Abandonment, Vacancy, Default – How Are These Related?

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JDoes a tenant have a duty to occupy the leased space? No, not unless the lease requires it to do so. So, what should a lease say in that regard? We begin by contrasting two terms, vacate and abandon.

What does it mean to “abandon” leased premises? To abandon the leased space is for a tenant to relinquish its right or interest in the space with the intention of never claiming it again.  Normally that requires an understanding of the tenant’s subjective intent, a very difficult “state of mind.”  In some cases, however, that state of mind can be determined, such as when an entity tenant vacates the leased premises and is dissolved.  Mere passage of time during a cessation of active use does not constitute abandonment.  Although length of time is a factor to be considered, it is not the sole factor.  Some discontinued uses are more readily revivable than others, and the passage of time must be considered in conjunction with all circumstances, including those that caused the cessation, the nature and quality of efforts being made to resume the use, and any other objective manifestations supporting or negating the owner’s expressed intent to continue the use.  Further, just because a tenant ceases using particular leased premises does not mean that it doesn’t intend to find a subtenant for those premises.  Thus, if a tenant is otherwise performing its obligations under its lease, a landlord under a lease lacking a definition for “abandonment,” applicable to the particular circumstances, is without the ability to terminate the Lease or recapture the space.

Merely leaving leased space vacant does not constitute abandonment.  In fact, many retail tenants refuse to agree to “continuous” operation clauses, thus reserving the right to leave their space vacant.  In such cases, they continue to pay rent, heat the leased premises, and perform all of their duties.  In some cases, this is an acceptable situation for a landlord.  Often, it is not because:

  1. Vacant space makes a project less desirable to potential tenants.
  1. Vacant space scares potential lenders.
  1. Vacant space invites crime.
  1. Vacant space incurs higher insurance rates.
  1. Vacant space depresses sales for other tenants at a retail project.
  1. When a tenant vacates its space, it can be an early indication of pending financial problems.

As can be seen, there is a qualitative difference between having a vacant retail anchor tenant space and having a small office on the eleventh floor of a thirty story office building vacant.

One step a landlord can take in its leases to deal with vacant leased premises is to negotiate to make a vacancy into an “event of default.”  Here is an example of such text:

… or (z) if the Premises become vacant or deserted, then, and in each and every such event (“Event of Default”), at the option of Landlord, Tenant’s right of possession will thereupon cease and terminate, and to the extent permitted by law Landlord will be entitled to the possession of the Premises and to reenter the same… .

On the other side of this issue, one step that a Tenant can take to preserve the right to “go dark” (leave the space vacant) is to negotiate for a provision similar to this one:

Vacation of Premises. Notwithstanding anything contained or set forth in this Lease to the contrary, nothing set forth in this Lease will be construed, in any manner whatsoever, as an express or implied covenant of continuous operation on the part of Tenant, and Landlord acknowledges that there is no covenant of continuous operation with respect to the Premises, arising hereunder or otherwise, express or implied, on the part of Tenant.  If Tenant elects, in Tenant’s sole discretion, to cease business operations at the Premises, such cessation of business will not be deemed a breach or default of this Lease, and Tenant will remain liable for the performance of its obligations hereunder.

With such a provision or with any provision that gives a tenant the right to vacate its premises, the lease should not make simply vacating the space into a default. Since abandonment, of necessity, always includes vacating the leased space, no separate “default” needs be tied to abandonment. While it is true that a tenant’s “abandonment” includes not performing any of its obligations toward the space, the failure to observe those obligations (even if the space had not been vacated) would constitute a default on its own. For example, non-payment is a default whether the premises is vacant or not.

Tenants may wish to preserve a right to “go dark” at a particular location, and therefore will not want to covenant to continuously operate at the premises.  Landlords, and derivatively, other tenants, have a legitimate interest in keeping a shopping center populated with open and operating businesses.  One method of addressing this concern is to give the landlord the option of terminating the lease to “recapture” the premises should a tenant cease operations for a period of time.  On the other hand, it is one thing to allow a tenant with an unsuccessful store to close its operations, but another to allow a tenant to move a very successful unit “down the street” to a competing shopping center.  Therefore, a landlord may want to add a provision prohibiting its tenant from opening another store within a given distance from the shopping center because if the tenant did so, it would cannibalize the existing property.

So, a landlord who needs to concede that a given tenant can “go dark,” may seek, and is often granted, the right to terminate the lease (often inaccurately called “recapture”) after some period of time.  Here are two sample lease provisions that do this:

However, in the event Tenant ceases operations at the Premises for more than 120 consecutive days for any reason other than repairs, remodeling (but only the first 30 days of such period) or force majeure, Landlord may elect to terminate this Lease and recover possession of the Premises by giving Tenant 30 days’ prior written notice of such election to terminate, and upon such termination, Tenant and Landlord will have no continuing obligation to the other under this Lease.

— or —

If, after Tenant first opens for business for the one day period as required above, Tenant (or any person or entity holding under Tenant) ceases to operate a retail store within at least 50% of the floor area of the Premises, and that condition exists for a continuous period of more than 360 days [not counting, for any purpose, those days when such operation is halted by reason of remodeling (but only the first 30 days of such period), fire or similar casualty, condemnation, government intervention, or reasons beyond Tenant’s reasonable control, and treating such days as they didn’t exist], then Landlord, as its sole remedy, may terminate this Lease on 90 days’ notice to Tenant and this Lease shall so terminate on the 90th day if retail operations are not resumed within at least 50% of the floor area of the Demised Premises on or before the 90th day.  If this Lease is so terminated, Minimum Rent and Additional Rent for the last month of Tenant’s occupancy will be prorated and Landlord agrees to refund to Tenant any Minimum Rent and Additional Rent paid in advance, within 30 days after such termination.  Upon such termination, Landlord will pay Tenant an amount equal to the Tenant’s unamortized book balance on account of Tenant’s real property improvements to the Demised Premises, if any.  The unamortized portion of Tenant’s expenditures will be determined by multiplying such expenditures by a fraction, the numerator of which is the number of months of the Term of this Lease which have not yet expired at the time of such recapture by Landlord (making the assumption that Tenant would have exercised at least one 5-year renewal option, if at least one remains) and the denominator of which is the number of months of the Term of this Lease making the assumption that Tenant would have exercised at least one 5-year renewal option, if at least one remains.

“The Moving Finger writes; and, having writ, moves on: nor all thy Piety nor Wit shall lure it back to cancel half a Line, nor all thy Tears wash out a Word of it.” ― Omar Khayyám. In other words, that’s all we have to say for today.

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Comments

  1. Elliot L. Warm, Esq. says:

    I use a standard provision in my company’s leases to the effect that cessation of business and non-payment of rent for a defined period constitute an abandonment and allow for lease termination, re-entry and retention of what the tenant has left in the space. Those with greater practical experience than I in this field insist that the right of re-entry cannot be exercised without a court order or an acknowledgment by the tenant, presumably in writing, that it has surrendered possession. Taking the extreme case where the tenant has stopped paying rent for a long time, has closed for business, removed everything (maybe even destroying some of the premises) and become incommunicado, this leaves a situation where the landlord would still have to go to court to get a judgment for possession for a tenant that, for every practical purpose, has already dispossessed itself. More than that, a judgment for possession has no meaning if it not “perfected” through a warrant for removal and the action of a court officer in effecting a lockout of the tenant, which warrant must be sought within 30 days in order that the judgment not be rendered void This leads to the incongruous situation of a landlord having to meet a court officer at the premises for a “lockout” that is fiction rather than reality. Anyone’s thoughts will be appreciated.

  2. Jeremy J. Deeken says:

    Elliott, I can’t speak to the requirements of your jurisdiction, however you do present the typical efficiency v. certainty decision tree that landlord’s encounter. While you may be able to use self-help to save time and money, you are also assuming a risk (which varies by jurisdiction) that the tenant will seek an action for forceable entry. My opinion is that freedom of contract and common sense should rule the day (particularly in a commercial setting) and if the landlord bargained for the right to use self- help upon the occurrences of certain documented conditions precedent, then the landlord should be able to rely on that course of action.

    • Elliot L. Warm, Esq. says:

      Jeremy – I think what has happened in New Jersey is a reflection of the legislative efforts to protect residential tenants, and for sure it is the case that so-called slumlords and the like have created great need for tenant protections. However, in my view the legislators have never gotten around to making proper distinctions between commercial and residential landlords, as certainly there should be more freedom of contract for business transactions. I am aware that often even in the commercial realm there can be greatly unequal bargaining power (the advantage of which could go to either side) but the law can reasonably take care of unconscionable provisions in any kind of contract. There are a mish-mash of Landlord/Tenant statutes in New Jersey that should all be cleaned up so as to be logical and consistent, and to make valid distinctions for the nature of the tenancy. Regrettably, real estate matters often stay mired in the law from thousands of years ago. How inane it is that, for example, a landlord must expressly reserve a “right of re-entry” to have its normal default remedies, or that non-payment of, say, CAM billing does not get treated the same as non-payment of rent unless one deems the CAM charges as “additional rent”?

  3. Stephan L. Cutler, Esq. says:

    From the tenant’s perspective, granting the landlord an evergreen right of recapture can be an issue, particularly if the tenant has fairly flexible assignment or subletting rights. What assignee or subtenant is going to seriously consider negotiating an assignment or sublease with the original (dark) tenant where the landlord can recapture the premises? If tenant has the leverage, it’s better to give landlord a one-time right to recapture the premises (say 30-180 day period), which if not timely exercised lapses as to the particular event that gave rise to the recapture right in the first place. That way, the recapture right does not undermine the tenant’s ability to assign or sublet.

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