Mr. Clement Yow Mulalap’s Legal Analysis of ETG’s Land Lease Agreement (Template)
[Website Manager’s Note]
The following post originated from a facebook discussion. The topic was about the template (blank form) of lease agreement between ETG and Yapese landowners. Mr. Henry Norman posted the annotated lease agreement (link). Mr. Clement Yow Mulalap provided his legal analysis of the offered lease template.
This information is crucially significant to each person in Yap. Please take time to read the lease agreement template, and the analysis.
On ETG’s Land Lease Agreement (Template)
Henry K.O. Norman uploaded a file.
If you are the owner of land in Yap State, I recommend that you peruse the “agreement template” written up by the ETG PIIIGs… I received a copy of the document, in PDF/scanned format, and took the liberty to annotate it with highlights (“felt tip pen color”) and my personal footnotes.
This type of “agreement” leaves the land owner utterly and completely powerless after signing, giving absolute power over the leased property to the Lessee: no rights whatsoever is granted to the owner or the land, or future heirs thereof.
This “agreement” also makes it very complicated and expensive—FSM Supreme Court is the mandated court where to bring legal complaints—to file any kind of legal complaint after the execution of the “agreement”.
Note also that the ETG PIIIGs are trying to “sneak in” an “automatic term extension” of an additional 100 years (!) at the end of the first 99 year term! With the provision for “doubling” of the rent after 99 years… How generous is that?
Legal Analysis of ETG’s Land Lease Agreement (Template)
Thank you to Mr. Norman for posting a copy of ETG’s lease template in this group. (See here: http://www.facebook.com/groups/404462399564440/566223646721647/) Mr. Norman has done a good job of highlighting some troubling provisions in the template, and I urge everyone to read Mr. Norman’s comments when you can.
For my post, I will reiterate and clarify some of Mr. Norman’s comments about the template, as well as offer comments of my own. My primary purpose in this post is to highlight the provisions in the lease template that private Yapese landowners need to be wary of if they wish to lease their land to ETG for ETG’s proposed Project. Many of the provisions in this template are boilerplate, i.e., are common language in typical real estate lease agreements. I will focus on those provisions that are relatively novel and/or should be of concern for private Yapese landowners.
[T]he Lessee [i.e., ETG] shall be entitled to remove any and all buildings, fixtures or other facilities; to alter the Leased Property in any way; to remove and/or replace soil, rock and plant life of all kinds including food plants; to fill the land at Lessee’s sole discretion; and to conduct any construction, reconstruction or alteration of the Leased Property in any way without limitation and without the consent of the Lessor [i.e., the landowner.
It does not have to be this way. The private Yapese landowner can insist that ETG shall not conduct certain activities on the leased land. The landowner has every power to impose restrictions on the use of the leased land, restrictions that will apply for the entire duration of the land lease. If the landowner wishes that certain plant life, or certain land areas, or certain trees should not be disturbed by ETG’s activities on the leased land, then the landowner can insist on that in a final lease agreement. If the landowner wishes to prohibit ETG from erecting certain types of buildings or other structures on the leased land, then the landowner can insist on that in a final lease agreement. If the landowner does not want ETG or anyone invited by ETG to engage in certain activities on the land (e.g., holding concerts, burning the ground for “bonfires,”), then the landowner can insist on that in a final lease agreement.The landowner can do more than prohibit ETG from doing certain things on the landowner’s land. The landowner can insist on entering into a business partnership with ETG, so that the landowner participates in ETG’s Project activities on the land and earns income along with ETG if/when the Project produces revenues. The Yap State Department of Resources and Development used to advocate for a landowner-investor partnership model when it comes to foreign investors leasing Yapese land for their investment activities. A private Yapese landowner who wishes to lease land to ETG can put this policy into practice. Be creative. Be entrepreneurial. Be firm.• According to Article 1.3 of the lease template:—————————————————-The ownership of all the buildings, fixtures, facilities and equipment built or constructed by the Lessee on the Leased Property (the “Assets”) for the purpose of such changes or alterations belong to the Lessee or any third party approved by the Lessee. The Lessor shall not own, control or dispose of the Assets. The Lessee or any third party approved by the Lessee is entitled to transfer, assign, sublease, mortgage, pledge or otherwise encumber all or part of the Assets, without the prior consent from the Lessor. —————————————————-Additionally, according to Article 1.4 of the lease template:
[T]he Lessee is entitled to assign or sublease the Leased Property, without the prior consent from the Lessor.
Article 1.3 basically means–as Mr. Norman notes in his comments–that ETG owns anything and everything that it builds, constructs, or otherwise brings to the land that it leases for purposes of the Project. The landowner has no right to control any of those Project assets. Furthermore, ETG can transfer any of those Project assets to any third party without getting the consent of the landowner.
This is something that I discussed a long while back when I posted about leases in this group. My recommendation–and the recommendation of others–is that a private Yapese landowner should retain ownership of any Project assets on his leased land after ETG’s lease ends. Article 1.3 of the lease template prohibits that, but the landowner can insist on altering/deleting that provision.
Article 1.4 is very significant. Essentially, the Article allows ETG to transfer any interest that ETG has in leased land to a third party without getting the consent of the landowner. If that third party is an individual or entity that is loathsome for the landowner, the landowner cannot prevent ETG from bringing that third party in and letting the third party take either part or all of ETG’s interest in the leased land. If the landowner wants to have a say in that transfer of interest, then the landowner must amend the lease template to reflect that power on the landowner’s part.
(For more discussion about landowners owning Project assets after lease termination, as well as about restricting ETG from transfer any assets/interest in land to a third party, see:http://www.facebook.com/groups/404462399564440/477953578881988/)
Clement Yow Mulalap • According to Article 3.2 of the lease template, ETG will begin paying rent on leased land as soon as ETG takes possession of the leased land, unless otherwise agreed to by ETG and the landowner. As I have stated repeatedly in this group, ETG is prohibited by the signed Cooperative Investment Agreement with the State of Yap to “develop” its proposed Project in Yap unless and until the State reviews and approves ETG’s Master Plan. In my opinion, ETG cannot enter into a final lease agreement with a Yapese landowner before that Master Plan is reviewed and approved, because entering into lease agreements is a necessary component of “develop[ing]” any investment project. And yet, the lease template allows ETG to not only finalize the lease agreement, but to also start paying rent on the leased land—i.e., to actually expend financial resources—without having to wait for the State to review and approve ETG’s Master Plan. This is improper, in my opinion, and the Anefal Administration (as a signatory to the signed Investment Agreement) needs to step in and put a stop to ETG’s land leases for as long as the State has not approved ETG’s Master Plan.
In the meantime, while we wait for the Anefal Administration to do its duty, the landowner who wishes to lease land to ETG can insist on inserting a provision into the lease agreement that says that ETG cannot take possession of the targeted property unless and until the State reviews and approves ETG’s Master Plan. If the landowner cares about what ETG plans to do on his or her land, then the landowner should insert such a provision. Even if the landowner does not care about what ETG does on the targeted land, the landowner should care that ETG may stop paying the rent on the land if the State does not approve ETG’s Master Plan. It will be very tragic if the private Yapese landowner begins to make elaborate plans for the money received from the lease rents and actually changes his current living circumstances in anticipation of that money, only for that money to just dry up if/when the State rejects ETG’s Master Plan.
Clement Yow Mulalap • According to Article 3.2 of the lease template, and as Mr. Norman notes in his comments, ETG is not obligated under the lease agreement to help Yapese relocate from leased land. Here is the language from Article 3.2:
Lessor [i.e., the Yapese landowner] agrees to relocate from the Leased Property in accordance with the terms of [the lease agreement] and to accomplish relocation of himself or herself on or before the Possession Date [for the land] and also to accomplish the relocation of any other persons who may be on the Leased Property at the invitation or with the consent of Lessor not later than the Possession Date.
As Mr. Norman reminds us, a fairly significant component of ETG’s Powerpoint presentations and brochures about the proposed Project was ETG’s promise to build new “towns” in which ETG will relocate Yapese who are displaced from land that they lease to ETG. According to Article 3.2 of the lease template, though, ETG has no such obligation. Any relocation is the responsibility of the displaced Yapese.
A Yapese landowner interested in leasing land to ETG—and who lives on the leased land and/or whose relatives/offspring live on the leased land—can insist in a final lease agreement that ETG construct suitable new living quarters for the displaced individuals before ETG can take possession of the leased land. The landowner can specify how the new living quarters should be.
Clement Yow Mulalap • The lease template does not grant the private Yapese landowner any right whatsoever to unilaterally terminate a finalized lease agreement without suffering legal consequences. However, the template DOES give ETG the right to terminate a finalized lease agreement unilaterally in several circumstances. Those circumstances are laid out in Article 7.4 of the lease template.
It bears mentioning that one of those circumstances, as laid out in Article 7.4.3 of the lease template, occurs when the “purchasing of land by non FSM citizen or corporation not wholly owned by FSM citizens is allowed by local laws.” If you recall, according to the FSM Constitution, non-FSM citizens and corporations (like ETG) that are not wholly owned by FSM citizens cannot own land in the FSM. The inclusion of this provision in the lease template indicates that ETG is keen on purchasing land in Yap if/when the law allows it. According to Article 7.4.3 of the lease template, ETG will terminate the lease agreement as soon as the law is amended to allow ETG to purchase land in Yap. The private Yapese landowner who leases the land to ETG cannot stop ETG from terminating the lease agreement on its own when that circumstance arises.
This does not have to be the case. The landowner can delete this provision in the lease agreement (i.e., Article 7.4.3) so that ETG cannot use the change in law regarding land ownership to unilaterally terminate the lease agreement.
Clement Yow Mulalap • According to Article 11.1 of the lease template, ETG has a “right of first refusal” on leased land if the landowner wishes to transfer/sell the land to some other Yapese during the time that ETG leases the land. That right essentially means that ETGhas first priority when it comes to acquiring the land that the landowner wants to transfer/sell. If ETG does not exercise that right of first refusal, the Yapese landowner still cannot transfer/sell the land to another Yapese unless that other Yapese agrees in writing to comply with the terms of the lease agreement. In normal real estate contracts, a “right of first refusal” is supposed to be exercised within a set number of days after the property is put up for transfer/sale, but in ETG’s lease template, there is no set deadline, which means that ETG can effectively exercise that right whenever it wants, even if it means holding up the transfer/sale to the third party indefinitely. This is a very expansive power for ETG, one that ETG can use to prevent anyone from acquiring the land that ETG wishes to lease until such time that ETG can acquire the land on its own (perhaps when the FSM Constitution is amended to allow ETG to own land in the FSM).
A private Yapese landowner who wishes to lease land to ETG does not have to give ETG the “right of first refusal” in any way. ETG is not entitled to that right simply because ETG is leasing land from the landowner. The landowner can insist that ETG will have to compete with all other parties interested in the land, without getting any special treatment. Otherwise, if, for example, another foreign investor comes along that is interested in the landowner’s land, the landowner will not have full freedom to engage in a land transaction with that new investor.
Clement Yow Mulalap • According to Article 11.2 of the lease template, and as Mr. Norman notes in his comments, if a dispute arising under a finalized lease agreement is not settled informally by ETG and the private Yapese landowner within 60 days after one Party notifies the other Party of the dispute, then the dispute has to be submitted to the FSM Supreme Court (presumably its trial division). This means that the dispute cannot go through the Yap State Court, even though the Yap State Court is more familiar with conditions in Yap and with Yapese customs and traditions dealing with land than, I suspect, the FSM Supreme Court. ETG clearly prefers to go through the FSM Supreme Court rather than the Yap State Court.
This does not have to be the case. The landowner can insist in a final lease agreement that any disputes arising under the lease agreement must go through the Yap State Court rather than the FSM Supreme Court. The landowner has every right to insist on that dispute resolution approach, and it will be advantageous for the private Yapese landowner to go through a court that is quite familiar with how land matters are handled in Yap.
Clement Yow Mulalap • Section II of the lease template deals with the original length of the lease agreement, and Article 9.1 of the lease template deals with renewing the lease agreement after the original term is over. Section II makes it very clear that ETG intends to lease land for no less than 99 years. Whereas other parts in the lease template are blank and await filling-in at a later date, the provision on 99 years is pre-filled, not blank. ETG’s reps have made it clear in the past that ETG will not settle for a lease of less than 99 years.
This does not have to be the case. A private Yapese landowner interested in leasing land to ETG can negotiate any length of time for the lease term, as long as the length is no more than 100 years.
While negotiating the original durational term for the lease, the landowner needs to be aware of Article 9.1 of the lease template, too. Here is Article 9.1 in full:
Unless otherwise agreed by the Parties, upon the expiration of the Term as set forth in Section II herein, at the request of the Lessee [i.e., ETG] or its approved third party, the Lessor [i.e., the landowner] shall renew the land lease agreement for an additional one hundred (100) years lease term with the Lessee or the third party approved by the Lessee.
As Mr. Norman notes in his comments, this provision essentially means that after the original lease term is over, the lease agreement will AUTOMATICALLY RENEW for 100 years if ETG wishes to renew the lease. The landowner does not have any power to prevent that automatic renewal, unless the landowner AND ETG come to a different arrangement before the original lease is up. It is not enough for the landowner to say that he does not wish to allow the lease to be renewed for 100 years. The landowner also needs to get ETG to agree not to renew the lease for 100 years. If ETG insists on renewing the lease, then the lease will renew for 100 years, no matter what the landowner says.
This does not have to be the case. A private Yapese landowner who wishes to lease land to ETG can strike out Article 9.1 of the lease template, which will force ETG to come back to the negotiating table after the original lease is up and strike a new lease agreement with the landowner. The important point is that the power to renew the lease must be in the hands of the landowner, NOT ETG.
Clement Yow Mulalap • Private Yapese landowners are probably most interested in rent payments under the lease template. The two main provisions on rent payments are Article 4.1 and Article 9.1. According to Article 4.1, ETG will first pay what is called an Initial Rent,which is basically a certain rent that ETG will pay every month for the first ten years of the original lease. After the first ten years are over, ETG will increase the monthly rent by 10% for the next ten years. After that second decade is over, ETG will increase the monthly rent by 10%–however, this is 10% of the INITIAL RENT, not of the higher rent in the second decade of the lease. This will continue until the original lease ends.
After the original lease ends, ETG will likely attempt to renew the lease. Article 9.1 of the lease template also says that if the original lease is renewed, then the “[t]erms and conditions of such renewed lease agreement shall be consistent with [the original] Agreement but the Rent under such renewed land lease agreement shall be doubled based on the Initial Rent herein.” What this means is that if the lease is renewed, then ETG will pay double the rent for the land that it pays in the first ten years of the original lease (i.e., double the Initial Rent, as discussed above). This may sound enticing for the landowner. However, it is important to note that according to Article 9.1 of the lease template, the landowner CANNOT negotiate a new rental rate and rental payment schedule for the lease renewal period; rather, the landowner is stuck with the doubling of the rent that Article 9.1 prescribes. This means that if ETG pays the landowner, say, $300 a month for leased land during the first ten years of the original lease, then ETG will only have to pay $600 a month for the land in the lease renewal period. If ETG’s activities on the leased land generate over, let’s say, $100,000 per year after the original 99-year lease, then this doubling of the original rent is not so generous. Unfortunately, given the way Article 9.1 of the lease template is worded, the landowner cannot negotiate a higher increase than the doubling provided in Article 9.1.
This needs to be emphasized: ETG’s aim in Article 9.1 is to lock in a certain low rental rate nearly 200 years in advance. How does ETG do this? Simple. When ETG negotiates the original lease agreement, ETG will try to make sure that the initial rent paid by ETG will be as low as possible. That way, when ETG triggers the automatic renewal of the lease agreement for 100 years after the original 99-year lease is up, ETG will not have to worry about the landowner demanding much, much higher rents. Instead, the landowner will be stuck with receiving no more than double the Initial Rent that ETG pays during the first decade of the original lease. Unlike with the original lease, there is no 10% increase per decade during the 100-year lease renewal period. Thus, ETG will lock in how much rent it will pay to the landowner 199 years in advance, based on how much ETG’s Initial Rent is during the first decade of the original lease. This is very crafty and beneficial for ETG, and very problematic for the landowner.
Furthermore, according to Article 9.1 of the lease template, the terms of the renewed lease agreement must be “consistent with [the terms of the original] Agreement.” What this means is that the landowner cannot alter the terms of the original lease agreement when the lease is renewed. If the landowner does not take care of every contingency and eventuality in the original lease agreement, then the landowner cannot try to insert new provisions in the renewed lease agreement to account for changed circumstances, if those new provisions alter any of the provisions in the original agreement. Those original provisions are locked in.
The simplest way to resolve this is to alter Article 9.1 of the lease template, so that the landowner and ETG have to come back to the negotiating table to renegotiate a new lease agreement after the original lease is over, including a new lease rental rate. Also, as Mr. Norman notes in his comments, the landowner can insist that ETG and the landowner renegotiate ETG’s rental rate periodically—say, every 15 to 20 years during the original lease and during a lease renewal period (if the lease is renewed). This renegotiation is key. It is not wise for the landowner to be stuck with a set rental rate for nearly 100 years (if not nearly 200 years), given the rate of inflation and the possibility that ETG’s proposed Project may become incredibly lucrative—much, much more lucrative than $300/$600 a month for nearly 200 years. It is also not wise for the landowner to be stuck with the provisions of an original 99-year lease for an additional 100 years, since so many things can happen during the original 99-year lease that reveal the need to amend the terms of the original lease agreement if the lease is to be renewed.
Clement Yow Mulalap In my opinion, ETG’s lease template is written to strongly favor ETG, to the severe detriment of the private Yapese landowner. This is why it is so crucial for private Yapese landowners to seek expert legal counsel if they wish to lease their land to ETG. The landowners must bargain from the position of strength that they possess. They own the land. ETG wants the land. Make ETG pay dearly for the privilege of using land in Yap.
Clement Yow Mulalap Finally, and on a personal note, I must confess that, as a Yapese, I am astounded by how far ETG goes in the lease template to secure land in Yap for its proposed Project. We have talked in this group on a number of occasions about corporate social responsibility. ETG’s reps have repeatedly asserted that they have the best interests of Yap and her people at heart—that ETG’s proposed Project will truly be a “win-win.” However, can a corporation be considered socially responsible–can a corporation be considered truly concerned about the welfare of the community where it operates–if the corporation intends to snap up land in that community for nearly 200 years, pay very little for that land, and do whatever it wants on that land without any input/participation whatsoever from the landowner? We need to consider ETG’s approach and behavior in this situation; the opening offer of a negotiating partner says a lot about that person/entity, and in my personal opinion, ETG’s lease “template” reveals ETG’s true colors.
Download the lease template with Mr. Clement Yow Mulalap’s legal analysis and Mr. Henry Norman’s highlights ETG PIIIG Land Lease Agreement Template-annotated and with analysis (Ref)