A Unified Theory of Remedies for Breach of an Exclusive Use Right – a Work in Progress.

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With the help of some readers, Ruminations is spiraling in on a unified theory about remedies a “violated tenant” might have against its landlord and others for the breach of an exclusive use right granted to the violated tenant in its own Lease. I’m going to start with possible remedies against the landlord because that is the one most discussed in reaching a deal and in negotiating a lease. These are important to lenders and buyers as well because they can also affect the economics of sales and financing transactions. For an example, think about the effect on the shopping center buyer in the Office Depot case discussed in the Ruminations entry of July 25, 2011.

Our working theory is that there are four kinds of remedies available against a landlord: (1) damages or rent/money adjustments; (2) termination rights; (3) the right to obtain an injunction ordering the landlord to “do something; and (4) the right to control enforcement.

When it comes to damages, there are the following: (1) rent (including additional rent) adjustments; (2) liquidated damages; and (3) actual damages.

When it comes to a termination right, we see such variables as: (1) how long does the violation need to continue before the termination right is exercisable; and (2) what is the violated tenant’s remedy before the termination right becomes exercisable?

With each of the damages or termination remedies, there is the question of “how long or by when,” sometimes characterized at “… or get off the pot.”

A lease could give the violated tenant the right to enforce or control the enforcement of the breaching tenant’s lease, but that is probably the most unusual remedy and as such, is probably the most controversial. There is something about “control” that drives contracting parties crazy. More about that later.

In the case of each of the four categories: damages, termination, injunction, and controlling enforcement, there are the issues of “when does the remedy” begin and will some of those alternatives be retroactive to the initial violation? Also, there is the issue as to when the remedy expires.

Most of our Ruminations blog entries are quite long – longer, perhaps, than “industry standards.” Today, we’ll stop here. When thoughts haven’t yet “jelled,” it makes sense to this writer to break things down into building blocks. The building blocks will come later down the road. In the meantime, our call for “help” in getting these ideas together remains active and sincere. Let us know if We are on the right track. Help us refine these thoughts. Please post your “help” at www.retailrealestatelaw.com.

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Comments

  1. Great topic. Smaller tenants sometimes are victims of this sort of breach simply out of the Landlord’s desire to sign a larger tenant in the same line of business. Sometimes it’s just a lack of enforcement. Would it make sense to include, within the lease, a written notice requirement from Landlord to Tenant within x days of a new lease execution with a Tenant that may violate the exclusivity of the existing tenant? If no notice provided then Landlord has waived any cure period?

  2. Damon Osborne says:

    Full disclosure, I represent retail tenants. I think it is important to note that there are two categories of violations: (1) intentional violations where the landlord enters into a lease which permits the tenant to operate in violation of the existing exclusive; (2) and the “rogue tenant” situation where the violator’s lease prohibits the competing use and the tenant is operating in violation of that provision. With respect to category 1, the penalties should be severe since the landlord is culpable; reduced rent (usually a % of sales or flat 50% base rent in lieu of base and additional rent) and a continuing right to terminate until the violation ceases. It becomes a business decision for both LL and tenant. If the rent from the new tenant makes up for the reduced rent for the existing tenant, LL is free to make the deal. They also risk losing the existing tenant, but they can’t force the tenant out. For the tenant, the damages are monetized (in reduced rent); and they can, but are not compelled to, abandon the location if it makes business sense. With respect to category 2, I give a bit more leeway; usually 4-6 months before reduced rent kicks in (provided LL is diligently pursuing its remedies under the lease and at law), and 12 months before and the right to terminate if the violation continues for 12 months. The consequence is the same if the violation is not cured, but it gives the landlord a fair opportunity to take control of the situation before being subjected to the tenant’s remedies.

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