The COVID-19 Crisis Is Now Over – What Is Next For Retail Real Estate?

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If you are like we are, you’ve been receiving dozens of COVID-19 emails or other messages each DAY. On the “law” side, they discuss and dissect the legal rights and remedies implicated by the current crisis – force majeure, impossibility, impracticality, material adverse changes (effects), foreclosure moratoriums, and on and on. On the “business” side, they opine on holding off the payment under mortgages or leases, or the applicability of insurance coverage, and on and on. The late Newton Minow, when last to speak on a panel, is reported to have said something like: “By this time, everything to be said has already been said, but not everyone has had a chance to say it. Now is my turn.” That’s the feeling we are getting about the nearly 200 messages we are receiving weekly.

 

Some “advice” is well thought out; some is authoritative; some is important; some is trivial; some are well-meaning but dangerous. To us, the common factor is that all (that we have seen) are backward-looking. What about tomorrow? In the words of Bishop T. D. Jakes, “Never make a permanent decision based on a temporary storm. No matter how raging the billows are today, remind yourself: ‘This too shall pass!’” [Read more…]

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Today, Hubris And Existentialism, Not “The Missing Comma”

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Hubris (hu·​bris), n. [Gr. Hybris].wanton insolence or arrogance resulting from excessive pride or from passion. That’s what it would be if we were to present today’s blog posting as if our subject matter was important in the current situation. It is also what all of us, unknowingly for sure, have demonstrated in thinking that our agreements could cover every possibility. If any reader had a COVAD-19 provision in their documents before January, we invite you to share it with the rest of us.

Countries have shut down walk-in commerce. In the states and Canada, stores, large and small, are closing “temporarily.” Restaurants, the “saviors” in today’s shop-on-line world, are closing “temporarily.” Hours are being cut back. Rents won’t be paid. Some, mainly marginal, tenants won’t be coming back. Some (pretextually) will use their co-tenancy right to “skinny down” their portfolios. We’ll all fight about the meaning of “force majeure.” We’ll be picking through our leases, open purchase agreements, and loan documents (including loan commitments) in an effort to “get out.” [Read more…]

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Too Wordy To Be Enforceable?

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There are lessons to be learned by looking outside of our own field of interest. That was our thinking when we saw a decision out of a New Jersey appellate court last Tuesday. It involved how a document was drafted, an arbitration requirement, and more than questionable behavior by one party. Initially, when we saw that the heart of the case was overreaching by a nursing home, we set the decision aside. But, we were troubled. So, we resumed reading the decision and were rewarded with a tidbit of “wisdom.” What drew our attention was the following provision from the disputed agreement, especially its opening 229-word sentence: [Read more…]

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The Law Is Not Always Intuitive; Avoid Learning It At Your Own Peril

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Often, we come across a court decision based on a narrow set of facts and, thus, limited in its effect. The court’s analysis and the case’s result is primarily of interest to the involved parties and a handful of others who might find themselves in the same situation. Sometimes, however, there is a larger lesson to be gleaned, one not even about the narrow subject matter discussed by the court. As we see it, at the very end of January, a Florida District Court of Appeal Court delivered such a decision.

The subject matter before the court was a dispute over the obligation to pay a brokerage commission. Florida law provides that “[i]n the absence of a special contract, a broker is entitled to a commission when that person is the procuring cause of a sale.” We don’t know how many states have a similar law. Our experience is with those whose law requires a written agreement or a specific written substitute for such an agreement. For example, here is the relevant part of New Jersey’s statute [N.J.S.A. 25:1-16]: [Read more…]

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Why Are Obnoxious Holdover Rents Enforceable?

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Is a holdover rent of 200% or even 150% an unenforceable penalty or does it just give the tenant an option: pay it or leave? Earlier this month, a California appellate court answered that question for its jurisdiction, but not without a lengthy analytic dissent.

To get us all on the same page, here are some ground rule definitions. “Holdover” by a tenant means it stays in the space, without its landlord’s consent, after the term of its lease expires. [For a lengthier exposition, click HERE for an earlier blog posting.] As to whether such a cranked-up rent constitutes enforceable, agreed-upon, liquidated damages or an unenforceable penalty, we need to review what constitutes legitimate liquidated damages. That’s because if an agreement, such as a lease, specifies an amount to be paid by a party upon breach of its agreement, that agreed-upon amount needs to be a reasonable estimate, made at the time of agreement, of what the damaged party would lose upon such a breach in a situation where the damages, if calculated at the time of the breach, would definitely exist, but would be very difficult to calculate exactly. [For a lengthier exposition, click HERE for yet another earlier blog posting.] [Read more…]

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Landlords Can Be Retailers And Never Sell Any Goods

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At one time (and even today), when you saw a closeout bookseller or a Halloween store at a shopping center, a good guess was that the property was sucking wind or its functional equivalent. Though these are generally unattractive uses, they do bring revenue and customer traffic. So, the impact of their presence lies in the eyes or the pockets of the observer.

Temporary uses don’t have to tarnish a shopping center. If you call the Halloween store a “pop-up,” its image improves. There’s an idiom from as early as 1833, adjusted to 21st Century English: “Call me anything you want, just don’t call me late to dinner.” That would seem to apply to filling a property with rent-paying, foot traffic generating tenants.

Temporary tenants don’t have to be solely discount or low brow ones. Landlords have the power to create a shopping environment. Seemingly perennially vacant spaces can be converted to above-market rental opportunities. And, this isn’t just for the large properties. Permanent pop-up spaces can be created. Outfit a single store or more for use by a continuing series of fashion retailers. That would be like having a regular tenant that turns over its inventory every month. Just as furnished houses rent for more than vacant houses, “furnished” stores can rent for more than empty ones. Earn money on more than real property. Rent the improvements and the fixtures as well.

Fashion doesn’t tickle your fancy? Then, how about pop-up restaurant space? Invest in a fully equipped, first-class commercial kitchen with front-end restaurant fixtures. Then, rent the space out for a month at a time. Be even more adventurous, outfit a kitchen that can be rented every Tuesday by one “chef,” and every Friday by another. That’s seven tenants each week on a rotating basis. With a single day in the space, a once a week tenant could pay more than 1/7 of what a full-time, long-term tenant would pay. How about creating incubator space just like the high tech people do. You might even want to exchange use of the space for a percentage of any permanent restaurants growing out of your shared kitchen (or any shared retail space).

You can call the spaces “pop-up” or call the spaces “concept,” but whatever you choose, call them Kaching-Kaching, the sound of a cash register. Restaurants, art, jewelry, fashion, shoes, whatever – create a permanent marketplace of your own.

Think out of the box. When you’ve got an empty space and can’t easily rent it, you get hurt, and, importantly, so do your tenants. Quality traffic rises all boats.

These kinds of opportunities aren’t just for property owners. There’s a business in operating shared spaces. After all, many mall food courts are “that” business. One master tenant providing fit-up space to a variety of operators. The master tenant pays “wholesale” rent and charges “retail” rent to the restaurants. Why not be a tenant operating time-shared space?

What brought this to mind was Macy’s announcement last week that it would be bringing its brand to community shopping centers (strip malls) and closing about 125 mall stores over the next three years. Supermarket-based properties, especially ones with drug stores, remain stable, somewhat (but not wholly) insulated from today’s evil villain: THE INTERNET. They have decent foot traffic because people keep running out of food and toothpaste. We can’t speak for Macy’s and its planned 15,000 square foot “Market by Macy’s” stores (carrying apparel, accessories, home goods, and beauty products), but we think its thought is that customers, once at the property, will visit these smaller stores. Sephora and others are thinking the same thing.

What’s the connection? Why did the Macy’s announcement drive today’s blog posting? That’s simple. Foot traffic is the key to brick and mortar success. Tenants create foot traffic, but they don’t have to be the only ones. Landlords can do the same and make money doing so. Some tenants own their own properties. More landlords can own their own retail businesses and not even have to run them.

Why does Ruminations think today’s topic belongs in a blog focused on retail real estate law? Here’s our thinking. There was a time before condominiums, cooperatives, time shares, fractional ownership, and commercial mortgage-backed securities. Entirely new real estate industries and practice areas have been built on these concepts. Smart readers, especially those fearing declines in brick and mortar real estate, need to think outside the box. Retail real estate, and by extension, retail real estate law, doesn’t have to be stagnant. There are new ways to think about drawing customers away from their desktops. So, by example, some of the simple ideas we’ve tossed out today might work better with licenses, not leases. Or, perhaps, with an entirely different way to structure an occupancy agreement. Our readers can make that happen. Go for it!

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Thump, Thump, Thump – Are You Enjoying The Quiet?

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It’s been more than five years since we published a blog posting focusing on quiet enjoyment. It began with: “Ruminations doubts that most readers know what is really meant by the ‘covenant of quiet enjoyment.’” That doubt persists. [To see it for the first time or once again, as the case may be, click: HERE.]

[Today’s posting is a long one. You may want to brew a cup of coffee before you begin.]

One month ago, a New York court issued a decision whose central feature was “quiet enjoyment” and its blood relative, “constructive eviction.” The facts described won’t be strange to many readers. The core problem arose out of a conflict between the nature of the businesses conducted (or to be conducted) by neighboring tenants. In this particular case, a tenant intended to operate a cancer treatment center in the subbasement of an office building. Just above that space was a gymnasium-focused health club. The cancer center planned to use precision machines to locate a patient’s treatment and then to focus a pinpoint radio wave at the patient’s tumors. One of the activities in the gymnasium just above the cancer center involved dropping weights weighing up to 200 pounds on the floor. That floor served as the cancer center’s ceiling. The resulting noise would have been annoying to the tenant below; the vibrations would have made precision pinpointing of the radiation impossible.

The cancer center signed its lease in October of 2011. With extensions, the lease included a due diligence period that extended to January of 2013. In October of 2013, the lease was assigned to a successor, the one directly involved in the quiet enjoyment dispute.

In January of 2012, the gym signed its lease. That was within the due diligence period and before the assignee took over the cancer center’s lease. Both the original cancer center and the successor tenant were aware of the gym’s lease. So, even during the planning and permitting stages for the cancer center, it notified the landlord of its concerns and “stressed that [the landlord] had to take measures to abate the disturbances emanating from the Gym.” The cancer center received “repeated assurances” from its landlord that it would “investigate and abate the noxious noise and vibrations caused by” the gymnasium.

Now would be an appropriate time to reproduce some lease provisions from each of the two neighboring leases.

The cancer center’s lease included this provision promising it “quiet enjoyment”:

Landlord agrees that upon Tenant’s paying the rent and performing and observing the agreements and conditions on its part to be performed and observed hereunder, Tenant shall and may peaceably and quietly have, hold and enjoy the Demised Premises and all rights of Tenant hereunder during the term of this Lease.

Now, at first blush, one might think this was written for the tenant’s benefit, but it wasn’t. This is a landlord-favorable clause. That’s because the covenant of quiet enjoyment is implied in every lease. Basically, it protects a tenant’s ability to use and enjoy its premises against permanent and intentional harm caused by an act of the landlord or of someone for whose conduct the landlord is responsible. [It isn’t specifically tied to “noise.”] So, what the particular lease provision does is to condition an express promise of such protection on the “Tenant’s paying the rent and performing and observing the agreements and conditions on its part to be performed and observed” under the lease. Ruminations has urged tenants to reject such clauses.

As to the gymnasium’s lease, the parties understood that the gym’s activities could interfere with the cancer center’s use of the space below. To that end, that lease included this provision:

Tenant will be obligated to sound proof the ‘gym floor area’ of the Demised Premises at the Tenant’s sole cost.

a. Upon completion of the sound proof the tenant space below the Demised Premises will not exceed the sound levels normally associated with retail space.

b. If the [T]enant fails to properly sound proof the demised space the Landlord has the right to provide and install a sound proofing system that meets the above stated sound levels at the sole expense of the Tenant.

The court’s decision doesn’t exactly say so, but it would appear that the landlord never consulted with the cancer center as to what about a gymnasium could interfere with the center’s operation. That’s reflected in the gym’s lease’s sole focus on “noise.”

There was also the following self-help provision:

If Tenant shall default in the performance or observance of any agreement or condition in this lease contained on its part to be performed or observed, other than an obligation to pay money, and shall not cure such default within the applicable cure period … Landlord may, at its option … at any time thereafter cure such default for the account of Tenant … Landlord may cure any such default as aforesaid prior to the expiration of said thirty (30) days period, but after notice to Tenant, if the curing of such default prior to the expiration of said thirty (30) day period is reasonably necessary to protect the real estate or Landlord’s interest therein or to prevent injury or damage to persons or property.

Case law provides a landlord with an additional right of entry, but it “is limited, in part, to repairing a significant structural or design defect that is contrary to a specific statutory provision.” According to the court, however, “[c]omplaints about noise, though, do not constitute a significant structural or design defect.” Unexplained by the court was why an earlier lawsuit by the landlord against the gym was withdrawn. It alleged that the “background ambient noise in the subcellar far exceeded what was permissible under the Administrative Code of the City of New York …, and found that significant structural vibrations had caused pipes and anchors to dislodge from the subcellar slab.”

In December of 2012, the gym installed a commercially available noise control system on its floor. That did not solve the problem. So, it was agreed among all parties as follows:

The biggest issue for us right now is the noise … [n]oise from [the gym is] not currently acceptable. All parties agree that the noise will be abated to allow [the cancer center] a level of quiet enjoyment [at an estimated cost of $250,000 to install a raised floor]. [The parties] all agree that we will try less expensive options, including no weights thrown during treatment hours, before going to the raised floor. However, ultimately, [the cancer center] will need to have quiet enjoyment of its space during business hours, even if the floor must be built.

Despite this agreement, the nuisance continued. The basement and subbasement were condominium units (owned by the landlord) within the office building. Throughout 2013 and 2014, the building’s managing agent frequently complained about “shaking or falling lights, falling fireproofing material, and loosened or falling rods, hangers or sprinkler pipes from the vibrations.”

For some reason, however, the cancer center tenant stopped complaining after this agreement had been reached. Though the noise and vibration continued, it seemingly “backed off.” Whether this was in reliance on the agreement or because it was seeking to further assign its lease to another operator or even to the gymnasium, we don’t know. When a potential assignee dropped out and it looked like the gymnasium deal wasn’t going to take place, it expanded its search for an assignee. It was discouraged by the lack of interest and especially by a broker’s view that, given the noise and vibration, the space was most suitable for storage. Impliedly, that would call for a much lower rent than the cancer center was paying.

The cancer center then put its fit-up plans on hold and discharged its contractor. Notably, it stopped paying rent after January of 2015, whereupon in May the landlord obtained a default judgment of possession. [There was a dispute over whether the eviction complaint was proper, and that dispute continues, albeit in a different court.] In August of 2015, after being evicted, the cancer center sued its landlord. The complaint listed 15 counts. Central to the lawsuit, and central to today’s posting, was the tenant’s allegation that its landlord had breached the lease’s covenant of quiet enjoyment and that it had been constructively evicted.

As noted above, the covenant of quiet enjoyment and the doctrine of constructive eviction are closely related. Evidence of that appears in the court’s decision:

A cause of action for constructive eviction is “dismissible as duplicative of those for breach of the covenant of quiet enjoyment” when both claims are premised upon an active or constructive eviction…. Additionally, a constructive eviction claim is generally considered a defense to a nonpayment proceeding …. Because [the tenant’s] constructive eviction claim is predicated upon the same facts as the quiet enjoyment claim, the [constructive eviction] cause of action must be dismissed.

That’s not the only reason why the constructive eviction count was dismissed. Pay attention; this is key. “A party claiming constructive eviction must abandon the leased premises with reasonable promptness.” Here, the cancer center tenant had not abandoned its space before the warrant of eviction was issued. Further, it made no complaints about the alleged nuisance from mid-January 2013 until about January 2015, about two years later. “During this two-year period, [it] continued to pursue” its project. ”

This is a common reason why tenants with otherwise solid reasons to claim they have been constructively evicted lose in court. Afraid that they would lose on such a claim, they stay in their space thinking that making periodic complaints and then stopping its rent payments will get them their desired result. Doing so, i.e., remaining in the space, dooms a claim of constructive eviction.

Getting relief based on a landlord’s alleged breach of the covenant of quiet enjoyment presents the same problem in most jurisdictions. New York is typical of the vast majority of states. Under New York case law, “[t]o prevail on a cause of action for breach of the covenant of quiet enjoyment, a tenant must show an ouster, or if the eviction is constructive … an abandonment of the premises.”

Further, “[t]he tenant must also show that it performed all conditions precedent in its lease unless those conditions have been waived. … Where the tenant ceases to pay rent, a claim for breach of the quiet enjoyment provision in a lease cannot be maintained …, because the ‘failure to pay rent `constitutes an election of remedies.” In particular, under the cancer center’s lease, the tenant’s “right to quiet enjoyment was expressly conditioned upon its performance of all Lease obligations, including the payment of rent and additional rent.” Demonstrably, the cancer center stopped paying rent and for that reason, the tenant could claim no damages for the period after it stopped those payments. As for the period before it stopped making the payments, it was never physically expelled from its leased space or any part of that space. Thus, any claims for the period before rent was stopped were dismissed.

Even if New York law did not require the tenant to abandon the space, the cancer center would still have had difficulty in succeeding in its claims. After all, the center had not yet opened. In fact, no substantive construction had yet taken place. The tenant continued with its project “despite the disturbances emanating from the Gym. As such, the noise and vibrations originating from the Gym did not impede [the cancer center] from progressing with the Project and building out the Premises, and therefore, did not substantially interfere with [its] beneficial use and enjoyment of the Premises during its occupancy.”

Ruminations is uncomfortable with the concept that when a tenant and its landlord agree that the tenant cannot operate its business unless an ongoing barrier (in this case, the noise and vibrations) is eliminated, the tenant must still spend gobs of money and open for business before it can get relief. Yet, we accept this to be the law. Tenant-readers, you should accept the same. Even if you don’t, know full well that courts do.

This tenant knew or should have known that it needed a vibration-free space. We’ve been there. This kind of tenant knows that. Just as the landlord (inadequately) dealt with what it thought would be a problem placing a gym right above a cancer treatment center, the tenant should have anticipated such a possibility. It could even have sought to include a list of prohibited uses for the space above. It didn’t.

Instead, it tried to get relief somewhat retroactively. We don’t know what was in its mind when it stopped paying rent before abandoning its space. Almost certainly, it was seeking various solutions, including assigning its lease to the gym above. Perhaps it thought that stopping rent payments would force its landlord to do “something.” We also don’t know why it didn’t document its concerns during the two-year “quiet” period. It doesn’t appear that it got legal advice or, if it did, that it got effective advice. Prevailing on a claim of constructive eviction is like threading a needle. It can be done if the circumstances are right, but it takes skill. Lastly, though it appears that it had moved its administrative office and even had its landlord send rent bills to that new location, it never changed its address for notices under the lease. That’s an issue that will come up if and when it continues its challenge to the default judgment that ended its tenancy before it abandoned the leased space.

What’s the bottom line? That’s simple. If you think you have (or will have) a claim for constructive eviction or for a breach of the covenant of quiet enjoyment, immediately seek a lawyer who really, really knows these subjects. These are complicated legal concepts, really complicated. More importantly, as we have often written, you need to conceptualize what might happen in the future. Too often we spend much more time and effort in exchanging draft documents than in thinking, ahead of time, about what special concerns a particular lease needs to address. Pay a lot more now or a lot more later.

Was today’s posting too complicated or involved for you? Imagine what it would have looked like had we not “ignored” the other thirteen claims made by the cancer center or the claims made by the landlord against the gym and the gym’s counterclaims. If that doesn’t scare you off, then you might want to navigate the court’s decision yourself. If so, you can see it by clicking: HERE.

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Waste Is Only Waste If We Waste It

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Imagine you had a tenant for a free-standing building (say, one being used as a quick-service restaurant) who proceeded to alter that building without obtaining your consent as its lease required. To make it worse, the tenant’s alterations reduced the floor area of the building by 10%. Yet, the tenant is a good rent-payer and you don’t want to terminate its lease. Your lease might have anticipated such a situation by including the following:

Suit or suits for the recovery of the deficiency or damage or for any installment or installments of rent, additional rent or any other charge due under this Lease may be brought by Lessor at any time or, at Lessor’s election, from time to time, and nothing in this Lease shall be deemed to require Lessor to wait until the Term Expiration Date to bring suit.

It might have but, as we will see, it doesn’t. Using a December 12, 2019 California appellate court decision [that can be read by clicking: HERE], we’ll explain why that is the case. [Read more…]

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