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

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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The case of Ginsburg Development Companies, L.L.C v. Township of Harrison stands for the proposition that a developer can be responsible for the cost of off-site improvements that are made prior to the construction of the proposed development.  This is an unpublished opinion decided by the Superior Court of New Jersey, Appellate Division.

In 2005, the Planning Board of Harrison Township (“Board”) granted final major subdivision approval to Ginsburg Development Companies, L.L.C (“Ginsburg”) for the construction of 77 single family homes.   The approval was contingent on Ginsburg obtaining water treatment works approval from the New Jersey Department of Environmental Protection, a NJDEP-TWA permit.  This permit could not be obtained without Harrison Township (“Township”) certifying that the existing sanitary sewer could accommodate Ginsburg’s project.

The Township’s sewer system was inadequate to accommodate Ginsburg’s development.  A Developer’s Agreement between Ginsburg and the Township was executed in November 2005 in which the Township agreed to provide the certification and sewer service to Ginsburg’s development, provided that Ginsburg make a contribution to the off- site sanitary sewer improvements.  The parties reached an agreement as to Ginsburg’s pro rata share of the improvements.

Pursuant to the Developer’s Agreement, Ginsburg agreed to make payment within thirty days of the Township’s written notice indicating the price of the improvements.   The Township proceeded to make the necessary improvements to its sewer system and sought reimbursement from Ginsburg pursuant to the Developer’s Agreement.

Ginsburg took the position that it was not required to make any payment for the improvements until it commenced development of its project.  Ginsburg tried to cite the cases of River Vale Planning Board v. E & R Office Interiors, Inc., 241 N.J Super 391, 575 A.2d  55 (App. Div. 1990) and Toll Brothers, Inc. v. Board of Chosen Freeholders, 194 N.J. 223, 944 A.2d 1 (2008) for the proposition that “conditions of land use approvals are only enforceable when the developer actually proceeds with the project.”   The Court held that Ginsburg’s interpretation of those cases is too broad and also distinguished those cases.

The Court noted that the resolution granting Ginsburg’s approval remained valid and Ginsburg intended to develop the property.   Ginsburg did not seek to modify the conditions of its approval, allege that there were changed circumstances or allege that the percentage that it was assessed for the improvements exceeded its pro rata share of the completed work.  Ginsburg merely stated that it had not yet commenced to develop the property.  The Court found nothing unfair about having Ginsburg make payment pursuant to the terms of the Developer’s Agreement even though it had yet to commence construction.

As illustrated by this case, it is imperative that developers be careful about the wording in Developer’s Agreements and understand their commitments under these agreements. 

Eric Goldberg is a shareholder in Stark & Stark’s Real Estate and Franchise Groups.  If you have any questions or need additional information, please contact Mr. Goldberg at (609) 791-7013 or egoldberg@stark-stark.com. 

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Is Governor Christie seeking to bully property owners into giving up rights without just compensation? It is well accepted that beachfront dunes help to protect properties and people from storm damage and injury from events such as Superstorm Sandy. But many property oceanfront property owners have resisted granting those easement rights because of the impact to their views of the ocean and to their property values.

Historically beachfront property owners have been offered little or no money to compensate for their loss, although the law is clear that taking for public purposes such property rights constitutionally requires that the owners be provided just compensation. Recently the Court has determined that the compensation can be considerable. Given that storm protection is a general benefit shared in common with other property owners, including those without beachfront property, the arguments advanced by the state seeking to reduce the compensation to property owners fails and therefore cannot offset compensation due for the taking of the dune easement. If the state is offering just compensation it may well be a shame that property owners are not more concerned for the public good when declining to grant the easements. But if history is any indication, just compensation is not being offered and the Governor is seeking to shame people into giving up their property rights for less than the fair value in violation of the U.S. and New Jersey Constitutions. Here is a link to the article discussing how the Governor may seek to shame unwilling property owners.

Gary S. Forshner is a Shareholder in Stark & Stark's Real Estate, Zoning & Land Use Group. Mr. Forshner is the Secretary and Director of the Land Use Section of the New Jersey State Bar Association. Mr. Forshner serves as Chair of the Master Sponsor Committee and Director to the New Jersey Builders Association.  For questions, please contact Mr. Forshner.

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1. Was the building substantially totally destroyed? The court concluded, as was evident given historical decisions, that the house was substantially totally destroyed and therefore could not be rebuilt. The concept of total versus partial destruction is a fact-sensitive concept without an objective test. Moreover, the concept of total destruction is not what we might commonly refer to as “total.” While specifically not endorsed by the Courts, one rule of thumb employed by various municipalities is that the unit is not totally destroyed as long as the foundation and two (2) walls remain. Regardless, the determination is fact sensitive and subject to local interpretation as long as that interpretation is not arbitrary, capricious and unreasonable or contrary to law. Given no bright line test of partial versus total destruction this issue can be rather vexing in some instances and particularly challenging when local officials prefer that structures not be rebuilt. 
2. Did the property owner exceed the authority granted in the construction permit? In short, yes. The permit was for specific renovations and the owner undertook a total rebuild down to the foundation, albeit without exceeding the building footprint and envelope. Accordingly, even if the structure had not been “totally” destroyed, the stop work order was appropriate because the scope of the improvements far exceeded the permit issued.
3. Did the principles of equitable estoppel or relative hardship apply? While the Court’s decision includes a discussion of the principles, this blog will not focus on these equitable remedies as they are rarely applied and should never been relied upon in properly handling approval to rebuild. Indeed, good practices would be to obtain a zoning permit and construction permit consistent with the construction to occur and not to rely upon these principles. Not unsurprisingly, the Court declined to apply these principles to these facts. 

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