What is a Rider Agreement?
A rider is a supplemental document that increases or otherwise amends the terms of a pre-existing contract. It can be used to add obligations to a contract, delete provisions of the contract, explain contract provisions, or in any other way that the parties wish to use the rider to modify the underlying contract. Rider agreements are used by a variety of different industries and most typically in the residential leasing, commercial leasing and most frequently by automobile dealerships for vehicle leases and sales. Trader agreements have an equivalent in real estate known more commonly as an estoppel agreement.
In a real estate context , a rider agreement is generally a one or two page form document – usually using only the word "rider" in the title – which incorporates by reference a longer real estate lease or purchase and sale agreement and, therefore, makes the provisions of that longer document part of the shorter document. It is used to simplify document review. Without the rider agreement, however, the same document review is still necessary even if the lease or purchase and sale agreement were actually referenced in the document.
A lease rider agreement may also be for a shorter time period than the underlying real estate lease or purchase and sale agreement in order to allow the extension of the lease or purchase without rewriting the entire agreement.
Components of a Rider Agreement
While a rider agreement may seem like an additional document with a separate scope, the language in a rider agreement can be viewed as a distinct section of the main contract. So, for example, if the language in the rider agreement ends up in the middle of the main contract, that would not render the rider invalid because it functions as a coherent, singular document. A practical distinction, however, is that rider agreements often have a separate date of execution, such as the date the rider becomes effective. This fact is particularly important in analyzing potential legal remedies for a breach of a rider agreement that goes into effect prior to the end of the term of the main contract to which it is attached. The key components of a typical rider agreement are the following:
Different Types of Rider Agreements
Rider agreements can be broken down into a variety of different types depending on their function and purpose.
Insurance Rider: Used by an insurance company to clarify the scope of a property insurance coverage, adding and/or removing exclusions to a policy. In some instances, the rider would serve to modify the insurance policy and extend the terms of coverage to a property owner or contractor.
Entertainment Rider: Most commonly associated with the entertainment industry, these are used to outline specific requirements of performers that must be met by the location or production team, such as what food must be served or what transportation must be provided. Often used for high-profile films and actors, these are often extremely detailed and exhaustive in describing the requirements. Often, these documents have caused a bit of uproar when used by singers and bands that demand items such as stuffed animals, specific kinds of M&M’s and even high-end suites at hotels when they perform or stay somewhere.
Construction Rider: Used in the construction world to outline the requirements of a contract, not only between administrators and contractors, but also between contractors and suppliers. They set out the terms of the project security, liability, payment schedule and often, ways to resolve issues.
Drafting a Rider Agreement
Drafting a rider is an exercise in precision. Each provision must be precise enough to avoid ambiguity and specific enough to cover the situation at hand. In addition to clarifying the language necessary to avoid future disputes, a rider should also anticipate the issues or concerns each party may have. Changes to a standard form should be avoided whenever possible because modifying what has become a boilerplate agreement may not be in the best interests of all parties. In drafting a rider, it is essential to provide specific attention to the following:
1. Preamble. The Preamble language of a rider should state which of the Purchase and Sale Agreement terms are being overridden. The Preamble should also clarify if either party has additional rights or obligations resulting from other standardized forms. Listed next is a sample Preamble language: There is no earned deposit with respect to this Purchase and Sale Agreement until Delivery of Earnest Money as defined in Exhibit A, Paragraph 24 of this Purchase and Sale Agreement. Consequently, Section 5.B of this Purchase and Sale Agreement is revised to read: This Purchase and Sale Agreement shall not be binding upon the parties until such time (if any) as this Agreement is approved and signed by Purchaser and Seller and Purchase Price Earnest Money is Delivered, as defined in Section 24 of Exhibit "A", Paragraph 24 . THIS PURCHASE AND SALE AGREEMENT ______ DOES _____ DOES NOT 1. Form CO 10.1-6/81 or CU 2.1-1/79 is attached and incorporated herein, and The reference to either form shall only apply to this transaction if it is initialed in this box. 2. This rider covers the change[ s ] from GAC 2.2-9/79, 1-1/76, 1-3/79, 3-1/76, 3-2/76, 3-3/76, 3-4/79, 3-9/79, 6-1-5B/79; 200-1/84, 300-1/84, 300-3/76 or 300-3A/84; LSI 1-2/83, 5-1/81 or 8-1/86 form; OR from GAC Supplement 1-1/76, 2-1/78, 3-1/78, 4-1/89, 4-2/91, CUPA- 1/88, 2/90, 3/89 , 4/89 or 4A/88 form or any revisions to the same. Specific attention should be paid to the date the rider becomes effective and all contingencies, right-to-cure requirements and conditions precedent to closing should be readily apparent. If references to other exhibits or documents are made, the provisions of the particular exhibit or document referenced must be clear. Dates contained throughout the rider must be precise and consistent. Any term that is incorporated by reference from either the PSA or other addendum must also cross reference any necessary definitions. Attention to the context of the transaction is essential. Substantial amounts of money are generally at stake with the change in terms. The cost of a rider should not be an afterthought. Rider No. 1
Implications of Rider Agreements
Oftentimes rider agreements are not treated with the same formality as a primary agreement with regard to their legal significance. This is often the source of disagreement. The second most frequent dispute we have encountered is the disagreement between the rights granted under the primary agreement versus those granted in the rider agreement. The resulting confusion can be expensive.
Whether it is a modification or an amendment and restatement, it is essential that the primary agreement and rider agreement be viewed as a whole in terms of mutual consideration in order for the primary agreement to be legally enforceable. At the appropriate time, begin enforcing your rights as they are set forth in the rider agreement well before the primary agreement expires as a method of evidence of intent to enforce the rights granted.
What happens if all parties do not take the appropriate steps to finalize a rider agreement? The dispute ends up as litigation with oppositional positions taken because of the lack of communication. Attempts to settle in the past may come back to haunt both lessee and lessor alike. What if the lack of communication after the rider is placed in a table of contents was that of the management landman and not the landman who negotiated the deal? An oral agreement to extend the term of the primary agreement would not be in writing or signed. The rider would be considered an exclusion from the primary agreement and therefore would trigger the thirty day limitations period on excluding acreage from the primary agreement. The net result may be that the lessor has failed to opt out of the primary agreement. It would be as if the primary agreement had never been executed.
The key to avoiding disagreement over a rider agreement is for everyone involved to know and understand the significance of the rider agreement in advance. If you discussed the terms and conditions with your client, then document that conversation in your case notes. Confirmation of a rider agreement takes place prior to the expiration of the primary agreement, or the end of the primary term, in any event. If a rider agreement is not yet completed, it is essential as a matter of practice and client communication that all parties involved know what is going to happen at the expiration date.
Rider Agreement Examples
While many think that rider agreements and their short-form, but detailed nature is customarily used on more sophisticated transactions, we have been experiencing an increase in such agreements in the context of smaller private financings of less well-known companies by private investment funds. For instance, in one recent transaction, the fund entered into a short-form rider agreement with a portfolio company in respect of a particular investment of less than (i) $10 million and (ii) three months duration to put in place customary representations, warranties and covenants that the fund considered important to have in a financing document (fundamental representations, purpose, use of proceeds and representations and covenants regarding access to the portfolio company’s financial information). As the investment was small and short in duration, the report provided to the fund’s investment committee was also short, and the fund had no issues with establishing its formal reputational and business practices over years of investing in and working with such portfolio company.
In another example , a fund’s investment in public companies had historically been documented with relatively lengthy rider agreements. In light of the increasing pace of its investments and growth in number of portfolio companies, the fund found it increasingly inefficient to continue using its previous form. To address this issue, the fund began revising its rider agreements in a manner similar to that reflected in the examples above and execute them as a matter of course when the fund makes its investment in a new public company. The fund frequently incorporates pick-off provisions from the rider agreements in the respective credit, control and confidentiality agreements it signs with its material portfolio companies. Against this background, it is clear that short-form rider agreements can serve not only as stand-alone documents, but can also be referenced in or appended to financing documents and then incorporated by reference into other material agreements, thus streamlining the documentation process for an investment.