“And, If Not” – The Question Left Unasked: Crafting A Lease Requires Thoughtfulness

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The court opinion we wrote about last week continues to bother us. It wasn’t only about the court decision’s primary question of whether an “election,” once made, can be revoked. There is a second aspect that bothers us, one that we will get to about 300 words from now. First, we’ll summarize what bothered us about how the lease didn’t “do the right thing,” “didn’t keep the question out of a court.” And, if the parties went to court, the lease didn’t give the court a rule or even guidance.

As to whether a notice, once given, can be revoked, we know that the parties crafting an agreement should cover that in their agreement. We also know that if the non-electing party reasonably incurs damages when relying on such an election notice, it should be made whole. If they don’t, then what should the rule be? Last week, we saw a court look at a lease that was silent on the question as to whether a landlord that sent a 12-month notice requiring a tenant to temporarily vacate its premises could change its mind two months before the required move-out date. It ruled that the election made by the landlord requiring such a move-out could not be rescinded. What the court failed to do was to adequately explain why it ruled that way.

The question raised reminded us of these legal guidelines:

In the United States, everything which is not forbidden is allowed.

In Germany, everything which is not allowed is forbidden.

In France, everything is allowed even if it is forbidden.

In Russia, everything is forbidden, even that which is expressly allowed.

In North Korea, everything that is not forbidden is compulsory.

Of course, these are stereotypes, and stereotypes compress and distort the truth. Nonetheless, if we applied these rules to the question presented since this was a United States lease that didn’t forbid a rescission, the landlord should have been allowed to take its notice back. Is that really the rule? Should that be the rule? We plain just don’t know. What we do know, and we repeat – the lease should have covered the question – is that the lease should have covered this issue. [For those who missed last week’s blog posting, it can be seen by clicking: HERE.] http://www.retailrealestatelaw.com/archives/4653

BUT, that’s not all that bothered us. In last week’s posting, we quoted that lease’s provision dealing with what the landlord had to do in order to send its notice. It had met all of those conditions. Consequently, the landlord “set” a date (the “Suspension Date”) by which the tenant had to vacate its space for up to three years while the property was redeveloped. Here’s what was supposed to happen by the Suspension Date:

(b) On or prior to the Suspension Date (time being of the essence), Tenant shall quit and surrender to Owner possession of the Demised Premises, vacant and broom clean; provided, however, Tenant shall have no obligation to so surrender possession of the Demised Premises, and the Suspension Date shall not be deemed to have occurred, unless (i) on such date there shall not be any other tenants or occupants in possession of all or any part of the Building, (ii) no later than twenty (20) days prior to the Suspension Date, Owner shall have deposited into escrow with [a title insurance company] acceptable to Tenant (the “Escrow Agent”) (x) the payment described in Paragraph 4(c) hereof and (y) a letter of credit (the “Letter of Credit”) in the amount of Twenty-Five Million and No/100 Dollars ($25,000,000.00) to secure Owner’s payment obligations under Paragraph 5(h)(ii) and Paragraph 5(i), and in each case given Tenant reasonable evidence thereof, and (iii) on or prior to the Suspension Date, the Escrow Agent shall (x) pay to Tenant the payment described in Paragraph 4(c) hereof and (y) deliver to Tenant the Letter of Credit Tenant acknowledges that possession of the Demised Premises must be surrendered to Owner on or prior to the Suspension Date (time being of the essence), subject to the terms of the preceding sentence …

So, picture what the court (last week) did when it ruled that the landlord’s notice could not be revoked. Basically, the Suspension Date in that notice remained in place. So, would the tenant be obligated to vacate its space? Wasn’t that the intent? After all, the tenant was given one year to do so. That way, it could locate temporary space (if it chose to do so); it could furlough or reassign its employees; it could reschedule its merchandise deliveries; it could do all of the other things needed to transition out of the space. Then, BANG, the landlord decides to change its mind two months before the Suspension Date. Did the court really protect the tenant by invalidating the revocation notice? The answer can be found in the lease provision cited above, and appears to be: “no.”

According to the provision, the tenant had no obligation to vacate its space if the landlord didn’t make an (up to five million dollar) payment to the tenant, AND post the letter of credit, AND empty out the rest of the property. The tenant could have waived those pre-conditions and move out anyway (as the court pointed out), but it didn’t have to leave.

Tell us: if the tenant left anyway, would it be entitled to the payment and the letter of credit? Tell us: if it didn’t leave, could the landlord, ten years later, satisfy the pre-conditions, thus requiring the tenant to leave on one day’s notice?

The lease also provided that the tenant wouldn’t have to be out of its space for longer than three years. So, tell us: would the tenant have to return to its space at the end of the three-year period? What if the landlord met the pre-conditions two years after the tenant actually moved out: by when would the tenant have to return to its space – one year later or three years later (for a total of five years)? Could it even return if the property was under construction?

So, what is it that really troubles Ruminations? Simply speaking, it’s that those who crafted the lease failed to ask two important questions: “What if?” and “If not, then what?”

Over time, form leases “learn” to cover these questions. The most basic example is that a lease says that if a tenant pays the rent it can occupy the space, but if it doesn’t, it is in default and can’t occupy the space. Another example is that when a lease says that a tenant has to fix something, it also says that if it doesn’t do so, then the landlord can and charge the tenant for the cost.

But, when we write a “custom provision” such as the “suspension provision” in the lease before the court, we often “forget” to think through how those provisions will (or won’t) work under a variety of likely circumstances. Wasn’t it obvious to the parties that if a court, at the last minute, allowed even one other tenant to remain in the space, the whole house of cards would fall? What were the consequences of the landlord not following up with the payment to the tenant or furnishing the letter of credit? What should have happened if the landlord, despite extraordinary efforts, couldn’t empty out the rest of the property by the Suspension Date?

We know that some may think that a “lease suspension” provision is so uncommon, that Ruminations is wasting its time (and their time) by beating the horse after it died. So, we’ll offer another, a far more common example where parties don’t ask: “and, if not?” Far too many times, we’ve seen leases setting a commencement date based on when governmental approvals are received but don’t say what happens if those approvals aren’t or can never be obtained. Yes, there are ample ways to cover such a situation, but, nonetheless, there are plenty of leases where the parties were so sure “that can never happen,” that they don’t cover the “and, if not.”

Are you guilty?

[For those desirous of reading the New York court’s decision that triggered this week’s and last week’s blog posting, it can be seen by clicking: HERE.]

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Comments

  1. Nope. Not guilty.

    We ALWAYS insist upon drop dead dates for failure to deliver premises in a specified time frame and permit (and other) contingencies that allow for termination if those contingencies are not met.

    As you rightfully point out, “and, if not” requires critical, imaginative thinking that is far too often lacking. Stuff happens. Is it realistic to think that anyone can think of everything? Of course not. But anticipation, among our most basic survival instincts, is paramount in crafting a lease if for no other reason than that its terms and provisions may cover an extensive period of time during which anything may happen. Those who don’t take the initiative to attempt to contemplate every possible scenario in every direction are not doing their job.

  2. Marc Ripp says:

    The typical termination/renewal/expansion option in the vast majority of commercial leases does not require that the Tenant’s exercise notice be IRREVOCABLE and UNCONDITIONAL. Does the absence of those 2 qualifiers mean that the Tenant may withdraw the exercise notice later, or may impose conditions in the exercise notice whose non-performance would give Tenant the right to unwind its exercise notice? The standard custom and routinely accepted practice in our industry is that an option exercise notice: (i) is like a bell that cannot be “un-rung” and (ii) will fail if it has conditions attached to it that are outside of the option language itself.

    To view this any other way just adds enormous uncertainty to options. Any lawyer who counsels his client that an exercise notice may be later rescinded by the sender, or may include a host of conditions unilaterally imposed by the sender is just looking for future litigation work to unravel a dispute that is sure to follow.

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