Did They Guaranty The Lease For Its Extended Term?

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We’ve written about guaranties before, most directly in postings that can be seen by clicking: HERE and HERE. Today, we drill down to the enforceability of a lease guaranty after the lease has been modified, but without notice to or knowledge of the guarantor. Today’s Ruminating is informed by a January, 2018 unpublished opinion from the Maryland Court of Special Appeals. [Readable by clicking: HERE.]

A church’s lease was guaranteed by its Pastor, his wife, and six other church members. The church defaulted and its landlord sued for the remaining rent under a three-year extension properly signed by the Pastor on behalf of the church, but without the knowledge of the six church members. In fact, they didn’t even have a hint that the lease had been extended despite each being some form of “leader” in the church, though those roles appeared to be substantially ceremonial. Their only financial connection to the church was their obligation to tithe to it. The lower court described them as “commercially” unsophisticated.

The lease extension was by way of amendment. The lease did not have an extension option. The additional three-year term was related to a rent reduction sought by the Pastor and agreed-to by the landlord. The church performed until it didn’t with eight months to go in the lease’s term. At that time, by agreement with its landlord, the church vacated its premises. [Read more…]

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Can A Tenant Walk Out And Lawfully Stop Paying Rent When It Tires Of The Space?

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A restaurant’s lease permitted leasehold mortgages with the following proviso:

Tenant shall have the right … to encumber Tenant’s leasehold interest under this Lease … through a Mortgage (`Leasehold Mortgage’) with an institutional lender…. Landlord agrees that in the event the Leasehold Mortgagee succeeds to Tenant’s interest under this Lease (in which event it shall assume all of Tenant’s obligations under this Lease), Landlord shall, at the time of such succession, recognize such mortgagee, trustee or lender as the then Tenant under this Lease upon the same terms and conditions contained in this Lease and for the then unexpired portion of the Term.

Any such leasehold lender had the right under the lease to take over the tenant-borrower’s leasehold interest through a foreclosure. [Read more…]

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There’s A Material Thought Buried In Here

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We’re not sure if what we write in today’s blog posting could reasonably be expected to influence any reader’s use of the term: “material” in documents she or he prepares. If it could, then this posting would meet the criteria for materiality under a newly proposed, revised definition of “material” to be used by accountants in preparing financial statement or in conducting audits.

Long-time Ruminators with good memories might recall that we covered the topic of “materiality” before, specifically in late 2012. For those who were not then clued into Ruminations or for those with sieve-like memories like our own, that posting can be seen by clicking: HERE.  In yet another posting, this time only a year ago, we labeled “material” as a “weasel word,” but not as a term of derision.[That blog posting can be seen by clicking: HERE.]

We’ve met people who object to the use of the word “material,” such as when writing that one party will not materially interfere with the other’s business operations. Another place this “discussion” arises is when something (usually bad) happens if a party makes a material misstatement. The question in each of these cases and in all of the other cases readers can conjure up is; “What is material –can’t we be more definite and make a list of what would be material or, at least, include a definition for the word?” The position Ruminations has taken is that, at the end of the day, when something happens and the parties disagree whether the “something” was material, a judge will decide. And, judges, when resolving a dispute, will take into account all of the facts and circumstances that actually come up, and not all of the things that could have happened, but didn’t. That’s what judges are paid to do – make judgments. That’s why they are called judges.

The funny thing about the use of the word “material” to condition one thing or another in our agreements is that there aren’t a lot of cases where a judge has been asked to use her or his judgment as to what is material. That’s not to say there aren’t any court decisions, nor is it to say that there aren’t important court decisions in other areas about the word, but given how many agreements use the word, almost always multiple times, perhaps “material” “works.”

The business of real property agreements isn’t the only business where these “discussions” arise. As noted at the outset, accountants have the same discussion. But, in the case of accountants, they have a definition for the word. The definition differs depending on whether one looks to the Financial Accounting Standards Board (FASB) or to the International Accounting Standards Board (IASB). Today, we’ll work with the international standards because right now those are in the process of being updated.

Here is the most recently proposed language:

Material:

Information is material if omitting, misstating or obscuring it could reasonably be expected to influence the decisions that the primary users of a specific reporting entity’s general purpose financial statements make on the basis of those financial statements.

Materiality depends on the nature or magnitude of information, or both. An entity assesses whether information, either individually or in combination with other information, is material in the context of its financial statements. Material information might be obscured if it is not communicated clearly—for example, if it is obscured by immaterial information. A misstatement of information is material if it could reasonably be expected to influence decisions made by the primary users.

Assessing whether information could reasonably be expected to influence decisions of the primary users of general purpose financial statements requires consideration of the characteristics of those users judged in the entity’s circumstances.

Compare that to FASB’s understanding of the US Supreme Court’s definition of materiality:

… the U.S. Supreme Court’s definition of materiality, in the context of the antifraud provisions of the U.S. securities laws, generally states that information is material if there is a substantial likelihood that the omitted or misstated item would have been viewed by a reasonable resource provider as having significantly altered the total mix of information.

These two approaches are rooted in the same concept: if it really didn’t matter to the person who used the information (i.e., if that person didn’t rely on it), then the information (e.g., “representation”) was not material (a/k/a: it was immaterial).

What the proposed, revised definition from the IASB adds to the discussion is the concept of “obscuring.” When we write our agreements, the most likely battlefield upon which the “material” fight takes place is within the sections dealing with representations and warranties. But, in those sections we write about “material misstatements or omissions.” We don’t think about the burying of a true, but not very pretty, disclosure inside long boring prose or within voluminous documents “incorporated by reference.” Basically, our profession resorts to the principal of “caveat emptor,” something described by Investopedia as “a neo-Latin phrase meaning ‘let the buyer beware.’ It is a principle of contract law in many jurisdictions that places the onus on the buyer to perform due diligence before making a purchase.”

Should we impose greater responsibility on a party to a specific agreement to scrutinize every word in that agreement than we place on someone in the amorphous class of people who might read a financial statement? Probably, “Yes.” But what about a professional reader of financial statements such as a lender considering whether to make a loan? Great minds will differ and some will conclude that it is acceptable to obscure material (damaging) facts in an agreement or in a data dump of 10,000 due diligence documents, but somehow it doesn’t seem right to allow that to happen.

So, with that in mind, what do our loyal readers think about adding the underlined text to the following, pretty common words we all see in agreements:

[Seller represents that] this Agreement contains no untrue statement of material fact and does not omit a material fact necessary in order to make such information not misleading, and no material facts have been presented in this Agreement in a way that a reasonable person would conclude those facts have been intentionally obscured such that such obscured material facts were, in effect, omitted.

Yes, even to us, the underlined addition sounds like an unmanageable (unprovable) standard. That is, it does, until we compare it to the generally acceptable standard that precedes it: “and does not omit a material fact.” Placing a material (adverse) fact (expressed with 10 words) inside a 30 page exhibit might “technically” be disclosure of that fact, but, as we are starting to see, doing so is just a sneaky way of “omitting a material fact.”

Ruminations has no belief that anyone will be running to revive their documents or, if they do, that anyone will accept the added text. Nonetheless, this blog is aimed at provoking thought and discussion. If it has, then we’ve been successful (today, at least).

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Luddites Unite – Artificial Intelligence Will Replace Us

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We’ve been thinking about artificial intelligence applications and how they might change, even transform, the way we do our business. Then, we heard an interesting story on public radio. It was about a Southern California manufacturer of sex dolls who was introducing models incorporating artificial intelligence. For reasons quite obvious, the story didn’t get very deep into the details, but we learned that these new models were designed to figure out what their owners wanted and to respond appropriately.

We thought this application to be quite amazing in that here was a business way ahead of our own. Artificial intelligence is being used to read medical images with better results than even experienced radiologists achieve. It is being used to screen job applicants, much, much faster than humans doing so and with more satisfactory outcomes. Artificial intelligence is at the heart of visual recognition, allowing machines to replace people in manufacturing operations. It is used to write newspaper articles, such as those reporting sporting events. The list could go on and on. But, what it won’t include is negotiating agreements such as leases. That is, not yet.

Agreements such as leases are not zero-sum games. Though the parties exchange things of equal value, one needs to ask, “Value to whom?” Basically, when someone gets an item of value to them worth, say, $100, the other person may be giving up something worth only $60 to them. Someone may have two widgets and only need one. The duplicate widget isn’t very valuable to that person. A second person may need a widget and have two gizmos, but only need one. In each case, one widget or gizmo has a utility value of $100, but a duplicate one has a utility value of $60. Thus, if the parties trade widget for gizmo, each gives up $60 of value and gets $100 of value in return. That trade creates $200 of value out of $120 of value – a good deal for each trader. [Read more…]

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How To Cap The Very Wrong Lease Payment Obligation

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Here’s a question for commercial leasing mavens (that’s informal for: an expert or connoisseur). Have you ever seen (or contemplated) where a tenant wants to have a cap on its monthly estimated payments for its share of operating expenses, but doesn’t want a cap on its actual annual share of those expenses? If the question isn’t clear, it soon will become so.

Normally, we would give some background before presenting any lease clauses but, today, the clauses in question are the background. They come from a January 4, 2018 Court of Appeal of Louisiana decision, one that can be read by clicking: HERE[Read more…]

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Again: Say What You Mean; Mean What You Say!

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It’s been a while since we used these words: “Say What You Mean; Mean What You Say!” Well, we’re back (and, no, this isn’t going to be a dinosaur’s story.) Today, we report on an unremarkable, unpublished January 22, 2018 Order out of a United States District Court in Illinois. That’s what brings us back to those words.

Before we reveal exactly what we saw in that Order, we’ll start with a simple thought: How many times have you seen the following formulation?

If Grantor begins such repair work or to performs such obligations, but fails to promptly and diligently prosecute the same to completion within thirty (30) days of so beginning, … [Ed. – Note the underlined words]

Well, that drives us crazy. Obviously, the parties meant “within thirty (30) days after.” Yes, “after” is obvious in our example, but every time you encounter this formulation, think about whether, in the case in front of you, you really meant to say that the action could happen within the 30 days BEFORE. [Read more…]

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Groceries And Other Definitions Revisited

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Groceries, sandwiches, ice cream, supermarkets, restaurants, department stores, variety stores – oh, the words we use, what do they mean? Today, we revisit one of our most-read blog postings because a federal appeals court revisited the underlying case (again). We’re “talking” about the Winn-Dixie case. Our “take” on that underlying case can be read by clicking: HERE. Ruminations urges readers to refresh their memories now by re-reading our earlier blog posting

Winn-Dixie, a supermarket chain, won a court decision in Florida where the lower court ruled that “groceries” included soup, aluminum foil, and similar items. As a result, it ruled that dozens of “dollar” type stores run by three retailers were in violation of a provision in the supermarket’s lease prohibiting others from selling groceries. Basically, the federal court that first heard the lawsuit looked at an earlier state court ruling, and (kind of properly) treated it as binding on itself, the federal court. [Read more…]

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Grammar And Optical Illusions

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Ruminations has never really figured out when to use “which” and when to use “that.” No matter how many times we read that one is used with dependent clauses and the other is used with independent clauses, the rule never sinks in. We don’t even remember which is used with which. To us, it seems like the optical illusion of a hollow mask where you see either a convex face or a concave face depending on who knows what. Small comfort to us that we think we are in good company in this failing. [To learn more about the hollow mask, click: HERE.]

So, does this have anything to do with legal matters? We think so based on a recent decision out of the Delaware Chancery Court, one pitting lawyers from a pair of top drawer Delaware and Washington DC firms against a similar pair of top draw firms from Delaware and Washington DC. And, like many other disputes we’ve read about in judicial decisions, we just wonder: “How do some of us keep a straight face when making some of these arguments?” [Read more…]

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