You Can’t Be A Rogue Tenant If You Haven’t Gone Rogue (Yet)

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Imagine you leased a large space at a shopping center for your sports bar and restaurant. In that lease, you negotiated for the right to be the only “sports themed restaurant/bar larger than 5,000 square feet” at the shopping center. About four years later, a new, 7,000 square foot tenant signs a lease “for the purposes of operating [] indoor golf simulators, to include the sale of golf-related apparel, a ‘fast casual’ restaurant, and a bar.” You might be a little on edge until you see that the new tenant’s lease included just what you had bargained for. It included that this golf-related tenant “may not, among other restrictions, use its premises for ‘a sports themed restaurant/bar larger than 5,000 square feet.’”

So far, so good.

Then, you take a look at the new tenant’s franchisor’s website and Facebook page. Horrors! The Facebook page for this new location in the same shopping center as your restaurant is located is advertising that it would have a “full bar with 12 taps for beer and 8 TVs.” It features cocktails and beers in its photos.

Now, it is pretty clear to you that when the “golf” place opens, it will be in direct violation of the exclusive use protection you negotiated for years earlier, one that you feel you “paid for.” So, what do you do? This soon-to-arrive competitor has all of the signs of violating its own lease once it open as a sports-themed restaurant/bar larger than 5,000 square feet. Certainly, you cry “foul” and insist that your landlord show you the new tenant’s plans – construction and business. Of course, your landlord rejects your request. As expected, it denies that the newly-signed tenant will be a “sports themed restaurant and bar.”

Self-help isn’t permitted in your state (or anywhere else). So, you don’t hire a bunch of thugs to explain to the new tenant how upset you would be if, in fact, a big sports-themed bar and restaurant, one that sold golf shoes on the side, showed up. Instead, you ask a court to look the situation over and declare to your landlord and the “golf” place that the new operation can’t be a restaurant and bar that would violate your exclusive right. That seems pretty reasonable: just tell them: “Don’t do it, your lease doesn’t permit it.”

Here’s the rub. At the time you go to court, the new tenant is not yet violating its lease’s probation against operating a big sports bar. You went to court too soon. In legal parlance, your case isn’t “ripe.” Now, you might say” “Horsefeathers, the new tenant has actually declared that it will violate our exclusive; it is advertising exactly that.” That might even be a convincing argument that you aren’t too early. But, how are you going to overcome a little problem coming out of a likely compromise you made with your landlord when the lease was drawn? You agreed to a fairly reasonable and not uncommon landlord approach – the “give us time to deal with a ‘rogue’ tenant clause.”

The principle behind such clauses is that a landlord says, “Tag me right away if I let another tenant violate your exclusive use right, but cut me a break if a tenant breaches its own lease by violating your exclusive right.” Basically, landlords are willing to give a violated tenant some relief even if another tenant tramples over the “exclusive,” but first want a shot at stopping the “rogue” tenant from being a “rogue.” In the situation in Colorado where our story comes from, the original sports bar lease had the following form of the “rogue” tenant relief provision:

… Tenant shall have no remedy for a violation [of its exclusive use right] if: (i) another tenant or occupant of the Shopping Center violates a provision of its lease or license agreement, or other document burdening said tenant or occupant’s premises or property, which either does not permit or specifically prohibits such violating tenant or occupant from engaging in the Exclusive Use; and (ii) after receiving written notice of such tenant or occupant’s violation from Tenant, (A) Landlord provides written notice of the lease, license agreement or document violation to such other tenant or occupant; and (B) Landlord commences and diligently pursues all actions reasonably available to Landlord for the enforcement of the provisions of the lease, license, or other document. In such event (“Rogue Tenant Violation”), Landlord shall have a period of up to one year from receipt of the foregoing notice from Tenant within which to cure such violation of Tenant’s Exclusive Use, and, in the event that at the end of such one-year period the Rogue Tenant Violation shall not be cured, Tenant shall have the right to pursue the remedies afforded to Tenant under this Agreement.

We could use a lot of words to explain that the existing sports bar’s lease was written to protect it from an actual competitor, not one it (validly) believes will be a competitor once open for business. The existing sports bar tried to get the court to ignore this “rogue” tenant provision by enforcing the new tenant’s specific lease provision saying that the new tenant couldn’t operate a sports-themed restaurant/bar larger than 5,000 square feet. Basically, it wanted prophylactic relief against what would otherwise be inevitable. To Ruminations, that makes a lot of sense, but the court had other concerns. In the court’s words, “[T]here would be little use for the Rogue Tenant provision if [the existing sports bar] could immediately sue for a violation of the Exclusive Use provision.”

Here, the landlord had received notice from the existing sports bar of the violation. Then, by reason of the ensuing negotiations and its attempt to work out the issue with the existing tenant, it was (as the court described) “diligently pursuing all reasonable actions ….” So, the landlord “earned” the right to take as long as a year before the existing sports bar could have any remedy, and that remedy would need to be what the lease calls for, nothing more and nothing less.

After reading the federal court’s decision [one that you can read by clicking: HERE], this is what we are thinking: Tenants should seek to modify rogue tenant clauses to allow for relief before a rogue tenant opens for business and landlords should include a trigger for the start of rent if a new tenant is found to be a “rogue” even if that tenant hasn’t yet opened for business. Of course, that’s why leases grow in length every year. And, that trend gives us writing material for a to-be-written rant.

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