This will not be politically correct, and you can throw this back to me when you see me on the landlord’s side of a lease or the lender’s side of an SNDA. I’ll take that risk because I live by the overriding principle that everything is “bargaining power, everything is priced into the rent or into the deal.” Therefore, fairness is not the deciding factor. Ethical behavior, moral behavior, lawful behavior, politeness – yes, these are all overriding factors, but leases and SNDAs allocate “risk” between the parties, and the topic of this blog entry is a particular kind of risk.
Those caveats having been expressed, I going to pretend that I’ve been hired to fill the role of King Solomon, but there is no baby to be found. I’m being asked to decide what is right or wrong. I take comfort that if the parties to a lease or SNDA decide to do what I think is “wrong,” they’ve “priced” it into the lease or the loan. That’s a convoluted way of saying that parties can accept lease or loan or SNDA provisions that are “wrong” or “unfair” if the overall deal is advantageous. Ralph Waldo Emerson is said to have written: “For everything you have missed, you have gained something else, and for everything you gain, you lose something else.”
Now, to the subject matter of this blog entry. I’m using lease examples, but the final paragraph will extend those examples to SNDAs.
Why do landlord-prepared leases and off-the-shelf leases say that a tenant cannot be in default of the lease’s provisions if the tenant wants to exercise a bargained-for option? Why are many drafted to say that the tenant has to be default-free both at the time of exercising an option and the time it takes effect. Doesn’t that expose a tenant, thinking it has the right to stay another five or so years, to the loss of that right at midnight just before the start of the option period?
Why do I ask “why”? Because, where the parties have negotiated specific remedies for a default and for notice and cure periods, this kind of option language seems to be treated as entirely unrelated to those negotiations. If there are procedural safeguards against a landlord exercising a remedy upon its tenant’s alleged default, are they also there when the tenant wants to renew a lease or exercise an expansion right? Are the cure periods available? Notice rights?
If a tenant has bargained for only court-ordered remedies, such as for judicial eviction and not for landlord self-help eviction, does the same principle carry over to an option clause that begins, “provided Tenant is not in default of… “? What about minor defaults for which no court would evict a tenant. After all, eviction is an equitable remedy. Making the absence of a default into a condition precedent to the right to exercise an option is a matter of contract and, theoretically, a court should not be using its inherent equitable powers so readily when a contractual provision is up for review.
Here’s the circuit breaker for me. If the tenant is in default before, at the time of, or after the exercise of its option, and the landlord wants to do something about it, let the landlord seek eviction or whatever other remedy it has bargained for. If the lease is eligible for termination by reason of a tenant’s default and the landlord wants the tenant out – evict it (or use whatever self-help or conditional limitation remedy the lease allows). Don’t use the back door of cutting-off a bargained-for option right using a lesser standard of “badness.”
What about other in agreements, such as SNDAs? Just rewrite the foregoing by changing leases to SNDAs and changing landlords to lenders, and so on.