What Is A Rogue Tenant?

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I’ve struggled over this Blog entry more than any of the ones that have preceded it. That’s probably because I’m not comfortable with how to balance the legitimate needs of both a landlord and its tenant.

Certainly, without a tenant having a remedy for a breach of an exclusive use right granted in that tenant’s lease, the “grant” is mere surplusage. On the other hand, it isn’t always something a landlord did or didn’t do that is responsible for the breach. So, that’s one dividing point – was the landlord “bad” or just another innocent victim?

And, on top of deciding if the landlord was “bad” or “innocent,” there is the question of whether a landlord should have some time to “fix” the problem. If the answer is “yes,” then “how long,” and does the tenant get any kind of relief while waiting to see if the problem gets “fixed.” I’m not going to get to those questions (or others) in this entry.

Once that is settled, what should the actual remedy or choice of remedies look like? That’s for later, as well.

A starting point is to look at what might be an “innocent” breach. In common parlance, the parties often talk of “what if the exclusive use right is breached by a ‘rogue’ tenant.” I think this means, by “an unprincipled, deceitful, and unreliable person; a scoundrel or rascal.” Some in the Retail Real Estate world would say this definition fits lawyers, but that’s also for another day. Basically, the issue is what happens if the landlord’s lease with a rogue tenant actually and clearly forbids the rogue tenant from engaging in the protected activity? This then implicates the question of: “what steps would a landlord have to have taken so that the competing tenant is really a ‘rogue’”?

That goes back to the original lease where the exclusive use right is drafted. If it is written in the form of: “Landlord shall not permit any other tenant or occupant at the Shopping Center to sell or display widgets,” then who is or is not a rogue tenant will be hard to discern. Short of physically blocking the portals to the “rogue’s” store so as to prevent any sales and to keep any “forbidden goods” from being seen, no tenant or occupant is a “rogue” because, to be a “rogue,” you need to be unprincipled, deceitful, and unreliable; a scoundrel or rascal. If you had no obligation to avoid selling or displaying the target merchandise, then you aren’t a “rogue,” at least not in this context.

So, the first principle this seems to expose is that to distinguish between a rogue tenant situation and a landlord-created situation, you have to start with defining exactly what the landlord is obligated to do. There are a lot of ways to do this, one of which is to require that the landlord “not give possession of all or any portion of the Shopping Center to any occupant unless that occupant holds under a written lease specifically including the following text: ‘Tenant shall not sell, rent or dispense widgets at the Shopping Center or display widgets for sale or rental at the Shopping Center or permit or suffer the selling, renting or displaying of widgets at or from the Demised Premises.” Of course, before anyone jumps on this already challenged writer, the lease will have carve-outs for earlier leases and perhaps for certain kinds of tenants, etc., etc. It isn’t my intention to craft a full lease clause, only to set forth an illustrative principle.

Now, the concept continues as follows. If the landlord did all that the lease required it to do, i.e., put that text in all future leases, and its other tenant was a scoundrel and breached its own lease, that other tenant is surely a “rogue.” But, if a rogue tenant is one who violated an agreed-upon lease restriction, its landlord has the ability to restrain the rogue tenant and cure the exclusive use violation. That leads to the following set of thoughts.

Is the landlord who included the agreed-upon restriction in those future leases off the hook or not? Perhaps it is only off the hook if it takes the “next step.” What is that? It is something many landlords don’t want to commit to do – enforce their leases – evict the rogue tenant. Why should they? Two rents are better than one. Perhaps, if the landlord was forced to make an economic choice, it would be better off keeping the rogue tenant and let the “protected” tenant go.

That’s enough for this Blog, but you see where this is going, and we’ve just scratched the surface. Help this poor Blog writer by chiming in. If you have any idea where this topic should go next, let us know. In the meantime, we’ll be working on “when does a landlord lose the protection of blaming a rogue tenant for the violation or is that the end of the line as to a landlord’s obligation”? We’ll also be thinking of the name for an innocent violator and what should happen between a protected tenant and its landlord when you find an innocent violator.

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Comments

  1. Ira, perhaps the industry has been using the word “rogue” in the wrong context. According to my thesaurus, rogue depicts a deceitful scoundrel, cheat or villain. Perhaps “renegade”, “wayward ” or “stray” is closer to the mark, depending upon its mens rea. I think what is intended is a tenant (i) who openly flouts an express covenant to honor a disclosed exclusive ( a bit of a rogue here) , or (ii) whose use clause does not contain an express prohibition or is too broad or vague to prohibit encroaching upon the protected use and who makes a decision (perhaps erroneous) to engage in the protected merchandise.

    On your broader question, when or under what circumstances is the landlord off the hook? My view is almost never. If the landlord promises the exclusive holder it won’t lease to another who sells the protected merchandise and then does so openly or fails to draft a tight use clause or include a widget prohibition, then he should have an affirmative duty to enforce the offending tenant’s lease. If he drafted a tight use clause or included a prohibition and the other tenant violates it anyway (a true “rogue”), the duty to enforce is even stronger. Most leases do not contain such express language as your example – do not sell widgets. Instead, after negotiating a use clause as best it can, the landlord extracts a covenant from the incoming tenant to honor existing exclusives and then attaches a verbatim excerpt of those exclusives as a lease exhibit. Initially then it is up to (i) the incoming tenant to determine whether it can sell a particular line of merchandise without violation, and (ii) the exclusive holder to determine whether it has been violated. Once the exclusive holder complains, the landlord must address whether it is a clear enough transgression such that the landlord must enforce. For example, take the case of smartphones. Is it a phone that can also play music, surf the web and watch TV and videos, or is it an MP3 player or mini-computer that can also make and receive phone calls? It’s not always easy to conclude that a violation has occurred. The landlord may be liable to the exclusive holder if it decides incorrectly. Maybe an action for declaratory relief might be available to the landlord to guide its actions.

    If the landlord doesn’t want to have to make a Hobson’s Choice between two tenants, then it should (i) pursue (without a guarantee of success) injunctive relief but not termination against the violator, and (ii) extend to the exclusive holder compensatory remedies and an ultimate right to terminate if it so chooses. The lease could also bar the exclusive holder from pursuing legal remedies itself and be content with rent adjustment and eventual termination. This would impose upon the landlord a limited duty to enforce if the exclusive holder has granted the landlord a grace period before its compensatory and termination remedies accrue.

  2. I agree with your thought process on this Joel. I also think that the word “renegade” is a much better and more accurate word to use. Would like to hear some feedback on this from a Landlord’s perspective.

    • I think the discomfort with use of “rogue” is well placed, but this is the term used industry-wide and has achieved a meaning that does not parallel its dictionary or literary meaning. Perhaps my quoting and using the dictionary meaning in the context of my blog entry was too obtuse to point that out. “Renegade” would probably suffer under the same analysis. The word’s roots have a religious connotation, though “civil” usage may have overtaken the older sense in which “renegade” was used. But, it still has the sense of switching allegiances from one side or cause to another side or cause, and few use it to describe a contract-breaker. A “renegade” may leave the “group” and switch alliances, even to no new group at all, but that doesn’t seem to fit our lease-breaching tenant. In no other context do we describe a lease-breaching tenant as a rogue or as a renegade.

  3. How about “Schlemiel’?

  4. Adam Hirschfeld says:

    As someone who usually represents Landlords, a few thoughts:

    1. Although I have not been in practice as long as some others, I have yet to see flagrant examples of “rogue” tenants. By flagrant, I mean a tenant that makes a drastic change in use (regardless of it’s use clause) and violates an exclusive, say, a restaurant turning into a sporting goods store in violation of a sporting goods exclusive. Flagrant violations seem rare, if not extinct.

    2. One item not discussed: a good landlord counsel will insist on a carveout for existing leases (and successors and assigns) where the tenant is not prohibited from using its premises in violation of an exclusive. It’s a reasonable request. Whether replacements are included is a negotiation, and I will remain silent on which position is reasonable.

    3. In a rogue tenant situation, what is a landlord to do? He goes to court for an injunction, which, if not obtained/granted, means submission to the judicial process, which is like baseball: there is no set end time. Injunction is not favored where there is adequate remedy at law. If a judge feels the Landlord can obtain relief from the rogue tenant (regardless of whether said tenant can or would pay a judgment), injunction will not be granted. So now what?

  5. Adam: Regarding your 3 points;

    1. It is rare that a tenant’s violation of another tenant’s exclusive is deliberate – a true”rogue’. It is usually inadvertent and falls within that grey area on the outer fringes of its use clause when facing an overbroad exclusive. When booksellers have an exclusive for pre-recoded music and video and books on tape [now tablets] “and any technical evolution of the foregoing”, it may be a tough call for an electronics retailer or a music retailer when that language affects a portion of its product line. It frequently arises when that product line evolves, as it must in order to survive in the marketplace. Everybody sells a little bit of everyone else’s merchandise these days so the devil is in the drafting.

    2. Your comment is correct but goes to the drafting of the exclusive, which is the subject of a future post by Ira. This entire subject is an extensive one.

    3. Most exclusive clauses extend to the landlord an opportunity to rectify the situation within a specified grace period before any remedies kick in. If it takes longer to fix because of the judicial process or landlord’s attempt is unsuccessful, then the grace period becomes somewhat arbitrary but there must be a set time after which the lease remedies (rent relief and termination) of the exclusive holder arise.

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