Tag: commercial leases

Importance of Negotiating Assignment and Subletting Provisions in Health Care Leases

In our ongoing series of blog posts, we examine key negotiating points for tenants in triple net health care leases. We also offer suggestions for certain lease provisions that will protect tenants from overreaching and unfair expenses, overly burdensome obligations, and ambiguous terms with respect to the rights and responsibilities of the parties. These suggestions are intended to result in efficient lease negotiations and favorable lease terms from a tenant’s perspective. In our first two blog posts, we considered the importance of negotiating initial terms and renewal terms and operating expense provisions. This latest blog post in our series focuses on negotiating assignment and subletting provisions.

It is imperative for a commercial tenant, particularly a private equity-owned health care tenant, to include provisions in a lease which allow the tenant the flexibility to assign and sublease the commercial space without the necessity of having to obtain the landlord’s consent and/or to meet burdensome landlord conditions.

Most leases prohibit transfers by assignment and subletting or require landlord’s prior written consent subject to meeting certain burdensome conditions. In addition, landlords often include a “change of control” provision which provides that sale of a controlling interest is deemed a transfer requiring landlord consent. A health care tenant looking for flexibility for reorganization or internal transfer subject to private equity control will want to push back on change of control provisions and will want to ensure that their lease allows for certain permitted transfers that do not require landlord consent. Carving out “permitted transfers” customarily includes transfers to: (i) an affiliate of the named tenant under the lease (meaning, any entity, directly or indirectly, which controls, is controlled by or is under common control with tenant); (ii) a successor entity created by merger, consolidation or reorganization of tenant; or (iii) an entity which shall purchase all or substantially all of the assets or a controlling interest in the stock or membership of tenant. If the tenant is a management services organization (MSO), the lease should also include explicit landlord permission for a sublease between the MSO and the provider that will occupy the leased premises.

Landlords may accept the concept of permitted transfers but often seek to impose certain conditions to allowing such transfers. Certain conditions on permitted transfers are reasonable, such as requirements for advance notice, that the proposed permitted transferee assume all obligations under the lease, that the permitted transferee operate only for the permitted use set forth in the lease, and that a copy of the transfer document be provided to landlord. However, other conditions, such as requiring a net worth test for the assignee or financial reporting requirements, can be burdensome and serve to undermine the concept of permitted transfers without landlord consent. We advise our clients in these instances to push back or limit these conditions as much as possible.

Other common assignment and subletting provisions should expressly not apply to permitted transfers. These include recapture provisions which allow a landlord to terminate the lease and recapture the space, excess profit provisions which provide that any excess profits realized as the result of a transfer will be shared between landlord and tenant, and administrative fees and reimbursements to landlord which are often charged to tenants in connection with an assignment or subletting request. Restrictions on transfers should not apply to guarantor entities. Often with private equity, the guarantor is the parent entity and cannot be restricted by a landlord as to transfer, restructuring or reorganization at the top of its organization.

In the case of transfers that do not fall within the definition of “permitted transfers” and require landlord consent, a tenant will want to include language that landlord will not unreasonably withhold, condition, or delay such consent. Other tenant protections should also be considered, including a cap on administrative and review fees reimbursable by tenant to landlord, a reasonably short time period for landlord to approve or disapprove a request (i.e., 30 days) or be deemed to have approved, a reasonably short time period for landlord to exercise recapture rights or be deemed to have approved, and a provision that excess profits will be shared equally rather than all belonging to landlord.

Negotiation of assignment and subletting terms is critical for tenants, particularly with respect to private equity-owned health care tenants. The goal for tenants in negotiating these points is to provide flexibility for addressing future financial and operational needs. As with other highly negotiated lease terms, we recommend addressing assignment and subletting provisions in detail in advance in the letter of intent. This makes expectations of the parties clear, saves time and money by avoiding protracted negotiations, and results in an overall efficient lease negotiation process.

In our next post, we will cover the importance of negotiating maintenance and repair terms and will offer suggestions for limiting a tenant’s exposure.

©2024 Epstein Becker & Green, P.C. All rights reserved.
For more news on Health Care Leases, visit the NLR Health Law & Managed Care section.

Issues Facing Commercial Mortgage Lenders in the COVID-19 Pandemic

The far-reaching impacts of the COVID-19 pandemic will create challenges for commercial mortgage lenders and their borrowers. Rents, and therefore borrowers’ ability to make debt service payments, will be curtailed as, for example, retail tenants are forced to shutter their businesses and apartment dwellers face economic hardship on a rising tide of unemployment. In this environment, lenders will face tough decisions on how to proceed with transactions that have yet to close and with closed transactions that are running into trouble.

Deals in the Pipeline

In the commercial real estate world, whether you are a borrower or a lender, one question you will be asked countless times during the pandemic is, “What do you have in the pipeline?”

From the commercial mortgage lender’s perspective, the pipeline likely means the loan transactions for which a term sheet or a commitment letter has been issued to a borrower, and for which no closing date has been set or for which various closing conditions have not yet been satisfied. Most loans require as a closing condition that on the date of closing, no adverse change in the economic viability of the project or the borrower shall have occurred since the date the loan terms were agreed upon. Given the extreme economic uncertainty now pertaining in the United States, and virtually everywhere else, it is hard to imagine a lender with deals in the “pipeline” that is not asking, “Do I have to fund?”

Many times the answer to this will be found in the list of closing conditions set forth in the term sheet or commitment letter. The condition addressing material adverse changes can vary greatly from lender to lender and deal to deal. One version of this condition is the following: “The absence of any material disruption or material adverse change in current financial, banking, or capital market conditions that in the sole judgment of the lender, could materially impair the loan.” The clause may also appear more simply and require only that there is “no material change in the market value of the project or condition of the borrower.”

As long as this terrible pandemic is impacting the country, it would seem to be nearly impossible for a lender to be able to accurately underwrite an asset under existing conditions, even one for which it had planned to lend against as recently as two and a half weeks ago. Borrowers who have based major equity investments and personal guaranties on the value of a project will have the same concerns.

However, there are borrowers that retain confidence of the same level as they had a month ago, and who may insist on closing. It will behoove lenders with deals in the pipeline to immediately review the closing conditions in their documents to determine the answer to “Do I have to fund?”  If the answer is “no,” a lender could decide to either close regardless or terminate the transaction. However, a third option also exists, whereby a lender could invoke the material adverse change clause as the basis for introducing new lender protections to the deal. For example, a lender could require that the borrower fund a debt service reserve at closing, require additional guaranties, or require that the loan terms include cash management features such as a lockbox.

Modifications to Loans That Have Closed

With the economy in turmoil, borrowers will be contacting secured lenders to discuss their actual or anticipated inability to make debt service payments. Most lenders will require that borrowers in distress propose specific modification terms, as opposed to non-specific requests for relief. A borrower might request modifications such as a reduction in the interest rate, the conversion of an amortizing loan to require interest-only payments for a period, or some other waiver, reduction or deferral of payments. A borrower might also want to take the approach of adding investors to its capital stack, and therefore request that the lender consent to the addition of one or more new equity partners.

When faced with such requests, a lender will need to perform its underwriting on the proposed modifications to determine their feasibility and prudence. It would therefore be appropriate for a lender to ask for additional property and financial information and reports, perform a site visit, and require additional due diligence materials such as title, judgment and lien searches.

Such borrower requests for relief also present the lender with an opportunity to better protect itself. Upon receiving a loan modification request, a lender should review its loan file in order to identify and correct any deficiencies.The following are but a few of the inquiries that should be included in such a review of the loan file. Are any documents missing?  Have all documents been properly recorded or filed?  Do the documents contain any errors?  Is all insurance up to date with the lender properly named?

In the end, a lender might agree to the borrower’s requested loan modifications (or some variation thereof). The lender could also add its own conditions to the changes requested by the borrower. For example, a lender could require new reserves, a letter of credit or other additional collateral, a new guaranty and/or new cash management arrangements.

If some sort of a deal seems possible, the lender should require a pre-negotiation agreement before discussing terms. If it turns out that a deal is not to be had, the lender might agree to enter into a forbearance agreement, in order to give its borrower time to turn things around or find takeout financing. Both of these types of agreements are discussed in more detail below.

Pre-Negotiation Agreements

Before having any substantive discussions, the lender should require any borrowers and guarantors (the “Borrower Parties”) sign a “pre-negotiation” or “pre-workout” agreement (“PNA”) in order to allow the parties to have frank and open discussions about a potential resolution to the borrower’s distress. The PNA should, at a minimum, provide the current status of the loan, including the admission of any defaults, and have the Borrower Parties admit the genuineness of the loan documents. The PNA should also (1) provide that any negotiations, discussions, draft documents, or loan modification proposals are non-binding until a definitive agreement is executed, (2) include provisions preserving the lender’s rights and remedies under the loan documents, (3) provide for the mutual termination of the PNA by either party for any reason, and (4) confirm the ground rules governing settlement discussions, including that all discussions and writings be confidential and inadmissible for evidentiary purposes. Finally, and most controversially, the lender could require a full general release from the Borrower Parties to protect the lender from future lawsuits.

Forbearance Agreements

Because a lender may want to give the Borrower Parties some breathing room, one option is for the lender and Borrower Parties to execute a forbearance agreement. The purpose of such agreement is for the lender to agree to wait to begin exercising remedies (namely, foreclosure or suing personal guarantors), while giving the borrower time for the economy to recover or to seek refinancing. In exchange for the lender agreeing not to proceed against the Borrower Parties, the Borrower Parties should reaffirm the validity of the loan documents, the amount due on the loan, and provide the lender with a general release through the date of the Forbearance Agreement. The lender also can require the borrower to make reduced payments during the forbearance period. Lastly, the parties could use the forbearance agreement to cure any defects in the loan documents discovered after closing.

Conclusion

The economic impact of the COVID-19 pandemic spells bad news for commercial mortgage borrowers. In this environment, lenders will need to re-examine transactions that are currently in their pipelines. In addition, lenders should expect an uptick in requests for relief from borrowers of closed loans. In these uncertain times, lenders will need to be careful and exercise diligence in deciding how to proceed with troubled properties.

© Copyright 2020 Sills Cummis & Gross P.C.

For more on COVID-19 impacts on real estate and beyond, see the Coronavirus News section of the National Law Review.

Rent Relief Considerations in the Time of COVID-19

“In any moment of decision the best thing you can do is the right thing, the next best thing is the wrong thing, and the worst thing you can do is nothing,” said Theodore Roosevelt.

By now, everyone recognizes the havoc and uncertainty of the Coronavirus’s impact on almost every aspect of the commercial real estate sector – e.g., 630,000 US retail locations have closed, with the office and other sectors experiencing similar impacts. The duration of this crisis is uncertain, but in this evolving situation, every landlord, tenant, lender, and investor is processing and planning next steps with respect to their real estate relationship counterparties (while at the same time determining the applicability, if any, of insurance coverages; the applicability, timing, and requirements of government stimulus programs, such as the CARES Act; and countless other business continuity challenges). As April rents and debt payments come due or past due, many have already reached out to their counterparties (or their lawyers) to discuss short term solutions. These conversations are important to have.

While each situation may have unique aspects, and the lease language and overall relationship between the parties play a significant role in the outcome, there are some possible approaches for landlords and tenants to consider at this time including the following:

Rent Deferral: An agreement to defer all or a portion of rent (be it fixed or basic rent and some or all of the additional rent components – operating costs, taxes, insurance, etc. – due under the lease) for a defined period – say 60, 90 or 120 days. Deferred rent would then be repaid at some later date either in a lump sum or amortized (with or without an interest component) and repaid over a defined period once full rent commences – ideally, from a landlord’s perspective, quickly following full rent commencement, but this may vary based on many factors, including the tenant’s business operations and the landlord’s asset “hold” period. Restructured short-term repayment agreements deliver some immediate structure and “certainty” while providing tenant rent relief and maintaining the landlord’s cash flow under the lease, albeit restructured and extended, without adding defaulting tenants to the rent roll.

Rent Abatement/Tolling: An agreement to simply abate or “toll” rent (again, all or a portion of the various rent components) for a fixed period. After the abatement period, rent would recommence. This abatement approach provides tenant breathing room and cash flow relief but does not address the landlord’s on-going obligations – debt service, taxes and operating costs (although the landlord may be seeking similar relief from some of these). Accordingly, a landlord may resist this or add the abatement or tolling period to the end of the lease term (at what may then be higher rents).

Rent Reduction: An agreement to simply reduce rent for a short period of time to get tenant over the “hump” of the crisis while maintaining some level of cash flow to the landlord. While more economically favorable to the tenant than the landlord, this approach may provide other relationship benefits when coupled with other factors, such as an agreement to exercise (or not exercise) an extension or other option, future rent restructuring or other agreement.

Tapping the Security Deposit: An agreement or understanding that a landlord can apply some or all of the cash security deposit to rent shortfalls may provide a liquidity solution for both parties during the short term. The agreement could include replenishing of the security deposit at a later date or over time, or treat the reduction as a burn-down or burn-off.

Hardline: Some landlords and tenants will elect a more aggressive approach – exercising defaults and further remedies based on non-performance, or asserting that non-performance is excused or extended during the current Coronavirus pandemic based on lease language or legal doctrines (e.g., force majeure, impossibility or impracticability, frustration of purpose, etc.). In some situations, this approach may be appropriate. For instance, non-performance where a tenant is clearly not impacted or where the lease documents unambiguously prohibit such non-performance (e.g., a fully-net ground lease). It is also likely that a few will use this situation as a pretext for unrelated non-performance. Regardless of merit, these positions may simply set a difficult tone during and after the resolution, and the current court closures and restrictions (and likely backlog when those abate) won’t easily or quickly allow for a judicial determination.

Other considerations include the following:

Realistic Expectations: Set and seek goals that are practical and reasonable in terms of economics and duration and workable for all parties to the extent discernible and practical. While unilateral actions may be or become necessary, a mutually agreeable short term solution to span this crisis will likely leave parties in better positions post-Coronavirus impact.

Transparency: In order to seek and obtain relief, the requesting party should be willing to provide some level of transparency and evidence of hardship if requested. At the same time, while a showing of need may be important, requests for this information should be realistic and practical given the situation and fit the scope of the tenant and situation – rather than an exhaustive list difficult to quickly provide in current circumstances. This shouldn’t simply be a hurdle landlords use to reject requests, but landlords may need to explain, share or at least attest to tenant restructurings in order to obtain lender approval or latitude under loan documents to grant relief. Similarly, landlords may want to explain the limitations they face due to underlying financing or other restrictions.

Competent Planning: While difficult to assess the duration of the current situation, any request for relief should be accompanied by a competent and professional showing that there is a current plan to bridge the crisis based on realistic assumptions and that relevant stakeholders are putting skin in the game.

Lender (or Other) Approval: Parties should keep in mind that third party (e.g., lender) approvals may be necessary to restructure or amend leases. Consider seeking programmatic approval for parameters to restructuring/relief deals now to cut down on individual approvals.

Other Issues or Concerns: This may be an opportunity to address other outstanding issues or concerns providing the benefit to the other party and allowing relief to go forward – such as extending the term, waiving rights, acknowledging facts, etc. The degree of leveraging these issues during a crisis, however, should be prudently and strategically applied.

Documentation: Any agreement to modify, restructure or affect a lease should be in writing. This step is essential to ensure there’s an actual agreement to actual terms and conditions – even stripped-down writing is better than none.

This crisis has placed significant stress on both sides of the landlord-tenant equation. Both sides have suddenly found their operations interrupted, cash flow jeopardized, business continuity models upended, and have had their ability to perform their obligations to their lenders, investors, employees, and clients and customers severely strained. To the extent practical, each party should seek the mutually shared goal in this time to outlast the crisis impact in a manner that allows as quick a recovery as possible.

© 2020 SHERIN AND LODGEN LLP

For more on rent considerations among the COVID-19 pandemic crisis, see the National Law Review Coronavirus News section.

Avoiding Commercial Lease Disputes – Clearly Reflecting the Intent of the Parties is Key!

A commercial lease symbolizes a consensual relationship between parties that can be enduring and rewarding, or short-sighted and emotionally and financially taxing.

Entering into a clearly drafted lease agreement at the outset of the relationship helps to set expectations, which minimizes the possibility of disputes over how the lease should be interpreted.

However, not all commercial leases are clearly drafted, and disputes often arise between the parties over such issues as:

  • How the property can be used,
  • Who has responsibility for maintaining the property,
  • Effect of short term non-payments of rent caused by factors beyond the control of the tenant or just sheer forgetfulness, and
  • Who gets what when the lease terminates.

Disputes can also arise over the interpretation of provisions in commercial leases which deal with insurance coverage and liability of the parties.  Commercial leases typically include provisions which require one or both of the parties to have and maintain property and liability insurance policies with specific amounts of coverage.  These clauses also may include provisions which address the responsibility of the parties for damages or personal injuries.

Insurance and liability clauses are very important, and clearly drafting such clauses when the lease is created can minimize disputes between the parties regarding their obligations and liabilities under the terms of the lease.  Understanding how North Carolina Courts interpret such clauses may help the parties draft clear and unambiguous provisions which will set appropriate expectations and minimize the risk of future disputes between the parties.

The North Carolina Supreme Court recently published an opinion which addresses this issue and provides guidance on how the North Carolina courts should interpret insurance and liability provisions in commercial leases.  On December 7, 2018, the North Carolina Supreme Court reversed a decision of a divided panel of the North Carolina Court of Appeals in the case of Morrell v. Hardin Creek, Inc.  The issue decided by the Court was whether the insurance and liability provisions of a commercial lease operated as a complete bar to the tenant’s claims for damage against the landlord and other defendants.  In a split decision, the Court determined that the clear and unambiguous language of the subject lease indicated that the parties intended to discharge each other from all claims and liabilities resulting from hazards covered by insurance.

In Morrell, the tenant was in the business of manufacturing and distributing specialty pasta.  The tenant entered into a commercial lease for a building located in Boone, North Carolina.  During the term of the lease, an inspection of the premises found that modifications needed to be made to the building in order for the building to comply with state regulations regarding the production of food.

The lease contained a provision which allowed the tenant to alter or remodel the premises.  That provision also included language which stated that the parties agreed to discharge each other from all claims and liabilities arising from or caused by any hazard covered by insurance regardless of the cause of the damage or loss.  The landlord agreed to make the modifications in exchange for an extension in the term of the lease.  The project was completed but later discovered to be in violation of certain building code provisions related to fire sprinkler systems.

The violations were discovered when the sprinkler pipes burst and flooded the premises.  The flooding destroyed the tenant’s inventory and specialty equipment.  The tenant sued the landlord for negligence and other claims relating to the damages.  The landlord moved for summary judgment and asserted that the damages discharge clause in the provision of the lease which allowed the remodeling barred all of the tenant’s claims against the landlord.

The trial court agreed with the landlord and dismissed the complaint with prejudice.  On appeal, a divided panel of the North Carolina Court of Appeals reversed the decision and held that the provision of the lease was ambiguous in that it did not clearly reflect the intention of the parties to bar negligence claims.  The landlord filed an appeal to North Carolina Supreme Court based on the dissent in the Court of Appeals and for discretionary review of additional issues, which the Court allowed.

In its analysis of the case, the North Carolina Supreme Court discusses well-established principles of North Carolina law regarding the interpretation of contracts and, more specifically, provisions in contracts which exempt parties from liability ­­– so-called “exculpatory” clauses.  The Court cites to prior decisions which held that the intent of the parties is the deciding factor in contract interpretation cases.

Also, the Court states that contract provisions which exempt individuals from liability for their own negligence are not favored in the law.  As a result, such provisions will not be construed to exempt a party from liability for its own negligence or the negligence of those acting for that party in the absence of explicit language clearly showing that this is the intent of the parties.

So, when a provision that exempts a party from liability for its own negligence is well drafted, and the intention of the parties is clearly and unambiguously shown, the provision exempting the party from liability will be upheld.

With regard to the exculpatory language of the lease in question in Morrell, the tenant acknowledged the broad and expansive nature of the language while also arguing that the breadth of the clause did not satisfy the general rule that such clauses must contain explicit language which clearly shows the intent of the parties to exclude liability.  The Court was not persuaded and stated,

[Tenant’s] chameleonic construction of this contractual language is unworkable.  Given the ‘broad and expansive’ nature of the phrase ‘all claims and liabilities . . . regardless of the cause of damage or loss,’ it is a challenging exercise to conjure up language in an exculpatory clause that would meet [tenant’s’] implied standard for unambiguity regarding waiver of negligence-based claims other than to require such a waiver to explicitly mention the term ‘negligence.’

The parties had agreed that the hazard of flooding which caused the tenant’s damages was covered by insurance.  For this reason, the Court found that the exculpatory language of the lease barred the tenant from bringing an action against the landlord for all claims and liabilities caused thereby, including business losses.

The tenant also argued that the exculpatory provision was limited by language contained in another provision of the lease which required the tenant to maintain insurance and to indemnify the landlord.  The Court stated that, in effect, the tenant was asking the Court to add limiting language to the exculpatory clause based on inferences made from the separate insurance clause.  The Court rejected the argument and stated,

This Court cannot creatively interpret the parties’ actual lease agreement in the manner urged by [tenant], and must instead enforce the parties’ intent as evidenced by the clear and explicit language of the lease.

The Court was very clear that North Carolina Courts must enforce contracts as written and may not, under the pretext of construing an ambiguous term, rewrite the contract for the parties.

The bottom line is that disputes over the interpretation of provisions in commercial leases can potentially be avoided if issues like the one describe in Morrell are thoroughly addressed and the intention of the parties is explicitly and unambiguously stated in the lease.

As always, those who need assistance with drafting commercial leases, or with a dispute over the interpretation of the terms of a commercial lease, should consult an attorney who is experienced in the area of drafting commercial leases or litigating commercial disputes.

 

© 2019 Ward and Smith, P.A.. All Rights Reserved.
This post was written by Eric J. Remington of Ward and Smith, P.A.
Read more on commercial lease agreements on the National Law Review’s Real Estate page.

Recent Utah Decision Enforces the Importance of Eminent Domain Provisions In Commercial Leases

A recent Utah case serves as a cautionary tale of the importance of eminent domain provisions in commercial leases. In Utah Dep’t of Transportation v. Kmart Corp., 2018 UT 54, 428 P.3d 1118, the Utah Supreme Court examined a provision in Kmart’s shopping center lease which provided the lease terminated if eminent domain left Kmart’s “points of ingress and egress to the public roadways…materially impaired.” In 2010, the Utah Department of Transportation (“UDOT”) condemned property which provided access to the property Kmart leased. Both Kmart, as tenant, and its landlord, FPA, sought compensation from UDOT for the condemnation of the access point. In 2012, the Utah Supreme Court held that Utah’s just compensation statute required courts and appraisers to determine the value of a condemnation award for each party’s property interest separately using the “aggregate-of-interests approach” and remanded it to the district court for further proceedings. Upon remand, after review of separate appraisals of FPA’s and Kmart’s respective property interests, the district court determined UDOT’s condemnation “materially impaired access and caused the [l]ease to terminate” and awarded Kmart $1.4 million plus interest. UDOT appealed.

On appeal, UDOT urged the Utah Supreme Court to adopt the “termination clause rule” which had been adopted by other jurisdictions. Under that rule, when a lease’s termination clause is triggered, the tenant loses its claim to just compensation because any of the tenant’s continuing interest in the leased property is extinguished.

Kmart argued the 2012 Utah Supreme Court decision, where the “aggregate of interests” approach was adopted, rendered UDOT’s “termination clause rule” argument meaningless. Kmart argued that a condemnation clause’s sole purpose is to determine the landlord’s and tenant’s separate shares of condemnation awards. Because the “aggregate of interests approach” determined the value of each party’s interests separately, there was no reason to contract for each party’s share of the award. Thus, said Kmart, the condemnation clause in its lease should have no effect.

The Utah Supreme Court disagreed with Kmart and instead adopted UDOT’s “termination clause rule.” In rejecting Kmart’s argument, the court explained the “aggregate of interests” rule addressed only the value of a party’s property interest. In contrast, the “termination clause rule” dictated whether a tenant even had a property interest following condemnation. Put another way, the “termination clause rule” determines what is owned where the valuation method determines what is owed.

In examining Kmart’s lease, the Utah Supreme Court determined the termination clause was triggered when condemnation left “points of ingress and egress to the public roadways…materially impaired.” Because the district court already concluded UDOT’s taking left access “materially impaired,” the termination clause—in terminating Kmart’s lease—extinguished Kmart’s property interest. Consequently, the Utah Supreme Court held Kmart was not entitled to just compensation since it no longer had an interest in the property.

Issues relating to condemnation clauses in leases have also arisen in Wisconsin. In 1980, the Wisconsin Supreme Court tacitly acknowledged that it had “become customary” to include condemnation clauses in leases. Like Utah, Wisconsin courts hold that these clauses can terminate the tenant’s interest and bar any claim the tenant would have had to a portion of a just compensation award.

The importance of reviewing condemnation clauses in leases is often undervalued. Unclear drafting of condemnation clauses may also result in landlords having to share condemnation proceeds with tenant. Maxey v. Redevelopment Auth. of Racine, 94 Wis. 2d 375, 288 N.W.2d 794 (1980). Clauses that fail to contemplate Wisconsin’s specific eminent domain rules can also result in the inability of landlords to collect attorney fees. Van Asten v. State, 214 Wis. 2d 135, 571 N.W.2d 420 (Ct. App. 1997).

The Kmart case serves as a warning as to the drastic effects that a condemnation clause can have on the compensation of leasehold interests in a condemnation. To avoid the potentially devastating results of a poorly worded condemnation provision, landlords and tenants should request their real estate attorneys review the condemnation provisions in their leases to confirm that their rights are adequately protected.

 

©2019 von Briesen & Roper, s.c
This post was written by Joseph J. Rolling of von Briesen & Roper, s.c.
Read more real estate news on NLR’s Real Estate type of law page.

‘Tis The Season To Think About Your Retail Lease

McBrayer NEW logo 1-10-13

With November nearly upon us, the holiday shopping season is right around the corner. For retailers, the peak season can bring a whole host of issues to be considered in connection with a commercial lease. The best time to think about these issues is now – before the droves of eager customers start lining up at the doors. So, if you are a retailer and lease a space for your business, take a few minutes and consider the following:

  1. Does your lease require that you only operate during certain hours, preventing you from participating in “Black Friday” or staying open late during especially busy days?
  2. Is there available parking for seasonal employees?
  3. Are there any limitations in the lease about the type of signage or decorations? Must signs or decorations be approved by a landlord?
  4. Are there any provisions prohibiting special activities in or around the store (i.e., having carolers, a gift wrapping station, or passing out hot chocolate to bystanders)?
  5. If you are in a multi-unit building, how will advertising and general maintenance costs be divided? In other words, who is really paying for Santa and his elves to be stationed in the center?

Shopping Christmas Santa Claus

By addressing these issues early, landlords and tenants can reduce the possibility of misunderstandings and disputes during the shopping season. A little forethought and communication can go a long way in making everything merry and bright.

© 2014 by McBrayer, McGinnis, Leslie & Kirkland, PLLC. All rights reserved.

Chicken Restaurant Case Serves Up A Bucket of Sound Contract Principles for Commercial Leases

vonBriesen

 

In Tufail v. Midwest Hospitality LLC, 2013 WI 62, the Wisconsin Supreme Courthighlighted the importance of including precise language in commercial leases, especially if the lease includes an integration clause. The court confirmed that when dealing with a fully integrated lease, it is guided by the terms of the lease as written rather than by extrinsic evidence or unwritten understandings between the parties. While this may seem obvious, this case serves as a good reminder for those who negotiate commercial leases to always include all specific business and legal terms.

Tufail (“Landlord”) and Midwest Hospitality LLC (“Tenant”) entered into a lease for commercial property that was then being used by Landlord as a “New York Chicken” restaurant. Tenant leased this property with the intent of operating a “Church’s Chicken” restaurant. However, during build-out, Tenant discovered that a special use permit would be required to operate its fast food restaurant with a drive-through. While Tenant was able to obtain the permit it needed, the permit was conditioned upon the restaurant being closed by 9 p.m. (as opposed to the 4 a.m. close time allowed for the prior restaurant).

Tenant terminated the Lease and notified Landlord that it would stop paying rent due to the adverse effect the earlier closing time would have on its profitability. Tenant argued that the permit requirement was contrary to Landlord’s representation that Tenant would not be prevented from using the premises for the permitted uses set forth in the lease. The lease contained the following use clause: “[t]enant may use and occupy the Premises for any lawful purposes, including, but not limited to, the retail sales, consumption, and delivery of food and beverages which shall include, but not be limited to, Chicken products, Fish products, bread products, salads, sandwiches, dessert items, promotional items, and any other items sold by any Church’s Chicken store.”

After reviewing the lease’s integration clause and finding it to be complete, the court rejected Tenant’s argument that the general reference to “Church’s Chicken” in the use clause required that a fast food restaurant with a drive-through be allowed because the understanding between the parties was that Church’s Chicken restaurants were in fact drive-through fast food restaurants. The court concluded that the lease did not include a false representation and also limited its review to the specific language used in the use and representation clauses of the lease due to its conclusion that the lease was fully integrated.

The court also concluded that the terms of the representation clause as written required simply that Tenant not be prevented from using the property for the purposes set forth in the use clause. The court stated that there was nothing that prevented Tenant from specifically addressing hours of operation, the requirement that a drive-through be allowed, or other specific requirements it considered to be vital to the successful operation of its restaurant in the lease. However, the court was bound to interpret only the contract to which the parties actually agreed, and these requirements were not included therein.

While this is a misrepresentation case on its face, the case ultimately turned on basic contract principles and is an important reminder of the effects of integration clauses. Not only can these “boilerplate” clauses intensify the scrutiny of the specific language chosen by the parties, but, as shown in this case, they can be used to support the theory that even the smallest of deal points should have been included in the agreement if they were important to the parties. This case demonstrates that it is extremely important to include precise, unambiguous language in leases and to double check that even the seemingly minor deal points are included in the lease if they are necessary to make the deal viable.

Article By:

Chris A. Jenny
William R. West
Megan L.W. Jerabek
Of:
von Briesen & Roper, S.C.