What Kind Of Help To A Tenant Is Self-Help? Part 1.

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Here a mantra often heard by tenants all of their lives: “Make sure you get self-help rights. Make sure you get self-help rights.” It’s not a bad theme, but is it a cure-all? No, it’s not, and what it doesn’t cure depends on the relationship between the leased premises and the entire property. More about that in a little while. First, we’re going to list the kinds of landlord obligations that tenant might want to fulfill if the landlord doesn’t:

  • Pay the real property taxes or other governmental charges
  • Pay the interest, principal, costs or other charges under the landlord’s mortgage(s)
  • Satisfy liens affecting the leased premises
  • Resolve encumbrances affecting the leased premises
  • Perform required repairs
  • Do other work required of landlord pursuant to the lease
  • Cure breaches under other tenant leases where the tenant thereunder could terminate that tenant’s lease
  • Perform any other landlord covenants or obligations under the lease.

Now, we’ll list some of the things the tenant might want to do if any of those things happened:

  • Choose to perform a little, a lot or nothing of what the landlord was supposed to do
  • Reserve its right to seek damages
  • Reserve its right seek judicial enforcement or other equitable remedies
  • Get payment from the landlord for what it costs the tenant to perform the landlord’s obligations
  • Get interest on its expenditures from the date first made
  • Get paid for its attorney’s fees incurred in “covering” for the landlord
  • Offset against future payments of rent and other items otherwise payable to the landlord
  • Extend the lease term if the offsets aren’t exhausted before the stated end of the lease
  • Recover its unamortized cost of leasehold improvements if the lease is terminated

Now, just to stay within our pattern thus far, we’ll list some procedural considerations:

  • The landlord would get prior notice and an opportunity to cure, say 20 or 30 days.
  • Where there is threat of immediate loss of the lease, no prior notice would be required
  • Where there might be imminent harm to person or property, no prior notice would be required
  • The landlord’s lender should “sign on” to the landlord’s obligation to pay
  • Tenant would have no obligation to exercise its rights; doing so would be solely at its option
  • Tenant would be indemnified by landlord in connection with tenant’s exercise of self-help
  • Landlord would waive claims against tenant with respect to tenant’s exercise of self-help
  • Payments from the landlord would be due a given number of days after the tenant’s demand.
  • The lease would limit how quickly a tenant could offset its “cure” costs against what it would otherwise be paying its landlord.

Well, this is a good place to tell you that today’s posting will cover only a small number of the issues faced by negotiators when trying to craft a lease with any semblance of self-help rights in favor of a tenant. [Wise readers, i.e., most Ruminations readers, knew this already based on today’s title.] Yes, this is the first part of a multi-part discussion of tenant self-help rights.

Here are some truisms and some corollaries to those truisms. First, landlord-form leases never offer the tenant any such rights. Tenant-form leases always (or should always) give the tenant the right to act on behalf of the landlord with respect to one or more of the items on our very first list above. Only some tenants wind up with some self-help rights when the parties use a landlord form lease. Almost all tenants wind up with some self-help rights when using a tenant form lease. That’s because only tenants with bargaining power have tenant form leases and the quantum of self-help rights a tenant gets is related to the strength of its bargaining power.

For purposes of writing at all about this topic, Ruminations needs to assume that it is writing about a situation where a tenant is getting at least some self-help rights. Without such an assumption, we would need to end right here and admit that the list of possible self-help situations was posted to rub salt in every reader-tenant’s wounds. So, work with us. The reason they say, “If you build it, they will come,” is because if you assume you are going to get self-help rights, you may very well get some. If you don’t ask (or push), you won’t.

The most commonly seen self-help right is where a tenant has the right to make repairs or perform maintenance that its landlord should have done, but didn’t. This contemplates such tasks as fixing roof leaks, making exterior lighting work or clearing snow and ice from vehicular and pedestrian areas. Those, of course, are merely illustrative of activities the parties contemplated in a lease that allows the tenant to perform these tasks after its landlord bails out on them.

Now, it seems that fairness would militate in favor of giving every tenant those kinds of rights. After all, tenants are paying for all that work anyway. Tenants are entitled to have the parking lot plowed; they didn’t agree to move into a store that no one could reach. We could go on, but won’t.

Indulge us. Assume that any tenant who asks for the right to step in when its landlord doesn’t fix things or fails to keep the parking areas and sidewalks clear of snow and ice, gets such a self-help right. Now imagine a 1,500 square foot tenant in a property with 250,000 square feet of leasable space. Those situations are pretty easy to imagine. This one is tougher. Imagine our hypothetical 1,500 square foot tenant arranging to have the 1,000 space parking lot and associated drive lanes and entrances plowed (time after time). Or, perhaps, imagine this hypothetical tenant replacing a 50,000 square foot roof section. Each is unlikely to happen. To almost every tenant with that size space (regardless of the size of the tenant’s national business), these self-help right are, in practice, useless.

Now, faithful readers, “hold your angst.” The very next paragraph will discuss the core issues behind the following “self-help” rights. For now, let’s assume a tenant has been given the right to pay its landlord’s mortgage if its landlord hasn’t. Well, if that tenant’s rent approximates or exceeds the mortgage payment, it might be practical. But, our hypothetical 1,500 square foot tenant shouldn’t even bother.

We’re going to guess that many readers will charge Ruminations with heresy when we even dare to list the payment of a landlord’s mortgage as a possible tenant self-help right. For one, why would a tenant want to do so if it has an SNDA form that lender? We’ll tie that into the prior paragraph. Wouldn’t any tenant who could pay the mortgage already have an SNDA? Well, “yes.” But, what if that SNDA isn’t effective, such as what happens if the lender rejects the SNDA as an executory contract in the lender’s bankruptcy? Oh, “yes,” a lender can go bankrupt and an SNDA can be rejected. Perhaps, the SNDA sets forth some preconditions (conditions precedent) to the lender’s agreement not to disturb the tenant’s possession of the leased space? We readily concede that each example is unlikely. Unlikely, however, doesn’t equate to “not possible.” A good way to illustrate the “possibility” is to explore the almost universal response from landlords to a tenant’s request for this self-help right: “No, I don’t want you to interfere with our relationship with our lender.” Well, that can’t be a very good relationship if the mortgage isn’t being paid. What the objection seems to mean is, “I, your prospective landlord, want to be able to withhold my mortgage payments as a negotiation tactic with my lender.” If that supposition on the part of Ruminations is correct, then that’s exactly why a tenant, who might lose a valuable lease, would want to pay the mortgage using the (rent) money the landlord is supposed to use to pay the mortgage.

Yes, we know that just paying a delinquent mortgage probably won’t cure the landlord’s loan default. And, we know that a lender might even be able to refuse the tenant’s payment. And, yes, we know that a lender could achieve the same result by acting upon its assignment of leases and rents or even by having a receiver appointed. But, wouldn’t such a lender prefer a consensual arrangement with a tenant that has a self-help right in its lease?

Now, when it comes to real estate taxes and other governmental charges that could result in a lien if not paid, the argument above becomes a lot more compelling. There are no SNDAs with taxing authorities. Tax liens enjoy a “super priority.” It doesn’t matter that the lease was in force well before the taxes became delinquent. A tax sale can serve to terminate a lease. But, taxing authorities take money from anyone when it comes to collecting taxes. Furthermore, even a moderate size tenant’s rent will exceed a property’s entire tax bill.

This leads us to another situation where non-payment could jeopardize a tenant’s right to remain at the property – judgment liens and similar encumbrances. Here, a tenant could discover a judgment that preceded its lease. Of course, all tenants should (but many don’t) examine the landlord’s title before signing the lease. And, Ruminations concedes that any tenant willing to fight for this self-help right would certainly get that title search. Nonetheless, it may not be satisfying to a tenant to know that its leasehold policy will write a check if the insurer “missed” a lien or has “insured over” a known lien. Perhaps the tenant was willing to trust its landlord’s word that the judgment will be overturned on appeal. So, if the chances of the tenant ever needing to step up and pay a judgment against its landlord are remote, why would a landlord object? Isn’t a tenant supposed to be able to possess its leased space for the fully contracted time?

What about “encumbrances”? Well, why shouldn’t a tenant be able to use its rent money to eliminate any encumbrances that might interfere with access to a tenant’s leased space or use of the premises? Tenants don’t lease space for the sake of paying rent. They pay it in order to conduct their businesses. If the landlord doesn’t plow the parking area and drive lanes, the leased space is rendered useless. If the exercise of an easement right by the benefited party interferes with customers or others getting to the leased space, the effect is the same.

At the end of the day, pragmatism should override principle when reaching agreement as to the foregoing series of possible self-help rights. Each of those examples presupposes that the tenant’s ability to fruitfully use its space has been or is imminently likely to be impaired by reason of the landlord’s failure to pay what it owes to third parties or to cure a problem it has with a third party resulting in that third party having rights over the leased property. So, if the landlord is going to pay its bills or deal with other superseding third parties, there would be no reason for a tenant to step in. Thus, there is no need for a tenant to seek these kinds of self-help rights unless the tenant is imperiled. For that reason, when it comes to payment of the landlord’s mortgage or taxes or adverse judgments, a tenant (who has the bargaining power to do so) should only ask for such a right where its lease is subordinate to the rights of the unpaid creditor or encumbrancer and its possession or use of the leased space is imperiled. There are many formulations that could be used to condition a tenant’s self-help right to pay the landlord’s obligations to third parties. We won’t present any of them today.

Now, if a tenant pays a landlord’s overdue obligation to a third party, how is the landlord hurt? If the payment was due, the landlord no longer owes the money. If it wasn’t actually due, the landlord can pursue a refund much as if it had overpaid a bill. That leaves the “number one” stated objection, and not a very comforting one to hear: “But, we may want to withhold the payment to gain a bargaining advantage over the creditor.” Those who represent landlords should swap moccasins with those who represent tenants and play that one back. Collateral damage is still damage.

There’s a reason why Ruminations has focused on self-help rights that are obtainable only by a very limited number of tenants and, even for those who obtain those rights, are applicable only in a limited number of circumstances and, even when applicable, are difficult to exercise. We’ve done this to illustrate that even with all of those limiting circumstances, there is no legitimate reason why a landlord should place its tenants at risk by failing to pay superior obligations when the tenant can save itself by using its rent for what the landlord should have used its rent. And, it is important for a “small” tenant to root for its “big” neighbor to have such a right because, if exercised, the rising water will lift all boats.

But, loyal readers, be assured that next week we’ll explore the nuts and bolts of more generally granted self-help rights, ones that will be of more direct interest to a greater number of you. Yes, we’ll be coming down from 30,000 feet to more closely look at the ground.

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Comments

  1. Jim Henegan says:

    What happens if 2 space tenants decide to plow the same parking lot with different contractors or decide to fix the same pot hole? Self help outside of the 4 walls of the Premises doesn’t work well for a space tenant. It can work pretty well with a tenant who is also leasing its parking lot.

    Most tenants do not like to exercise self help unless there is an operational issue. If the tenant cannot operate because customers cannot get through the snow to shop there, then the tenant is going to want to take action.

    Roof leaks are another event on which tenants want to act. The water leaking through the roof can damage merchandise and cause safety issues for customers and employees.

    I don’t see many tenants wanting to pay the Landlord’s mortgage. If there is an option or a RFR to purchase the Premises or if it leases the entire property subject to the Mortgage, you might want to pay the late payments. If the Landlord has stopped paying the mortgage, why will it start paying it again? Is the Tenant going to make the payments indefinitely?

    Withholding rent after exercising self help can be a problem in states which have foreclosure statutes which provide that the only issue is whether there is a failure to pay rent. The Tenant can risk losing the store by exercising self help and then off setting versus rent as allowed by the Lease.

  2. paul mc devitt says:

    Interesting thoughtful outline.

    Here’s another risk for tenants and RE brokers. I know Rumination reades will be shocked to know that some landlords are slow to pay RE broker’s fees or try to renegotiate the fee after the deal is signed.
    If a tenant and broker have properly disclosed to the landlord a tenant’s expectations of RE fee sharing with the tenant, the Right of Offset should include that payment (along with other service providers/vendors). In my experience, on very large deals this can be serious money.
    Aside from the broker not being paid as agreed; a tenant’s real estate department could get cranky w/no recourse if their windfall rebate disappeared. If a landlord balks at this ROO at the outset, the red flags should alert the broker (and the tenant) that the landlord may be in financial distress or may less than fair in his dealings.

    Similarly, the ROO should carry interest at whatever the legally permitted default rate is set at in the lease so there is no interest free loan to the landlord.

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