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.