of the lease. However, if that cannot be negotiated, then the lease should provide that if a relocation occurs, the landlord will pay for all expenses associated with such a move, such as moving expenses, installation of equipment, replacement stationery, etc. In addition, the lease should require that the new space will be similar in size and quality to the existing space. The tenant also may want to limit the landlord's relocation right to one time during the lease term. Additionally, if the tenant has preferential rights or expansion rights granted in connection with the initial location, a relocation will complicate these rights and this will need to be addressed.

3. Summary of "Top 10" Issues.

4. "Cutting Edge" Issues. Some cutting edge issues which are rapidly becoming a part of many lease negotiations include the "Three R's": risers, rooftops and redundancy. Many larger tenants or tenants with special communications needs are particularly concerned with these issues. "Risers" refers to the tenant's access to riser space in a building to bring in fiber optic cables and other cable lines. "Rooftops" refers to the tenant's access to space on the roof of a building for satellite and microwave communications antennae and related facilities. "Redundancy" refers to the tenant's access for space for back-up generators and to power computer systems and perhaps back-up HVAC systems. Landlords may want to charge additional rent for such access, while tenants will seek to have such access included in the base rent. Other issues concern the Landlord's approval rights regarding the installation, repair and maintenance of such facilities, as well as conflicts among various tenants with similar facilities. Provisions dealing with these issues are found in Sections 12 and 13 of the attached Addendum.

5. Other Issues. The above "Top 10 Issues" are not exclusive. There are any number of other issues that will arise in lease negotiations. A detailed discussion of these other issues is beyond the scope of this paper. Many of these additional issues will be covered by other authors and speakers on this program with regard to particular types of leases. Some other issues (in addition to the "Top 10") also are addressed in the attached Addendum form.

3. THE ADDENDUM

   The attached Addendum form is not intended to fit every situation or solve every problem. Rather, it is a convenient starting point. Each provision in the Addendum should be compared to its counterpart provision in the actual lease. The provisions in the Addendum will almost always require adjustment to fit the particulars of any given lease. Moreover, every lease transaction will involve special considerations that are unique to that particular deal. Therefore, additional provisions will invariably be required. Also, some issues may be more easily dealt with through interlineation in the lease form itself, especially if you have the opportunity to receive an electronic copy of the lease and can easily insert the tenant's proposed changes. Accordingly, a combination of interlineation plus an addendum is usually needed.

ADDENDUM TO LEASE AGREEMENT

This Addendum is incorporated by reference into and is a part of that certain Lease Agreement (the "Lease") between __________________________________________ as Landlord, and ___________________________________ as Tenant. The term "Premises" as used in this addendum shall mean the Leased Premises described in Section _____ of the Lease, and the term "Building" as used herein shall mean the building described in the Lease and of which the Premises are a part. Except as otherwise indicated herein, all defined terms in the Lease shall have the same meaning in this Addendum.

1.      Completion of Construction. The Lease shall, at Tenant's option, be terminated in the event Landlord has not commenced construction of the Premises within _____ days after the date of the Lease, or if the Premises are not completed by Landlord and ready for occupancy within _____ days after the date of the Lease. If the Premises are not completed by such date but Tenant does not elect to cancel the Lease, the Landlord shall reimburse Tenant on demand for all additional or "holdover" rent incurred by Tenant after such date for Tenant's current leased space to the extent such rent exceeds the rent Tenant would have paid during such period of time under this Lease. Notwithstanding anything contained in Section _______ of the Lease, taking of possession of the Premises by Tenant shall not be deemed an acceptance by Tenant of any latent defects or matters of which Tenant notifies Landlord in writing within 30 days after occupancy, which latent defects and other matters Landlord agrees to correct within a reasonable time after notification thereof.

2.      Operating Expenses Exclusive. Notwithstanding anything contained in Section _____ of the Lease to the contrary, the following shall be excluded from Operating Expenses for the purposes of the Lease:

(a)      The cost of repairs, replacements, or other work occasioned by fire, windstorm, flood, or other casualty, or the exercise by governmental authorities of the right of eminent domain;

(b)      Leasing commissions, attorney's fees, costs and disbursements and other expenses incurred in connection with negotiations for leases with tenants, other occupants of the building and similar costs incurred in connection with disputes between Landlord and tenants of the Building.

(c)      Tenant allowances, concessions, or other costs incurred in building out, completing, renovating or otherwise improving or decorating or redecorating space for tenants or other occupants in the Building or vacant leasable space in the Building.

(d)      Costs of correcting defects (including latent defects) in the construction of the Building, parking areas or other improvements, or in the equipment used therein, except that, for the purposes of this subparagraph, conditions resulting from ordinary wear and tear and use, vandalism, and other matters not occasioned by construction defects shall not be deemed defects.

(e)      Landlord's costs of electricity and other services sold to tenants and which are not standard for the Building, or for which Landlord is reimbursed by tenants as an additional charge or rental.

(f)      The cost of any improvements, repairs, alterations, additions, changes, replacements, equipment, tools and other items which under generally accepted accounting principles are required to be classified as capital expenditures (whether incurred directly or through a lease or service contract or otherwise).

(g)      Depreciation of the Building and all equipment, fixtures, improvements and facilities used in connection therewith.

(h)      Material expenses in connection with services or other benefits of a type which are not standard for the Building and which are not available to Tenant without specific charge therefor, but which are provided to another tenant or occupant.

(i)      Costs (including penalties, fines and associated legal expenses) incurred due to the violation by Landlord of the terms and conditions of the Lease, or any applicable federal, state, and local governmental laws, ordinances, orders, rules and regulations, which costs would not have been incurred but for such violation by Landlord.

(j)      Except for management fees, overhead and profit increments paid to subsidiaries, partners or other affiliates of Landlord for services on or to the Building, any appurtenant garage or the property on which the Premises are located, to the extent that the costs of such services exceed competitive costs for such services rendered by persons or entities of similar skill, competence and experience, other than a subsidiary of Landlord. Management fees charged to Operating Expenses shall not exceed similar fees charged in connection with the operation of projects of like location, size, character and quality.

(k)      Interest on debt or amortization payments on any mortgage or mortgages, and rental under any ground or underlying leases or lease (except to the extent the same may be made to pay or reimburse, or may be measured by, ad valorem taxes).

(l)      Costs of Landlord's general corporate overhead and general administrative expenses, which would not be chargeable to Operating Expenses of the Building, determined in accordance with generally accepted accounting principles, consistently applied; and all costs related to maintaining Landlord's existence as a corporation, partnership or other entity.

(m)      Any compensation paid to clerks, attendants or other persons in commercial concessions, if any, operated by Landlord or any affiliate of Landlord.

(n)      All services for which Tenant (or any other tenant of the Building) specifically reimburses Landlord or for which Tenant pays directly to third persons.

(o)      Costs incurred in installing, operating and maintaining any specialty not normally installed, operated, and maintained in buildings comparable to the Building, and not necessary, at Landlord's reasonable discretion, for the operation, repair, maintenance, and providing of required services for the Building, such as an antenna, broadcasting facilities (other than life support and security systems), luncheon club, athletic or recreational club, and costs incurred for sculpture, paintings or other art.

(p)      Advertising and promotional expenses incurred to publicize the Building primarily for leasing purposes.

(q)      Contributions to operating expense reserves.

(r)      First-time costs of materials, spare parts, tools and equipment used in the operating, maintenance, cleaning, repair, landscaping and security of the Building, including the initial construction thereof.

(s)      Premiums and other charges with respect to rental loss insurance.

(t)      Contributions to charitable organization.

(u)      Costs incurred in removing the property of former tenants and/or other occupants of the Building.

Tenant at its expense shall have the right at all reasonable times to inspect Landlord's books and records relating to the Lease and the Building for any year in which Operating Expense charges are due, any such inspection to be conducted at Landlord's office in ___________ Texas, during normal business hours; provided, however, Landlord agrees to reimburse Tenant for the cost of any such inspection conducted by or for it in the event the inspection proves that the Operating Expense charges charged to Tenant by Landlord hereunder for the period of time covered by such inspection shall have been overstated by ten percent (10%) or more. Any such inspection must cover a period within two (2) calendar years prior to the then current calendar year, any objections to charges prior thereto being conclusively presumed to have been waived.

3.      Default by Landlord. Any provision in the Lease to the contrary notwithstanding, if Landlord fails to perform its obligations under the Lease and such failure (a) interferes substantially with the normal use of the Premises or appurtenant parking and/or other common areas by Tenant as allowed herein, and (b) continues for more than three (3) consecutive business days, then the rental shall be proportionately abated until such interference is eliminated or the Premises are otherwise rendered tenantable again. Additionally, if such interference continues for a period of 30 or more consecutive days, then Tenant shall have the right and option to cancel the Lease by giving written notice to Landlord within 15 days after the end of such 30 day period.

4.      Tenant's Right to Perform Landlord's Obligations. Notwithstanding the provisions of Section _____ of the Lease, if Landlord defaults in the observance or performance of any term or covenant required to be performed by it under the Lease, Tenant after not less than 30 days notice to Landlord may, but shall not be obligated to, remedy such default and in connection therewith may pay or incur reasonable expenses. Notwithstanding the foregoing, Tenant shall not have such right in the event Landlord takes action to cure the default within such 30 day period but is unable, by reason of the nature of the work involved, to cure the same within such period, provided Landlord continues such work diligently and without unnecessary delays. Additionally, Tenant shall have the right to remedy any default of an emergency nature in the event Landlord fails to commence curing any default creating an emergency situation promptly upon being given notice which is reasonable under the circumstances, and Tenant shall have the right to remedy such a default without notice (if the giving of notice is not reasonably practicable) in the event of an emergency. All sums expended or obligations incurred by Tenant in connection with the foregoing shall be paid by Landlord to Tenant upon demand, and if Landlord fails to reimburse Tenant, Tenant may, in addition to any other right or remedy that Tenant may have, deduct such amount from subsequent installments of rent hereunder which from time to time thereafter become due to Landlord.

5.      Restoration Following Casualty. Anything in Section _____ of the Lease to the contrary notwithstanding, if the damage to the Premises or the Building has not been repaired and the Premises made ready for occupancy within ____ days after the date of the damage or destruction, then the Tenant shall have the right and option to terminate this lease by giving written notice to Landlord at any time within 15 days after the end of such _____ day period. Additionally, if the damage is to such an extent that it cannot reasonably be repaired and the Premises made ready for occupancy within _____ days after the date of the damage or destruction, then Tenant may terminate this Lease within 30 days after the date of the damage or destruction by giving written notice to Landlord. Following any casualty loss which renders the Premises untenantable, Tenant shall be entitled to an abatement of rent from the date of the damage or destruction until the Premises are rendered tenantable notwithstanding any negligence on the part of Tenant. If only a portion of Premises is rendered untenantable, then Tenant's rent shall be partially abated taking into account the diminution in value of the Premises. If the lease is terminated, rent shall be prorated to the date of the damage or destruction and any prepaid rents or other prepaid amounts shall be refunded to Tenant.

6.      Indemnification; Insurance. Anything in Section _____ of the Lease to the contrary notwithstanding, the indemnification by Tenant shall be only for claims by third parties and not for claims by Tenant. Additionally, Landlord shall indemnify and hold Tenant harmless from and against claims by third parties for any loss or damage to property or person to the extent caused by the acts or omissions of Landlord or its agents or employees. Landlord shall be responsible for obtaining and maintaining insurance covering the Building, and Tenant shall be responsible for insuring its fixtures and contents, against fire and other causes included in standard extended coverage by policies. Each party hereby releases and waives all claims, rights of recovery and causes of action against the other party, their officers, directors, employees, agents or invitees, or, in case of tenant, its subtenants, in connection with any loss or damage to the Premises, the Building, and personal property within the Building regardless of cause, including the negligence of Landlord or Tenant. Neither party, nor its officers, directors, employees, agents or invitees, nor, in case of tenant, its subtenants, shall be liable to the other for loss or damage to its respective property. Moreover, Landlord and Tenant shall be relieved of their respective obligations of indemnity to the extent of the amount actually recovered by Landlord or Tenant from one or more of the insurance carriers of Tenant or Landlord. The indemnities and releases set forth in the Lease as modified and supplemented by this paragraph 9 shall survive the expiration of the term of this Lease.

7.      Notice of Tenant Default. Notwithstanding the provisions of Section _____ of the Lease, Tenant shall not be deemed to be in default until Tenant has received reasonable notice of such default. For purposes of this paragraph, "reasonable notice" shall be at least 5 days in the case of payment of rentals, and at least 30 days for all other events constituting a default. If Tenant cures such default within this notice period, then Landlord shall not be entitled to avail itself of the remedies described in Section _____ of the Lease. Additionally, Landlord shall not be entitled to exercise its rights under that Section _____ in the event Tenant takes action to cure a default within this notice period, but is unable, by reason of the nature of the work involved, to cure the same within such period, provided Tenant continues to work thereafter diligently and without unnecessary delays.

8.      Subordination of Landlord's Lien. Landlord hereby subordinates all statutory and contractual landlord's liens (and, provided Tenant is not in default at the time, agrees to sign documents so indicating, upon Tenant's request) to any liens or security interests covering Tenant's inventory, or financed fixtures, furniture or equipment of Tenant in favor of bona-fide third-party lenders providing financing to Tenant (including purchase-money financing). Additionally, Tenant shall be permitted to remove contents from the Premises without Landlord's consent (free and clear of any landlord's liens) whenever Tenant has not previously received from Landlord a written notice of default which remains uncured.

9.      Assignment and Subletting. Notwithstanding the provisions of Section _____ of the Lease, if Tenant requests Landlord's consent to an assignment of the Lease or subletting of all or a part of the Premises, Tenant shall submit to Landlord, in writing, the name of the proposed assignee or subtenant and the nature and character of the business of the proposed assignee or subtenant. Landlord's consent to an assignment or subletting shall not be required if the assignee or subtenant is (a) an "affiliate" (as defined below) of the Tenant, or (b) an entity which acquires all or substantially all the assets or outstanding stock of the Tenant through a merger or acquisition, and the assignee or subtenant agrees to be bound by the terms of the Lease. For purposes hereof, the term "affiliate" means any person or entity which now owns at least 51% voting control of the Tenant and any entity in which the Tenant or Tenant's current owners own at least 51% voting control. Additionally, a transfer of ownership interests in Tenant by reason of the death or divorce of an owner of Tenant shall not be deemed an assignment or subletting for purposes of the Lease. In situations where Landlord's consent is required, if Landlord has the option under the Lease to cancel the Lease (or the applicable portion thereof as to a partial subletting) and Landlord intends to elect to cancel the Lease, Landlord must give written notice of such election to Tenant, and Tenant shall have five (5) days after receipt of such notice in which to withdraw its request, thus precluding Landlord's right to cancel the Lease.

10.      Non-Disturbance of Tenant. The subordination provided for in Section _____ of the Lease shall extend only to such mortgages or deeds of trust under which the mortgagee by agreement in the mortgage or deed of trust or in a separate instrument contracts in substance not to disturb Tenant's occupancy so long as Tenant performs its obligations in the Lease on condition that Tenant, when requested by the mortgagee, shall execute an attornment agreement to the mortgagee should the mortgagee succeed to the rights of the Landlord under the Lease.

11.      Landlord's Approvals. Notwithstanding anything to the contrary contained in the Lease, it is specifically understood and agreed that as regards any approvals or matters to be performed to the satisfaction of Landlord, the Landlord shall not unreasonably withhold or delay its approval or indication of satisfaction and shall approve or be satisfied as to any matter so long as any deviation from the requirements of Landlord are of a minor and insubstantial nature such that Landlord will realize substantially the benefits to which it is entitled. Further, any matter required to be approved by Landlord hereunder which has been approved at any time shall be deemed approved for purposes hereof.

12.      Telecommunications Equipment. Tenant is hereby granted (on a non-exclusive basis in conjunction with other tenants and subject to Landlord's approval) reasonable access to Building riser and chase space (but in no event more than Tenant's proportionate share of available space in the aggregate) and telecommunications areas for telecommunications equipment and cabling requirements in order to install and operate thereon microwave dishes/earth satellite disks and whip antennae (collectively, the "Rooftop Communications Equipment"), in locations as selected by the Tenant provided the same complies with all applicable governmental rules, regulations and codes. Without liability for Rental or any other charges, Tenant shall be permitted to select a contractor of its choice to undertake the installation of the Rooftop Communication Equipment, subject to Landlord's approval, which approval shall be based upon conforming with Building warranties and rules and regulations, but which shall not be unreasonably withheld or delayed. In addition, Tenant shall be permitted to construct equipment enclosures, if required, in locations, design and materials to be mutually agreed upon, for accommodation of the Rooftop Communications Equipment at no cost to Tenant during the Lease Term. Tenant shall also have the right to install necessary conduit and sleeving from the roof to the points of connection within the Premises. The Tenant shall be responsible for all costs of installation (including structural reinforcing, if required), repair and maintenance with respect to the Rooftop Communications Equipment. Further, Tenant shall have access to the incumbent local exchange carrier (ILEC) and shall have the right to access competitive local exchange carriers (CLECs) mutually agreed upon between Landlord and Tenant. All risers, chase space, telecommunications areas and associated telecommunications equipment and cabling shall be secured from access to the public. Tenant shall be responsible for payment to local exchange carriers for contracted charges within the Leased Premises. In addition, Landlord shall permit access to the Building, at the then prevailing rate for such access in comparable buildings of similar class and size in Houston, Texas, to a qualified telecommunication provider specified by Tenant and approved by Landlord (such approval not to be unreasonably withheld or delayed), and Landlord shall permit such provider to use the Building shafts, conduits, risers and other interfloor connections for the installation of cabling and other equipment.

13.      Emergency Power and Other Facilities. Tenant shall have the right to install a freestanding generator, including storage tanks, UPS batteries and all other equipment necessary to facilitate such generator, at Tenant's cost, on the existing generator pad depicted on the attached Exhibit ____. The site upon which the generator is placed shall be at no cost to Tenant. The exact size and specifications of such generator shall be mutually agreed upon between Landlord and Tenant. During the Term, Tenant shall have the right to use Building shafts or conduits between the Premises and other parts of the Building (including the roof) for the installation and maintenance of conduits, cables, ducts, flues, pipes and other devised, supplementary HVAC and other facilities consistent with Tenant's use of the Premises and other portions of the Building. Furthermore, Tenant shall also have the right to use, in common with other tenants, the lobbies and other public areas of the Building, plus service elevator, loading dock, mail room and other Building facilities.

14.      Compliance with Laws. Landlord and Tenant agree to comply with applicable laws, with their respective responsibilities to be allocated as follows:

(a)      Tenant will be responsible for compliance with all applicable laws, statutes, ordinances and governmental rules, regulations or requirements now in force or that may hereafter be in force with respect to the operation of Tenant's business or the Premises, including, without limitation, any accommodations or alterations that need to be made within the Premises to accommodate disabled employees and customers of Tenant pursuant to requirements under the Americans With Disabilities Act [Public Law 101-336 (July 26, 1990)] and the Texas Architectural Barriers Act (Tex. Civ. Stat. Art. 9102) (collectively, the "Disability Statutes"). Any alterations made to the Premises in order to comply with any such statutes must be made solely at Tenant's expense and such alterations must also comply with the requirements of Section _____ of the Lease.

(b)      Except for the obligations of Tenant under clause (a) above, Landlord shall be responsible for compliance with all applicable laws, statutes, ordinances and governmental rules, regulations or requirements now in force or which may be thereafter be in force that affect the Building, including without limitation, the Disability Statutes and local building or fire code requirements applicable to the Building. If Landlord is required to make any installation in the Building pursuant to the Disability Statues or local building or fire codes, the cost of such installation shall be a part of Operating Expenses if such installation constitutes a day-to-day operational expense. However, if such installation constitutes a capital improvement item under generally accepted accounting principles, such installation shall be accomplished at Landlord's sole cost and expense and shall not be charged to Tenant as a part of the Operating Expenses of the Building.

15.      Certain Representations, Warranties and Agreements of Landlord. Landlord represents and warrants to Tenant as follows:

(a) To the best of Landlord's knowledge, the Building does not contain any material quantities of asbestos. To the best of Landlord's knowledge neither the Building nor the land on which it is located contain any substance deemed hazardous under federal, state, or local environmental statues, ordinances, rules, regulations, or orders ("Hazardous Materials"), other than negligible quantities of such Hazardous Materials as may typically be found in commercial construction or cleaning products used and disposed of in accordance with applicable laws. There are no underground storage tanks for petroleum products or Hazardous Materials, active or abandoned, located on the land on which the Building is located. There are no environmental liens on any of the real property comprising the Building. Landlord agrees not to cause or permit any Hazardous Materials to be produced, stored, kept, discharged, or released in or about the Building other than negligible quantities of such Hazardous Materials as may typically be found in commercial construction or cleaning products used and disposed of in accordance with applicable laws. Any provision in the Lease to the contrary notwithstanding, in no event shall Tenant be liable to Landlord for any Hazardous Materials stored, released or disposed of on the Premises prior to the commencement of the Lease by anyone other than the Tenant, or for any contamination due to Hazardous Materials in or about the Building which was not caused by Tenant.

(b)      The Premises shall at all times during the term hereof have unobstructed access to the common areas of the Building, which in turn shall have access to public road(s) abutting the property on which the Building is located.

(c)      The foundation, flooring and structural components of the Premises are sufficient to support loads common to Tenant's business.

(d)      The HVAC system, elevators, electrical system, plumbing system, fire prevention system, roofs, foundations and all structural components of the Building are in good working order and conditions, are fit for their intended purposes, and, subject to the provisions of Section _____ of the Lease, will be maintained in good working order and condition by Landlord throughout the term of the Lease.

(e)      Tenant will not be deemed to be a holdover tenant (and holdover rents will not apply) unless the Landlord is entitled to possession under the terms of the Lease and Tenant fails to vacate the Premises within 30 days after Tenant receives a written demand for possession from the Landlord.