Don’t Know How To Do It? Then, Don’t!

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Some concepts are so simple that we never think that we’d have to point them out. But, today, one of those concepts occurred to us, and we’d like to share it with our readers. Here it is:

If you are going to craft documents, be they leases, purchase agreements or ‘whatever,’ you should know what you are doing.

Experience can be a good teacher, if your experience is good. Bad experiences could be a good teacher as well if you learn (quickly and correctly) and especially if they were someone else’s bad experiences.

Today’s blog posting was triggered by a nearly year-old Maryland court decision. The particular problem pointed out by the court, however, is something we’ve seen played out more than several times over the years. In this version, it involved a right and option provision amended into an existing lease. The relevant text read as follows:

[D]uring the Primary Term (but not during the Extended Terms) the Lessee shall have the right and option to purchase or cause the sale of all or any of the properties leased pursuant to the Leases listed on Exhibit C attached hereto for a price that is equal to the then-current fair market value, but which in any event shall not be less than the amount which is shown on Exhibit C. The prices shown on Exhibit C shall be subject to annual increases of two percent (2%) effective as of July 31 of each year.

The tenant sent proper notice to its landlord that it was exercising that purchase option. The notice included what the tenant calculated to be the fair market values for the chosen properties. In response, the landlord rejected the exercise on the belief that the prices offered were less than actual fair market values. Its response suggested a typical dueling arbitrator process for determining the prices with a third arbitrator resolving any dispute exceeding 15% between the first two.

Obviously, as is often the case (here a lease and a couple of amendments), litigating parties shop for attorneys at their favorite plumbing supply houses. That’s so they can buy a kitchen sink and throw it at the judge or judges. This case was no different, but the court didn’t get distracted. It went right to the heart of the matter. The lease provided no mechanism for determining fair market value, and that was fatal to the tenant’s case. We aren’t going to expound on the law or the court’s reasoning today. To Ruminations, the result was unsurprising. Yes, sometimes a court will “go the other way,” but there is a high risk that if you call for “fair market value” and don’t provide a means to determine it, the court won’t either.

What disturbed us about this case is that anyone who prepares a document calling for “fair market value” should know not to gamble on whether a court will “save the day.” What further disturbed us is that when the landlord offered a procedure that could easily have been written into the lease in the first place, the tenant rejected the offer. Moreover, though we speculate, the tenant’s litigating attorney might have negotiated a resolution.

Basically, “if you are going to craft documents, be they leases, purchase agreements or ‘whatever’” you should know what you are doing.”

There are lots of other examples gleaned from our reading court decisions and from reviewing countless leases over the years. As we’ve already written, we’ve seen the no fair market value flaw before. Another thing we commonly see is where document drafters say that something will happen when the last of (a), (b), and (c) is satisfied (such as rent begins at that point), but don’t say what happens if one or more of (a), (b), and (c) never happens or seems like it will never happen. For example, rent begins after land use approval is obtained.

And, speaking of land use approval, which one – municipal, road commission, state, etc.? And, what about the running of all appeal periods?

How about the one where the clock starts running when all approvals are received? What are those approvals – the permit to operate the walk-in cold box or health department approval for the employee lunchroom?

Here’s a common one when it comes to approvals: the tenant must start construction within 10 days after all construction permits and approvals are received. Does that mean final inspections and a certificate of occupancy?

Speaking of certificates of occupancy, does the document contemplate a final versus a temporary certificate?

How many times have we all seen a lease’s work letter calling for things that don’t exist or saying “as to be agreed-upon” when there are no standards for reaching an agreement and the item to be “delivered” is a critical one.

What about the work letter that says the tenant will receive an allowance for carpeting (or something else), but doesn’t say how much?

Leaning into this holiday week, it behooves us to be shorter than usual and given our propensity for wordiness that will be easy. But, don’t let that stop any reader from pitching in with examples or, even better, solutions. That’s what the “comment” feature was designed for.

[Totally unnecessary as it is to see, if you’d like to do so anyway, the case we saw can be seen by you if you click: HERE.]

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Comments

  1. If you set up a fair market value purchase option of any sort, it’s definitely a good idea to establish a mechanism to determine that FMV. We always do that. But the court maybe should have taken a different view. There is no question here that the parties intended to give tenant an FMV-based option. The only question is how do you determine FMV. Couldn’t the court have said FMV is a factual matter that the court can determine like any other factual matter? What if the lease had said the option price equals $112.77 times the occupiable square footage of the building? Would the parties have needed to establish a fact-determination mechanism in their lease to figure out the occupiable square footage? Or might the court have been able to determine it like any other factual question — perhaps with dueling experts or through appointment of a special master to investigate the issue? Maybe the court should have tried a little harder to determine the factual issue of FMV, using the same mechanisms the court would have used to determine occupiable square footage, given that it’s clear as day the parties intended to give tenant a meaningful option. If courts can determine facts, why can’t they determine FMV — just another factual matter? I realize Maryland precedent suggested otherwise, so I am questioning not only this particular case but also the precedent that drove it. And of course I don’t mean to suggest that we should write FMV options like the ones in these reported cases.

  2. STEPHEN C ANDERSON says:

    I don’t believe that I have ever seen a provision like the one that gives the tenant the right “to cause the sale of …..[the leased] properties ……” The sale to whom? If to the tenant, then it’s pure surplusage. If to any third party, is that the same as an assignment? Or is the designated buyer a third party beneficiary with all those attendant difficlulties (at least in Massachusetts)?

    Steve Anderson

  3. As with every aspect of a lease, the devil is in the details. And in my experience, most courts are loathe to look beyond the four corners of the document in an attempt to ascertain the intentions of the parties. FAR, FAR too often, small space users with little lease experience choose to sign leases reflecting little or no legal guidance from an attorney with an appropriate commercial lease negotiation skill set. And agreeing (out of ignorance) to a FMV rent structure without sufficient detail as to what constitutes FMV and how it will be determined, accompanied by their failure to include an appraisal or arbitration mechanism for determining the FMV (thus significantly devaluing their renewal options) is one of the most common, costly mistakes they make. Occasionally, I run into a landlord who refuses to agree to any such determination mechanism, in which case I take my client somewhere else. My personal complaint is that, over the decades, the “landlord” community has successfully established as a “norm”, that, irrespective of the FMV, “the rent will never go down” or that the new rent “will never be lower than last year.” FMV and “no lower than last year” are totally contradictory. In the end, however, it all comes down to leverage. Unfortunately, however, in many cases, the small, inexperienced tenant either doesn’t have the leverage or doesn’t know how to exercise it in the negotiation.

  4. Margaret D. Petersen says:

    As for small tenant leases, the FMRV clause, typically re-setting the rent for any exercised option, that makes me pull my hair out is the LL’s (supposed) FMRV lease form language that says that the FMRV is whatever the LL says it is, and the tenant can take it or leave it. No mechanism or reasoning – just the LL’s number.

    • George Vaill says:

      Any knowledgeable lease negotiator would never agree to a FMV provision without an appraisal or arbitration mechanism.

      • Margaret D. Petersen says:

        Of course, which is why this clause always mystifies me – I mean, why bother? I strike it, we put in an arbitration type clause (if the parties don’t otherwise agree on the then FMRV), including time periods, yada yada, or the parties just agree to fixed, known increases for the option(s). But the fact that this language is in a LL’s lease form – or otherwise comes slotted into the LL’s form – leads me to believe that some tenants actually agree to it (shudder). A head scratcher. In addition, beyond the obvious negative for the tenant, I don’t think this would be a clear slam dunk for a LL, and if I represented a LL with that clause, I would advise otherwise. The language leaves open an invitation for a LL to issue a clear “highball” number, or for the TT to claim it’s a “highball” number, and if it’s demonstrably above FMRV, then, depending on what’s legally supportable locally/statewide (and the judge draw), this could lead to some sort of a bad faith claim. Even if winnable or knocked out by the court, we all know that even starting and eliminating litigation is a huge pain + costly, so why invite this type of claim? I honestly don’t get the wisdom of this language, from the LL’s perspective.

  5. Lance Bond says:

    Nice article and well said Mr. Vaill.

  6. ” I honestly don’t get the wisdom of this language, from the LL’s perspective.”

    It’s simple. Smart landlords INITIALLY craft a one-way lease that provides THEM with greatest possible POWER and LEVERAGE and FLEXIBILITY and PROFITABILITY and DENIABILITY while, at the same time, denying the tenant all of those advantages. And landlords do so by being very SPECIFIC about THEIR RIGHTS and the TENANT’S OBLIGATIONS while, at the same time, being very VAGUE about the TENANT’S RIGHTS and THEIR obligations. These landlords know that MOST inexperienced space users are intimidated by the process, feel that they have no leverage, do not know how to parse the legal (or even the business) concepts and rarely engage professionals to negotiate on their behalf. And when they do, most landlords accede to reasonable requests/demands to level the playing field.

    Most of my 43 years of lease negotiations has been in the services of small, independent tenants. And it’s disheartening to see how few of them understand the NEED for knowledgeable representation, nonetheless actual engagement of negotiation professionals to guide and protect them as they navigate a very perilous process.

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