Unified Theory of Remedies for a Breach of an Exclusive Use – 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. We’re going to start with possible remedies against the landlord because that’s the most discussed facet of this topic when reaching a deal and when negotiating a lease. The agreed-upon remedies are important to lenders and buyers as well because what is agreed-upon can 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 (think, landlords) crazy. More about that in a later posting.

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. We know this is an “unsettling” end to a blog posting, but there is a reason to this madness – it’s like seeing the gun just before the commercial break. So, before next week, 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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  1. Ira: (A) My first overall assumption is that the Landlord breach his covenant by leasing to a competitor of the protected tenant and the new tenant was unaware of the exclusive and was thereby operating within the confines of his use clause. This is not a brilliant move on the Landlord’s part as they should be aware of what exclusives they have given out in the past and should advise the incoming tenant about them.

    1. The remedies against the landlord should be immediate rent reduction, reflecting a diminution of value of the exclusive holder’s lease. Whether the rent drop is 50% (rather dramatic but customary) or something less painful is a matter for negotiation. To that extent I see the damages are “liquidated”. I do not believe that the exclusive holder has to show a drop in sales – actual damages – to prove entitlement to relief. The Landlord breached the covenant.

    2. Actual damages – if the exclusive holder can show it suffered damages through lost sales would seem to be overkill if he is already getting a rent reduction. If he can show such damage, that will affect the remedy in #1.

    3. Termination rights – Yes after a period of time, typically a year as the landlord will not be able to fix the problem in a day, if ever. At the fish-or-cut bait point, the rent should go back up but to something less than the original rent (e.g. 85%) as the exclusive holder has lost some value of his lease.

    4. Injunctive relief against the landlord – there should always be a covenant in the original exclusive requiring the landlord to protect the exclusive rights granted to the exclusive holder. This is necessary, even in view of the above, if the landlord doesn’t care about receiving reduced rent because it really wanted the new tenant. Then perhaps there should be no fish-or-cut bait if the Landlord is doing nothing to enforce.

    5. I don’t understand the “control of enforcement” point your raised.

    (B). Remedies against the violating tenant. If the violating tenant is operating within its use clause and was innocently unaware of the existing exclusive, then I don’t see how the exclusive holder can proceed against him successfully. However, if the violating tenant is a renegade violating its use clause or had notice or knowledge of the exclusive (unclean hands) despite what it use clause said, then the exclusive holder should have injunctive relief against him. If he is completely innocent, then I would think his covenant of quiet enjoyment was violated and he would have recourse against the landlord. That is why I always insist, on behalf of an exclusive holder, that the terms of its use clause and exclusive be recorded in a memorandum of lease verbatim.

    The above is my initial offering towards your Unified Theory’ although I am usually guided by Heisenberg’s Principle of Uncertainty, which is something is true (unless it’s not).

  2. Dean Wieber says:

    In regards to terminations in many cases it would be small consolationn for the injured tenant to walk away from his business and investment. It seems that the LL should pay a termination fee to the tenant to help them recoup their investment and possibly relocate.

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