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³³ Most of the airports interviewed for this digest did not often agree to changes in their lease templates and, if they did, they most often stated that they agreed to such changes only insofar as they did not alter the substance of a lease provision.

³⁴ 52 C.J.S. Landlord and Tenant § 334 (2024).

³⁵ 52 C.J.S. Landlord and Tenant § 340 (2024).

³⁶ Union Park Square Cmty. Coal., Inc. v. NYC Dep’t of Parks & Recreation, 985 N.Y.S.2d 422, 427 (N.Y. 2014).

³⁷ AM. JUR. 2D Easements and Licenses §§ 1-2 (2024).

³⁸ 52 C.J.S. Landlord and Tenant § 1 (2024).

³⁹ Metro. Airport Auth. of Rock Island Cnty. v. State of Illinois, 716 N.E.2d 842, 845 (1999); 52 C.J.S. Landlord and Tenant § 341 (2024).

⁴⁰ The distinctions between licenses, leases, and easements, while not particularly important in the ordinary scheme of GA leasing, may have consequences in less common contexts such as taxation, leasehold mortgages, and bankruptcy. A lease, for example, may be rejected in bankruptcy, while an easement may not. See 11 U.S.C. § 365 and, in particular, § 365(h). In any case, research for this digest discovered any number of arrangements by which airports manage to make services available to tenants and airport users. FBOs, for example, are often allowed to enter into subleasing and licensing relationships with specialized aviation service providers (SASOs) in order to provide services required by an airport’s minimum standards that an FBO may be unwilling or unable to provide. And, as noted in the text, some airports seem to prefer the use of the term license where others prefer the term lease or agreement.

___________________

⁴¹ FRIEDMAN at 26-25.

⁴² See generally Alex M. Johnson, Correctly Interpreting Long-Term Leases Pursuant to Modern Contract Law: Toward a Theory of Relational Leases, 74 VA. L. REV. 751 (1988).

⁴³ FRIEDMAN at 26-4 to 26-5. Divining the intent of the parties, however, does not mean reading the lease language literally and avoiding the context in which an agreement is reached. In Giuseppi v. Walling, Judge Learned Hand explained the use of extrinsic evidence as an aid in contract interpretation:

[W]e must put ourselves in the place of those who uttered the words, and try to divine how they would have dealt with the unforeseen situation and, though their words are by far the most decisive evidence of what they would have done, they are by no means the final.

Giuseppi, 144 F.2d 608, 224 (2d Cir. 1944).

⁴⁴ See, e.g., Bowdin Square, LLC v. Winn-Dixie Montgomery, Inc., 873 So. 2d 1091, 1101 (Ala. 2003) (call center not a use typically found in shopping mall).

⁴⁵ See 52 C.J.S. Landlord and Tenant §§ 422, 428 (2024).

⁴⁶ See 52 C.J.S. Landlord and Tenant § 434 (2024).

⁴⁷ Some leases provide context for the transaction by employing several lease recitals at the beginning of the lease that explain the business deal, provide an explanation and introduction to the parties from the airport’s perspective, or that explain the planned use of the premises. Additionally, language, grammar, and writing style also play a role in the meaning of a lease, but they may have their limitations as well. 52 C.J.S. Landlord and Tenant §§ 425-27 (2024). As the court observed in Tyrrell v. Mayor of the City of New York:

Punctuation . . . is subordinate to the text and is never allowed to control its plain meaning, but when the meaning is not plain, resort may be had to those marks, which for centuries have been in common use to divide writings into sentences, and sentences into paragraphs and clauses, in order to make the author’s meaning clear.

Tyrrell, 53 N.E. 1111, 1112-13 (N.Y. 1899) (italics added). See also FRIEDMAN § 26:5.6. There is also a contrary view:

Punctuation marks are rarely, if ever an infallible token of intention, for punctuation is to a large degree arbitrary and very often a matter of individual taste unrelated to the expression of the intention, and the comma is frequently employed merely to indicate rhetorical pauses and interruption in continuity of thought and sometimes with an eye to structure without regard to precision in the delineation of the common purpose. Although not to be entirely ignored, punctuation cannot be allowed to control the meaning of the words chosen to voice the intention.

Casriel v. King, 65 A.2d 514, 516 (N.J. 1949).

⁴⁸ AM. JUR. 2D Landlord and Tenant §§ 110-18 (2024).

⁴⁹ The term provision is also a convenient place to mention any renewal options or to refer to the place in the lease where a renewal option can be found.

⁵⁰ Other Lessees simply seek a lease term for as long as an airport is willing to allow.

___________________

⁵¹ Airport Compliance Manual, FAA Order 5190.63 Change 3 (Sept. 23, 2023) at 12-2.

⁵² FRIEDMAN § 14:1.1 & nn.46-50, but emphasizing that a lease’s default provisions will control. See also Annotation, Right to Exercise Option to Renew or Extend Lease as Affected by Tenant’s Breach of Other Covenants or Conditions, 23 A.L.R.4th 908 §§ 2, 3, 5 (1983 & Supp. 2022).

⁵³ As a general rule, renewal options pass with an assignment. See 52 C.J.S. Landlord and Tenant § 59 (2024). The same is not generally true of a sublease because there exists no privity of contract between the Lessor and the subtenant. 52 C.J.S. Landlord and Tenant §§ 60-63 (2024).

⁵⁴ E.g., Ins. Indus. Consultants, Inc. v. Essex Invs., Inc., 549 S.E.2d 788, 790 (2001).

⁵⁵ E.g., Flavors Stores of Va., Inc. v. Hoffman Candies, Inc., 370 S.E.2d 293, 295 (Ct. App. 1988).

⁵⁶ See generally AM. JUR. 2D Landlord and Tenant §§ 137-42 (2024).

⁵⁷ See generally AM. JUR. 2D Landlord and Tenant §§ 201-05; FRIEDMAN § 14:2.2 (2024).

⁵⁸ Available at https://www.txdot.gov/business/resources/airport-rules.html.

⁵⁹ Note the implicit policy that the lease term is limited to 20 years unless the Lessee has agreed to make a capital investment that requires a leasehold mortgage and a term longer than 20 years is required by a lender. Also note that lenders prefer and frequently request that the lease term exceed the loan by a minimum of five years.

_____ year lease term and upon mutual and written agreement by Lessor.⁶⁰

Example No. 2: SAT GA Hangar Condominium Lease Agreement with Security Air Park (August 25, 2017). This example contains a statement of the lease term and two extensions and requires a minimum capital investment of $3 million. The term provision conditions the Lessee’s right to exercise the extension options on its continued good standing under the lease, the absence of a default under any lease provision, having satisfied the required maintenance and repair obligations stated in the lease, and, finally, obtaining the airport’s consent to the request. The example also contains an unusual provision requiring a sworn affidavit from the Lessee’s contractors regarding the details of the completion of the required construction.

5. Lease Term

5.1 The initial term of this Lease (the “Initial Term”) shall commence on the first day following the effective date of an Ordinance by the City Council of San Antonio approving this Lease (the “Commencement Date”)⁶¹ and shall terminate at midnight of the last day of the eighth (8) Lease Year unless extended or earlier terminated in accordance with this Lease.

5.2 Subject to the conditions described below, Lessee shall also have up to two (2) options (each, an “Extension Option”) to extend the term of this Lease. The first extension is for an additional ten (10) years and the second extension is for an additional five (5) years.⁶² Such Extension Options may be exercised by Lessee by (a) providing satisfactory documentation to Lessor demonstrating that Lessee has at all times satisfied the minimum capital investment for each Extension Option as described below and (b) delivering written notice to Lessor of its election to exercise such Extension Option, no later than one hundred eighty (180) days prior to the expiration of the then current term. Lessee’s right to exercise each Extension Option shall also be contingent upon Lessee’s not being in default under this Lease beyond any applicable cure period, having performed all required maintenance and repairs, keeping the Leased Premises in a clean and attractive condition, and being in good standing in the performance of all obligations under this Agreement.⁶³

5.3 In order to have the right to the first (1st) Extension Option (“Lease Extension #1”), Lessee must be able to demonstrate that it or its sub-lessees has expended at least $1,000,000.00 towards approved Capital Improvements on the Leased Premises since the Commencement Date (i.e., during the Initial Term). In order to have the right to the second (2nd) Extension Option (“Lease Extension #2”), Lessee must have expended at least $2,000,000.00 towards Capital Improvements and/or Lessor approved sublease improvements on the Leased Premises since the Commencement Date (i.e., during the Initial Term and Lease Extension #1, cumulatively).

5.4 Up to sixteen percent (16%) of the minimum Capital Improvement costs may be allowable design, civil and engineering fees. Profit and overhead shall not be included in the allowable minimum Capital Improvement amount.⁶⁴

5.5 Lessee shall submit to Lessor, to verify Lessee’s investment in Capital Improvements to the Lease Premises, itemized contractor’s invoices detailing the costs incurred by Lessee for the Leased Premises Capital Improvements. Such costs may not include any finance or interest expense and/or separate overhead costs of Lessee. Additionally, Lessee shall submit a certified statement and sworn affidavit⁶⁵ from Lessee’s contractors specifying the total costs incurred and stating that all applicable work was performed in accordance with the approved plans and specifications and in strict compliance with all applicable building codes, laws, rules, ordinances and regulations.

5.6 The Director, upon mutual agreement by the parties to extend the term, shall have the authority to exercise the options set out in Sections 5.2 and 5.3 on behalf of the City without City Council action.

Example No. 3: Hastings Michigan Commercial Ground Lease Template (2007). This provision can be read to provide the Lessee with a lease term that may extend from 20 to 50 years, when renewal options are included, but it is otherwise a fairly standard provision for a small GA airport.

ARTICLE 3
TERM AND COMPENSATION

Subsection 3.01. Term.

The initial term of this Agreement shall be for a period of TWENTY (20) years, effective the ________ day of __, A.D., 2007 and terminating on the __ day of ___, A.D., 2027.

Subsection 3.02 Option to Renew.

At the end of the full twenty (20) year term of this Agreement, the Lessee shall have the first option to enter into a new Agreement for the demised premises.⁶⁶

1. ^~The time period during which the Lessee may exercise its option shall commence on the 180th day prior to the expiration of this Agreement and shall expire at midnight of the last day of the Agreement.
2. ^~TSo long as Lessee is not in default under Section 9.01 of the Lease, Lessee shall have the option to renew the Lease for two (2) additional terms of fifteen (15) years each by providing Lessor, within one hundred eighty (180) days of the termination date of the initial

___________________

⁶⁰ Note the fairly typical procedure required for the Lessee’s renewal notice for the lease; all of the leases reviewed for this digest require a written notice from the Lessee. The requirement for the mutual agreement of the parties to any extension is less typical. The available extensions and their length vary based on the amount of the Lessee’s investment.

⁶¹ Note that the commencement date is not stated explicitly, but the date can nevertheless be determined with reference to the date of passage of an ordinance approving the lease.

⁶² Note that the two available extensions are for different numbers of years (10 and five years, respectively) and that both extensions require the Lessee to make capital investments.

⁶³ Note the conditions that the Lessee must satisfy in order to invoke the extensions: (1) proof of the required capital investments—a $1 million investment for each extension; (2) written notification of the extension no later than 180 days prior to expiration of the lease; (3) the absence of uncured defaults; (4) satisfaction of the Lessee’s maintenance and repair requirements; and (5) being in good standing under the lease.

⁶⁴ Note the exclusions on capital expenditures for certain professional fees, capital, and overhead and, in the next section, for finance and interest expenses.

⁶⁵ Note the unusual requirement of a sworn affidavit from contractors attesting to construction costs and certifying that the work was performed in accord with the approved plans and specifications and applicable codes and laws.

⁶⁶ Note that this provision has an initial term of 20 years but that the Lessee “shall have the first option to enter into a new Agreement for the demised premises” (italics added). The provision allows for two 15-year “renewals.”

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⁶⁷ Some leases, particularly those with FBOs, require the Lessee to pay a certain percentage of its gross fuel sales to the airport. Any number of formulae are used. Although some non-airport leases adopt a formula that imposes a percentage fee after a certain threshold has been reached (usually called a “break even” point), such a formula is not used in any of the leases that were examined for this digest. Instead, fuel flowage fees at airports are based on gross fuel sales or deliveries.

⁶⁸ See, e.g., Michael Hodges, Not Yesterday’s Lease—Revisited, AVIATION PROS (Aug. 2016) (discussing analysis for GA lease rental rates and arguing against comparison of GA rental rates to off-airport commercial/industrial rates in neighboring geographic areas and in favor of comparison to rental rates for on-airport property at other airports in the larger geographic region), https://www.aviationpros.com/airports/article/12199553/airport-lease-agreement. Some of the airports interviewed for this digest agreed with this view and some did not.

⁶⁹ For a general discussion of rent adjustment methodology, see Annotation, Lease Provision Providing for Rent Adjustment Based on Event or Formula Outside Control of Parties, 87 A.L.R.3d 986 (1978 & Supp. 2022). Some leases adopt conditions and methodologies specific to airports: One lease, for example, contains a claw back provision stating that the airport may recover rent from the Lessee if a federal agency should determine that the rate charged in the lease is less than the fair market value (FMV).

(C) In the event the FAA or the United State Congress makes a determination that the rental payments under this Lease are not fair market rental payments, and if Lessor is required by the FAA or the United States Congress to increase the rental under this lease in order to maintain its funding with the FAA or the United States Congress, Lessee agrees to pay such increased payments to Lessor and to amend this lease to require such increased payments; provided Lessor and Lessee mutually agree to cooperate with one another in challenging any such proposed rental increase.

Article 3 (C), Chattanooga Choo Choo Aero Charter Operator Lease (Sept. 2000). Also note that Grant Assurance 24 requires airports to “maintain a fee and rental structure of the facilities and services provided to airport users which will make the airport as self-sustaining as possible.” Airport Compliance Manual, FAA Order 5190.63 Change 3 (Sept. 23, 2023) at 2-15 to 2-16.

⁷⁰ See generally https://www.bls.gov/cpi/overview.htm.

⁷¹ See generally ACRP Synthesis 86, supra note 16, at 37.

⁷² The reappraisal process, however, may recommend that the rent decrease rather than increase. If the amount of any decrease in rent is significant, the reappraisal may result in additional negotiation or litigation to settle a dispute about the way the appraisal was performed, the amount of the increase in the rental amount, or the determination of FRV. A reappraisal provision that makes such disputes less likely may contain the following process suggested by ACRP Synthesis 86: If two appraisals differ by 10% or less, then the new rent would be an average of the two appraisals; if the appraisals differ by more than 10%, then a third appraisal would be allowed to set the new rent. See ACRP Synthesis 86, supra note 16, at 36-37. In the alternative, as with rental increases

tration with appraisal procedures used by certain airports that they viewed as producing skewed rental rates and escalations; some operators advocated for setting rental rates based on a survey of rental rates at airports in a specified region; others simply advocated for more participation in the rate setting process; and all preferred simple, predictable formulae over more complicated calculations.

The parties to a lease are, generally, free to define rent in any way they choose.⁷³ And it is not uncommon for the parties to negotiate the meaning of the term to include pass-through expenses and charges that may benefit one or both parties to the transaction—such as late fees, interest, insurance premiums, and maintenance expenses.⁷⁴ These costs may be characterized in the lease as “additional rent.” Doing so may have certain tax advantages for Lessees and, if a jurisdiction provides for expedited judicial proceedings for the collection of rent or the eviction of tenants in default, certain other advantages for Lessors. Rather than file separate actions to recover amounts owed in these jurisdictions, for example, Lessors may be permitted to file a single action to recover all monetary amounts characterized in the lease as “rent.”⁷⁵

Taxes are annual recurring charges that are used to support local government; assessments are special impositions that pay for local improvements.⁷⁶ The party who owns the reversion for the leased premises typically is responsible for the payment of special assessments, but local law may make exceptions for long-term leases.⁷⁷ Because airports are often characterized by state law as local governmental units, they are often not subject to taxes themselves. But there are instances where states and local governments have instituted or have attempted to institute such taxes.⁷⁸ In any case, airports are more likely to be subject to and responsible for the payment of special assessments⁷⁹ and, in some cases, especially for independent airport authorities, to payments in lieu of taxes (PILOTs).⁸⁰ Finally, leases in some jurisdictions may be subject to property taxes on the leasehold,⁸¹ but the leases reviewed for this digest typically make these taxes the responsibility of the Lessee.

If a jurisdiction levies taxes on airport property, the lease may require that the taxes be paid by the Lessee directly or included in the definition of additional rent (this may also present tax consequences for the Lessee).⁸² Special assessments for local improvements are generally treated similarly. The lease should be specific about the party who is obligated to pay special assessments and whether they will be characterized as additional rent.

In some areas of the country, the cost of water use or the handling of stormwater may require special consideration. Where water is delivered at a fixed amount, the charge is generally treated as a tax paid by the Lessor and passed on to the Lessee. Metered water, on the other hand, is generally charged directly to the Lessee through a specific lease provision. Some jurisdictions levy a fee for handling stormwater and the amount of runoff from nonpermeable surfaces. If these charges are an issue, the lease may specify their treatment as a utility or as additional rent.⁸³ Similarly, taxes and utilities may be characterized as additional rent if explicitly identified as such in the lease.⁸⁴ Late charges and attorneys’ fees may also be characterized as additional rent, but if they are not billed promptly, their tardiness may draw the assertion of a waiver defense in some jurisdictions. Examples of representative lease provisions follow.

Example No. 1: Tampa International Airport (TPA) Hangar Lease with Civil Air Patrol (2017). This example is from a lease between TPA and a flying club for a hangar at one of TPA’s reliever airports. Note that the rent provision contains a reduced rate for the non-profit flying club (but only so long as the club continues to operate an aircraft at the airport), specifies the method of rent adjustment, allows the Lessee to terminate the lease with 30 days’ written notice, makes rent payments a separate covenant to the lease, identifies late charges and fees for late rent, and states the preferred method of payment (electronic), but provides acceptable alternative mail and hand delivery options. Note that the provision that follows erroneously refers to the Lessee as “Company” rather than the flying club/Civil Air Patrol that is the actual party to the lease.

ARTICLE 5 PAYMENTS

For the rights and privileges granted herein, Company agrees to pay to Authority in lawful money of the United States of America, in advance and without demand, all applicable rents, fees and other charges on or before the first day of each and every month, unless otherwise specified, throughout the term for the Premises.

___________________

based on the CPI, the lease may simply state that adjustments to the rent will only increase and will never decrease the rent over the lease term.

⁷³ Fargo Realty, Inc. v. Harris, 414 A.2d 256, 257-58 (N.J. Super. Ct. App. Div. 1980). See generally AM. JUR. 2D Landlord and Tenant § 526 (2024).

⁷⁴ This practice has certain limitations in bankruptcy where post-filing rents are under the jurisdiction of a bankruptcy judge.

⁷⁵ E.g., Richard v. Broussard, 495 So. 2d 1291, 1292-93 (La. 1986).

⁷⁶ The parties to a lease may express their intention regarding responsibility for the payment of taxes and special assessments.

⁷⁷ See generally AM. JUR. 2D Landlord and Tenant § 501 (2022).

⁷⁸ See, e.g., Millions at Stake in Fight Involving Tampa Bay Port and Airport Tenants, TAMPA BAY TIMES (Sept. 26, 2019), https://www.tampabay.com/news/business/2019/09/26/millions-at-stake-in-tax-fight-involving-tampa-port-and-airport-tenants/.

⁷⁹ This is often based on the theory that the assessment is made for a permanent improvement to the lessor’s property. See generally 52A C.J.S. Landlord and Tenant § 843 (2024).

⁸⁰ PILOTs are described in detail at the following link: https://www.doi.gov/pilt.

⁸¹ See generally Is Your Airport Leasehold Taxable?, AVIATION PROS (Feb. 18, 2021), https://www.aviationpros.com/fbos-tenants/article/21206544/is-your-airport-leasehold-taxable

⁸² The tax consequences of leases can be a motivating factor for either party in the transaction, yet it is rarely discussed in general commentaries. For a basic and lucid explanation of tax issues in the context of leasehold improvements and capital projects. See generally Mark S. Hennigh & Stephen A. Bonovich, Tax Considerations Affecting Construction Allowances and Dispositions of Leasehold Improvements, reprinted in ALI-ABA PRACTICE CHECKLIST MANUAL FOR DRAFTING LEASES IV at 81-83 (ALI-ABA 2004).

⁸³ See generally 49 AM. JUR. 2D Landlord and Tenant § 638 (1995 rev.).

⁸⁴ See generally McCann v. Evans, 185 F.3d 93, 95 (3d Cir. 1911).

5.01 Rents

1. Provided Company operates an aircraft at the Airport, in accordance with the provisions of Federal Register, Vol. 64, No. 30 regarding leases to Civil Air Patrol units,⁸⁵ the total annual rent for the Premises will be $10.00 per year, plus applicable taxes, due on or before the first day of each year of the term, beginning November 1, 2016, in advance and without demand.
2. In the event that Company ceases to operate an aircraft at the Airport at any time during this Lease, the annual rent for the Premises will be $1,635.92, payable in monthly installments of $136.33, plus applicable taxes,⁸⁶ on or before the first day of the month, in advance and without demand. The annual rent in such case is determined as follows:
   1. Land rent: 7,436 square feet of land at $0.22 per square foot = $1,635.92 per year, plus applicable taxes; and
   2. Facility rent: Due to Company’s nonprofit status and its use of the facility to benefit aviation; the age, condition, and location of the facility that render it incapable of generating more than minimal revenue; and the fact that the facility is not needed for an Airport purpose, the Authority has determined that the facility does not carry a rental payment obligation.⁸⁷
   3. Adjustment of Rents and Other Payments: At the commencement of each renewal option period, Authority may, at its option, adjust the Premises land rent to be paid for the remaining term of the Lease. The adjustment will be determined by Authority based upon 10 percent of the fair market value⁸⁸ for the Land or the prevailing rate for land of comparable use at the Airport, and Company agrees to pay said adjusted Land rent. Notwithstanding any other provision in this Lease, Company may terminate this Lease within 30 days of written notification of rent adjustment. Such termination by Company must be by written notice to Authority.

5.02 Rent and Other Payments a Separate Covenant⁸⁹

Company will not for any reason withhold or reduce its required payments of rents, fees and other charges provided in this Lease, it being expressly understood and agreed by the Parties that the payment of rents, fees and other charges is a covenant by Company that is independent of the other covenants of the Parties hereunder.

5.03 Interest on Delinquent Charges or Fees

Without waiving any other right or action available to Authority, in the event of default of Company’s payment of rents, fees or other charges hereunder, and in the event Company is delinquent in paying to Authority any rents, fees or other charges for a period of five (5) calendar days after such payment is due, Authority reserves the right to charge Company interest thereon from the date such rents, fees or other charges became due to the date of payment at the Federal Reserve Bank of New York prime rate in effect on the date the rents, fees or other charges became due plus four percent (FRBNY prime + 4%) or 12 percent per annum, whichever is greater,⁹⁰ to the maximum extent permitted by law from the date such item was due and payable until paid. Such interest will not accrue with respect to disputed items being contested in good faith by Company, in which event the legal rate of interest will prevail.

5.04 Place of Payments

Company will submit all payments required by this Lease as follows:

(ELECTRONICALLY – PREFERRED METHOD)

VIA ACH WITH REMITTANCE ADVICE TO XXXXXXXX@ TAMPAAIRPORT.COM

OR

(MAIL DELIVERY)

HILLSBOROUGH COUNTY AVIATION AUTHORITY ATTN: FINANCE DEPARTMENT

TAMPA INTERNATIONAL AIRPORT

P. O. BOX XXXXXX

TAMPA, FLORIDA 33622-XXXX

OR

(HAND DELIVERY)

HILLSBOROUGH COUNTY AVIATION AUTHORITY ATTN: FINANCE DEPARTMENT

TAMPA INTERNATIONAL AIRPORT

XXXXXXXX

SUITE XXXX, ADMINISTRATION BUILDING

XXXXXXX

TAMPA, FLORIDA 33607

Example No. 2: Elmyra Corning (ELM) Fixed Based Operator (FBO) Lease (2010) with rent and additional fuel flowage. Note that this provision does not select a particular CPI as the benchmark for rent escalation and that the provision contains a schedule for determining the fuel flowage fee.

5. RENT Upon the “rent commencement date”, Lessee agrees to pay Lessor rent in the sum of twenty-six thousand one hundred thirty-six dollars ($26,136) per year payable in equal monthly installments of two thousand one hundred seventy-eight dollars ($2,178) in advance on or before the first day of each calendar month. Such annual rent payment shall remain at twenty-six thousand one hundred thirty-six dollars ($26,136) through the 30th day of June 2016 and shall be adjusted annually each July 1, thereafter for the term of this agreement by the percent increase of the Consumer Price Index⁹¹ for the preceding full calendar year.
6. ADDITIONAL RENT In addition, starting immediately upon execution of this agreement without regard to the rent commencement date, Lessee shall submit to Lessor a fuel flowage fee⁹² based on the schedule noted below for all retail fuel sold and all fuel used by Lessee in its own aircraft. Lessor reserves the right to impose fuel flowage fees at some future date for fuel pumped into aircraft performing regularly scheduled air carrier operations at the Airport.⁹³ A monthly report in a format approved by the Lessor shall be prepared detailing fuel flowage each calendar month of this agreement and forwarded with payments for such month by the 15th of the month following:

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⁸⁵ Note the conditions necessary for the reduced rental rate.

⁸⁶ Note the escalation of the rental to FMV if Lessee fails to operate an aircraft.

⁸⁷ Note the explicit statement of the rationale for the reduced rental rate.

⁸⁸ Note the statement of the formula for future rental increases.

⁸⁹ Note the characterization of rent as an independent covenant, which does not allow for rent abatement and, in many states, allows for more efficient collection actions.

⁹⁰ Note the calculation of interest on overdue rental amounts.

⁹¹ Note that the escalation clause does not identify a specific CPI for use in the lease.

⁹² Note that the fuel flowage fee is characterized as “additional rent.”

⁹³ Note that the airport reserves the right to redefine the fuel flowage fee; at this airport the FBO also provides into plane fuel delivery for commercial aircraft.

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⁹⁴ Note the reference to the internal airport calculation of any rental increase for renewal periods and that such increases will be “consistent” with rates paid by other Lessees on the airport.

⁹⁵ Note the statement that the rental rate will increase to the FMV rate once ownership of a structure passes to the airport. Many airport leases miss this opportunity to increase rental revenue when the Lessee’s costs of owning a structure decrease.

⁹⁶ Note that the landing fee rate and process are straightforward and similar to the base rent provision, allowing the airport to set and revise rates without amending the lease.

⁹⁷ Note the express “Triple Net” lease language shifting all expenses to the Lessee except those expenses explicitly stated in the lease as borne by the Lessor.

⁹⁸ Note the straightforward statement of the calculation of interest on late rental payments.

⁹⁹ Note that an additional charge is imposed for fuel delivered from a source other than that provided by an airport concessionaire so as not to escape the airport’s fuel flowage fee.

¹⁰⁰ Note that this Rent section, quite logically, also contains a security deposit provision; security deposits are discussed elsewhere.

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¹⁰¹ The Coronavirus Response and Relief Supplemental Appropriation Act (CRRSAA) (Public Law 116-260) was signed into law on December 27, 2020 and included $2 billion in funds for economic relief at eligible airports. The FAA’s Corona Virus Response Grant Program is described at the following links: https://www.faa.gov/airports/crrsaa and https://www.faa.gov/airports/special_programs/covid-19-airports/acrgp_faqs.

¹⁰² 52A C.J.S. Landlord and Tenant § 1086 (2024).

¹⁰³ These issues and their potential solutions have provoked much discussion among commentators. See FRIEDMAN § 40:2.

¹⁰⁴ Section IV, A discusses federal regulations generally and provides information about the relevant federal Grant Assurances.

¹⁰⁵ These issues and others are discussed in more detail in FRIEDMAN § 40:2 et seq. (the later sections of FRIEDMAN Ch. 40 may be of particular interest because they consider and describe lease enforcement issues related to pandemic measures and lease performance).

¹⁰⁶ E.g., Specialty Foods, Inc. v. City of South Bend, 997 N.E.2d 23, 26 (Ind. Ct. App. 2013).

¹⁰⁷ E.g., Svenska v. Harris Corp., 3 F.3d 576, 580 (2d Cir. 1993) (“government interference” found to encompass government regulation).

¹⁰⁸ See, e.g., 476 Grand LLC v. Dodge of Englewood, Inc., 2012 WL 670020 (N.J. Super. Ct. App. Div. Mar. 2, 2012).

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¹⁰⁹ HOWARD O. HUNTER, MODERN LAW OF CONTRACTS § 18:15 at 248 (2023) [hereinafter HUNTER].

¹¹⁰ Id. § 18:23.

¹¹¹ See id. § 18:24.

¹¹² RESTATEMENT (SECOND) OF CONTS. § 261, AM. JUR. 2D Act of God § 12 (1981 & Supp. 2024). RESTATEMENT § 261 recognizes the circumstances of the complete impracticability of contract performance, while RESTATEMENT § 270 recognizes the circumstance of partial impracticability of performance. The commentary to each section explains that the remedies for complete and partial impracticability will, necessarily, differ.

¹¹³ HUNTER, supra note 109, § 18:24 & nn.15-17. As HUNTER observes, courts seem generally to rationalize that the failure of the parties to include such risks in a force majeure clause suggests that they intended the risk to be borne by one of the parties, rather than shared by both.

¹¹⁴ Robyn S. Lessans, Force Majeure and the Coronavirus: Exposing the “Foreseeable” Clash Between Force Majeure’s Common Law and Contractual Significance, 80 MD. L. REV. 799, nn.239-40 (2021), https://digitalcommons.law.umaryland.edu/mlr/vol80/iss3/6.

¹¹⁵ See id.; e.g., Gen. Elec. Co. v. Metals Res. Grp. Ltd., 293 A.D.2d 417, 418-19 (N.Y. App. Div. 1st Dep’t 2002) (“contract was not an illegal contract to gamble, but rather a legitimate commodity swap agreement”; mere financial disadvantage does not satisfy impossibility rule).

¹¹⁶ See generally 52A C.J.S. Landlord and Tenant §§ 1041-43 (2022); 49 AM. JUR. 2D Landlord and Tenant § 644 (1995); Disturbing Concepts: Quiet Enjoyment and Constructive Eviction in the Modern Commercial Lease, 35 ABA REAL PROP. & TR. J. 57 (2000).

¹¹⁷ Route 6 Outparcels v. Ruby Tuesday, 931 N.Y.S.2d 436 (App. Div. 2011).

¹¹⁸ Id. at 437 (italics added).

¹¹⁹ Id. at 438.

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¹²⁰ See generally FRIEDMAN § 40:6, including Appendix 40A (which provides a detailed example of lease modifications for the deferral of rent related to a pandemic event); HUNTER, supra note 109, §§ 18:23-18:24.

¹²¹ 52 C.J.S. Landlord and Tenant §§ 791-93 (2024). But see FRIEDMAN at 27-10 to 27-15 (noting that ambiguous lease restrictions are likely to be construed against the restriction). Consequently, it may be advisable to insert a reference to a particular airport policy document in support of a lease restriction.

¹²² The stated application of an airport rule or the designation of a specific use for the premises, however, does not constitute a representation by the Lessor that the premises are fit for any particular use. 52 C.J.S. Landlord and Tenant § 453 (2024). But a minority of jurisdictions imply a warranty of the fitness of the premises for a specific commercial use. See generally AM. JUR. 2D Landlord and Tenant § 443 (2024); e.g., D & H Aircraft Sales, Inc. v. Engine Components Inc., 933 S.W.2d 653, 655-56 (Tex. Ct. App. 1996).

¹²³ GA facilities do not often pose zoning issues. There are other local codes and policies, however, that may apply to GA activities on airports. Leases make mention of and require compliance with local building codes and occupancy permits and some airports, in sensitive locations, may require compliance with certain “good neighbor” design criteria. All of these issues require a familiarity with local regulations and airport policies.

¹²⁴ Leases of land used for agricultural purposes require special consideration and some additional protections for the airport: (1) location and crop height (crops should be low growing and must meet FAR Part 77 Obstruction Surfaces and FAA Design Standards); (2) wildlife attractants (crops must not attract wildlife that can present a hazard to airport operations); (3) agricultural equipment (the equipment should travel prescribed routes on airport land and obey other traffic regulations and security measures); (4) damage to crops (indemnification and exculpation clauses should hold the airport harmless for any damages to crops resulting from airport operations); and (5) lease term and rates (agricultural lease terms should not exceed five years, although renewals are permissible; rental rates should reflect the adjusted agricultural use of the land).

erator, not listed on the operator’s Part 135 charter certificate, or not directly under the operator’s management. The provision below is from Centennial Airport’s Minimum Standards, which limit commercial fueling activities to FBOs and addresses an operator’s attempt to avoid limitations on commercial activities by requiring that those limitations must be incorporated in any charter or aircraft management agreement between the operator and its client.

AIRCRAFT LEASEBACK, SUBLEASE, OR OTHER AIRCRAFT OPERATING AGREEMENTS

All aircraft leases, leasebacks, subleases, or other aircraft operating agreements involving commercial activity between an aircraft owner/operator and other parties operating at the airport shall conform to the standards stipulated under PART 3, Sections (2) through (12) for the respective aeronautical activities being performed under the subject agreement.

Where such agreements contemplate the right or responsibility or obligation to perform maintenance on aircraft (other than preventive maintenance), such agreements must involve reasonable use of and payment for aircraft commensurate with the value and usage of said aircraft.

A copy of all such agreements shall be provided to the Authority upon the execution of the agreements.

All aircraft leases, leasebacks, subleases or other aircraft operating agreements involving commercial aircraft activity at or from the Airport shall include the following: “This agreement shall not violate the Minimum Standards for Commercial Activities asset by the Arapahoe County Public Airport Authority, nor shall this instrument be used for the purpose of evading any of Centennial Airport’s Rules and Regulations.”¹²⁵

Although supervening changes to the rules under which a lease was signed may give rise to a claim that the purpose of the lease has been frustrated, such cases are not usually successful unless the Lessee is unable to carry on its business.¹²⁶ The Restatement (Second) of Contracts § 261 (1981), however, takes a different view and suggests that frustration of purpose may be supported by a showing of the impracticability of performance, unless the lease demonstrates otherwise and the non-occurrence of the event that is alleged to have caused the frustration was assumed by the parties to the lease (the non-occurrence of a pandemic, for example). All of the leases reviewed for this digest expressly state a Lessee’s responsibility for supervening regulations from various federal, state, and local sources. The failure of a claim of frustration of purpose before a court, though, does not mean that such a claim will not find practical or political resonance before a legislative body or an airport board.¹²⁷ Examples of several lease provisions follow.

Example No. 1: San Antonio International Airport (SAT) GA Hangar Condominium Lease with Security Air Park (August 25, 2017) stating the limitations on the use of the premises without reference to Airport Policy Documents.

4. USE OF LEASED PREMISES

Lessee may use the Leased Premises solely for the hangaring, modification, maintenance and repairs of aircraft and other aviation-related uses approved in writing by the Aviation Director. No other activities shall be conducted on the Leased Premises unless authorized in writing by the Aviation Director.¹²⁸ The fuel farm located on the Leased Premises as of the Commencement Date will be the only fuel farm permitted on the Leased Premises. Fuel sales on Leased Premises shall be permitted to be made by Lessee only to Lessee and its sublessees.¹²⁹ No fueling of transient aircraft is permitted on the Leased Premises. Fuel trucks belonging to third party fixed based operators (FBO) based at the Airport may be permitted access to Leased Premises only if such FBO provides evidence to Lessor, prior to commencing any fueling activities, that it carries sufficient pollution and other

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¹²⁵ Centennial Airport (APA) Minimum Standards for Commercial Aeronautical Activities at Part 2, page 3 of 4 (Jan. 1, 2018) (italics added). The APA minimum standards limit commercial fueling operations to Fixed Base Operators and (Part 3 Section (2)) and to Helicopter Fixed Base Operators (Part 3 Section (3)). As a result of the paragraph quoted in the text, the limitations on fueling activities at APA are incorporated by reference into individual leases.

¹²⁶ E.g., Mel Frank Tool & Supply, Inc. v. Di – Chem. Co., 580 N.W.2d 802, 808-09 (Iowa 1998) (no frustration where business simply becomes less profitable).

¹²⁷ Not many rules in any commercial leasing context anticipated the COVID-19 pandemic, or the federal, state, and local regulations enacted to address the resulting health concerns. Although the first cases alleging frustration of purpose resulting from the COVID-19 pandemic have yet to make their complete journey through the judicial system (e.g., Valentino USA, Inc. v. 693 Fifth Owner LLC, No. 652605/2020, 2020 WL 3485810 (N.Y. Supp. Ct. June 21, 2020) (complaint); see also FRIEDMAN § 27:4.2, courts do not seem predisposed to apply the doctrine. See HUNTER, supra note 109, § 18:24 and at 15-17.

¹²⁸ Note the explicit limitation on the use of the premises without reference to the airport’s primary governing documents. For a discussion of the FAA requirements and limitations on non-aeronautical uses of hangars, see 81 Fed. Reg. 38906 (June 15, 2016).

¹²⁹ Note the limitation of the Lessee’s fueling rights; a frequent source of contention in GA leases. The Chattanooga air charter lease template is even more restrictive and provides that violation of the restrictions is cause for immediate termination of the lease.

10 OWNERSHIP OF AIRCRAFT.

1. Tenant hereby covenants that Tenant is the lawful owner of the Aircraft stored in the Space. In the event that an Aircraft is owned by multiple parties, each owner shall sign and execute this Agreement prior to Tenant’s occupancy of the Space and each owner shall be jointly and severally liable for the terms of this Agreement.
2. Should the ownership of the Aircraft change during the Term of this Agreement, it shall be considered an assignment requiring Authority’s consent under Section 18, and, if Authority consents, all additional and current owners must sign and execute a new Agreement within thirty (30) days after the applicable transfer of ownership, and shall provide to Authority new proof of Aircraft ownership as described above.
3. For AVGAS customers, on request and within five (5) business days, Tenant shall make available for Authority’s inspection a copy of the Tenant-owned aircraft AC Form 8050-3.
4. Authority may terminate this Agreement immediately by written notice for Tenant’s failure to comply with any requirement set forth in this section.

Section 10, Chattanooga Air Charter Hangar Lease Template (2020).

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¹³⁰ Note that the scope of the Lessee’s FBO activities is described with reference to the airport minimum standards for that commercial activity (a copy of which is attached to the lease as a separate exhibit) and restated in the lease.

¹³¹ Note that the use provision adds a “quality of service” standard.

¹³² The leases examined exhibit the view that airport leases are intended to transfer to the Lessee most, if not all, liabilities associated with the possession and control of the premises, including compliance with all federal, state, and local laws and regulations, and, perhaps especially, those pertaining to the use, storage and disposal of hazardous materials.

¹³³ See generally J. Arthur Mozley & Anne M. Landrum, Indemnity Agreements in the Aviation Context and Related Issues at 19 (2011), http://www.mfllaw.com/wp-content/uploads/2015/10/NTSB_Bar_Association_-_Blue_Angels_Air_and_Transportation_Law_Conference.pdf; Amount, Validity of Exculpatory Clause in Lease Exempting Lessor from Liability, 49 A.C.R.3d 321 (1973 & Supp. 2022) [hereinafter Indemnity in Aviation]. It is important for airports to consult with their attorneys and risk managers to determine the appropriate balance of risk and cost in order to address liability issues in particular leases.

¹³⁴ In an interesting, but uncommon clause, the indemnification provision in the Susquehanna Commercial Hangar Lease contains a mutual exculpation provision for certain kinds of damages, such as lost profits and consequential and punitive damages.

18.10 Mutual Waiver of Certain Damages. Notwithstanding anything to the contrary in this Lease, in no event shall either party hereto be liable to the other party or to any other person claiming through the other party for any consequential, incidental, special, exemplary, indirect or punitive damages, lost profits, lost business or similar damages, regardless of whether the same arises out of the negligence of such party, its agents or employees, even if such other party has been advised of the possibility of such damages.

Susquehanna Airport Commercial Hangar Lease Template (2022).

¹³⁵ See generally Indemnity in Aviation; FRIEDMAN at 17-20 to 17-21.

¹³⁶ Indemnity in Aviation at 4. Some leases also try to limit premises liability. One way of doing so, as many leases do, is to insert a clause stating that the Lessee takes the premises “as is, where is” and without any representations by Lessor regarding the fitness of the premises for the Lessee’s intended use or for any other particular purpose. These clauses may have the desired effect, but not usually for latent defects and not usually without the Lessee having conducted (or having been offered the opportunity to perform) an inspection. See generally Reste Realty Corp. v. Cooper, 251, 272-73 (N.J. 1969) (recognizing implied warranty against latent defects and fitness of premises for lease). A clause, for example, that contained a reference to the Lessee’s inspection of the premises was upheld in Bedrosky v. Hiner, 430 N.W.2d 535, 539-40 (Neb. 1938) and was enforced as an estoppel against the Lessee’s claim that the premises were not in good and satisfactory condition at the time of the taking of possession. The Bedrosky provision stated as follows:

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Lessee has examined said premises prior to his acceptance and the execution hereof and is satisfied with the physical condition thereof, including al equipment and appurtenances, and his taking possession thereof shall be conclusive evidence of his receipt thereof in satisfactory order and repair, except as otherwise specified hereon, and Lessee agrees and admits that no representation as to the condition or repair hereof has been made by the Lessor or his agent which is not herein expressed or indorsed hereon, and likewise agrees and admits that no agreement or promise to decorate, alter, repair, or improve said premises including all equipment and appurtenances, either before or after the execution hereof, not contained herein, had been made by Lessor or his agent.

Bedrosky, 430 N.W.2d at 538.

¹³⁷ See generally Annotation, Tenant’s Agreement to Indemnify Landlord Against All Claims as Including Losses Resulting from Landlord’s Negligence, 4 A.L.R.4th 798, 802 (1981 & Supp. 2022) (discussing the unsettled state of the law and citing cases on both sides of the issue); 42 C.J.S. Indemnity § 21 (unequal bargaining power of parties and statutory provisions) (2024).

¹³⁸ See generally Kemira, Inc. v. A-C Compressor Corp., 755 F. Supp. 1059, 1063 (S.D. Ga. 1991); e.g., E. Air Lines, Inc. v. CRA Transp. Co., Inc., 306 S.E.2d 27, 28-29 (1983).

¹³⁹ FRIEDMAN at 17-2 to 17-15; 17-17 to 17-19; 42 C.J.S. Indemnity § 21 (statutory provisions) (2024).

¹⁴⁰ Note the statement of the Narrow Form of indemnity, but that the language of the provision does not explicitly exclude indemnity for the Lessor’s conduct.

¹⁴¹ Note the scope of the Lessee’s indemnity obligation and the explicit statement that the obligation is not limited by the Lessee’s insurance coverage.

¹⁴² Note the relaxed notice requirement that does not specify a deadline, but only an aspirational goal.

¹⁴³ Note the clause that explicitly extends the Lessee’s obligation to indemnify beyond the termination of the lease; not all leases take this additional step.

¹⁴⁴ Note the explicit exclusion from the indemnity the obligation to indemnify against the Lessor’s conduct.

¹⁴⁵ Note the relaxed notice requirement.

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¹⁴⁶ Note the explicit exclusion of the indemnity for violations of the law by the Lessor.

¹⁴⁷ Note the statement of the Narrow Form of indemnity for the Lessee’s conduct and excluding the Lessor’s conduct.

¹⁴⁸ Note the unusual, explicit reference to the law of comparative negligence.

¹⁴⁹ Note the explicit reference to and the negation of any waiver of any governmental immunities or other defense provided to government entities by Texas law.

¹⁵⁰ Note the exclusion of third-party beneficiaries from the indemnity created by the lease.

¹⁵¹ Note the short period of time required for notification of any claim or demand made under the clause.

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¹⁵² Note the statement of Broad Form indemnity for the Lessor’s conduct and any condition on the premises.

¹⁵³ Note the exculpatory provision for any liability to Lessee for certain kinds of damages.

¹⁵⁴ Note that the notice provision is unilateral.

¹⁵⁵ Note the exculpatory provision regarding the Lessor’s liability to Lessee for third-party injuries and damages.

¹⁵⁶ Note the disclaimer of liability for stored aircraft and other personalty stored in the hangar or on airport property.

¹⁵⁷ 93 C.J.S. Waste § 1 (2024).

¹⁵⁸ Right of Tennant to Make Alterations in Structures on Leased Premises, 13 A.L.R. 824 (1921 & Later Case Service 2022). There may, however, be an issue about exactly what constitutes an improvement. See Annotation, What Constitutes Improvements, Alterations, or Additions Provisions of Lease Permitting or Protecting Tenants’ Removal Thereof at Termination of Lease, 30 A.L.R.3d 998 (1970 & Supp. 2022).

¹⁵⁹ E.g., Hy-Vee Food Stores, Inc., v. Scrivner, Inc., 381 N.W.2d 275, 282 (S.D. 1986). The Hy-Vee court stated the measure of damages to the premises as “a) the cost of reasonable repairs necessary to the premises . . . [that] were not part of ordinary wear and damage [or] b) the difference between the reasonable fair value of the premises immediately before the acts constituting the breach of [the] lease and proximately causing the damage and immediately after its injury.” Id. at 281. See generally 93 C.J.S. Waste § 19 (2024); minor alteration may be treated differently. See FRIEDMAN at 23-17 to 23-18.

¹⁶⁰ The Ashland Oregon Airport Hangar Ground Lease, for example, is different. That lease provides, at Para. 9, that upon completion of construction, the hangar becomes the property of the Lessor. Ashland Oregon Airport Hangar Ground Lease at Para. 9, https://www.ashland.or.us/Files/Master%20Hangar%20Lease%20with%20Abstract%209-11-2009.pdf. Such a provision may, however, affect a Lessee’s ability to amortize its investment in a hangar.

¹⁶¹ A bankruptcy filing can alter circumstances at termination. The estate of a bankrupt Lessee has a choice to accept or reject a lease—if the estate accepts the lease, it must abide by all of the lease’s provisions, including those requiring the removal of improvements, fixtures, and personal property and restoration of the premises. C.f., In re Malden Mills, 303 B.R. 688, 702-03 (1st Cir. B.A.P. Mass. 2004).

¹⁶² For a discussion of the rules governing the timing and removal of fixtures, see Annotation, Time Within Which Tenant’s Right to Remove Trade Fixtures Must be Exercised, 109 A.L.R.5th 421 (2003 & Supp. 2022).

tion and improvements. Some airports, however, seem unable or unwilling to devote resources to such an effort.

Some leases exhibit a concern, or seek an assurance, that a Lessee has the financial wherewithal to complete a construction project or an improvement that it has proposed or that has been made a condition of the lease. This concern is addressed by requiring the Lessee to provide either a construction bond or a letter of credit payable to the Lessor.

Construction on an airport often affects other airport activities and tenants. And so other leases express an interest that the construction or improvement should be completed on the schedule agreed by the parties and that a failure to complete the project on schedule may constitute a default. In order to meet this interest and alleviate any adverse effects on the operation of the airport or the activities of other airport tenants, airport Lessors may decide to reserve a right to terminate the lease if construction has not commenced on or has not been completed by a specified date; leases may also insert a provision that charges the Lessee additional rent for the airport’s administrative expenses related to the delayed date of completion of construction.

Airports are also concerned that construction is consistent with its Airport Master Plan (AMP) and Airport Layout Plan (ALP), and that the construction is completed without disruption to other tenants, the movement of aircraft, or the disruption of airport operations. Consequently, airport Lessors are interested to review and approve construction or renovation plans and specifications in order to ensure that all airport rules and regulations have been met. There is also interest in reviewing all local permits and certificates of occupancy and all other necessary local approvals, as well as ensuring that work on the project is performed by qualified labor. Finally, because the federal Grant Assurances require airports to maintain good title to airport property, all of the reviewed leases contain provisions prohibiting the filing of mechanic’s liens against airport property or, if such liens are filed, that they are contested and resolved promptly and within a specified period of time.

Construction of GA facilities on airports may be funded in several different ways—the Lessor may finance the project itself (through the use of local, state, or federal funds), or the Lessee may use its own funds or its leasehold interest to obtain a mortgage for the improvements.¹⁶³ In negotiating any of these funding mechanisms, it is important to have at least a rudimentary understanding of the drafting of certain lease terms that may affect the tax consequences of the project. For example, Lessees may receive certain tax benefits from ownership of the improvements during a long-term lease by depreciating the capital assets; if a state does not exempt certain airport property from taxes, an airport Lessor may be able to avoid such taxes by delaying ownership of the asset until the conclusion of the lease when ownership of the asset reverts to the Lessor.¹⁶⁴

Other issues are presented when a Lessee fails to remove its personal property at termination. In such circumstances, the issue is whether the Lessee has abandoned its personal property or can (or should) be treated as a holdover tenant and whether the airport can avoid liability when it moves, stores, or disposes of the Lessee’s personal property.¹⁶⁵ In order to avoid liability, the lease may specify a process by which the Lessor provides notice of the left personal property, establishes a timeline for its removal, and declares the property abandoned after that date so that title to the personal property vests in the Lessor.¹⁶⁶ Examples of improvements and alterations lease provisions follow.

Example No. 1: Hastings Michigan Commercial Ground Lease (2018). A standard provision for a small GA airport.

ARTICLE 4

LESSEE’S CONSTRUCTION REQUIREMENTS

Subsection 4.01. Requirements for Improvements on Demised Premises.

The Lessee shall construct a building with dimensions of ____________________________________________________, which shall be equipped with one “bifold” type electric door with a manufacturer-specified width of at least fifty-eight (58) feet and at least one “personnel” door. The building shall contain heavy gauge steel siding with a steel roof. All construction and site preparation costs, including construction of hangar approach ramp, bringing utilities to the site, monthly utility costs and all other fees, etc., shall be the responsibility of Lessee. All construction shall conform to the “Rules and Regulations for Hangars, Buildings and Leased Premises for Hastings Airport” (hereinafter referred to as the “Hangar Rules”) and all other state and/or local governmental requirements.

No building, structure, fencing, roadway, utility line, addition or improvement of any kind or nature shall be made or installed by Lessee without the prior written consent of the Lessor, as provided for herein. The Lessee may also be required to provide the Lessor with proof of funds necessary to complete construction of the improvements which have been irrevocably dedicated to such construction.

Subsection 4.02. Future Construction Dates.

In the event that the construction of the building or any improvement during the term hereof is not substantially completed within

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¹⁶³ ACRP Synthesis 86: Airport Operator Options for Delivery of FBO Services explains the various ways that GA development on airports is funded. Most often a lease will require a specific capital investment amount and state the breakdown by category of how that capital investment must be spent. Lease audit provisions allow the Lessor to verify spending on capital projects or remodels.

¹⁶⁴ Some state statutes exempt airport property from taxation either entirely or only in certain circumstances. Kansas exempts all property owned and operated as an airport by a political subdivision. See KAN. STAT. § 79-201q (2024). But Connecticut only exempts airport property that is owned by one municipality and located in another municipality. See CONN. GEN. STAT. § 12-74 (2024). Pennsylvania, on the other hand, exempts property that is used for a “public purpose,” which includes operating an airport. See, e.g., PA. CONST. art. 8, § 2. An in-depth discussion of the tax consequences of Lessee improvements and lease terms is beyond the scope of this digest. But see generally Mark S. Hennigh & Stephen A. Bonovich, Tax Considerations Affecting Construction Allowances and Dispositions of Leasehold Improvements, reprinted in ALI-ABA PRACTICE CHECKLIST MANUAL FOR DRAFTING LEASES IV at 81-83 (ALI-ABA 2004) (providing an orientation to the topic and related issues).

¹⁶⁵ AM. JUR. 2D Landlord and Tenant §§ 665-66 (2024).

¹⁶⁶ AM. JUR. 2D Landlord and Tenant § 668 (2024); e.g., Milanovich v. Dwyer, 2004 MT 91N, 94 P.3d 764, PP 24-26, 30, 34 (MT 2004).

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¹⁶⁷ Note that the referenced Hangar Construction Requirements can be viewed at https://www.ashland.or.us/Files/Hangar%20Construction%20Requirements.pdf.

¹⁶⁸ Note that upon completion, title to the structure vests in the Lessor/City.

¹⁶⁹ Note that Lessee is also required to indemnify and defend the Lessor against any claim to its title to the structure.

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¹⁷⁰ FRIEDMAN § 9:1.1; AM. JUR. 2D Landlord and Tenant § 449 (2024).

¹⁷¹ AM. JUR. 2D Landlord and Tenant § 456 (Lessor) and §§ 599, 679-80 (Lessee) (2024).

¹⁷² 52A C.J.S. Landlord and Tenant §§ 881-85 (2024). The rule varies among the states; FRIEDMAN § 9:2.1 provides citations to state statutes and case law on the subject.

¹⁷³ In addressing the issue, commentators suggest that such provisions contain specific terms such as “damage” or “destruction” rather than more generic terms such as “casualty” or “act of God.” For example, a clause that characterizes the casualty as “damage or destruction by fire or otherwise” should capture the widest array of risks to the premises. FRIEDMAN recommends avoiding certain terms in casualty provisions that have a history in caselaw for generating questions of fact (“untenantability” and “destruction”) or that have particularly complicated and unsettled caselaw histories (“action of the elements,” “acts of God,” and “unavoidable casualty”). Also, because fire is most often treated separately by insurance carriers and because it is the most frequent cause of a casualty loss, it is prudent to treat fire separately in casualty provisions. See FRIEDMAN §§ 9:2.2, 9:8.

issue, but simply require repair or reconstruction. Other leases provide a formula for the calculation of a settlement amount. In either case, Lessees are held to their obligation to repair or reconstruct the premises or improvements or to provide to the Lessor the proceeds of insurance policies in lieu of fulfilling those obligations.

The same provisions should describe the specific circumstances under which the Lessee’s obligation to pay rent will be relieved and for how long. It is also important to identify the party who will be responsible for paying for the restoration of the premises, under what circumstances the premises will be restored, and the timetable for the restoration. Negotiations on these issues will also necessitate a discussion of the insurance requirements for the party charged with the restoration of the premises. Finally, the lease should describe the circumstances under which termination will occur rather than the repair or restoration of the premises and under whose election such a decision will be made. Long-term net leases generally require the Lessee to restore the premises and structures in a form substantially similar to what existed prior to the casualty, with the necessary funds provided by the insurance proceeds required elsewhere in the lease.¹⁷⁴ A casualty that occurs near the end of the lease, however, may be treated differently—with an insurance payout made directly to the Lessor, for example. (The sample lease provisions reprinted at the end of this section illustrate how airports treat leasehold casualties.)

A termination standard that often appears in commercial leases allows the Lessor to terminate the lease if it estimates the damage to the premises to be 30% or more of the replacement value of the damaged improvements made by the Lessee. Friedman explains that the rationale for the 30% standard is that the amount could not reasonably be placed much higher without compelling restoration of the premises when restoration may not be economically feasible.¹⁷⁵ This formulation also makes sense in the GA airport context when the premises are owned by the airport, but they would seem to have less application to airport land leases where the Lessee’s options to acquire suitable substitute premises are more limited. In the case of long-term land leases, it appears to make more sense to shift responsibility for the restoration of the premises to the Lessee, who should be required by other provisions of the lease to carry sufficient insurance for just such an occurrence.

Consideration should be given to whether casualties near the end of the lease term should be treated differently—with the most economically and commercially reasonable approach resulting in the Lessee simply releasing its insurance payout to the Lessor. This process relieves both parties of the burden of reconstructing a facility that the Lessee, in a short time, will vacate and may no longer be interested in leasing or competing for when the airport issues a request for proposals at some point in the future. This approach also benefits an airport seeking the long-term stability of a new long-term lease for the premises, regardless of who the Lessee may be.¹⁷⁶

The Lessor’s remedies for an uninsured casualty

In preparation for lease negotiations on the subject of casualty losses, it may be helpful, as Friedman suggests, to consider the remedies available to a Lessor should the Lessee fail to obtain or maintain the required insurance, the lease’s casualty provisions fail to provide sufficient funds to restore the premises, or should the Lessee’s insurer deny coverage. In such a case, the Lessee’s liability for a casualty may be based on at least three different legal theories: (1) in tort for negligence; (2) in contract for breach of the lease covenant to maintain the required insurance or to return the premises at termination in the condition specified in the lease; and (3) for breach of the indemnification provision in the lease, if the clause is broad enough to capture the particular casualty.¹⁷⁷ Recovery on legal theories based in tort or for breach of contract is fairly straightforward; but recovery under an indemnification clause depends, to a significant degree, on how the clause is drafted and the law of the jurisdiction in which the premises are located.¹⁷⁸

Although indemnification clauses are treated in more detail elsewhere (see Subsection 4, earlier), it is helpful to discuss two related issues here. Because the Lessee spends more time on the premises and has control of the activities that take place there, casualties are most often caused by the Lessee and those under its control (its agents, employees, customers, and invitees). Most of the reviewed indemnification clauses are drafted in very broad terms and require airport Lessees to assume liability for any damages resulting from the use of the premises or damages that “arise out of” the use of the premises. These clauses also require the Lessee to indemnify and hold harmless the Lessor for any negligence of the Lessee, its employees, agents, visitors, customers, etc. Some indemnification clauses also require the Lessee to accept liability for the Lessor’s negligence. A related issue (Exculpation Clauses) is also discussed in Subsection 4, earlier. In leases with such broad indemnification risks shifted to and accepted by the Lessee, both parties should consider

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¹⁷⁴ FRIEDMAN at 9-57 and generally § 9:8.

¹⁷⁵ Id. at 9-56.

¹⁷⁶ Id. at 9-58 (providing sample clauses).

¹⁷⁷ FRIEDMAN at 9-66 to 9-67 and generally § 9:10. Tort and contract theories provide remedies for the violation of specific protected interests. For a Lessor’s recovery in contract for the breach of the covenant to obtain or furnish proof of insurance, as well as a discussion of a Lessor’s specific theories of recovery in contract, see HUNTER, supra note 109, §§ 11:1-11:6 (explaining the theory of breach) and §§ 13:1-13:5 (explaining the available damages for a Lessor’s reliance, expectancy, and restitution interests). On the related issue of the available claims and remedies in the context of insurance issues, see 3D COUCH ON INSURANCE §§ 232:1-232:5 (2023). For a description of the interests protected and the remedies available in tort for Lessors, see THE AMERICAN LAW OF TORTS §§ 9:1-9:4 (negligence) and §§ 32:1-32:6 (fraud, deceit, breach of warranty in a commercial context). And note particularly the common law origins of each of these torts and the resulting limitations on remedies in contract (rescission and specific performance) and tort (damages). Id. at §§ 32:5-32:6.

¹⁷⁸ See the text and examples contained in earlier subsection 4.

whether the Lessee should carry appropriate insurance to shoulder the financial burden of the indemnification and exculpatory clauses. And, where there exists a specific insurance requirement and the Lessee fails to obtain it, the Lessee may be obligated to indemnify the Lessor in any case.¹⁷⁹ Finally, as airports continue to wrestle with the post-9/11 era and although such insurance coverage may be prohibitive in cost and narrow in coverage, the parties should consider adding terrorism insurance to their lease, or at least having that discussion during lease negotiations.¹⁸⁰ As can be seen from the sample provisions at the end of this section, there is some uniformity among airports on these issues, but there are also variations that continue to rely on fault-based principles.

Example No. 1: Hastings Michigan Commercial Ground Lease (2022). A straightforward casualty provision that shifts the responsibility and cost to the Lessee to restore, rebuild, or raise the structures on the premises.

Subsection 8.04. Fire and Casualty Coverage Insurance.

The Lessee shall, at its expense, procure and keep in force at all times during the term of this Agreement with a company authorized to do business in Michigan, insurance on the building(s) and other improvements on the demised premises against loss and damage by fire and casualty loss. The Lessee shall furnish evidence of insurance in an amount no less than the replacement cost of the improvements.

Subsection 8.05. Destruction of Premises (Uninsured Cause).

In the event of damage to or destruction or loss of the building or buildings by an uninsured cause, Lessee shall decide, within thirty (30) days of the event, whether it will repair, restore, rebuild, or raise said building or buildings. Within sixty (60) days of the event, Lessee shall initiate restoration or raising activities and complete those activities within one hundred twenty (120) days of the event unless otherwise agreed by the Lessor.¹⁸¹ In the event Lessee fails to take action as noted above, Lessor shall have the right to raise the building(s) and return the site to its original condition. Lessee shall be liable for reimbursing the Lessor for all costs incurred, thereupon the Lease shall be terminated.¹⁸²

Example No. 2: Saratoga New York Commercial Hangar Ground Lease (2018). A complicated provision that shifts to the Lessee the responsibility to repair the structure “wholly or partially damaged by the elements or fire resulting from the elements or natural causes” (Para. 1), but allowing the Lessee to make the judgment to raze the structure and terminate the lease if, in the Lessee’s “opinion” the structure is damaged to the extent that it is “render[ed] . . . not fit for [the Lessee’s] business purposes” (Para. 2).

ARTICLE VII: DESTRUCTION

1. If the Prime Hangar shall be wholly or partially damaged by the elements or fire resulting from the elements or natural causes, it shall be the responsibility of TENANT to repair.¹⁸³
2. If the Prime Hangar shall, in the opinion of TENANT, be substantially damaged by the elements or fire or other casualty so as to render the Prime Hangar not fit for TENANT’s business purposes,¹⁸⁴ TENANT shall have the right, to be exercised by notice in writing delivered to LANDLORD within ninety (90) days from and after said occurrence, to terminate this Lease, and in such event, this Lease and the tenancy created shall cease at the date of the occurrence, and the rent shall be adjusted as of the date of the occurrence. If TENANT shall terminate this Lease as aforesaid, then the provisions of Article III, subpart B8 shall control.

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7. TENANT shall deliver to LANDLORD possession of the Leased Premises, including the proposed Prime Hangar and any other buildings, structures or facilities, at the expiration or termination of this Lease in good condition, reasonable wear and tear excepted. If the Prime Hangar shall be substantially damaged at the time of lease expiration, TENANT shall be obligated to raze the Prime Hangar and return possession of the Leased Premises to LANDLORD in a rough graded condition (in which event TENANT shall have the right to retain and all insurance proceeds that TENANT may receive in connection with such damage).¹⁸⁵ If the Prime Hangar shall be partially damaged at the time of lease expiration, LANDLORD shall have the option to require TENANT to either (x) repair the Prime Hangar to substantially the condition existing immediately prior to such damage (in which event TENANT shall have the right to retain and all insurance proceeds that TENANT may receive in connection with such damage), or (y) accept the Prime Hangar in the condition existing following such partial damage, in which event TENANT shall be required assign to LANDLORD any insurance proceeds payable to TENANT on account of such damage to the Prime Hanger. TENANT shall have the right, at any time during the term of this Lease, to remove its vehicles, aeronautical equipment, tools, and other equipment from the Leased Premises.

Example 3: MSP Reliever Airport FBO Lease Operating Agreement (January 2021). A straightforward provision that gives

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¹⁷⁹ See generally Annotation, Construction and Application of Insurance Procurement Provisions and Clauses – General Considerations, Indemnity Issues, and Nature of Agreement Containing Provision and Clauses, 29 A.L.R.7th 1 (2017 & Supp. 2022) (a Lessee’s failure to provide the required insurance may subject it to imposition of an obligation to indemnify).

¹⁸⁰ The parties must also understand the state of the law on subrogation in the jurisdiction where the premises are located and decide who should insure for the casualty (such as a fire), whether the insurance coverage should be for the benefit of the Lessor or for both parties, and whether the parties will agree to mutual waivers of subrogation. These questions can be addressed by an airport’s risk manager and insurance carrier.

¹⁸¹ Note the schedule for requiring the Lessee’s decisions to restore, rebuild, or raze the damaged structures and the consequences, in the next line, of its failure to meet the stated schedule without reaching an agreement with the Lessor.

¹⁸² Note that the Lessee bears the cost of razing any structures whether the work is performed by either party.

¹⁸³ Note that the circumstances under which the Lessee must repair the structure.

¹⁸⁴ Note that the Lessee is given the option to raze the structure and terminate the lease if, in its opinion, the premises are rendered “not fit” for its business purposes.

¹⁸⁵ Note the different option the lease creates for razing the structure if it is “substantially” damaged at termination and, in the next line, the still different options the lease creates if the structure is only “partially” damaged at termination.

either party 60 days to exercise the option to require the “restoration” of the premises following a casualty and exculpates both parties from any other related damages.

2.23 Destruction of Buildings

If the buildings or any of them thereafter constructed on the Demised Premises for any reason or cause should be wholly destroyed, or partially damaged to the extent that they cannot be used for the purposes hereinbefore set forth, Tenant’s obligation to pay rent hereunder shall proportionally cease and shall not recommence until such time as said building or buildings have been restored (rent shall resume as of the date of beneficial occupancy of the restored facility).¹⁸⁶ In such case, either party may, at its option, notify the other that said buildings should be restored.¹⁸⁷ Subject to Section 2.22 herein, if either party so elects to have said buildings restored, each party shall contribute to the costs of restoration all proceeds of all insurance, if any, paid to it on account of such damage or destruction, and Tenant shall pay the amount, if any, by which the total costs of said restoration exceed the total of such insurance proceeds, if any, and in the event of no insurance, the whole of such cost.¹⁸⁸ If the option to restore is not exercised or if restoration is impossible because of governmental restrictions or for any other reason remaining in effect for six (6) months after such damage or destruction, then said obligation to restore shall lapse, and the lease on that portion of the Demised Premises formerly occupied by such damaged or destroyed buildings shall terminate.¹⁸⁹

Either party may exercise its option to have the buildings restored hereunder by giving written notice to the other party not later than sixty (60) days after such damage or destruction, and Tenant shall undertake said restoration upon giving or receiving such notice.¹⁹⁰ Except as provided in this Section 2.23, neither party shall be under any liability to the other party for any damages or loss to the Demised Premises, the structures located thereon or Tenant’s interest in the Demised Premises.¹⁹¹

7. Airport Security

GA security measures vary according to the size and complexity of an airport. Airports that receive flights by scheduled airlines operating aircraft with 61 or more seats must develop a TSA approved Airport Security Program (ASP).¹⁹² Smaller GA airports are not required to develop an ASP, but instead follow best practices developed jointly by the TSA and the GA community. The TSA has published guidance on the subject¹⁹³ and the Aircraft Operators and Pilots Association (AOPA) has published its own security manual for GA aircraft operators.¹⁹⁴ The Transportation Research Board has published a list of resources on the subject for GA airports and operators.¹⁹⁵ Nevertheless, recognizing the extraordinary importance of airport security, some GA leases contain specific provisions regarding compliance with TSA and state and local airport security regulations and requirements. And, in the same way that the TSA’s security regulations increase in complexity as airports receive larger commercial aircraft and traffic, these airport security lease provisions tend to become more complex and expansive as the size of the airport increases. Many of these provisions, just as their non-security-oriented counterparts, often contain their own, specific indemnification provisions.

Several security-related clauses are fairly standard in GA leases and require the Lessee to: (1) comply with all federal, state, and local security laws, rules and regulations (along with all future changes or amendments); (2) acknowledge the Lessee’s awareness and review of the airport security plan or regulations; (3) promise to take all steps necessary to ensure that its employees, agents, contractors, and customers will comply with the airport’s security provisions; (4) acknowledge responsibility for the costs associated with badging and background checks; and (5) agree to pay, often as additional rent, any fines or penalties lodged by the TSA against the airport for violations of security rules or regulations. Examples follow.

Example No. 1: Hastings Michigan Commercial Ground Lease (2022) provides an example of a simple, direct security provision at a small GA airport that is not required to develop a TSA approved ASP.

Subsection 5.09. Airport Security.

The Lessee recognizes the Lessor’s required compliance with Federal Aviation Regulations concerning airport security and agrees to comply with the Lessor’s Security Plan¹⁹⁶ as it relates to its use of the demised premises and the Airport’s public facilities.

Example No. 2: Orange County John Wayne Airport FBO Lease (2018) airport security provision below is characteristic of an airport with scheduled commercial air service and is corre-

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¹⁸⁶ Note the provision for rent abatement if the structure is destroyed or damaged.

¹⁸⁷ Note that either party may elect to notify the other that the structure shall be restored.

¹⁸⁸ Note the apportionment for repair or replacement of the structure (a) when the parities have available insurance proceeds and (b) when the Lessee does not have insurance proceeds. In either case, the Lessee is responsible for payment of the amount for the repair or replacement not covered by insurance.

¹⁸⁹ Note that the option to notify that the structure should be restored expires in 60 days and, if the option is not exercised, it terminates.

¹⁹⁰ Note that if the option to restore is exercised by either party, the Lessee must commence restoration after receiving or giving notice.

¹⁹¹ Note that the provision exculpates both parties from any further liability for damages related to the casualty.

¹⁹² 49 C.F.R. pt. 1544.

¹⁹³ TSA, Security Guidelines for General Aviation Airport Operators and Users, https://www.tsa.gov/sites/default/files/2017_ga_security_guidelines.pdf.

¹⁹⁴ AOPA GA Security Guidebook, https://www.aopa.org/advocacy/airports-and-airspace/security-and-borders/tsa-airport-access-security-requirements.

¹⁹⁵ TRB resources for managing security at small airports are available at https://crp.trb.org/acrpwebresource6/home/chapterresources/chapter-4-operations-running-a-safe-and-efficient-airport/4-5-security/. TRB has also published a synthesis addressing safety and security practices for small airports, available at https://www.trb.org/Publications/Blurbs/157793.aspx.

¹⁹⁶ Note that the provision identifies the airport’s Security Plan document and puts the Lessee on notice of its obligation to be both familiar and compliant with the document.

spondingly more expansive. Note that this provision references airport security requirements in addition to those required by federal regulations.

SECTION 10.01 AIRPORT SECURITY

In addition to FAA safety regulations, the LESSEE must also comply with all Airport security rules, regulations and plans,¹⁹⁷ Department of Homeland Security-Transportation Security Administration (TSA) regulations, United States Customs and Border Protection (USCBP) regulations, and all other applicable federal, State and local regulations regarding security during the term of this Lease. LESSEE is responsible for fines imposed by any regulatory agency as a result of LESSEE’s failure to comply with applicable rules and regulations regarding airport security.¹⁹⁸

LESSEE shall be required to obtain airport security clearance in order to operate on the Leased Premises pursuant this Lease. LESSEE must designate one or more Authorized Signatories to attend training by the Airport, and to be the primary point(s) of contact for Airport Issued I.D. security badge related correspondence and records management. LESSEE, its employees and contractors must complete a background clearance, and a Security Identification Display Area (SIDA) class in order to obtain an Airport issued I.D. security badge for access to secure areas. All Airport Operations Area (AOA) drivers must also complete training to receive driver’s authorization to drive on the airfield.¹⁹⁹

1. Authorized Signatory

Authorized Signatories are individuals or designated representatives authorized to sponsor badge applicants and request Airport issued I.D. security badges on behalf of their organization. They are responsible for initiating and understanding the security I.D. badge application process, and certify applicant employment. Authorized Signatories are also the primary points of contact for the Airport I.D. Badge Office correspondence related to audits, changes to employee access authority, if an employee is arrested or convicted of a disqualifying criminal offense, and if an employee is terminated.

2. Airport Issued I.D. Security Badge Acquisition

Prior to issuance of I.D. security badge(s), LESSEE’s personnel must successfully complete the Airport issued I.D. security badge acquisition process. LESSEE personnel who will be working onsite and engaged in the performance of work under this Lease, must be sponsored by a Lessee identified Authorized Signatory, pass Airport’s screening requirements, which includes, but may not be limited to, an F.B.I. Criminal History Records Check and a Security Threat Assessment, and shall pay any applicable fees. Upon successful completion of the background checks, LESSEE personnel will be required to attend a 3-hour SIDA class and pass a written test. Those personnel who may be permitted by the Airport to drive on the Airport Operations Area (AOA) perimeter road must also complete a Driver’s Training class and written test. The physical Airport issued I.D. security badges are not issued until LESSEE personnel have: 1) completed appropriate application forms and submitted proof of identity and employment eligibility, 2) passed all required background checks, 3) completed and passed appropriate classroom training and 4) paid an I.D. badge fee for each badged person. LESSEE should anticipate a minimum of five (5) business days to complete the Airport issued I.D. security badge process if all requirements listed above are fulfilled by individual applicants in a timely manner. LESSEE shall be responsible for all applicable fees and costs associated with the background checks and I.D. security badging process. The amount of such fees is subject to change without notice.

3. Airport Issued I.D. Security Badge Holder Requirements and Responsibilities

The Airport Security Plan (ASP) requires that each person issued an Airport issued I.D. security badge be made aware of his/her responsibilities regarding the privilege of access to SIDA, Secure, Sterile, and AOA areas of the Airport.

LESSEE and all its personnel within access-controlled areas (AOA, SIDA, secured area or sterile area) are required to display on their person an Airport issued I.D. security badge, unless they are escorted by a properly badged individual with escort privileges. When working in a SIDA, AOA, Sterile or Secure area, each badged person is responsible for challenging any individual who is not properly displaying an Airport issued or approved and valid I.D. badge. Any person who is not properly displaying or who cannot produce a valid Airport issued I.D. security badge must immediately be referred to the Sheriff’s Department – Airport Police Services Office for proper handling.

The Airport issued I.D. security badge is the property of the County of Orange and must be returned upon termination of employment and/or termination of the Lease. The loss of a badge shall be reported within 24 hours to the Sheriff’s Department–Airport Police Services by calling (949) 252-5000. LESSEE or its personnel who lose their badges shall be required to pay a fee before receiving a replacement badge. The charge for lost badge replacement will be posted in the Airport Administration Office and is subject to change without notice. A report shall be made before a replacement badge will be issued.

The Airport security badge is nontransferable. In the event that the LESSEE’s badge is not returned to the Airport upon termination of employment and/or termination of the Lease, the LESSEE and/or LESSEE personnel shall be liable to the County of Orange for a fine in the amount of $250 per unreturned badge. The amount of the fine is subject to change without notice. LESSEE’s security deposit may be applied to cover the cost of the fine.

8. Assignment and Subleasing

An assignment is the transfer of all of a Lessee’s interest in a lease and the premises.²⁰⁰ When a Lessee reserves some interest in the lease or premises, the transfer is a sublease—a transfer of something less than the entire leasehold estate.²⁰¹ Although a Lessee gives up all of its rights under a lease in an assignment, the Lessee still remains liable for all of its lease obligations unless (in very rare instances) it is expressly released from them. An assignment is most often used when a Lessee sells or transfers its business to another entity, while a sublease is most often used to provide space for other commercial operators or aircraft owners (FBO subleases to specialized aviation services operators (SASOs) or private aircraft owners, for example), to reduce costs (corporate hangar subleases when an airport’s FBO no

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¹⁹⁷ Note that the provision notifies the Lessee that its security obligation exceeds the standard federal requirements.

¹⁹⁸ Note that the Lessee is placed on notice of an obligation to indemnify the Lessor for all fines imposed as a result of the Lessee’s noncompliance with security requirements.

¹⁹⁹ Note that the provision describes elements of the airport’s security plan in detail and emphasizes the Lessee’s compliance with specific requirements such as the airport security badging process and regulations.

²⁰⁰ 52 C.J.S. Landlord and Tenant § 30 (2024).

²⁰¹ AM. JUR. 2D Landlord and Tenant § 947 (2024). See generally FRIEDMAN § 7:4.1.

longer has available space), or to shed unneeded or unwanted space (a Lessee experiencing financial difficulties, for example). (Issues related to assignments also arise in the context of leasehold mortgages, which are discussed in the following subsection, Subsection 9.)

The distinctions between assignments and subleases can be important because assignments create privity of contract—a direct legal relationship between the Lessor and the assignee—and a continuation of existing lease terms; subleases do not. In a sublease, privity of contract exists between the Lessee and the sublessee. After executing a sublease, the sublessee is left with no direct recourse against the Lessor and must instead rely on the Lessee for any enforcement action on the lease. The Lessee also remains liable to the Lessor for the acts and omissions of its subtenant/sublessee.²⁰²

Lessees may have several reasons to negotiate with their Lessors for sublease and assignment rights. Lessees, such as FBOs, may have a lease obligation to provide certain specialized aviation services that they themselves are unwilling or unable to perform. Accordingly, FBOs may request that Lessors allow them to provide the services by subleasing space to certain SASOs in order to fulfill these lease obligations. Other Lessees are simply interested in obtaining the maximum amount of flexibility in their leasehold rights to assign or sublease because they consider those rights a vehicle for mitigating the risk of assuming exclusive liability for the full term of a lease or, in some cases, for fueling the aircraft of their sublessees. Although a sublease or an assignment will not relieve a Lessee of the entire obligation for a lease, those leasehold obligations will at least be shared with another party.²⁰³

Finally, some Lessees start an airport commercial operation (an FBO business, for example) with the expectation of selling that business at some time in the future. This view is not without some justification; the FBO industry has seen remarkable activity and consolidation in the last 25 years. A sale of an airport business, however, is less likely without the right to assign a lease (or at the very least, to enter into a sublease) along with any accumulated business assets and good will.²⁰⁴

The primary concern of Lessors regarding subleases and assignments is to obtain the rent and capital improvements that they originally bargained for and, when a sublease or assignment is proposed, to make certain that the Lessee remains liable for all of its lease obligations and those of the subtenant. Accordingly, Lessors are primarily interested in stability, control of the Lessee/assignee/sublessee selection process, and security concerns related to Lessees and Sublessees who enter and leave the premises. Although the liability of an additional party as the result of a sublease or an assignment may present an opportunity for added stability, the complexity of a layered and indirect relationship with a sublessee or assignee may motivate Lessors to prohibit any transfer of a lease, or to at least give serious consideration to whether they should provide their consent to such arrangements.

When subleasing is allowed, there are three common drafting requirements: (1) the Lessor’s approval of the sublessee; (2) the Lessor’s approval of the terms of the sublease (which must incorporate the terms of the original lease agreement); and (3) the Lessee’s continuing liability on the original lease. There are several options in drafting a document to meet these requirements: First, it is possible to draft a skeletal sublease agreement that essentially adopts the terms of the original lease agreement and includes any new terms that the Lessor wishes to add, amend, or update, as well as any terms that have been negotiated between the Lessee and its subtenant. Second, the airport may draft an entirely new sublease agreement that includes only the necessary portion of the original lease agreement that will have application to the sublessee. Third, the airport may adapt a form lease between the Lessee and its subtenant that references, but does not include or incorporate, the terms of the original lease. The third option is not likely to be acceptable to airport Lessors because it is the most complex solution, contains a high risk of error, and is likely to produce conflicts between the lease and the sublease (it also likely will deviate from an airport’s standard lease templates). Of the two remaining options, the first is likely to be preferred for use in an airport transaction because it is the simplest, most straightforward, and comprehensive solution (it is also likely to produce the fewest errors).

In reviewing a proposed sublease, a Lessor will likely wish to pay particular attention to several additional issues: (1) the business terms between the Lessee and the sublessee (if they are disclosed, if the Lessor can compel their disclosure, or if the original lease requires that they be disclosed); (2) the sections of the original lease incorporated by reference that apply between the Lessee and its sublessee; (3) the identification of any lease obligations that will continue to be performed by both the Lessor and the Lessee; and (4) the Lessee’s enforcement of obligations against the Lessor that also work to the benefit of the

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²⁰² E.g., Capital Com. Props., Inc. v. Vina Enters., Inc., 462 S.E.2d 74, 77 (Va. 1995). See generally AM. JUR. 2D Landlord and Tenant § 916 (2024).

²⁰³ None of the leases examined for this digest allow a Lessee to escape continuing liability after a sublease or assignment.

²⁰⁴ An asset purchase agreement usually requires the transfer of the existing lease and the airport’s consent; an equity purchase transaction often preserves the existence of the acquired entity and may not require a lease transfer or airport consent. Yet another reason to request to transfer a lease arises from a consolidation or change in the form of the Lessee’s business structure. Airports experienced this circumstance as FBOs consolidated and changed ownership in the previous two decades. Corporate consolidation and restructuring may also give rise to a name change or the substitution of one corporate entity for another. One option available to a Lessor in such circumstances is to be the reservation of a right to terminate the lease upon notice of the transfer or sale of the Lessee’s stock or ownership of the original business entity. At least one commentator has criticized this approach as leading to increasing degrees of complexity in drafting suitable lease language, doubtful results, likely litigation, and the potential for Lessees to use the provision to exit the lease. See FRIEDMAN § 7.3.3(C)(1) & (E)(1); Annotation, Merger or Consolidation of Corporate Lessee as Breach of Clause in Lease Prohibiting, Conditioning, or Restricting Agreement or Sublease, 39 A.L.R.4th 879 (1985 & Supp. 2022). But the existence and preservation of a right to terminate the lease does not require the Lessor to exercise that option.

sublessee. When using this drafting approach, it is important to be certain that all of the necessary provisions from the original lease have been incorporated into the sublease and that none are in conflict.

One particular lease term deserves specific attention in this context—lease extensions. Jurisdictions differ on whether renewal options contained in a lease transfer along with an assignment or sublease and whether any limitations apply to such options. A lease may explicitly limit or prohibit the transfer of renewal options to an assignee or sublessee,²⁰⁵ but most of the examined leases do not address the issue. An airport Lessor should consider whether limiting or prohibiting such transfers of renewal options makes the lease more or less attractive to the airport, the Lessee, or to prospective Lessees and then make its decision accordingly.

Lessor’s consent to subleases and assignments and the reasonableness standard.

Airport leases typically require the Lessor’s consent to an assignment or sublease; if the lease is silent on the issue of the Lessor’s consent, the rule in most jurisdictions is that the Lessor’s consent is necessary,²⁰⁶ but the Lessor’s exercise of the right will, most likely, be held to a reasonableness standard, unless the lease provides otherwise.²⁰⁷ It is, therefore, important to check the rules in a specific jurisdiction. Some leases require that the Lessor’s consent may not be unreasonably withheld.²⁰⁸ In an airport context, several factors may be relevant to the determination of the reasonableness of a Lessor’s decision-making process in considering an assignment or a sublease request:

1. Is the Lessee in default or in breach of any portion of the lease or the Airport Policy Documents?
2. Is the use proposed in the sublease or assignment consistent with the use contained in the existing lease and the Airport Policy Documents?
3. Is any aspect of a proposed new use detrimental to the airport, aeronautical operations, or the specific premises, its location, or its structures?
4. Is the proposed subtenant or assignee different in kind than the existing Lessee?²⁰⁹
5. Do the terms of the proposed sublease or assignment affect or alter a material term of the existing lease?²¹⁰
6. Has the Lessee proposed a subtenant who is ready, willing, and able to perform all of the obligations stated in the lease?²¹¹

If a lease provides the Lessee with a right to sublease or assign, the Lessor will, more likely than not, be held to act reasonably in addressing that request, whether the lease states that requirement or not.²¹² So it may be of some benefit to consider the law on this issue in the particular jurisdiction where the premises are located and whether the language of a specific lease term may serve to temper the Lessor’s obligation in this regard. Inserting a reasonableness standard into the lease, on the other hand, may invite litigation or, at the very least, potentially contentious negotiation of the issue. If litigation results, a judge or arbitrator will decide whether a Lessor acted reasonably in refusing a request to sublease or assign.

An airport Lessor can nevertheless shape negotiation or litigation of lease transfer issues by articulating within the lease some or all of the factors listed previously, or it can list additional factors that must be considered in evaluating such requests. The sample provision reproduced later takes this tack.²¹³ The Lessor may also insert a provision in the lease that limits the Lessee’s

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²⁰⁵ E.g., Snortland v. Larson, 364 N.W.2d 67, 73 (N.D. 1985).

²⁰⁶ 52 C.J.S. Landlord and Tenant § 38 (2024).

²⁰⁷ E.g., RESTATEMENT (SECOND) OF PROP. (Landlord and Tenant) S15.2 (1977 & Supp. 2023).

²⁰⁸ But see the unusual provision contained in the Hastings Michigan Airport Commercial Ground Lease (reproduced here), which imports a reasonableness standard when Lessor provides its “consent, approval or otherwise exercise its discretion or judgment,” but gives the Lessor sole and complete discretion on financial matters that “affect the Lessor and the continuing operations of the Airport.”

Subsection 14.13. Duty to be Reasonable.

Wherever in this Agreement the Lessor is to give its consent, approval or otherwise exercise discretion in judgment, such consent, approval or judgment discretion shall not be unreasonably exercised or unreasonably withheld. When the Lessor is called upon to give its consent or approval, or otherwise exercise its discretion and judgment as to financial matters which affect the Lessor and the continuing operations of the Airport, the exercise of its judgment as to any such matters shall be solely and completely within the discretion of the Lessor.

Hastings Michigan Commercial Ground Lease (2022).

²⁰⁹ For example, there may be circumstances in which a new entity’s business model, its formal structure, or the condition of its assets may be problematic or raise questions or concerns about its ability to perform under the lease or to pay the required rent. There may also be an instance where the new entity is a state, local, or federal government agency rather than a private enterprise.

²¹⁰ This issue is likely to arise in circumstances where a proposed sublessee requests a change in the lease’s use provision.

²¹¹ See generally Annotation, Construction and Effect of Provision in Lease that Consent to Subletting or Assignment Will Not be Arbitrarily or Unreasonably Withheld, 54 A.L.R.3d 679 (1973 & Supp. 2022); Annotation, When Lessor May Withhold Consent Under Unqualified Provision in Lease Prohibiting Assignment or Subletting of Leased Premises Without Lessor’s Consent, 21 A.L.R.4th 188 (1983 & Supp. 2022). Specific lease language may also restrict a right to assign a renewal option, limit the circumstances for its exercise, or prohibit it entirely. As a general rule, if the lease is silent on the matter, an assignment most often carries a right to a renewal option while a sublease generally does not. AM. JUR. 2D Landlord and Tenant §§ 188-89 (2024). E.g., Darin, LLC v. Stratedge Corp., No. 07-ADMS-40019 (2008 WL No. 1699450) (Mass. App. Ct. Apr. 4, 2008) (failure to meet burden of proof regarding financial stability and capability to perform).

²¹² See generally RESTATEMENT (SECOND) OF PROP. (Landlord and Tenant) § 15.2(2) (2018) (collecting cases and jurisdictions).

²¹³ A lease can always be drafted to explicitly reject any application of a “reasonableness” standard by reserving to the Lessor the right, “in its sole discretion, to reject any request to sublease or assign the lease for any reason or no reason at all.”

remedies for the Lessor’s breach of the obligation to act reasonably in response to a request to sublease or assign—limiting such claims for breach of the lease to a declaratory judgment or injunctive relief—along with an explicit waiver of the Lessee’s right to recover any damages for the refusal.²¹⁴ Such a provision renders litigation less attractive because the potential for the recovery of damages has been removed from consideration. In either case, neither party will likely find the cost and other expenses of litigation appealing or as satisfactory a resolution as a negotiated settlement.

As mentioned previously, a Lessee’s ability to request a sublease or an assignment can also be conditioned on the Lessee’s standing under the lease. For example, a clause may prohibit the right to sublease or assign if the Lessee is in default or in breach.²¹⁵ Another prudent drafting consideration is the insertion of a statement in the lease that, should an assignment take place, the Lessee shall remain liable for performance of all of the obligations stated in the lease. This provision, while not strictly necessary, may prevent the Lessee from raising the argument that it has been released from any of its lease obligations.

The consequences of unreasonably withholding consent to a request to sublease or assign may lead to a tort claim and recovery in damages.²¹⁶ As mentioned above, the drafting strategy to protect against such an eventuality, which is the same for any breach by Lessor of any requirement that it act “reasonably,” is to insert a provision in the lease that limits recovery in such instances to declaratory and injunctive relief and explicitly prohibits the recovery of damages.²¹⁷ A clause precluding damages may take the form of a simple statement that a party “shall not be liable for money damages for any default hereunder.”²¹⁸ A sample clause that excludes damages and examples of other issues discussed in this section can be found below.²¹⁹

Example No. 1: SAT Condominium Hangar Lease (2017). A standard provision used at a medium hub airport and its GA reliever airports.

12. SPECIAL PROVISIONS

12.1 The Leased Premises contain hangar complexes made up of multiple smaller hangar units which are subleased to third parties for the storage and maintenance of personal and corporate aircraft and the operation of various aviation-related businesses. Additionally, the Leased Premises house multiple individual hangars that are leased to corporate sublessees for aeronautical purposes. As the City does not wish to directly administer leasing the aforementioned buildings or the maintenance of the common areas associated therewith, the parties agree as follows:

12.1.1 A sublease shall be offered by Lessee to all current sublessees or their successors in interest who are in good standing and who have fully complied with all provisions of the 1999 Lease Agreement, including remittance of reports and gross receipts payments.

12.1.2 Lessor shall ensure that all subleases comply with the terms, conditions and obligations of this Lease Agreement and that no sublease contains any terms or conditions that are in conflict with any provisions of this Lease Agreement. Any sublease containing provisions that are in conflict with any terms or conditions of this Lease Agreement, will be of no force and effect as against the City. Notwithstanding the above, Lessee will not be required to offer a sublease to any previous sublessee under the 1999 Lease Agreement that does not enter into a sublease with Lessee under this Lease Agreement within 90 days of the Commencement Date of this Lease Agreement.

12.1.3 It is the express agreement of the parties that Lessee shall ensure that each hangar sublessee who operates a business which is open to the public complies with the Americans with Disabilities Act (ADA) to include the nondiscrimination requirements.

12.1.4 In consideration of the management and subleasing services performed by Lessee pursuant to this Lease Agreement, City is entering into this Lease Agreement with up to a twenty-three-year term and agrees to permit Lessee to retain as payment from the City the following amounts from sublease payments received by Lessee:

12.1.4.1 Five percent (5%) of the total amount of the monthly payments of rent due and owing by sublessees throughout the term of this Lease Agreement; and

12.1.4.2 City will credit $38,974.04 annually for 50% of the cumulative annual administrative expenses (Exhibit 3, Administrative

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²¹⁴ AM. JUR. 2D Landlord and Tenant § 74 (2024); WILLISTON ON CONTRACTS §§ 65.6-65.7 (4th ed.).

²¹⁵ E.g., Markowitz v. Landau, 171 A.D.2d 564 (N.Y. App. Div. 1st Dep’t 1991). Care should be taken in drafting provisions restricting such transfers because they are restraints on alienation of property and are not favored in the law. See generally 51C C.J.S. Landlord and Tenant § 33(b); 49 AM. JUR. 2D § 1090 (2024).

²¹⁶ E.g., Campbell v. Westdahl, 715 P.2d 288 (Ariz. Ct. App. 1985). But see FRIEDMAN § 7:3.4[E] (noting that, in some jurisdictions, Lessees may also have a right to terminate the lease).

²¹⁷ Leet v. Totah, 620 A.2d 1372, 1374 (Md. 1993). See generally FRIEDMAN at 7-77. Airports may nevertheless wish to exercise caution in drafting such provisions. While tort claims do not inevitably follow from a finding that a Lessor has unreasonably withheld consent from a request to sublease or assign (on which see Chrysler Corp. v. Lavender, 934 F.2d 290 292 (11th Cir. 1991) (where both a jury and an appellate court rejected a tortious interference claim even though the lessor had been found to have unreasonably withheld its consent because there was no evidence of “intentional and unjustified” conduct by the Lessor)), there have been cases finding Lessors liable in tort. E.g., Campbell, supra note 216, at 295-96 (facts supporting breach of lease claim also supported tort claim for interference with contractual relations).

²¹⁸ E.g., Leet, supra note 217, at 1374, 1378-79. (The “Remedies Limitation Clause” in Leet provided as follows: “Seller shall not be liable for money damages for any default hereunder.”)

²¹⁹ One final issue regarding subleasing and assignment deserves mention. Leases may be assumed or rejected in bankruptcy. 11 U.S.C. § 365(d)(4). The Bankruptcy Code allows as part of the reorganization of the debtor’s estate the assignment of assumed leases, regardless of any restrictions contained in the lease. 11 U.S.C. § 365(f). Although the Bankruptcy Court may avoid restrictions on the use of the leased premises, the likelihood of doing so for a GA lease for premises located on an airport when lifting such restrictions would be in conflict with other federal statutes and extensive FAA regulations that would create the potential for grave safety and security issues in the process, is not a concept alien to the Bankruptcy Code and, thus, would seem highly unlikely. C.f. In re Black Enters., Inc., 39 B.R. 253, 257 (Bankr. D. Guam 1982) (citing 11 U.S.C. § 365 (b)(3)(D) and recognizing the inconsistency of assignee’s proposed use and existing use of premises); see also In re Sun TV & Appliances, 234 B.R. 356, 370 (Bankr. D. Del. 1999).

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²²⁰ See generally AM. JUR. 2D Landlord and Tenant §§ 976-78 (2024).

²²¹ See generally Attorneys’ Title and Guaranty Guide to Ground Leases, https://www.atgf.com/tools-publications/pubs/ground-leases. Guidelines and sample ground lease provisions are available from various lending institutions and ALTA. E.g., https://www.alta.org/policy-forms/.

²²² Airport hangars are occasionally constructed with public funds. See, e.g., Hangar Project at Johnstown Airport Viewed as Part of School to Work Pipeline, https://www.aviationpros.com/fbos-tenants/news/21287351/hangar-project-at-johnstown-airport-viewed-as-part-of-schooltowork-pipeline (aircraft maintenance and repair hangar developed with $1.5 million in state funds to support aviation careers and education).

²²³ See, e.g., Stein, Model Leasehold Mortgagee Protections, AMERICAN COLLEGE OF REAL ESTATE LAWYERS PAPERS (Oct. 1999) (providing sample lease provisions), https://cdn.ymaws.com/acrel.site-ym.com/resource/collection/8CD585C9-0FD8-42C5-A162-9590402FE64E/a002096.pdf.

unless the lender has been provided with notice and an opportunity to cure defaults. Airport Lessees and their leasehold mortgage lenders may raise the following matters during GA lease negotiations:

1. A prohibition against lease amendments during the term of the lease without the Lender’s consent, especially during the time that the mortgage is outstanding.
2. Furnishing the Lender copies of all notices issued to the Lessee, including notices of breaches or default that could result in termination of the lease, such as
   1. the non-payment of rent, taxes, and insurance;
   2. breaches of any requirement to maintain or repair the premises; and
   3. breaches of any obligation to comply with any rules, regulations, or statutes.
3. The Lender’s ability to cure any lease defaults on the Lessee’s behalf (particularly those for the defaults or breaches listed in No. 2, above).
4. If the Lessee experiences repayment problems, the Lender’s right
   1. to foreclose on the loan;
   2. that the foreclosure will not be considered a default under the lease; and
   3. that the lender will have an unrestricted right to sublease or assign (except for the Lessor’s review of certain financial standards) and, should there be an assignment, the lender’s liability to the Lessor will end with the assignment.
5. Should any of these options fail, the Lender’s option to enter into a lease directly with the Lessor on the same terms as the existing lease.
6. The payment to the Lender of any insurance proceeds, condemnation awards, or other funds payable to the Lessee for application to the restoration of the premises in the event of a casualty or should be used to pay down the outstanding balance of the loan.
7. Furnishing the Lender with certain documents: estoppel certificates, lease status updates, and a clause promising the Lessor’s reasonable cooperation with the lender.²²⁴

Examples of representative lease provisions follow.

Example No. 1: Orange County John Wayne International Airport Commercial FBO Lease (2022). A fairly standard provision for an airport with a mix of commercial and GA operations.

SECTION 8.02 LEASEHOLD MORTGAGES

A. LESSEE’s Right to Encumber Leasehold Estate; No Right to Encumber COUNTY’s Fee Interest. LESSEE may, at any time during the Term of this Lease (with the consent of COUNTY after prior written notice providing evidence that all requirements of this Lease applicable at the time have been complied with)²²⁵ encumber all or any portion of LESSEE’s leasehold estate in and to this Lease, including LESSEE’s rights, title and interest in and to the Leased Premises and Improvements, or any applicable portion thereof or interest therein (“Leasehold Estate”) with one (1) or more mortgage, deed of trust, security deed, conditional deed, deed to secure debt or any other security instrument (including any assignment of leases and rents, security agreement and financing statements) held by an institutional lender by which LESSEE’s Leasehold Estate is mortgaged to secure a debt or other obligation, including a purchase money obligation (“Leasehold Mortgages”); provided, however:

1. Such Leasehold Mortgage(s) (as of the date recorded) shall not exceed 80% of the costs of the improvements and facilities²²⁶ to be constructed by LESSEE prior to completion and 80% of the Leasehold Estate value after completion;
2. That LESSEE shall not have the power to encumber, and no Leasehold Mortgage shall encumber, COUNTY’s fee interest²²⁷ in the property underlying the Leased Premises (“COUNTY’s Fee Interest”);
3. The Leasehold Mortgage and all rights acquired under it shall be subject to each and all of the covenants, conditions, and restrictions set forth in this Lease²²⁸ and to all rights and interests of COUNTY hereunder, except as otherwise provided in this Lease;
4. Nothing in this Lease shall be construed so as to require or result in a subordination in whole or in part in any way of the COUNTY’s Fee Interest to any Leasehold Mortgage;²²⁹ and
5. In the event of any conflict between the provisions of this Lease and the provisions of any such trust Leasehold Mortgage, the provisions of this Lease shall control.²³⁰

B. Notification to COUNTY of Leasehold Mortgage. LESSEE or any Leasehold Mortgagee shall, prior to making any Leasehold Mortgage, provide COUNTY with notice of such Leasehold Mortgage and the name and address of the Leasehold Mortgagee. At the time of notice, LESSEE shall furnish to Airport Director a complete copy of any trust deed and note to be secured thereby, together with the name and address of the holder thereof. Thereafter, LESSEE or any Leasehold Mortgagee shall notify COUNTY of any change in the identity or address of such Leasehold Mortgagee.²³¹

Because ground leases often involve significant capital improvements and are typically long-term leases, Lessees are often motivated to treat the transaction as if it were a purchase rather than a lease. This means that the prospective Lessee, for example, can be expected to approach lease negotiations with much more care, motivation, and interest than one who rents a T-hangar. Consequently, more time will be required to conduct negotiations and for such due diligence activities as the completion of an environmental baseline and the lease’s default and termination provisions. Alternatively, because a default or

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²²⁴ See generally Joseph McNabb, Selling Ground Lease Real Estate—Check the Financing Provision (with Sample Clauses), reprinted in ALI-ABA PRACTICE CHECKLIST MANUAL FOR DRAFTING LEASES IV at 13-19 (ALI-ABA 2004); Protecting a Ground Lease Lessee’s Interests—Refining the Requirements for Financeability, https://www.natlawreview.com/article/protecting-ground-leasehold-mortgagee-s-interests-refining-requirements; and Ground Lease Fundamentals, https://www.lorman.com/resources/ground-lease-fundamentals-what-distinguishes-a-ground-lease-and-why-16791.

²²⁵ Note that the right to a leasehold mortgage is conditioned on the Lessor’s consent to the transaction and the Lessee’s good standing under the lease.

²²⁶ Note the 80% cap on the Lessee’s mortgage amount.

²²⁷ Note the prohibition against any mortgage on the Lessor’s fee interest in the property.

²²⁸ Note the restatement and reassertion of the requirement that the leasehold mortgage, and hence the mortgagor, are subject to the term of the lease.

²²⁹ Note the reassertion, once again, of the Lessor’s fee interest in the property.

²³⁰ Note the reassertion, once again, of the supremacy of the terms of the lease over any leasehold mortgage.

²³¹ Note that not only must the Lessee provide the Lessor with the existence of the mortgage, it must also provide a copy of the note, the identification of the lender, and updates of any changes.

termination by the Lessee may leave the Lessor in possession of premises that have been constructed or improved for subtenants who now have leases, the Lessor should pay particular attention to provisions that provide the right to review and approve all plans for construction or remodeling and the right to approve all subleases. Finally, if the Lessee has secured a mortgage to finance its capital improvements, the lender will pay particular attention to provisions that guard against a termination if the Lessee defaults on any of its ground lease obligations—including the right to notice, cure, and to assume the lease in case of termination or a bankruptcy filing. The Lender may also press for additional time if the remaining lease term is short and the right to assign the lease when it locates a substitute operator or purchaser for the operation. Examples follow.

Example No. 2: MSP Reliever Airport Commercial Lease (2022). A fairly standard provision for a larger airport system.

18.4. Collateral Assignments

Subject to MAC’s consent,²³² Tenant may not assign, transfer, mortgage or otherwise pledge all or any portion of its rights, title or interest in the Leased Property pursuant to this Lease or any of its other rights under this Lease as collateral to secure Tenant’s payment of a debt or performance of any other obligation of Tenant, except as provided in this Section 18.4.

1. An agreement pursuant to which Tenant pledges, assigns, or grants an interest in its rights under this Lease as collateral for the payment of a debt or performance of some other obligation of Tenant must take the form of a leasehold mortgage.²³³
2. Tenant must not be in default of this Lease or any other agreement between Tenant and MAC.²³⁴
3. In the leasehold mortgage, the mortgagee must expressly acknowledge, for the benefit of MAC, that the mortgagee is acquiring no right, title, or interest in MAC’s fee title to the Leased Property and that the mortgagee’s rights in and to any Improvements are, at all times, subject to the terms and conditions of this Lease.²³⁵
4. If Tenant has not already done so, Tenant must obtain a legally sufficient legal description of the Leased Property, and Tenant must execute a memorandum of this Lease and record it, and the leasehold mortgage, in the appropriate county land records.²³⁶
5. MAC hereby agrees that if the leasehold mortgagee notifies MAC of an address to which MAC may send notices, MAC will send a copy of any notice MAC is required to deliver to Tenant under the terms of this Lease to the leasehold mortgagee at the address the leasehold mortgagee had provided.²³⁷
6. MAC agrees that if Tenant defaults in the performance of one or more of Tenant’s obligations under this Lease and MAC gives a notice of default as contemplated by Section 19 [Default], the leasehold mortgagee has the right, as far as MAC is concerned, to cure the default but nothing herein constitutes MAC’s assurance that Tenant will grant the mortgagee access to the Leased Property to cure any non-monetary default and the mortgagee should address this issue through the inclusion of appropriate provisions in the mortgage.²³⁸
7. Tenant must also grant the leasehold mortgagee a mortgage on Tenant’s right, title, and interests, if any, in and to any Improvements.²³⁹
8. In the leasehold mortgage, the mortgagee must expressly acknowledge and agree that, notwithstanding any other provisions of the mortgage or any related loan documents, the mortgagee will permit the Tenant to retain sufficient insurance proceeds available as a result of any damage to or destruction of the Improvements to permit Tenant to fully perform its obligations under Section 14.2 [Damage to Improvements].²⁴⁰
9. Tenant must provide a copy of the leasehold mortgage and related loan documents to MAC, upon request by MAC.

If Tenant grants a leasehold mortgage satisfying the requirements of this Section 18.4, MAC agrees to execute a subordination agreement with the leasehold mortgagee pursuant to which MAC subordinates any statutory or common law lien MAC may have on the personal property of Tenant or on Improvements Tenant owns. MAC will not subordinate MAC’s fee interest in the Leased Property, MAC’s interest under this Lease, or any rights which MAC may have to the Improvements upon the expiration or termination of the Lease.²⁴¹

10. Default and Termination

Only the breach of a material provision of a lease will support termination—otherwise damages are available.²⁴² A default is an uncured breach of an obligation that the parties have agreed will justify termination or other specified remedies—this can be an act (conducting activities outside the use provisions stated in the lease) or an omission (failing to make a timely

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²³² Note the requirement of the Lessor’s consent to the leasehold mortgage transaction.

²³³ Note the restriction on the right of the Lessee to mortgage to its leasehold interest.

²³⁴ Note that the requirement that the Lessee must be in good standing under the lease.

²³⁵ Note the reassertion of the prohibition against the lender acquiring anything more than a leasehold mortgage and that any such mortgage is subject to the terms of the lease.

²³⁶ Note the unusual requirement for the recordation of the leasehold mortgage.

²³⁷ Note the Lessor’s concession to send to the mortgagor copies of notices sent to the Lessee.

²³⁸ Note the Lessor’s concession that the lender may cure the Lessee’s monetary defaults but refusing to assure the mortgagee that the Lessee will allow the mortgagee access to the premises to cure non-monetary defaults; suggesting instead that this issue should be addressed between the mortgagee and the Lessee in the mortgage document.

²³⁹ Note the apparent concession that the mortgagee is provided with an interest, such as it exists under the lease, in the Lessee’s improvements.

²⁴⁰ Note that the provision expressly addresses the Lessee’s insurance obligation under the lease for casualties and requires that the mortgage “acknowledge and agree” that the lease’s insurance obligations take precedence over any conflicting provision contained in the mortgage.

²⁴¹ Note the very limited extent to which the Lessor will subordinate its lien interest in the Lessee’s personalty but will not subordinate its fee interest in the property, any interest it may have in the leasehold, or its interests at termination, including its reversion interest in any improvements.

²⁴² Entrepreneur, Ltd. v. Yasuna, 498 A.2d 1151, 1161 (D.C. 1985). See 52 C.J.S. Landlord and Tenant §§ 490, 494-95 (2024); FRIEDMAN § 16:2. In some leases, a Lessee’s bankruptcy filing or insolvency will trigger a default. While these clauses may be of some value before or after a Lessee files for bankruptcy, in the absence of fraud or other exceptional circumstances, the Bankruptcy Act disregards these provisions during the pendency of bankruptcy proceedings. 11 U.S.C. § 365(b)(2) & (e) (1). It may be more productive to use well-drafted breach and default provisions in conjunction with audits and compliance efforts in order to obtain a forewarning of an impending insolvency or a bankruptcy filing.

rental payment)—that extends for a sufficient length of time beyond the cure period specified in the lease. Some leases (such as the next sample provision) add an additional procedural layer—the Lessor’s notification to the Lessee of a non-monetary default.

It is important to recognize, even in the context of a comprehensive default provision, that not all defaults can be cured quickly. A failure to make a timely rent payment can usually be cured more quickly than some maintenance problems can be repaired, particularly if the repairs follow a natural disaster or affect airport operations or require parts or materials that are not readily available. Thus, leases may contemplate extensions to cure periods where repairs or compliance with regulatory requirements will take additional time. Leases address these issues by including provisions that extend the cure period as long as the Lessee has, in good faith, taken and continues to take prompt and necessary action to address and rectify the condition that gave rise to the breach. Lessors, however, must be particularly sensitive in drafting default provisions that avoid creating a circumstance where forbearance of remedial action (such as the provision in Example 2) can turn into a waiver of the breach.²⁴³ Default provisions may also include the Lessor’s right (but not its obligation) to cure immediately the Lessee’s breaches and the right to charge any such costs to the Lessee as additional rent. The Lessee’s insurance obligation is an important example of such a circumstance; so too are aspects of a Lessee’s compliance with FAA regulations, especially those related to airport safety and security.²⁴⁴

During lease negotiations, default provisions are a particular priority for airport Lessees—especially for those with ground leases requiring a significant capital investment. Accordingly, airport Lessees suggest lease provisions that monetize default and termination clauses by proposing the insertion of a schedule of fees, such as the payment of additional rent or for liquidated damages for specific defaults or breaches. Lease termination may only follow if the Lessee is unable or unwilling to pay the additional rent, fees, or liquidated damages and any required interest. Often a default will affect renewal options; airport Lessees would prefer the use of monetary remedies in order to avoid any such impediments to extending a lease.

Airport Lessees also negotiate for cure periods without a specified completion date for maintenance and repair defaults on the theory that, when a Lessee is working diligently toward removing the breach, an airport Lessor is interested primarily in obtaining a removal of the breach rather than retaking the premises or resorting to self-help and repairing the breach on its own. Lessors who experience high demand for airport property, on the other hand, tend to be interested in a statement of a specific cure period so that they may make a determination about holding the Lessee liable for its lease obligations (rent and capital improvements), making a decision about the Lessee’s status, remedying quickly certain breaches (such as those related to safety, security, and environmental matters), and deciding whether to pursue retaking the premises by eviction. Inasmuch as Lessee defaults may present themselves as an early sign of an imminent bankruptcy filing, Lessors have a particular interest in obtaining control of the leased premises as quickly as possible and understanding whether it is an indicator that a bankruptcy filing is imminent.²⁴⁵ The remedies associated with defaults

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²⁴³ The law familiarly defines a waiver as a voluntary relinquishment of a known right. Waiver, BLACK’S LAW DICTIONARY (11th ed. 2020). Its close cousin, estoppel, is defined as engagement in a course of conduct that supports justifiable reliance and renders the insistence on strict performance of an obligation inequitable. Leases that declare a Lessor’s actions in the context of a breach “shall not constitute a waiver of such breach” and that Lessor retains “all rights to enforce all provisions of the lease and any remedies therein” are sometimes enforced. E.g., Model Dairy Co. v. Fotis-Fischere, Inc., 67 F.2d 704, 706 (2d Cir. 1933) (Hand, J.).

²⁴⁴ Lease default provisions may be drafted to contain certain clauses that shorten the length of time in which the parties may file a lawsuit regarding the lease (which are generally upheld if reasonable) or to waive the right to a trial by jury or for arbitration (upheld somewhat less often). Such waivers must, in any case, be stated clearly, explicitly, and unambiguously, and are often required to be conspicuous (preferably set off in a separate section) and reasonable. See generally Annotation, Validity of Contractual Time Period, Shorter than Statute of Limitations for Bringing Action, 6 A.L.R.3d 1197 §§ 3, 10 (1966 & Supp. 2022); e.g., Trizec Props. v. Superior Court, 229 Cal. App. 3d 1616, 1618-19, 1621 (2d Dist. 1991) (jury trial).

²⁴⁵ Bankruptcy proceedings can have a significant effect on the business operations of airports. In many instances, airport assets can sit idle for months while a Lessee contemplates the acceptance or rejection of its lease; in the meantime, the premises do not generate revenue and cannot be repaired or renovated while the Bankruptcy Court considers the bankrupt estate. After a bankruptcy is filed the automatic stay prevents the enforcement of contracts or debts against the debtor. Thereafter the Bankruptcy Court controls all matters relating to the debtor’s estate. 11 U.S.C. § 362. The estate of a bankrupt Lessee is required to accept or reject a lease (11 U.S.C. § 365); if the estate accepts a lease, it must perform all of its obligations, including those requiring removal of improvements at the termination of the lease. See generally GINSBERG & MARTIN ON BANKRUPTCY § 7.02[E]; HOMER DRAKE, JR. & KAREN D. VISER, BANKRUPTCY PRACTICE FOR THE GENERAL PRACTITIONER § 9:20 at 713-20 (West 2023). The Lessor may not terminate a lease after the Lessee has filed for bankruptcy, but any lease termination that takes place prior to the bankruptcy filing is effective. 11 U.S.C. § 365(c)(3). Care should be taken (and bankruptcy counsel should be consulted) because if a lease termination is found to be a “constructive fraudulent transfer” within the meaning of the Bankruptcy Code, funds related to the transaction may be subject to a claw back period from one to six years before the bankruptcy filing. See 11 U.S.C. § 548(a)(1)(B). This provision of the Bankruptcy Code has been interpreted broadly. See In re Great Lakes Quick Lube, LP, 816 F.3d 482, 484-88b (7th Cir. 2016) (claw back provision used to reach “negotiated” pre-bankruptcy settlement and transfer).

Despite these rules, some airport GA leases continue to include provisions that characterize a bankruptcy filing as a default that allows the Lessor to terminate the lease. There may be two reasons for the continued presence of these provisions. First, it is always possible that over the course of a long lease term the Bankruptcy Code or case law will evolve to allow an airport Lessor to terminate a lease after the Lessee has filed for bankruptcy. If such a change in the law occurs, then a lease containing a bankruptcy termination provision will provide a remedy to the Lessor that was not otherwise available. Second, some bankruptcy filings have been found fraudulent under various theories. Should the Lessee’s bankruptcy filing be found fraudulent (or in bad faith) and be dismissed, the Lessor will have an additional remedy available to it. A typical provision that allows termination by Lessor if Lessee files a petition for bankruptcy follows.

and lease terminations are dependent on state law and drafters should pay particular attention to how the courts in their jurisdiction treat such issues.

As a practical matter, airport Lessors have a justifiable concern about the breach of any provision that is important enough to have been included in a lease. There are, however, several default provisions that are of particular interest to airport Lessors during lease negotiations: (1) the payment of rents and fees; (2) the payment of premiums for required insurance coverage; (3) the occurrence of a pattern of defaults that may indicate insolvency or an imminent bankruptcy filing;²⁴⁶ (4) the failure to pay required taxes; and (5) the lack of compliance with laws, statutes, rules, and regulations, particularly those related to aeronautical activities and security on airports. In negotiations, Lessors can insist on provisions addressing each of these issues as well as insisting on a well-constructed default process that provides a Lessee with sufficient notice of the default and a fair and disciplined mechanism for cure. It is helpful for Lessors to understand (prior to negotiations) how defaults and breaches are treated in the jurisdiction in which the premises are located. Although remedies for defaults and breaches of the lease vary by jurisdiction, Lessors are generally allowed the ability to choose among (1) actions for performance (or curing the lack of performance by the Lessee) and damages or (2) termination of the lease and damages. Some leases provide additional remedies. Samples of default and termination provisions follow below.

Example 1: Miami Executive Airport Land Lease Template (2020). A sophisticated provision from a large airport system.

ARTICLE 12 Termination²⁴⁷

12.01 Payment Defaults: Failure of the Lessee to make all payments of rentals, fees and charges required to be paid herein when due shall constitute a default, and the County may, at its option, terminate this Agreement after seven (7) calendar days’ notice in writing to the Lessee, unless the default is cured within the notice period.

12.02 Insurance Defaults: The County shall have the right, upon 15 calendar days written notice to the Lessee, to terminate this Agreement if the Lessee fails to provide evidence of insurance coverage in strict compliance with Article 11 (Insurance) hereof prior to commencement of operations, or fails to provide a renewal of said evidence upon its expiration; provided, however, that such termination shall not be effective if the Lessee provides the required evidence of insurance coverage within the notice or grace period.

12.03 Other Defaults: The County shall have the right, upon thirty (30) calendar days written notice to the Lessee, to terminate this Agreement upon the occurrence of any one or more of the following, unless the same shall have been corrected within such period, or, if correction cannot reasonably be completed within such 30-day period, the Lessee has commenced corrective steps within such 30-day period and diligently pursues same to completion:

1. Failure of the Lessee to comply with any covenants of this Agreement, other than the covenants to pay rentals, fees and charges when due, and the covenants to provide required evidence of insurance coverage.
2. The conduct of any business, the performance of any service, or the merchandising of any product or service not specifically authorized herein by the Lessee.
3. Failure of the Lessee to comply with any Environmental Law or Environmental Requirement as those terms are defined in Article 8.01 (Definitions) of this Agreement.

12.04 Automatic Termination: The happening of the following events shall constitute a default by the Lessee and this Agreement shall automatically terminate ipso facto: abandonment of the Premises or discontinuance of operations; filing of insolvency, reorganization, plan of arrangement or bankruptcy petitions; adjudication as bankrupt; making of a general assignment for the benefit of creditor; failure of the Lessee for fifteen (15) days or more to occupy the premises for one or more of the purposes permitted under this Agreement; and if a lien is filed against the leasehold interest of the Lessee and not removed within a reasonable time.²⁴⁸

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14. DEFAULT AND TERMINATION

1. Termination by Lessee. This Agreement shall be subject to termination by Lessee, at Lessee’s option, in the event of any one or more of the following events:
2. Termination by Lessor. This Agreement shall be subject to termination by Lessor, at Lessor’s option, in the event of any one or more of the following events:

1. The default by Lessee in the performance of any of the terms, covenants, or conditions of this Agreement, and the failure of Lessee to remedy, or undertake to remedy, to Lessor’s satisfaction such default for a period of thirty (30) days after the receipt from Lessor to remedy the same.
2. Lessee files a voluntary petition in bankruptcy, including a reorganization plan, makes a general or other assignment for the benefit of creditors, is adjudicated as bankrupt, or if a receiver is appointed for the property or affairs of Lessee and such receivership is not vacated within thirty (30) days after the appointment of such receiver.

Mitchell Municipal Airport South Dakota FBO Lease (2019) (italics added). Available at https://www.cityofmitchellsd.gov/405/Airport.

²⁴⁶ There are several strategies available to an airport Lessee experiencing financial difficulties. The favored exit strategies include: (1) subleasing or, when subleasing is not allowed by the lease, having a frank discussion with the Lessor, disclosing the Lessee’s negative financial situation, and proposing a prospective subtenant who is ready, willing, and able to perform under the lease; (2) if the Lessee has made a substantial capital investment, the Lessee may request a lease buyout from the Lessor, again with the proposal of a ready, willing, and able party to take over the lease; (3) using the lease’s force majeure clause, especially if the clause explicitly mentions the circumstances that gave rise to the Lessee’s financial difficulties (such as the 2020 Pandemic); (4) although rarely successful, resort to common law contract defenses (frustration of purpose, impracticability, and impossibility); and (5) using a strategic bankruptcy filing as a negotiating tool. All of these strategies are discussed in a light most favorable to the Lessee in the article, Is it Time to Go? Considerations for Terminating Your Lease, THOMSON REUTERS (Feb. 2021), https://legal.thomsonreuters.com/en/insights/articles/termination-considerations-of-commercial-lease-agreement. The article proposes all of these strategies with the suggestion that negotiation, rather than litigation, most benefits both parties to the lease.

²⁴⁷ Note the hierarchy of defaults contained in this provision: (1) rent, (2) insurance, and (3) breaches of other lease provisions, unpermitted use of the premises, and environmental breaches.

²⁴⁸ Note the various breaches that result in immediate termination of the lease; these breaches can be characterized, essentially, as the Lessee’s failure to continue using the premises and paying rent.

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²⁴⁹ Note the substance and effect of this somewhat uncommon provision: the Lessee’s cumulative defaults, even if cured, may serve as the basis for termination of the lease, after notice.

²⁵⁰ Note this uncommon provision that allows the Lessor to immediately collect agreed upon damages as a result of a termination for the Lessee’s default.

²⁵¹ Note this uncommon reciprocal default provision, which provides the Lessee the right to terminate should the Lessor fail to perform “any covenant or agreement.”

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²⁵² Note the focus of the articulated default examples—the Lessee’s failure to use and pay rent, including attempts at alienating the premises by assignment, subleasing, or sale—and the commission of acts that result in environmental damage.

²⁵³ Note that the initiation of the default process, termination, and reentry on the premises do not relieve the Lessee of its obligations to pay rent.

²⁵⁴ Note the statement negating the inference that the Lessor’s forbearance in response to a Lessee default constitutes a waiver of any other right or provision of the lease.

²⁵⁵ E.g., MSPC v. NAASCM, 662 S.E.2d 745, 749 (Ga. App. 2008). See generally Annotation, Breach of Covenant of Quiet Enjoyment in Lease, 41 A.C.R.2d 1414 (1955 & Later Case Service 2022); Annotation, Breach of Covenant of Quite Enjoyment in Lease, 62 A.L.R. 1257 (1929 & Later Case Service 2022).

²⁵⁶ See generally 52A C.J.S. Landlord and Tenant §§ 768, 771, 777, 780 (collecting cases) (2024).

tion, the Lessee is still required to perform its obligations under the lease.²⁵⁷

A Lessee’s right to quiet enjoyment might seem superfluous in an airport environment, but Lessees, in particular their lenders and insurers, still feel the necessity for a lease provision that addresses the theoretical possibility that the Lessor’s right to the premises could be disturbed by a third party. Although the covenant is still implied in almost all jurisdictions, it can be avoided by an express provision in the lease—though none of the examined leases do so.²⁵⁸ When they appear, quiet enjoyment provisions tend to be narrow and do little more than provide a cause of action against the Lessor, should the tenancy be disturbed by a challenge to the Lessor’s claim to good title.

Sometimes, however, the express covenant contained in a lease is stated in language that extends beyond its common law origins. Those who draft leases on behalf of airport Lessors should take care that the scope of an express covenant of quiet enjoyment does not exceed that of the covenant implied in a particular jurisdiction, or at least understand that the lease provision they have drafted is more generous than the one that would otherwise be implied. Other GA leases take a step back and state that the express covenant only has application if the Lessee is not in breach of some provision of the lease.²⁵⁹ Lessees may take issue with such a provision—arguing that simple fairness dictates that not all breaches of the lease should be regarded as significant enough to result in a forfeiture of the covenant. Accordingly, Lessees may insist that a forfeiture of the covenant take place only if there is an outstanding notice of a default of a material provision of the lease.²⁶⁰

Lessor’s Reserved Right of Entry

Closely related to the covenant of quiet enjoyment is the Lessor’s reservation of a right of entry onto the premises. At common law the Lessor was held to pass exclusive possession of the premises to a Lessee with no implied right of entry. All of the leases reviewed for this digest reserve to the Lessor a right of entry onto the premises. There is no question that such clauses are enforceable.²⁶¹ There are, however, circumstances where an emergency response is necessary, an entry is made, but carelessness and inconvenient facts lead to liability for the Lessor.²⁶²

Airport Lessors typically reserve a right to enter the premises for the limited purposes of conducting inspections, making repairs, conducting audits, and responding to emergencies. Lessees prefer the insertion of a “reasonableness” standard into such provisions, explaining that the standard will protect against undue interference with the operation of their businesses. The lease provisions examined for this digest, such as the following examples, provide that such entries will take place at reasonable hours and with appropriate notice to the Lessee. Some of the provisions go further and insert a more categorical reasonableness standard for the Lessor’s conduct.

Example No. 1: Pittsburgh International Airport FBO Lease (2021): A provision containing a very narrow covenant of quiet

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²⁵⁷ Id. § 772. Constructive eviction claims are typically raised in the context of a Lessor’s failure to provide agreed upon services, such as heat, water, or sewer service. But the claims can also be raised when a Lessee is denied access to the premises. The elements of a claim require a Lessee to demonstrate a disturbance to the tenancy that (1) renders the premises unfit for the leased purpose; (2) deprives the Lessee of the beneficial enjoyment of the premises: and (3) requires the Lessee to vacate. There is no claim if any of these conditions is created by someone other than the Lessor. FRIEDMAN at 29-26, -43, -59.

²⁵⁸ Following the pandemic of 2020, Lessees filed claims alleging that government regulations in response to COVID-19 breached the covenant of quiet enjoyment and amounted to a constructive eviction. Lessors responded with the observation that they were not the source of any of the pandemic-related regulations and that, in any case, there had been no constructive eviction because Lessees continued to have access to the premises. Courts have generally agreed with Lessors. E.g., Valentino USA, Inc. v. 693 5th Owner LLC, 160 N.Y.S. 3d 858, 859 (App. Ct. 1st Dep’t 2022).

²⁵⁹ The covenant is generally regarded as an independent lease provision, meaning that it is not dependent for its operation on any other lease provision. FRIEDMAN at 29-22 to 29-23. But, as stated above, a condition restricting the covenant may be inserted in a lease. E.g., Boise Mode LLC v. Donahoe Pace & Partners, Ltd., 294 P.3d 1111-20 (Idaho 2013) (availability of covenant expressly conditioned on payment of rent).

²⁶⁰ Airports are usually operated as public entities, and some may wonder whether the exercise of their statutory or constitutional authority might provide the basis for a breach of the covenant of quiet enjoyment. Courts have answered the question in the negative. The simple notice of the grant of an option to purchase in favor of a public authority, for example, does not breach the covenant of quiet enjoyment because it constitutes the Lessor’s cooperation with the exercise of a sovereign right, for which the lease or the law may provide other, separate remedies. See Dolman v. U.S. Tr. Co. of N.Y., 2 N.Y.2d 110, 115 (1956). But sending continuing and harassing notices of lease violations to a Lessee, on the other hand, may violate the covenant. But the denial of the Lessee’s beneficial use of the premises resulting from construction activities (dust, debris, noise, infestation by vermin, etc.) does. E.g., Koretz v. 363 E. 76th St. Corp., 178 A.D.3d 445, 446-47 (App. Div. 1st Dep’t 2019). So too does the Lessor’s “wrongful” service of multiple notices of default and termination. E.g., 255 Butler Assocs., LLC. v. 255 Butler, LLC, 173 A.D.3d 655, 656-57 (App. Div. 2d Dep’t 2019) (Lessee who was in possession of premises remained open for business for curbside delivery).

²⁶¹ See generally 52A C.J.S. Landlord and Tenant § 722 (2024); AM. JUR. 2D Landlord and Tenant § 391 (2024).

²⁶² Winchell v. Schiff, 193 P.3d 946 (Nev. 2008) was a case where a lessor’s entry to inspect set in motion a series of events that resulted in the loss of the lessee’s business. Winchell, the Lessee, operated a seafood company at Schiff’s, the Lessor’s, cold storage facility in Las Vegas, Nevada. The lease provided the Lessor with the right to enter the premises and conduct periodic inspections and maintenance. On the mistaken belief that the facility had been abandoned by the Lessee and that the electricity to the cold storage unit may have been turned off, an employee of the Lessor entered the premises to conduct an inspection. In the process of the inspection, the employee had the locks to the unit removed and changed and when a theft alarm sounded, the employee disconnected the alarm and then left the premises unattended. When the Lessee returned, he found most of the firm’s inventory of frozen fish had been removed and, without inventory, the Lessee’s business failed. The Lessee vacated the premises and sued for conversion and breach of the covenant of quiet enjoyment. The latter claim was dismissed because the lease allowed the Lessor to have access to the premises for periodic inspections and maintenance. Recovery was allowed, however, on the conversion claim for the loss of the Lessee’s inventory, for the loss associated with the failure of the business, as well as lost profits. Id. at 949-52.

enjoyment and, even though couched in terms of “reasonableness,” a very broad reservation of the Lessor’s right of entry.

Section 3.05 Quiet Enjoyment of Premises. The Authority covenants that, if the Lessee shall perform all obligations and makes all payments as provided herein,²⁶³ the Lessee shall, during the Term, peaceably have and enjoy the Premises and all the rights, licenses, privileges, appurtenances, and facilities granted herein.²⁶⁴

Section 3.06 Inspection of Premises. The Authority, through its duly authorized agents, shall have at any reasonable time the full and unrestricted right to enter²⁶⁵ the Premises for the purpose of periodic inspection for fire protection, maintenance and to investigate compliance with the terms of this Agreement;²⁶⁶ provided, however, that except in the case of emergency, such right shall be exercised upon reasonable prior notice to the Lessee and with an opportunity for the Lessee to have an employee or agent present, and will not interfere with Lessee’s operations.²⁶⁷

Example No. 2: Elmyra Corning FBO Lease (2011) (italics added in the following example for emphasis): A reservation of a right of entry that exculpates the Lessor from liability for any entry.

18. ACCESS BY LESSOR.

Lessor expressly reserves the following rights: (a) to enter the demised premises at any time during an emergency; (b) to enter the demised premises during reasonable²⁶⁸ business hours to examine the same; (c) to enter the demised premises and display a notice or sign “FOR RENT” and/or “FOR SALE” at any time within the six (6) months before the expiration or on the sooner termination of this lease, and to maintain the same as placed; and (d) during or after the time Lessee abandons or vacates the premises or otherwise defaults hereunder, to enter and decorate, remodel, repair, alter or otherwise prepare the premises for reoccupancy. The exercise of any reserved right by Lessor shall never be deemed an eviction or disturbance of Lessee’s use and possession of the premises and shall never render Lessor liable in any manner to Lessee or to any other person.²⁶⁹

Example No. 3: Rapid City South Dakota Commercial FBO Lease (2021) (italics added): a provision containing an exculpatory clause.

8. LESSOR’S RIGHTS AND PRIVILEGES

8.1 Performance of Acts

8.1.1. All acts performable under this Agreement by Lessor may, at the option of Lessor and without right of objection by Lessee, be performed by a representative of Lessor.

8.2 Access to the Leased Premises

8.2.1. Lessor shall have the right to enter the Leased Premises (including all buildings, structures, and Improvements located thereon) at any time and for any purpose connected with the performance of Lessee and/or Lessor’s obligations under this Agreement.²⁷⁰ Lessor shall provide 48 hours advanced notice (and a reason) prior to entering the Leased Premises²⁷¹ except when Lessor determines emergency circumstances require immediate entry without prior notice.²⁷² Lessor shall provide notice to Lessee in accordance with Section 37 of this Agreement.

8.3 Exercising Rights

8.3.1. No exercise of any rights reserved by Lessor shall be deemed or construed as an eviction of Lessee or others nor shall such exercise be grounds for any abatement of rents, fees, or other charges nor serve as the basis for any claim or demand for damages of any nature whatsoever.²⁷³

12. Reversion

When an owner of a property enters into a lease, the Lessor’s fee estate separates into two parts—the Lessee receives a present interest in the premises for the term of the lease (the leasehold estate) and the Lessor retains a future interest in the fee estate with a right of possession at the termination of the lease (the reversion). The Lessor’s fee interest is said to continue “subject to” the lease.²⁷⁴ At common law, when the leased estate reverted to the Lessor, it carried along with it all of the leasehold improvements made by the Lessee.²⁷⁵ Modern leases describe in much more detail what will occur at the termination of the lease, but the Lessor’s reversion interest has remained a constant in commercial and airport leases.²⁷⁶

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²⁶³ Note that the right to quiet enjoyment is conditioned on Lessee’s compliance with all lease obligations and required rental payments.

²⁶⁴ Note that the Lessor covenants the Lessee’s right to quiet enjoyment to the “rights, licenses, privileges, appurtenances, and facilities” granted in the lease and no further.

²⁶⁵ Note that although the provision uses a “reasonableness” standard to circumscribe the Lessor’s right to enter, the breadth of the right is defined as “unrestricted.”

²⁶⁶ Note the broad scope of the Lessor’s right to enter the premises by use of the term “unrestricted” and the investigation of Lessee’s compliance with the terms of the lease.

²⁶⁷ Note the three restrictions on the Lessor’s right of entry: (1) reasonable notice; (2) the opportunity for the presence of Lessee’s representative; and (3) the promise not to interfere in Lessee’s business operations.

²⁶⁸ Note that the provision imports a “reasonableness” standard for the Lessors entry but, in the very last sentence, exculpates the Lessor for any liability associated with the exercise of the right, which “shall never render Lessor liable in any manner to Lessee or to any other person.”

²⁶⁹ Note the comprehensive exculpatory language.

²⁷⁰ Note the breadth of the Lessor’s reserved right to enter the premises and the absence of any “reasonableness” standard applicable to the Lessor’s conduct.

²⁷¹ Note that in place of a “reasonableness” standard applicable to the Lessor’s conduct there is a 48-hour notice requirement and the necessity of an articulation of a reason for the entry.

²⁷² Note that “emergency” circumstances, as determined by the Lessor, provide an exception to the 48-hour notice requirement.

²⁷³ Note the exculpatory effect of this clause denying that an entry by the Lessor shall constitute neither an “eviction,” nor shall it allow for the abatement of rent, nor as the basis for any claim for damages.

²⁷⁴ See generally FRIEDMAN at 36-1 to 36-2.

²⁷⁵ 52A C.J.S. 2d Landlord and Tenant § 927 (2024).

²⁷⁶ The economic justification for a reversion clause is that an airport’s continuing control of an asset results in a greater return on investment. As one commentator has observed, commercial Lessors understand that they can obtain a better return by not selling their real estate and airport sponsors obtain a better return on their real estate because they are subject to regulations that forbid them from doing so. Michael Hodges, Reversion Clauses Revisited: Are Airports Really That Different?, AVIATION PROS, at 1 (Dec. 2016), https://www.aviationpros.com/fbos-tenants/article/12241409/airport-reversion-clauses [hereinafter Hodges]. Hodges

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also notes that reversion clauses are standard “across the board” in commercial leasing and points out that among the benefits to airports of reversion clauses are the development of long term revenue streams, the acquisition and retention of capital assets, and a lease structure that enhances the ability to control and manage airport development.

²⁷⁷ Some of the benefits of a ground lease reaped by Lessee’s are considerable (1) improvements to the leasehold are depreciable over the length of the term and (2) the ground rent paid on the leasehold is a deductible business expense.

²⁷⁸ E.g., Business owners say airport lease changes could chill investment, TRI-CITIES J. BUS. (Feb. 2021), https://www.tricitiesbusinessnews.com/2021/02/airport-leases/ (describing land lease tenants at the Port of Pasco’s Tri Cities Airport complaints about lease provision containing reversion clause). The resistance to an end of term reversion is based on a feeling, despite the fact that the reversion was negotiated at the start of the lease, that the Lessee has invested its time, effort, and capital in an airport business and that will have no value (or a negative value if restoration of the premises is required) at the end of the term unless the Lessee is able to enter into a new lease in competition with other bidders. One FBO characterized this predicament as being forced to buy back its own business. See General Aviation Leases: The Foundation of the Business vs. the Interests of the Airport (Aviation Pros video presentation at min. 12:00, Apr. 2012), https://www.aviationpros.com/airports/airports-municipalities/video/10690118/leases-the-foundation-of-the-business-vs-the-interests-of-the-airport. Airports, however, have a different perspective and point out that such comments are made (1) despite the operator’s full understanding of the terms of the business deal that it entered into with the airport; (2) that Lessees have taken full advantage of the tax benefits and property cost savings of using assets (buildings) and renting property while earning revenue over a course of a long-term lease; and (3) that reversions are the norm in off airport commercial leasing transactions. These commercial operators, airports argue, are seeking a windfall because they entered into long-term ground leases after developing a business plan that contemplated and received full and fair compensation for a reversion clause that was negotiated and accepted as part of the business deal they made when they agreed to lease the premises.

Some airport leaseholders characterize the reversion clause contained in airport leases as a taking without compensation. This characterization is inaccurate for a number of reasons—the typical airport lease reversion clause is part of a consensual contract with a government entity acting in its proprietary, rather than sovereign, capacity. See Santa Monica Airport Ass’n, FAA Final Agency Decision (FAD) (FAA Docket No. 16-99-21). There are also issues regarding airport compliance with federal Grant Assurances 5 (Preserving Rights and Powers) and 38 (Hangar Construction). See e.g., Wilson Air Ctr. v. Memphis & Shelby Cnty. Airport Auth., FAA Docket No. 16-99-10 (Aug. 30, 2001), aff’d, Wilson Air Ctr., LLC v. FAA, 372 F.3d 807 (6th Cir. 2004). See also Spa Rental, LLC v. Somerset Pulaski Cnty. Airport Bd., 2015 WL 5308076, at 1-2 (Sept. 1015); Aviation Ctr., Inc. v. City of Ann Arbor, 2005 WL 3722716, at 1, 21 (FAA Docket 16-05001) (Dec. 2005); Appalachian Star Ventures, Inc., 1997 WL 1120735 FAA Docket No. 16-96-02.

Other commercial operators understand and accept that reversion clauses are common in commercial real estate and airport leases, but express mild frustration with more recent developments in airport leasing that require more stringent maintenance requirements during the course of long-term leases. Airports institute such programs in order to ensure that an asset is returned at the end of a lease in a useable state of repair and structural integrity. Still other Lessees may not even be aware of the reversion at termination provision contained in a lease, or they may not understand its consequences. As a result, it may be helpful to discuss the reversion clause during lease negotiations and to display it prominently in the written lease document requiring a separate sign off or initialing. Gerald R. Ford Int’l Airport includes the reversion provision at the beginning of its commercial leases. See generally Relationships are Important When Negotiating Leases (Oct. 2021), https://nbaa.org/news/business-aviation-insider/2021-sept-oct/relationships-important-negotiating-leases/.

It may also be helpful for airports to take several additional steps to ensure that Lessees are, at the very least, made aware of the terms of their lease agreements before execution, requiring Lessees to initial or sign a provision identifying the presence of the reversion clause, and sending notifications to better remind Lessees that their leases contain reversion clauses and the effect of the clause. This can be accomplished, perhaps, by sending Lessees yearly notices highlighting the clause and the date a reversion will take place. Id. at min. 49:00. See also Hodges, supra note 278, at 4. Based on interviews conducted for this digest, neither the presence nor the effect of airport reversion clauses seems to present significant issues at airports.

²⁷⁹ Research for this digest located only one airport that offered such a cash out provision. Originally conceived as an incentive to developers of airport facilities, the Monroe County Airport (BMG) near Bloomington, Indiana, advertised leasing arrangements under which Lessees could retain an ownership interest in an improvement after termination of the ground lease. Under the BMG plan, the airport interest in the Lessee’s improvements vested at a rate of 2.5% each year; at the end of a 30-year lease, the Lessee could be expected to possess a 25% ownership interest in the leasehold improvements. Under the program, the airport would be required to purchase the Lessee’s interest in the improvements at the termination of the lease. Monroe County Creates Out of the Box Hangar Leases, AIRPORT IMPROVEMENT (Dec. 2009), https://airportimprovement.com/article/monroe-county-creates-out-box-hangar-leases. Note that such a program would require an airport to set aside a significant amount of funding to pay out Lessees at termination for their remaining capital investment. This obligation may place a significant financial burden on airports, particularly small GA airports, if funding sources are not carefully considered. Although BMG’s offer attracted some development, the airport has since discontinued the program in favor of standard termination and reversion provisions. The Hastings Airport commercial lease provision at the end of this section provides a variation on the BMG cash out method, but with a condition more favorable to the Lessor. The Hastings provision allows the parties to negotiate a value for the Lessee’s improvements but provides the Lessor with the right to require the removal of the improvements if the parties cannot reach a mutually agreeable price.

their condition or suitability. The second is much like the first but carries with it the residual cost necessary to pay a Lessee for its remaining ownership interest in improvements. The third type of reversion clause provides the airport with the greatest amount of flexibility because it allows the airport to assess the condition and suitability of the improvements given the present state of commercial development on the airport.²⁸⁰ If the Lessor has supervised the maintenance of the structure and approved the original building design specifications, the structure may be an asset worth assuming.²⁸¹

GA lease termination clauses typically describe how the premises must be left (usually restored to the same condition in which they were delivered, “wear and tear excepted”). If alterations or improvements were allowed, most often the Lessor will be provided with the opportunity to decide whether to retain them or to require their removal by the Lessee and the premises restored after their removal. The potential expense of removing improvements should provide an adequate incentive for Lessees to adequately repair and maintain the improvements, but, based on interviews conducted for this digest, it appears that is not always the case.²⁸²

A breach of the termination and restoration provision by the Lessee results in a claim for damages in the Lessor’s favor. Damages may include returning the premises to their prior condition and the loss of rental income while work is under way, but generally only if there is a lease provision to that effect.²⁸³ Identified liquidated damages for a Lessee’s failure to restore the premises at termination would seem an attractive and efficient alternative, but liquidated damages are not without complications and, occasionally, litigation. Lessees, for example, may dispute the reasonableness of the liquidated damages amount, whether they constitute a penalty rather than true liquidated damages, and whether the difference in the bargaining positions of the parties forced acceptance to the termination provisions.²⁸⁴ The following examples of termination provisions deal not only with the termination issues discussed earlier, but also holdover tenant issues and increases in the rental rate after the date of termination.

Example No. 1: Saratoga New York Ground Lease (2019): A simple, straightforward provision with an explicit statement of the reversion of the Lessee’s improvements.

4. All buildings and facilities constructed by TENANT pursuant to this Lease shall become the property of LANDLORD at the expiration or termination of this Lease or any extension thereof.²⁸⁵
5. TENANT shall not make any improvements, alterations, repairs, or changes to the Leased Premises without the prior written consent thereto by LANDLORD as provided by the Commissioner of Public Works and County Administrator. Prior to performing any such improvements, alterations, repairs, or changes TENANT is to submit detailed plans and specifications to LANDLORD. LANDLORD shall review such plans and specification and return reasonable comments thereto, as soon as reasonably practical.²⁸⁶ TENANT shall incorporate such comments into the plans and specifications and resubmit such revised plans and specifications for LANDLORD’S review and approval pursuant to this Article III.B.5. If LANDLORD grants or is deemed to have granted such consent, TENANT shall have the right to construct the improvements reflected on such plans and specifications, provided such construction is performed in a good workmanlike manner, in accordance with all applicable Federal, State or local building code regulations.²⁸⁷ The cost of such alterations, repairs, improvements, and changes are the responsibility of TENANT.

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²⁸⁰ This option is most beneficial to airports because, during the course of a long-term ground lease, the pattern of aviation activity on the airport may have changed or the premises may be required for a different purpose. If the Lessor has supervised the maintenance of the Lessee’s improvements and approved the original building design specifications, the structure may be an asset worth assuming. If not, having a lease requirement that the Lessee return the premises to a green field site saves the airport time and money.

²⁸¹ Hodges, supra note 278, suggests that airports can do a better job of monitoring the condition of improvements made on airport property and, hence, making an end of term decision about whether to retain those improvements. Airports, for example, may require Lessees to submit periodic “Condition Assessments” of their facilities. Under such provisions, Lessees are required, at their own expense, to retain an engineer or inspector approved by the Lessor to conduct a review and submit reports on specified improvements and leased structures. The reports provide the Lessor with a baseline for the facilities, their maintenance, the wear and tear they have experienced, whether the Lessee has been deferring necessary maintenance, and the basis for the Lessors to request that the Lessee make necessary repairs or replacements during the term or at termination. More importantly, however, the reports provide the Lessor with the data necessary to decide at the end of the term whether to retain an improvement. Hodges, supra note 278, at 2.

²⁸² Some airports make it the responsibility of a succeeding Lessee to remove structures and restore the premises.

²⁸³ See generally 52A C.J.S. Landlord and Tenant § 902 (2024); AM. JUR. 2D §§ 405, 693-700 (2024).

²⁸⁴ See generally Annotation, Measure of Damages for Tenant’s Failure to Surrender Possession of Rented Premises, 32 A.L.R.2d 582, 687 (1953 & Later Case Service 2022); see also Validity and Construction of Lease Provision Requiring Lessee to Pay Liquidated Scam for Failure to Vacate Premises or Surrender Possession at Expiration of Lease, RESTATEMENT OF PROP. (Landlord and Tenant) § 12.2(1). 23 A.L.R.2d 1318 (1952 & Later Case Service 2022). Most recently, the FAA observed that the failure of Shreveport, Louisiana’s Downtown Airport to enforce the reversion clauses contained in its hangar leases violated Grant Assurances 5, 23, 24, and 29. FAA Final DTN, Shreveport Downtown Airport Land Use Compliance Inspection – Feb. 27-Mar. 1, 2018, https://www.scribd.com/document/380102398/2018-Shreveport-DTN-Final-FAA-Report. A report in the local newspaper (People are Living in Hangars at Shreveport Downtown Airport, FAA Says, SHREVEPORT TIMES, https://www.shreveporttimes.com/story/news/2018/05/24/people-livinghangars-shreveport-downtown-airport-faa-says/641529002/), describes several tenants who appeared to have been residing in the airport’s T-hangars beyond the term of their leases. The Lessees objected to the reversion provisions contained in their leases.

²⁸⁵ Note the clear, unambiguous statement of the Lessor’s reversion interest in the improvements at the conclusion of the lease.

²⁸⁶ Note that this provision reserves the Lessor’s right to approve plans for the improvements; this provision allows the Lessor to make a judgment about the quality of the construction of the improvement and, as is the case on some airports, any applicable aesthetic considerations.

²⁸⁷ Note the requirement that the construction be “performed in a good workmanlike manner” and meet all applicable codes and regulations. These qualifications allow the Lessor to monitor and inspect the Lessee’s construction of the improvements, if necessary.

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²⁸⁸ Note the grant of ownership of the improvements to the Lessee during the term of the lease, subject to the Lessor’s reversion interest.

²⁸⁹ Note that these conditions, which impose certain costs on the Lessee for fuel tanks at termination, create an incentive for Lessees to maintain the tanks during the term of the lease.

²⁹⁰ Note the specific treatment given to “tanks, wells and septic systems” at the termination of the lease and that the Lessee is provided with the several options for addressing them: removing, properly abandoning, repairing, or working out a process for their transfer to a succeeding tenant.

²⁹¹ Note that the Lessee’s personalty receives specific treatment at termination and streamlines the process for disposing of that property by stating that any personalty not removed becomes the property of the Lessor. Some clauses go further and add a right of the Lessor to recover any costs associated with the removal of the left personalty.

²⁹² Note that the Lessee is required to remove its improvements and, if it fails to do so, the improvements (except for fuel tanks and other systems) become the property of the Lessor.

²⁹³ Note that this provision is unusual in a number of ways. First, the paragraph anticipates a negotiation for the payment of a purchase price for the Lessee’s building. Second, the very next subsection provides the Lessor with the option to “authorize” the Lessee to remove its building within 180 days if the parties do not agree on a purchase price for the building.

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²⁹⁴ Note that this provision, perhaps as an additional incentive to the Lessee to come to an agreement regarding a price for its building, requires that the parties enter into a separate agreement (1) for the details regarding the removal of the Lessee’s building and the restoration of the premises and (2) a bond to cover the removal and restoration.

²⁹⁵ Note that only after the Lessee fails to pursue all of its other available options does the building revert to the Lessor. It is unclear whether this final clause operates to provide an incentive or a disincentive for the Lessee to maintain its building during the term of the lease.

²⁹⁶ Only one of the more than 20 airports interviewed for this digest reported an experience with a condemnation performed on airport property.

²⁹⁷ If an airport sponsor possesses the statutory authority to condemn land, it should be kept in mind that exercising that authority, even if it is the Lessor of the condemned property, is the exercise of its sovereign authority under its police powers and, thus, does not constitute a breach of the lease. See Lundell v. Coop. Power Ass’n, 707 N.W.2d 376, 381-83 (Minn. 2006) (condemnation of property for which condemner already had a leasehold interest). An Airport’s authority to condemn land for airport purposes is generally upheld, but it is litigated more often than one might expect. See Annotation, Exercise of Eminent Domain for Purposes of Airport, 135 A.L.R. 755 (1941 & Later Case Service). Consequently, it may be in the airport’s interests to avoid litigation altogether and to negotiate a voluntary relocation agreement with the Lessee.

²⁹⁸ None of the airports interviewed for this digest could recall or had a record of a condemnation or relocation of an airport leasehold. One commentator refers to drafting lease condemnation provisions as drafting for the unlikely because a typical lease runs to thousands of words and many, many pages that cover numerous matters such as fire, condemnations, and others that rarely come to pass. FRIEDMAN at 3-11.

²⁹⁹ E.g., City of Milwaukee Post No. 2874 VFW v. Redevelopment Auth., 768 N.W.2d 749, 763-65 (Wis. 2009) (Lessees recognized leasehold interest under “unit” theory of valuation was zero); 29A C.J.S. Eminent Doman §§ 221-22 (lease term) (2024); AM. JUR. 2D Eminent Domain §§ 185-86 (2024).

³⁰⁰ A Lessee is generally allowed to receive the full amount of its leasehold interest (AM. JUR. 2D Eminent Domain §§ 184-85) (2024); an entitlement to renew a lease for additional terms is generally regarded as a Lessee’s leasehold interest (see id. § 94). 29A C.J.S. Eminent Domain § 259 (1972) (lease renewals).

³⁰¹ See generally United States v. Certain Prop., 306 F.2d 439, 449-55 (2d Cir. 1962); L. Horgan, Some Legal and Appraisal Considerations in Leasehold Valuation Under Eminent Domain, 5 HASTINGS L.J. 34, 38-40 (1953).

³⁰² See City of Lansing v. Wery, 242 N.W.2d 51, 54-55 (Mich. Ct. App. 1976) (unique location of parking business).

³⁰³ It is conceivable that the valuation in condemnation of a Lessee’s leasehold rights may be greater than the value of the Lessor’s premises. In order to avoid such occurrences, some Lessors have drafted leases that provide for the immediate termination of the lease at condemnation. The result is that the Lessee’s interest in the premises is ended with the termination of the lease, and it is left with no claim for damages in condemnation. Some jurisdictions find the rule an unconscionable forfeiture and either refuse to enforce it or interpret it against the Lessor. Maxey v. Redevelopment Auth., 288 N.W.2d 794, 806-07 (Wis. 1980).

lease may diminish or cut off completely any or all of these common law avenues of recovery.

In addition to these issues, several elements should be considered in drafting condemnation provisions. First, in the case of a partial condemnation, the parties should consider establishing a threshold amount of space that must remain after condemnation but before a party may terminate the lease. Second, if the taking occurs toward the end of the lease, the parties should, perhaps, have some flexibility to terminate the lease, especially in the case of a Lessor who is bound to restore the premises to their previous state. Third, in the case of a partial taking, the condemnation provision should provide for a reduction in the rent; perhaps employing a formula related to the proportion of the remaining space. Fourth, if arbitration of the condemnation award is considered, the lease should provide sufficiently clear standards for the arbitrator to apply to the existing facts. One approach attempts to award to the Lessor and Lessee amounts related to the time remaining on the lease with the Lessor receiving a greater portion of the condemnation award as the lease approaches its termination date. Examples of these and other issues follow.

Example No. 1: Susquehanna Pennsylvania Commercial Hangar Lease (2010). A straightforward provision that preserves the Lessee’s right to file a claim against the condemnor.

ARTICLE XII CONDEMNATION

If the whole of the Leased Premises shall be condemned or taken either permanently or temporarily for any public or quasi-public use or purpose, under any statute or by right of eminent domain, or by private purchase in lieu thereof, then in that event, the term of this Lease shall cease and terminate from the date of title vesting in such proceeding or purchase and LESSEE shall have no claim against LESSOR for the value of any unexpired term of the Lease, and shall release unto LESSOR any such claim it may have against the condemnor.³⁰⁴ In the event a portion only of the Leased Premises shall be so taken, LESSEE may elect to (i) terminate this Lease from the date of title vesting in such proceeding or purchase; or (ii) in the event LESSOR elects to repair and restore, at its own expense, the portion not taken, rent such remaining portion, subject to a rent reduction proportionate to the portion of the Leased Premises taken.³⁰⁵ In the event of a whole or partial condemnation or taking, LESSEE shall have the right to file a separate claim against the condemnor for reimbursement of the value of LESSEE’s improvements, including the Fuel Farm and related facilities and equipment, that are affected due to condemnation.³⁰⁶

Example No. 2: MSP Reliever Airport Commercial Lease Template (2022). This provision addresses a condemnation by the Lessor and by other governmental agencies.

15. Condemnation

15.1. MAC’s Right to Taking

MAC reserves all of its rights, as provided by law, to condemn, whether in whole or in part, Tenant’s (and any Subtenants’) interest under this Lease and Tenant’s (and any Subtenants’) interest in any Improvements even though it is a party to this Lease.³⁰⁷ This provision is not a waiver by Tenant of its right to contest any such condemnation. If MAC exercises its rights described in this paragraph, Tenant may, prior to the effective date of such condemnation, terminate this Lease and surrender the Leased Property in accordance with the terms and conditions of this Lease.

In the event of any such condemnation by MAC pursuant to this Section 15.1, MAC will request that the award of damages, determined by the commissioners identified in Minnesota Statutes, section 117.085 (or as amended), show the amount of the award of damages, if any, which is for the value of the land taken, and the amount of the award of damages, if any, which is for damages to the remainder involved (which remainder would include any damages for Improvements).³⁰⁸ Tenant will receive the amount of the award of damages, if any, which is for damages to the remainder involved, but will not receive the amount of the award of damages which is for the value of the land taken. This provision does not prohibit either MAC or Tenant from appealing the condemnation commissioners’ award of damages,³⁰⁹ in accordance with applicable laws. Tenant will not lose Tenant’s compensable interest as described in this Section 15.1 due to termination of this Lease resulting from condemnation as described in this Section 15.1.

Notwithstanding the terms in the previous paragraph, Tenant will not receive an award of damages for any Improvements made in violation of this Lease.³¹⁰

15.2. Taking by Other Governmental Agency

If the whole or any part of the Leased Property is taken, or purchased in lieu thereof, by an entity other than MAC, then Tenant may terminate this Lease any time prior to the effective date of such taking or purchase. If the whole of the Leased Property is taken, or purchased in lieu thereof, by an entity other than MAC, or if there is a taking, or purchase in lieu thereof, of a material portion of the Leased Property by an entity other than MAC, such that Tenant is no longer able to use the Leased Property for any of its permitted uses, then MAC will have the right to terminate this Lease as of the effective date of such taking or purchase. All rents and other charges due under this Lease for the part of the Leased Property that is taken will cease as of

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Nevertheless, Lessors have, in many jurisdictions, used termination clauses as tool to defeat condemnation claims by Lessees. E.g., City of Muskegon v. Lipman Inv. Corp., 239 N.W.2d 375, 382-84 (Mich. Ct. App. 1976) (acknowledging the rule favoring Lessors; but also, that a Lessee may have a claim against the condemner that includes recovery for lost business).

³⁰⁴ Note that this clause requires the Lessee to surrender any claim to the unexpired term remaining at the time of condemnation, but to forego any such claim against the condemnor.

³⁰⁵ Note that in the case of a partial taking, the Lessee is provided two options: (1) terminate the lease; (2) accept at a reduced rent the portion of the premises restored for continued use by the Lessor.

³⁰⁶ Note that this provision allows the Lessee to retain its right to litigate any claim it may have against the condemnor. It is worth mentioning, however, that it is not unusual for condemnors to attempt to reduce the award to a Lessor by the amount of a Lessee’s claim.

³⁰⁷ Note that this provision applicable to an airport taking, as previously discussed, constitutes the exercise of a sovereign right and, therefore, would not be considered a breach of the lease.

³⁰⁸ Note that in this provision applicable to an airport taking the Lessor states that it will “request” that the condemnor specify the division of its award between payments for the land and improvements.

³⁰⁹ Note that this provision applicable to an airport taking does not require the Lessee to surrender its right to appeal the condemnor’s award.

³¹⁰ Note this provision applicable to an airport taking contains the unusual, but clever, statement that the Lessee’s unpermitted improvements are not compensable.

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³¹¹ Note that in the case of a complete taking of the premises, such that the Lessee is no longer able to use the premises “for any of its permitted uses” (emphasis added), provides the Lessor (but not the Lessee) with a right to terminate the lease. As a result, all obligations for the Lessee to pay rent cease.

³¹² Note that the Lessee retains a right to contest the condemnation.

³¹³ Note that, just as in the case of a condemnation by the Lessor, in this provision addressing condemnation by a third party, the Lessor agrees to “request” an award identifying the amounts applicable to the value of the land and the value of the improvements. But unlike the circumstance of a taking by the Lessor, the Lessee’s right to contest the award comes at the price of conceding that it may appeal “so long as the same does not diminish [the Lessor’s] award.”

³¹⁴ The time that it may take the Lessor to regain control of the premises of a Lessee in default may be considerable (a minimum of 60 to 180 days at some airports, almost one year at others) or even longer if the Lessee files for bankruptcy.

³¹⁵ H. Haber, R. Mallory & M. Ripp, List of Eight Potentially Costly Events that Allow Security Deposit Increase, COM. LEASE L. INSIDER (Oct. 2002) (relevant consideration for Lessor’s ability to raise security deposit during term of lease may include: (1) additional construction or improvements by Lessee; (2) financial change or weakness of lease parties: Lessee, assignee, sublessee, bank, guarantor; (3) Lessee’s chronic defaults, breaches, late rental payments).

insert a third party into the transaction who is made responsible for certain obligations of the Lessee. These more formal approaches offer additional security if the Lessee should declare bankruptcy or become insolvent. Letters of credit (LOCs), for example, are recommended because they provide the greatest number of benefits to both parties and they are generally regarded as a less expensive alternative for Lessees to maintain and for Lessors to monitor. Additionally, the primary benefit to the Lessor is that, should there be a bankruptcy filing, the Lessor will, most likely, be able to draw on the LOC and to apply the funds as specified in the lease without violating the automatic stay entered in the bankruptcy proceedings.³¹⁶ The Lessor, however, should consider taking several precautions in drafting a security deposit provision that requires an LOC by:

1. ensuring that the bank issuing the LOC is financially stable;
2. requiring that the LOC renew automatically unless the bank provides notice otherwise;³¹⁷ and
3. stating that the LOC must be held for a sufficient period of time after lease termination in order to provide the Lessor with a sufficient amount of time to make any necessary repairs to the premises.

The advantages of an LOC to a Lessee are its relatively low cost and the express date and time for the return of the release of the LOC funds following the termination of the lease. The LOC funds are released automatically by the third-party bank after the condition establishing the LOC has been satisfied. There is no need for the Lessee to have continuing contact with the Lessor to obtain the release of the funds.

A guaranty offers another financial vehicle with which to fund a security deposit. A guaranty is an agreement by which a third party (the Guarantor) assumes the liability of a Lessee for part or all of the Lessee’s monetary obligations under the lease (rent, fees, and other charges) or, in some cases, for the performance of certain specified non-monetary obligations. The Lessee pays a fee to the guarantor for the benefit of the Lessor, and, in the event of a breach, the Lessor may obtain recourse from the Lessee or the guarantor. If the guaranty covers only monetary obligations, the Lessor is usually required to first obtain a judgment against the Lessee and, only then, may the Lessor proceed against the guarantor. If the guaranty specifies that the guarantor has responsibility for both monetary and non-monetary lease obligations, the liability of the parties to the guaranty takes on the characteristics of joint and several liability and the Lessor often may proceed directly against the guarantor.³¹⁸ There are, however, several qualifications to these rules that should be taken into account when drafting or reviewing guaranties and, as always, the law in the jurisdiction where the premises are located should be consulted.

The common law principles that guaranties are strictly construed and that ambiguities in the written document will be resolved in favor of the guarantor remain the majority rules.³¹⁹ However, a minority of jurisdictions take the opposite view and resolve ambiguities against the guarantor.³²⁰ Consequently, it is important to pay particular attention when drafting or reviewing a guaranty to make certain that the obligations specified in the document reflect the intention of the parties.

It is also important to review the law in the jurisdiction where the guaranty will be used in order to determine against whom any ambiguities in the document will be resolved and whether courts have developed any new circumstances in which a guarantor may be released from performance. Most often these rules and exceptions have developed in fact patterns where the parties have made material changes to the obligations under a guaranty without obtaining the consent of the guarantor (such as the assignment of a lease or some other amendment).³²¹ Accordingly, because guaranties are subject to certain well-established defenses (including unconsented lease modifications), some commentators view them as more complex and problematic than LOCs, even though it is common practice for a well-drafted document to require the guarantor to waive any or all of those defenses.³²² It is, therefore, important that all parties to a guaranty understand the obligations that will be assumed by the guarantor, the defenses that the guarantor will agree to waive and those that will remain in place, and whether the Lessor will be able to proceed directly against the guarantor or must first obtain a judgment against the Lessee before recovering on the guaranty.³²³

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³¹⁶ The theory underlying this method is as follows: The automatic stay in bankruptcy normally prevents a Lessor from issuing a notice of default to the debtor/Lessee. If the Lessor holds an LOC and is not required to give a notice of default to the Lessee before drawing on the LOC, there should be no conflict with the automatic stay. Because the bank that issued the LOC is the debtor in this case and not the Lessee, the bankruptcy stay should not prevent the Lessor from drawing on the LOC and using the finds as directed in the lease.

³¹⁷ This type of instrument is commonly known as an “evergreen” LOC because it automatically renews at the end of its term without any action required by the applicant. See generally https://content.next.westlaw.com/practical-law/document/Ic9fcca0376fc11e38578f-7ccc38dcbee/Evergreen-Letter-of-Credit?viewType=FullText&contextData=(sc.Default)&transitionType=Default&firstPage=true.

³¹⁸ There are those that see little practical difference between a Guaranty and a Surety. A surety, for example, offers the same protection for a Lessor and while the terminology may be different, the distinction between monetary and non-monetary obligations for purposes of filing a claim for compensation is not relevant. RESTATEMENT (THIRD) OF SURETYSHIP & GUAR. § 1 & n.34.

³¹⁹ E.g., State ex rel. Wagner v. Amwest Sur. Ins. Co., 738 N.W.2d 805, 810-11 (Neb. 2007).

³²⁰ E.g., Ameris Bank v. All. Inv. & Mgmt. Co., 739 S.E.2d 481, 486 (Ga. Ct. App. 2013).

³²¹ See generally 38A C.J.S. Guaranty §§ 96-98 (2024).

³²² For a full discussion of the defenses available to guarantors, see Stein and Wang, Revisiting the 24 Defenses of The Guarantor—24 Years Later, PRAC. REAL EST. LAW. 9 (Jan. 2012).

³²³ As one commentator has observed, it is, perhaps, most important for the Guarantor (and the parties) to concentrate their attention on the actual lease in order to understand the obligations that the Guarantor will and will not assume:

A Guarantor should live with waivers that make [the] Guarantor’s position no worse than Tenant’s, but reject waivers that put Guarantor in a worse position than if Guarantor had simply signed the lease itself. A careful

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Guarantor should also ask serious questions about the underlying Lease. Since Guarantor should end up with the same liability as if it had signed the Lease, Guarantor should care whether the Lease is a balanced document, reasonably negotiated for Tenant. A Lease defines a relationship far more complex than a Guaranty. Landlords want and usually achieve leases that favor Landlords, period. Guarantor will have to live with everything in the Lease. Rather than focus primarily on whether the Guaranty “favors” Landlord or Tenant, Guarantor should focus on the Lease itself. And, by delivering the extra credit support of a Guaranty, Tenant and Guarantor can in exchange sometimes obtain a more balanced Lease.

Joshua Stein, Model Lease Guaranty, https://real-estate-law.com/PDF/Model_Lease_Guaranty_100074.pdf

³²⁴ Some practitioners report the use of performance and payment bonds in addition to an LOC for the guarantee of rent. In such circumstances, Lessees may wish to require the general contractor bid and carry a payment bond (which, in any case, may be required by state statute) for the project. An example of a commercial lease guaranty document, containing all of the standard guaranty clauses, including a full waiver of all defenses, can be found at https://real-estate-law.com/PDF/Model_Lease_Guaranty_100074.pdf as well as the form contained in the Manual for Drafting Leases at 31.

³²⁵ Note that this provision identifies the airport’s policy for the requirement of a security deposit: (1) a tenancy at the airport of less than 12 months or (2) an overdue rent payment within a 12-month period.

³²⁶ Note that this security deposit provision allows the Lessee a choice between an LOC and a bond.

³²⁷ Note that this provision requires the Lessee to replenish the funds in the security deposit at Lessor’s request, but it does not set a deadline by which the replenishment must be completed.

³²⁸ Note that this provision not only sets the amount of the security deposit (25% of the estimated annual rental amount) but also provides a sunset clause.

³²⁹ Note that this provision provides that the Lessor must consent to the entity that provides the LOC or bond.

³³⁰ Note that this provision also provides the Lessee with the choice between a bond and an LOC and that the amount required as a security deposit by this provision is three times the amount of the rent charged.

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³³¹ Note that the Lessor reserves the right to adjust the security deposit, that the deposit must remain in place for at least one year, and that written consent from the Lessor is required for the termination of the financial instrument security the deposit.

³³² Note that this provision contains an 18-month, rather than a 12-month, expiration.

³³³ FRIEDMAN at 10-7.

³³⁴ 52 C.J.S. Landlord and Tenant §§ 974-75 (2024); AM. JUR. 2D Premises Liability §§ 16-17 (2024).

³³⁵ E.g., Anderson v. Hamilton Gardens, Inc., 229 A.2d 705, 710 (Conn. Civ. Ct. 1966).

³³⁶ See Annotation, Who as Between Landlord and Tenant, Must Make, or Bear Expense of, Alterations, Improvements, or Repairs Ordered by Public Authorities, 22 A.L.R.3d 521, 526-27 (1968 & Supp. 2022).

³³⁷ See generally RESTATEMENT (SECOND) OF TORTS § 357 (1965).

³³⁸ See generally AM. JUR. 2D Landlord and Tenant §§ 455-58. See also FRIEDMAN § 10:7.3 for a discussion of the legal theories of recovery and § 10:8.2 for a discussion of the Lessor’s damages flowing from a breach. See, e.g., In re Evergreen Ventures, 247 B.R. 751, 760 (D. Ariz. 1992); Ed Miller & Sons, Inc. v. Earl, 502 N.E. 2d 444, 450 (Neb. 1993).

³³⁹ See generally Annotation, Lessee’s Covenant to Repair, 20 A.L.R.2d 1331, 1339-42 (1951 & Later Case Service 2022); Annotation, Measure and Elements of Damages for Lessee’s Breach of Covenant as to Repairs, 45 A.L.R.5th 251 (1997 & Supp. 2022).

³⁴⁰ See FRIEDMAN at 10-158 to 10-159.

³⁴¹ Id. at 10-60 to 10-62.

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³⁴² Drafters may also wish to avoid using such vague and nebulous terms as “structural repairs”; damage due to “casualties” or the “elements” or “Acts of God”; and “events beyond control.” FRIEDMAN at 10-101.

³⁴³ Note that this section contains (1) the Lessee’s acknowledgement of an inspection of the premises; (2) its acceptance of the premises in their present condition; and (3) that the premises are suitable for the purposes of the lease.

³⁴⁴ Note that the Lessee acknowledges that the Lessor has not made any representations regarding the premises.

³⁴⁵ Note that the provision states that Lessor has no responsibility for repairing or maintaining the premises, but that the Lessee assumes those obligations.

³⁴⁶ Note that this provision refers the Lessee’s maintenance responsibilities to the more detailed statement contained in a more detailed airport regulation that is incorporated by reference.

³⁴⁷ Note that this provision requires the Lessee to accept responsibility for the maintenance of certain pavement sections.

³⁴⁸ Note that rather than specify particular kinds of conduct or behavior, this provision references the common law concepts of waste and nuisance.

³⁴⁹ Note that this provision both states the Lessee’s maintenance responsibilities in general terms and also incorporates those responsibilities in a separate exhibit attached to the lease.

³⁵⁰ Note that the Lessee is required to “replace and repair” as part of its maintenance obligations.

³⁵¹ Note that the Lessee is obligated to maintain certain specified pavement.

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³⁵² Note the inclusive standards for the Lessee’s maintenance obligation.

³⁵³ Note that the Lessee is required to perform an annual pavement inspection by a qualified specialist and to provide the airport with a copy of the report of the inspection.

³⁵⁴ Note that the section also includes the Lessee’s responsibilities regarding trash and recycling.

³⁵⁵ Note this provision, should the Lessee fail to meet its maintenance obligations, allows the Lessor to perform those obligations and to charge the Lessee.

³⁵⁶ Note that the section imposes an “administrative fee” for maintenance costs performed by the Lessor and billed to the Lessee.

³⁵⁷ Note that this section contains an unusual provision requiring the Lessee to waive damages against the Lessor for any loss or damage resulting from utility (sewer, gas, water, etc.) failures of any kind, except when caused by the Lessor’s conduct.

³⁵⁸ FAA Airports Contract Provision Guidelines for Obligated Sponsors and Airport Improvement Program Projects (Issued on May 24, 2023), https://www.faa.gov/sites/faa.gov/files/2022-11/combined-federal-contract-provisions-2022-11-17_0.pdf. These guidelines provide the required language for various contract provisions, including civil rights provisions and an analytical matrix for their application. Most GA leases are considered “non-AIP Contracts” for purposes of the matrix. But note that not all of the provisions identified in the matrix are required for GA leases.

³⁵⁹ The FAA Guidelines can be accessed at https://www.faa.gov/airports/aip/procurement/federal_contract_provisions/may_2023.