Can A Tenant Walk Out And Lawfully Stop Paying Rent When It Tires Of The Space?


A restaurant’s lease permitted leasehold mortgages with the following proviso:

Tenant shall have the right … to encumber Tenant’s leasehold interest under this Lease … through a Mortgage (`Leasehold Mortgage’) with an institutional lender…. Landlord agrees that in the event the Leasehold Mortgagee succeeds to Tenant’s interest under this Lease (in which event it shall assume all of Tenant’s obligations under this Lease), Landlord shall, at the time of such succession, recognize such mortgagee, trustee or lender as the then Tenant under this Lease upon the same terms and conditions contained in this Lease and for the then unexpired portion of the Term.

Any such leasehold lender had the right under the lease to take over the tenant-borrower’s leasehold interest through a foreclosure. [Read more…]


The Invisible Hand Behind A Lease (It’s Economics)


How is rent determined? Is it just tossed-out by one party or the other (most often the landlord) and then hashed out without reference to outside sources of information? A long time ago, market information may have been difficult to obtain. Today, that’s not the case. Those who choose to ignore market information negotiate in the dark. But, competitive rent rate information is not all that can or should go into negotiations.

If any reader is expecting Ruminations to now present a formula or algorithm that will eliminate rent negotiation, that reader gives us too much credit. We do think that the day will come when rent negotiations will be done between “machines,” but we neither see “when” that will happen or “how” that will work. Today, in what we hope will be a relatively short blog posting (for Ruminations), our goal is to toss out a theory of how rent is set while recognizing that no one will agree with us because we’ll be positing a theory involving “invisible” factors.

“Market rent” is a real thing. It may be difficult to ascertain precisely, but it is a number that reflects actual rents in the marketplace. Yes, defining the “marketplace” is an art and, yes, adjusting each lease in the market data bank to a “standard” is an art, but that doesn’t mean there isn’t such a thing as “market rent.” When one party or the other throws out a rental figure to start a leasing discussion, it is done with some sense of the market rent for the available space. The negotiations that follow, i.e., where they go from the starting figure, do so based on each party’s own sense of market rent and, even if both agree on the “market rent,” there still remains the duel between how much the tenant really wants “that” space and how much the landlord wants to lease “that” space. [Read more…]


There’s A Material Thought Buried In Here


We’re not sure if what we write in today’s blog posting could reasonably be expected to influence any reader’s use of the term: “material” in documents she or he prepares. If it could, then this posting would meet the criteria for materiality under a newly proposed, revised definition of “material” to be used by accountants in preparing financial statement or in conducting audits.

Long-time Ruminators with good memories might recall that we covered the topic of “materiality” before, specifically in late 2012. For those who were not then clued into Ruminations or for those with sieve-like memories like our own, that posting can be seen by clicking: HERE.  In yet another posting, this time only a year ago, we labeled “material” as a “weasel word,” but not as a term of derision.[That blog posting can be seen by clicking: HERE.]

We’ve met people who object to the use of the word “material,” such as when writing that one party will not materially interfere with the other’s business operations. Another place this “discussion” arises is when something (usually bad) happens if a party makes a material misstatement. The question in each of these cases and in all of the other cases readers can conjure up is; “What is material –can’t we be more definite and make a list of what would be material or, at least, include a definition for the word?” The position Ruminations has taken is that, at the end of the day, when something happens and the parties disagree whether the “something” was material, a judge will decide. And, judges, when resolving a dispute, will take into account all of the facts and circumstances that actually come up, and not all of the things that could have happened, but didn’t. That’s what judges are paid to do – make judgments. That’s why they are called judges.

The funny thing about the use of the word “material” to condition one thing or another in our agreements is that there aren’t a lot of cases where a judge has been asked to use her or his judgment as to what is material. That’s not to say there aren’t any court decisions, nor is it to say that there aren’t important court decisions in other areas about the word, but given how many agreements use the word, almost always multiple times, perhaps “material” “works.”

The business of real property agreements isn’t the only business where these “discussions” arise. As noted at the outset, accountants have the same discussion. But, in the case of accountants, they have a definition for the word. The definition differs depending on whether one looks to the Financial Accounting Standards Board (FASB) or to the International Accounting Standards Board (IASB). Today, we’ll work with the international standards because right now those are in the process of being updated.

Here is the most recently proposed language:


Information is material if omitting, misstating or obscuring it could reasonably be expected to influence the decisions that the primary users of a specific reporting entity’s general purpose financial statements make on the basis of those financial statements.

Materiality depends on the nature or magnitude of information, or both. An entity assesses whether information, either individually or in combination with other information, is material in the context of its financial statements. Material information might be obscured if it is not communicated clearly—for example, if it is obscured by immaterial information. A misstatement of information is material if it could reasonably be expected to influence decisions made by the primary users.

Assessing whether information could reasonably be expected to influence decisions of the primary users of general purpose financial statements requires consideration of the characteristics of those users judged in the entity’s circumstances.

Compare that to FASB’s understanding of the US Supreme Court’s definition of materiality:

… the U.S. Supreme Court’s definition of materiality, in the context of the antifraud provisions of the U.S. securities laws, generally states that information is material if there is a substantial likelihood that the omitted or misstated item would have been viewed by a reasonable resource provider as having significantly altered the total mix of information.

These two approaches are rooted in the same concept: if it really didn’t matter to the person who used the information (i.e., if that person didn’t rely on it), then the information (e.g., “representation”) was not material (a/k/a: it was immaterial).

What the proposed, revised definition from the IASB adds to the discussion is the concept of “obscuring.” When we write our agreements, the most likely battlefield upon which the “material” fight takes place is within the sections dealing with representations and warranties. But, in those sections we write about “material misstatements or omissions.” We don’t think about the burying of a true, but not very pretty, disclosure inside long boring prose or within voluminous documents “incorporated by reference.” Basically, our profession resorts to the principal of “caveat emptor,” something described by Investopedia as “a neo-Latin phrase meaning ‘let the buyer beware.’ It is a principle of contract law in many jurisdictions that places the onus on the buyer to perform due diligence before making a purchase.”

Should we impose greater responsibility on a party to a specific agreement to scrutinize every word in that agreement than we place on someone in the amorphous class of people who might read a financial statement? Probably, “Yes.” But what about a professional reader of financial statements such as a lender considering whether to make a loan? Great minds will differ and some will conclude that it is acceptable to obscure material (damaging) facts in an agreement or in a data dump of 10,000 due diligence documents, but somehow it doesn’t seem right to allow that to happen.

So, with that in mind, what do our loyal readers think about adding the underlined text to the following, pretty common words we all see in agreements:

[Seller represents that] this Agreement contains no untrue statement of material fact and does not omit a material fact necessary in order to make such information not misleading, and no material facts have been presented in this Agreement in a way that a reasonable person would conclude those facts have been intentionally obscured such that such obscured material facts were, in effect, omitted.

Yes, even to us, the underlined addition sounds like an unmanageable (unprovable) standard. That is, it does, until we compare it to the generally acceptable standard that precedes it: “and does not omit a material fact.” Placing a material (adverse) fact (expressed with 10 words) inside a 30 page exhibit might “technically” be disclosure of that fact, but, as we are starting to see, doing so is just a sneaky way of “omitting a material fact.”

Ruminations has no belief that anyone will be running to revive their documents or, if they do, that anyone will accept the added text. Nonetheless, this blog is aimed at provoking thought and discussion. If it has, then we’ve been successful (today, at least).


Luddites Unite – Artificial Intelligence Will Replace Us


We’ve been thinking about artificial intelligence applications and how they might change, even transform, the way we do our business. Then, we heard an interesting story on public radio. It was about a Southern California manufacturer of sex dolls who was introducing models incorporating artificial intelligence. For reasons quite obvious, the story didn’t get very deep into the details, but we learned that these new models were designed to figure out what their owners wanted and to respond appropriately.

We thought this application to be quite amazing in that here was a business way ahead of our own. Artificial intelligence is being used to read medical images with better results than even experienced radiologists achieve. It is being used to screen job applicants, much, much faster than humans doing so and with more satisfactory outcomes. Artificial intelligence is at the heart of visual recognition, allowing machines to replace people in manufacturing operations. It is used to write newspaper articles, such as those reporting sporting events. The list could go on and on. But, what it won’t include is negotiating agreements such as leases. That is, not yet.

Agreements such as leases are not zero-sum games. Though the parties exchange things of equal value, one needs to ask, “Value to whom?” Basically, when someone gets an item of value to them worth, say, $100, the other person may be giving up something worth only $60 to them. Someone may have two widgets and only need one. The duplicate widget isn’t very valuable to that person. A second person may need a widget and have two gizmos, but only need one. In each case, one widget or gizmo has a utility value of $100, but a duplicate one has a utility value of $60. Thus, if the parties trade widget for gizmo, each gives up $60 of value and gets $100 of value in return. That trade creates $200 of value out of $120 of value – a good deal for each trader. [Read more…]


How To Cap The Very Wrong Lease Payment Obligation


Here’s a question for commercial leasing mavens (that’s informal for: an expert or connoisseur). Have you ever seen (or contemplated) where a tenant wants to have a cap on its monthly estimated payments for its share of operating expenses, but doesn’t want a cap on its actual annual share of those expenses? If the question isn’t clear, it soon will become so.

Normally, we would give some background before presenting any lease clauses but, today, the clauses in question are the background. They come from a January 4, 2018 Court of Appeal of Louisiana decision, one that can be read by clicking: HERE[Read more…]


Make The Lease Fit The Parties; Don’t Make the Parties Fit The Lease


Not every lease is going to pay for the cost of a child’s college. [That raises the question, unanswered today, as to whether the cost (internal or external) to get any lease done should cover a year’s tuition and board.] Sometimes, we need to do a mental reset and ask ourselves: “What is needed here?” It’s easy to approach every deal as if all deals are the same. It’s smart to step back each time and ask: “What is needed here.”

A close relative, bearing the same family name and looking very much like this writer, recently asked us to look at an office lease for him. Our first thought was that we would finally show a member of the younger generation how this progeny’s college education was paid for. Then, the lease appeared on our screen – a two year office lease, on a new form, for space the business and his predecessor business already had been occupying for eight years. Whoa! [Read more…]


Part 2: Are You Buying A Shopping Center? If So, Look Here:


A few weeks ago, in response to a constant, but small, stream of requests for suggested language,” we posted a set of possible representations and warranties and a set on conditions precedent a buyer might want to consider for inclusion in a purchase agreement to acquire a leased property. We got a number of “thank you” messages following our doing so. Now, since Ruminations is not immune to adulation, we thought we’d put a lid on the topic by sharing another set of provisions a buyer might want to see in that same purchase agreement. If this pleases you, then savor today’s because it is unlikely that we’ll be taking Ruminations on this kind of detour very soon again. As always, if any reader has any suggested language to share with the many, many other readers who suffer through our postings each week, please add your contribution as a comment to today’s posting. [Read more…]


When Do We Go Too Far In Taking Away Normal Real Property Remedies?


Take your pick: Yellowstone National Park, Yellowstone Boulevard (Forest Hills, Queens, New York City), Yellowstone, the TV series, Yellowstone supercomputer, Yellowstone River, Yellowstone (the steamboat), Yellowstone whiskey or Yellowstone injunction. [There are more.] We have picked the injunction. That’s probably no surprise to readers in and around New York, but for others who haven’t yet figured out where this is going, we’ll briefly describe this brand of injunction. We think it is a distinctly New York thing, but even if other places have the same thing under a different name, we think today’s blog posting will make all of us do a little thinking. [That means we are not going to provide any answers today, just questions.] [Read more…]