New Jersey Lawyer & Attorney : Stark & Stark Law Firm : New Jersey Law Blog

Landlords and others have suffered from heavy rains, high winds and flooding.  And experts predict that severe storms will become more common due to global climate change.  Although you can’t stop storms, you can reduce risks.

One important way landlords can reduce risks is by reviewing their insurance coverage.  When was the last time you reviewed and updated your insurance coverage and inquired as to the insurance coverage of your tenants?  It is vitally important to know and understand what risks your property is protected from.  Commercial landlords must be sure their certificates of insurance are up to date, accessible and provide adequate coverage for the most likely damage due to storm damage. 

Another important way to reduce risks is to review your leases, contracts, and documented procedures.  Will storms obligate you for unexpected repairs, liabilities and costs? 

These are just a few of the issues that all landlords face as they encounter damage from storms.  Evaluating these and other legal questions requires careful review on an individual basis with experienced counsel.  Stark and Stark’s Commercial Real Estate Group assists landlords in evaluating their risk and work with the firm’s Insurance Coverage Group to be sure that landlords are protected with the proper amount of insurance coverage.  

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A building owner recently prevailed in a wrongful death and survivorship action involving Legionnaires’ disease caused by contamination in an office building’s water supply system.  On May 28, 2013, the Appellate Division upheld the trial court’s ruling granting the owner summary judgment in Anthony Vellucci, Etc. vs. Allstate Insurance Company, Et Al., App. Div. Docket # A-2905-10.  It is an important decision for property owners, managers, employers, brokers, and others in New Jersey because it involved deadly contamination and shows that you can avoid liability by taking appropriate measures.       

The decedent was employed by Allstate in an office in the commercial building.  The trial court had dismissed Allstate from the case and then granted the building owner summary judgment, stating: “The plaintiff offers that the building owner has an obligation to provide safeguards necessary to make its premises reasonably safe for the uses [it] has invited others to make, but the Court finds that Mack-Cali did so and that [Legionella] infection is a rare occurrence and that Mack-Cali owed no duty to take special precautions against [Legionella] bacteria.” 

The Appellate Division concluded that summary judgment was properly granted, stating: “The prevailing industry and regulatory standards do not impose a duty on Mack-Cali to take proactive measures to ensure that a commercial office building’s water supply is not contaminated by the Legionella bacteria.  Absent evidence that Mack-Cali actually knew or should have known, through the exercise of reasonable maintenance measures, that the building’s water supply had been contaminated with the Legionella bacteria, Mack-Cali is not liable for decedent’s demise.”

In deciding in favor of the building owner, both the trial judge and Appellate Division relied on Carvalho v. Toll Brothers & Developers, 143 N.J. 565 (1996) and balanced “several factors -- the relationship of the parties, the nature of the attendant risk, the opportunity and ability to exercise care, and the public interest in the proposed solution.”  The Appellate Division applied these legal principles, stating: “Plaintiff did not present any rational basis to impose a duty on Mack-Cali to forsee the advent of the Legionella bacteria in the building’s water system... Although tragic in its result, decedent’s case was an isolated one.  Once relevant information concerning decedent’s illness was brought to its attention, Mack-Cali took appropriate measures to investigate the matter and ascertain what needed to be done to prevent a recurrence.” 

The Court noted that Mack-Cali retained a certified industrial hygienist to investigate and take samples of the building’s water for testing and that the investigation was “extensive” and included a survey of the entire building, multiple water samples, testing, and a report.  The Court also noted that Allstate retained its own occupational and environmental health consultant to test the building’s water system, and that Mack-Cali hired a water treatment provider to clean the building’s plumbing system as recommended and “after the remediation was completed, there was an extensive period of continued testing.” 

This case is important because it emphasizes the defense of taking appropriate measures.  Based on the “salient facts” of this “isolated” case of a “rare occurrence”, the Appellate Division found that appropriate measures were required after learning of the illness “to investigate the matter and ascertain what needed to be done to prevent a recurrence”.  But other courts or circumstances could require additional proactive and other appropriate measures both before and after learning of an illness.  The big question for you and your matters is what will be deemed “appropriate measures” to minimize risk?   

Evaluating your legal issues requires careful review on an individual basis with experienced counsel.

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Would you like to buy, finance, improve, or sell properties?  Landlords are taking advantage of these opportunities now, according to two recent articles in The Wall Street Journal.   

The May 22, 2013 article entitled “Starwood Capital Goes Shopping for Malls”, reveals that landlords are buying and financing retail properties.  Other landlords are selling in all categories of commercial real estate and one the largest real estate IPOs since the financial crises is being prepared.  And other landlords are upgrading properties to attract tenants and increase rents.  Landlords are acting now to take advantage of low interest rates, available financing, increased rents and rising values. 

Landlords are also improving properties now by transforming vacant and aging office parks into new uses, according to the May 22, 2013 article entitled “Office Parks Get a Makeover".  New uses include apartments, stores, movie theaters, restaurants and hotels.  Some landlords have made these changes due to high vacancy rates, including vacancy rates of 17% or more in suburban markets, where some vacant office complexes may have become obsolete.  And local officials in many communities have approved plans for such changes.

Before you buy, finance, improve, or sell properties, careful planning is required.  For example, governmental, construction, operation, tax, and other requirements and restrictions need to be evaluated and addressed.  And it is important to develop a strategy to quickly achieve your goals. 

Evaluating legal issues with your properties requires careful review on an individual basis with experienced counsel.  The attorneys in Stark & Stark’s Commercial Real Estate Group can help you minimize risks, maximize opportunities, and meet your commercial real estate needs. 

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How can some landlords receive rents of $600 or more a square foot?  A recent article in the New York Times reveals that the answer is by leasing to data centers.  According to the May 13, 2013 article entitled “Landlords Double as Energy Brokers”, businesses in New Jersey are now paying $600 or more a square foot to lease data centers and these rents are four (4) times that being paid for trophy high-rises on Madison, Park and Fifth Avenues in Manhattan.

Data centers have become crucial to many businesses that need remote computer storage, electrical power and ultrafast fiber optic links, including financial traders, bankers and physicians and the New York metro market now has the most rentable square footage in the nation.  Rents are particularly high in northern New Jersey due to the proximity to the New York Stock Exchange and other markets.

Before you decide to rent warehouse or commercial space to a data center, careful thought should be put into the provisions of your lease.  For example, using a form lease simply won’t do and could significantly hurt your ability to enforce your rights with this type of tenant.  And data centers have construction, operation and other requirements that need to be evaluated and addressed.

This is just one way that landlords can maximize rents.  Evaluating data center and other leases requires careful review on an individual basis.  It behooves landlords to speak with experienced counsel prior to negotiating or drafting leases and other documents. 

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The 2013 ICSC RECon Show is just around the corner.  Tons of deals will be made.  However, Landlords need to be wary of restrictions, termination and co-tenancy rights, and unexpected landlord obligations, that can be hidden in commercial leases and other documents.  These provisions, like buried landmines can kill deals, prevent operation and development, and cause lost rent and damages.  The good news is that landlords can, with the help of experienced counsel, avoid lease landmines. 

The 5 Most Dangerous Lease Landmines

1.  Use Restrictions

There are many types of use restrictions that tenants can request.  One type is an exclusive use restriction that prohibits other tenants from selling certain types of products/services.  Suppose that you want to rent to a tenant that wants to sell gifts and related items.  Is it clear exactly what they will be selling?  What exactly are “gifts”?  What exactly are “related items”?  And the problem can get worse.  Suppose that your tenant wants an exclusive use restriction to prohibit others from selling gifts and related items.  If you agree to allow such a broad, undefined, use and restriction, how will you know exactly what uses will be allowed?  Convincing your other tenants to agree to be bound and limited by such a broad and undefined restriction can be difficult.  This type of restriction can prevent you from making new deals and can be difficult to police.  These questions are important, since courts can hold both landlords and their violating tenants responsible for violations.  See, Barr and Sons, Inc. v. Cherry Hill Center, Inc., 90 N.J. Super 358 (App. Div. 1966) (Court held that jeweler-tenant violated restrictive use clause, which in turn caused commercial landlord in violation of lease).  And courts can interpret leases to allow tenants broad use rights that may result in violations.  See, Monmouth Real Estate Inv. Trust v. Manville Foodland, Inc., 196 N.J. Super. 262 (App. Div. 1984) cert. denied, 99 N.J. 234 (1985)(Court held tenant permitted to assign its lease to a retail store that was not a supermarket).  

A more limited type of use restriction is an exclusive use restriction that prohibits leasing to a particular type of business, such a frozen yogurt store.  Another type of use restriction is a restriction that prohibits leasing to types of stores that some tenants may consider offensive, such as a massage store.  Although both of these types of restrictions can be more limited than broad product/service exclusives, they can also cause problems, including defining and limiting each restriction, carving out needed exclusions, and evaluating how each restriction will be interpreted. 

Besides a landlord being willing and able to adequately define and limit use restrictions, it is essential to ensure that all of the needed protections are also properly negotiated and drafted.  For example, you can seek to avoid violations by excluding not only existing leases, but also excluding extensions, renewals and modifications. 

2.  Building Restrictions

Like use restrictions, there are many types of building restrictions.  One type is a restriction that prohibits all changes at a property, adjacent properties and expansions, including prohibiting all construction, development, repairs, and other work.  This type of building restriction can be stated in many different ways and may be hidden with general language, including representations that may have the effect of freezing all existing conditions.  See, Pathmark Stores, Inc. v. Bernard Oster, Inc., 2009 LEXIS 2027 (N.J. Super. App. Div. 2009) (unpublished)(Court enjoined shopping center owner from proceeding with construction plans where lease gave tenant an easement and landlord agreed that the common areas shown on the site plan would not be changed without tenant’s consent).  

Other types of building restrictions may prohibit changes within certain designated areas, or in excess of certain limits, such as parking ratios.  These types of restrictions may contain general language, such as language prohibiting interfering with access or visibility.

And other types of building restrictions may also prohibit changes, including prohibiting construction, development, repairs, and other work during certain times of the year, such as holidays.    

Landlords may seek to avoid or limit and define such general restrictions.  For example, you may seek to show specific “no build” areas on a site plan and permit all other changes.  You may also seek to limit building restrictions by defining the restrictions and permitting exceptions, including exceptions to permit future development and other possible changes.    

3.  Termination Rights

Tenants may seek broad termination rights for any reason or no reason at one or more times during the term.  Other types of termination rights can be based upon specific reasons, such as failure to achieve a certain level of gross sales during a certain period(s).  And other termination rights may be based upon defaults by landlord. See, Armur Realty, LLC v. Banco Do Brasil, S.A. 2011 WL 1327422 (D.N.J. 2011) (unpublished)(Court held tenant could terminate lease where landlord failed to meet certain delivery deadlines).

One way landlords can seek to avoid or limit termination is by conditioning termination rights that are tied to gross sales upon tenants continuously operating for the permitted use, not opening a competing store that would reduce gross sales, and reimbursing landlord for certain costs, such as unamortized construction and brokerage costs.   

4.  Co-tenancy Rights

Tenants may also seek rights if certain other co-tenants close or fail to open.  But such rights can cause multiple closings and create a domino effect giving rights to multiple tenants.  If you must grant such co-tenancy rights, you can seek to limit such rights.  For example, you can seek to exclude certain closings, such as temporary closings, or closings due to holidays, alterations, casualty, condemnation, assignments and bankruptcies.  You can also seek to avoid or limit tenant remedies, including rights to close, terminate, or pay reduced rent, and require that all remedies cease after a certain period of time, or when landlord relets all or a portion of the space to any other tenant or tenants. See, 2000 Clements Bridge LLC v. Officemax North America, Inc. LEXIS 27-7-7578, (D.N.J. 2012) (unpublished)(Court concluded that defendant-tenant was not entitled to terminate a commercial lease under co-tenancy and prohibited use provisions).

5.  Unexpected Landlord Obligations

Landlord obligations, including obligations and costs for construction, repairs, maintenance, and compliance, may be hidden, or arise as a result of ambiguous language.  Landlords may seek to avoid such obligations and costs.  For example, you can seek to clearly define and limit the landlord’s obligations and expressly state that the tenant is solely responsible at tenant’s sole cost and expense for all obligations and costs other than landlord’s obligations.  Additionally, you can seek to include all language needed to clarify that the lease is a triple net lease (if that is the case).  And you can seek to add all language needed to clarify that the lease was the product of negotiation by both parties and that any ambiguity will not be interpreted against either party.  It is important to avoid ambiguities since where doubt exists courts can favor tenants rather than landlords.  See, Crewe Corp. v. Feiler, 49 N.J. Super. 532, 542 (App. Div. 1958), reversed on other grounds, 28 N.J. 316 (1958)(Court held tenant not responsible for a portion of realty taxes assessed against the property and paid by landlord).

Obtain Outside Counsel to Avoid Lease Landmines

These are just a few lease landmines to avoid either when negotiating at the 2013 ICSC RECon show or any other day.  Evaluating these issues requires careful review on an individual basis.  It behooves landlords to speak with experienced counsel prior to negotiating or drafting leases and other documents.  As they say, an ounce of prevention, goes a long way. Having an attorney familiar with these issues and how they will be enforced is critical in ensuring certainty.  The attorneys in Stark & Stark’s Commercial Real Estate Group can provide you the insight you need to address these and other questions for your commercial real estate needs.

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In a recent unpublished decision, 701 Penhorn Avenue Associates, Inc. v J. Fanok Services, Inc., BMF Air Freight aka Team Fanok and Jeffrey Fanok, App Div. Docket # A-2921-11T3, the Appellate Division upheld the trial court's judgment allowing Landlord to pierce the corporate veil of Tenant’s principal. It is an important decision for commercial landlords because it not only shows the factors required to pierce the corporate veil in New Jersey, but also the highlights due diligence needed before negotiating a lease.

In Penhorm, Landlord owned and leased a warehouse. Landlord had leased to a tenant, J. Fanok Services, Inc. (“Services”) since the 1960s. Services’ CEO was J. Fanok. In 2006, Fanok created J. Fanok Holdings, LLC (“Holdings”).  Due to the relationship with Services, Landlord and Holdings entered into a lease for four (4) units in the warehouse. Conveniently, all four (4) units were occupied by Services with subleases with Holdings.  Holdings had no employees, no inventory and no assets, other than the lease with Landlord.

In 2010, Holdings lost its biggest customer.  Subsequently, Holdings defaulted on all four (4) leases. Landlord filed a complaint, alleging among other things, veiling piercing and fraud.  Specifically, Landlord claimed Holdings was just a shell corporation and was entitled to pierce the corporate veil against the other defendants.

The court found that Fanok did not disclose to the Landlord that Holdings had no assets. Further, the court held that they abused corporate assets by setting up the shell corporation - Holdings.  Fanok and the entities appealed.

The Appellate Division upheld the trial court's judgment in-full . The Appellate Division held that Fanok did not dispute that he was the sole shareholder of Holdings. Further, Services paid all rent for Holdings. Finally, the company was completely undercapitalized and the lease was used to shield Services.  The Appellate Division held that based on Landlord’s showing of same owner, no employees, and undercapitalization, corporate veil piercing was shown.

This case is important because it emphasizes the importance of knowing who your tenant is, and what corporate form your tenant has structured for itself. When entering into a lease with the tenant, it is imperative for commercial landlords to conduct appropriate due diligence to find out the assets, ownership and form of the tenant. The landlord has the ability to find out this information before the lease is signed, rather than discovering after the fact that its tenant has no assets to pursue if they fail to pay.

For more discussion on your leasing issues, Stark & Stark’s Commercial Real Estate Group can help. 

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Stark & Stark Shareholder Gary S. Forshner is a panelist for the program “After Hurricane Sandy: Planning For the Next Superstorm” hosted by MIDJersey Chamber of Commerce in collaboration with The Hamilton Partnership.  The free seminar will be held at the Princeton Healthcare System Conference Room at the Hamilton Area YMCA on Tuesday, May 7, 2013 from 8:00-10:00am.  

Mr. Forshner will be joined by five other panelists and Hamilton Township Mayor Kelly A. Yaede to offer advice on preparing your home, business and real estate for the next inevitable superstorm. 

For more information, click here.

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A landlord recently prevailed in an unpublished case involving non-payment of rent during superstorm Sandy.  In Gardens at Maplewood v. Fowlin, ESS, LT 5240-13, the tenant withheld one-half of the rent because he had no lights, heat or hot water as a result of Sandy and claimed that he had no obligation to pay the balance of the rent. 

The issue before Essex County Court Judge Mahlon Fast, was whether the tenant was entitled to a rent abatement.  The tenant’s position was that he should not have to pay for something that he did not receive.  Judge Fast disagreed and concluded that the tenant must pay the unpaid rent by April 15 or a judgment of possession would be entered.

Judge Fast considered three legal issues.  First, the Judge found that the defense of a lack of habitability was not applicable and said, “the power outage was not the fault of the landlord; the landlord was not responsible to restore power; nor was the landlord able to have power restored.”  Judge Fast did not believe “that the landlord would have agreed to have been responsible for the results of a situation such as Sandy” and the Judge found that the conditions in this case were “not the result of any latent defects in facilities nor the result of a fault by the landlord (to maintain or repair) but rather a (hopefully) unique situation unquestionably beyond the power of the landlord to have reasonably avoided or corrected.”

Judge Fast distinguished cases in which landlords have failed to make necessary repairs within a reasonable time, such as Marini v. Ireland, 56 N.J. 130 (1970).  The Judge also cited Chess v. Muhammad, 179 N.J. Super 75 (App. Div. 1981) for the proposition that, “even the most diligent landlord cannot prevent occasional interruptions in the livability of rented premises, whether due to the breakdown of mechanical facilities or sudden acts of nature.”  And Judge Fast said, “restoration of power …was within the control of the power supplier…rather than the landlord…and I find it unreasonable to expect landlords to have generators installed for unforeseen events, such as Sandy, except, perhaps, in a luxury rental with a corresponding rent.”

Second, Judge Fast found that the concept of impossibility of performance was not applicable and said, “I know of no case allowing relief to a tenant because of a loss attributable to an act beyond the reasonable control of a landlord.”

Third, Judge Fast found that, “there is no legal requirement (and no contractual requirement in this case) that would have compelled plaintiff to have maintained insurance for the benefit of the tenant, to cover the loss sustained as a result of Sandy.”

Although the landlord prevailed in this case, Judge Fast warned, “I can easily conceive of conditions that would justify an abatement because the conditions would substantially and negatively affect the reasonable use and enjoyment of an apartment and because elimination of those conditions would be within the reasonable control of the landlord.”  Additionally, although this case involved a residential lease, all landlords should be aware of this case and carefully review their individual circumstances with experienced counsel in the wake of superstorm Sandy, especially in circumstances where courts may be more apt to apply principles of equity to abate rent.

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If a lender holds a mortgage encumbering multiple properties and wants to take title to the properties by separate deeds in lieu, how are the New Jersey Realty Transfer Fee (the “Transfer Tax”) and the buyers tax due under Chapter 33, Laws of 2006 of the State of New Jersey (the “Mansion Tax”) handled? 

If the lender discharges the mortgage and there is no other consideration for the transfers, there will be no Transfer Tax or Mansion Tax.  However, if the lender wants to keep the mortgage lien open, the Transfer Tax and Mansion Tax must be considered.  The total consideration for the transfers is the outstanding balance due under the mortgage.  It’s necessary to split this consideration between each deed in lieu.  A determination must be made of the relative value of each property being transferred by deed in lieu.  This is done by computing the percentage of the assessed value of property in each deed in lieu to the assessed value of all the property being transferred.  Those percentages are then applied to the outstanding balance due under the mortgage.  For example:

1. The mortgage encumbers Property A and Property B.
2. The outstanding balance due under the mortgage is $10,000,000.
3. The assessed value of all property subject to the mortgage totals $50,000,000.
4. Property A has an assessed value of $20,000,000.
5. Property B has an assessed value of $30,000,000.
6. Property A has 2/5 of the total value and is charged with 2/5 of the consideration, which is $4,000,000.
7. Property B has 3/5 of the total value and is charged with 3/5 of the consideration, which is $6,000,000.   
8. The Transfer Tax due on each deed in lieu is computed based on these figures.  A notation should be made in the affidavit of consideration for each deed in lieu explaining the allocation of the consideration between the two deeds in lieu.

Computation of the Mansion Tax must take into account both the value and property classification of each property being transferred in the deeds in lieu.  Only properties conveyed for a consideration greater than $1,000,000 and classified as Class 2 (residential), Class 3A (farm land with a structure intended for residential use), Class 4A (commercial other than industrial or apartment), and Class 4C (co-operative units) are subject to the Mansion Tax.  Using the example above, if Property A is a house the Mansion Tax will have to be paid on the deed in lieu conveying Property A because the consideration is greater than $1,000,000 and Property A is Class 2 property.  If Property B is a factory the Mansion Tax will not have to be paid on the deed in lieu conveying Property B.  Although the consideration is greater than $1,000,000, Property B is Class 4A industrial property, and not subject to the Mansion Tax. 

Sharon Wynn is a Shareholder in Stark & Stark's Real Estate, Zoning & Land Use Group in the firm's Lawrenceville, New Jersey office.  For more information, please contact Ms. Wynn.

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