Can You Tell The Difference Between The Bagel And the Hole?

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Yes, this will be a complaint; one we think is shared by many readers. Have you ever worked on a deal with someone who, as we say in New York, confuses the hole for the bagel itself? [Years and years ago, we might have said, “donut,” but it seems that you can now buy the “hole” by itself. Think about that. Are we really buying a “hole”?]

Ruminations offers two examples of the kind of people accused of this approach to deal making. The first is the person who had a “bad” experience in a deal and is driven, compelled, obsessed, preoccupied, and engrossed to make sure that if the agreement being discussed covers anything at all, it absolutely must have language that will make sure the disturbing experienced is never experienced again. As we see it, however, the problem is that the “driving” experience either came out of the facts in the earlier situation or the perceived “drafting shortfall” in the earlier “nightmare” agreement and was really a proxy for whatever went on. And, all too often, the prior situation was for a different kind of deal – basically, the deal on the table and the “nightmare” deal have little, if anything, in common. Yes, in the prior deal, had the parties been required to wear fur mittens, they wouldn’t have gotten frostbite. But, in this “put up a building on the equator” deal, requiring fur mittens actually interferes with getting the project completed. [Read more…]

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Additional Rent Is No Rent At All

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We are aware that in New Jersey, if a lease doesn’t denominate a particular tenant’s financial obligation as some version of “rent,” then the landlord can’t get the tenant evicted for non-payment of that item. The reason we are aware of this is because we’ve seen case law that denies a landlord such relief. While the landlord can sue to collect such charges, for example, common area charges, it can’t evict the tenant if the lease doesn’t say that such charges are “rent” or “additional rent.” It doesn’t matter that Ruminations thinks that’s just plain silly. That’s the way it works even if everyone other than the court knows that such items are part of a tenant’s rent.

Nonetheless, since courts, not Ruminations, get to issue eviction documents, almost all New Jersey leases recite something like: “All monies required by this Lease to be paid by Tenant to Landlord constitute ‘Additional Rent’ and the failure to pay Additional Rent will have the same consequences as failure to pay Basic Rent.” Still, some New Jersey leases don’t say anything like that but, fortunately, almost all tenants actually pay their rent (and additional rent). So, you don’t see a lot of court decisions about the issue. [Read more…]

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What Did “Shopping Center” Mean? – An Expensive Question

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Last week, we rambled (no, make that Ruminated) about the consequences of failing to precisely and correctly identify or define the “Leased Space,” something usually called the premises or the demised premises. We got some “side” comments expanding on the examples we gave, but we’ll hold those for a (much) later blog posting. Today, we’ll write a little about the failure to precisely (or more precisely) define or identify the “Shopping Center.” But, in our inimitable style, we’ll digress before we even start.

We’ve seen a lot of approaches to defining “the” shopping center. Many, many lease provisions reference “the” shopping center, especially when it comes to defining the landlord’s responsibilities, the costs that will be passed along, and even the “locational” scope where competing tenants may not be located. Those are only a few examples of how important it is to know the boundaries of “the” shopping center.

So, in that context, we’ve always wondered about leases that refer to the “Shopping Center,” but never show us its boundaries. In simple cases, it probably isn’t necessary to define the referenced shopping center. The physical set-up may make it obvious as to what is meant. That is, unless what we see isn’t what we get (WWSIWWG). That is (to coin a phrase), unless what looks like a unified shopping center is actually two or more contiguous shopping centers that share entrances, exits, and parking areas. To the customer, the property looks like one center – one owner. To the tenant who hasn’t inquired or investigated, it looks just like the customers think it looks, but isn’t.

We’ve also seen leases that describe the shopping center by tax block and lot. That’s pretty definite, but have you checked to see if those are all the tax lots you see when looking at the property from the road?

The same goes for shopping centers described by attached metes and bounds descriptions. Do the attachments reflect the entire shopping complex?

Even where a drawing is attached, making it much easier to visualize the property, does the drawing show everything you see on the ground? Perhaps it shows more than everything, such as land that isn’t useful for the shopping center, but for which tenants will share the operating costs.

Do you understand what is a leased pad and what is a third-party-owned outparcel?

We’re not going to make a list of horribles. Our readers are savvy enough to expand on the following example. We’ve seen a lease that describes the shopping center as consisting of a particular tax lot and where the Leased Space is on that tax parcel. The overall project, however, is two tax lots owned by the same owner and operated without regard to its “split” nature. Costs are allocated as between the two tax lots as if they were separate properties. But, by nature of the lease’s description of “the” shopping center, unless a tenant is diligent in negotiating its lease, any fought-for exclusive use right only protects against competitors on the tenant’s “side” of the property. We won’t ascribe evil motive because there is absolutely no evidence of that being the case. It is just a historical anomaly “baked” into the form lease.

Now, in order to fulfill our promise of last week that we would do so, we’ll describe a court decision.

In today’s story (a much fuller tale being told in the court’s decision available to you by clicking: HERE), a tenant at a shopping center under construction was only required to pay full rent once 60% (not including the tenant’s space) of the ‘gross leasable area of the Shopping Center are [sic] open and operating at the Shopping Center.’” So, to know when the full rent obligation was triggered, one had to know what was meant by “gross leasable area of the Shopping Center.” Obviously, the landlord and tenant couldn’t agree on that, because had they agreed, we wouldn’t have a court’s decision to write about.

We’ll start with what the lease used as the definition for the “Shopping Center”:

The premises and improvements and appurtenances constructed and to be constructed thereto (the Premises) located at the SE corner of State Highway Route #120 and South Union, in Manteca, California (the Shopping Center). The legal description of the Shopping Center is attached hereto as Exhibit A and made a part hereof, and the Shopping Center is outlined in red on the site plan attached hereto as Exhibit B and made a part hereof … Nothing contained in this Lease will prohibit Landlord from constructing the Shopping Center at various times, and in various phases or sections … The buildings located within phases or sections constructed after the date of execution of this Lease will be deemed to be included within the defined Shopping Center for all purposes of this Lease as of the date that the buildings are fully constructed. . . .

The tenant’s position was that the “Shopping Center” was defined by Exhibit B, including all of the buildings shown on that exhibit. [Note, and don’t be shocked, there was no red outline on the Exhibit – it was, to quote the landlord’s attorney, an “oversight” that “happens all the time.”) The landlord’s position was that the last two sentences controlled and the gross leasable area of the Shopping Center was to be determined only with reference to whatever building actually existed at the time of measurement.

So, the court needed to decide whether, when measuring its gross leasable area, the Shopping Center comprised 743,908 square feet of space or only the 373,000 of completed buildings at the time the landlord demanded full rent. [Construction of the unbuilt buildings was being deferred until “better times.”]

Whatever readers personally believe the “right” answer might be, be advised that the court found the lease’s definition to be ambiguous. To refresh our readers’ memories, “ambiguous” comes from the root “ambiguus,” Latin for “uncertain.” In modern usage, that translates to: “open to more than one interpretation; having a double meaning.” Such a determination allows a clue to search for the original intent of the parties and to find clues outside of the document (in this case, the lease) itself. We’ve written about that so many times, that we’re loathe to include a link to any prior blog posting. So, use the search feature with the word “ambiguous” or “parol” or even “intent.” You’ll find a variety of very similar “checklists” employed by courts all over the country to aid in the search for the “intent of the parties.”

Here, briefly, we’ll tell you what you already know. The lease’s negotiation history showed that the tenant wanted to operate in an active, vibrant center and thus insisted that there be certain named tenants already open and operating as well as a healthy number of less-than-major tenants open for business. It wanted to be in a thriving community, not a ghost town. It’s a long story as to why the tenant opened before its lease’s “co-tenancy” trigger had been met, but the “less than full rent” relief was part of the lease as well. It was also clear that the landlord wanted to be covered in case there wasn’t solid tenant demand for all of the originally planned buildings. So, it negotiated for a provision protecting itself in case the seemingly promised full complement of buildings didn’t get built right away (or ever).

The court found no incompatibility between the two partially interrelated concerns. It ruled that the landlord was correct that “Shopping Center” meant only the buildings present at the time in question, but that definition applied only to situations where the context called for such an understanding. On the other hand, when it came to whether the 60% co-tenancy trigger had been reached, “Shopping Center” meant all of the buildings drawn on the site plan and the total, fully-constructed, gross leasable area shown on that site plan.

So, there you go, in the case at hand, “Shopping Center” meant two different things at the same time.

How much smarter would it have been had the co-tenancy provision required a minimum gross leasable area as one of its requirements? It didn’t have to be the entire 743,908 square feet of space; it could have been a lesser amount to account for a slow market. This omission doesn’t surprise us. In our experience, it is a common oversight. Ruminations urges that it no longer be any reader’s oversight. The letter of intent should cover this point.

Now, as a bonus, we’ll take a look at that part of the cited lease text that read: “Nothing contained in this Lease will prohibit Landlord from constructing the Shopping Center at various times, and in various phases or sections.”

Did that sentence shield the landlord from liability if it stopped at 373,000 square feet of buildings? The tenant didn’t think so when it claimed that its landlord breached a promise to deal fairly and act in good faith. We can’t reproduce that “covenant” from the lease because there are no such words (or similar words) to that effect in the lease. But, as all or almost all readers know, the law imposes those contractual obligations on contracting parties because the law implies the “covenant of good faith and fair dealing” in the performance and enforcement of every agreement, and a lease is an agreement.

There are many ways to explain this implied covenant, but they all come down to this basic principle. Without a good business reason of its own, a party cannot (rightfully) do anything (or fail to do anything) that “will injure the right of the other party to receive the benefits of the agreement.” Here are a few nuggets telling us a little more about the implied covenant:

To show that a party has not exercised its discretionary power in good faith, a party does not need to show dishonest conduct because “the covenant of good faith can be breached for objectively unreasonable conduct, regardless of the actor’s motive.”

A party need not show bad faith conduct to prove breach of implied covenant.

Good faith performance of a contract requires “faithfulness to an agreed common purpose and consistency with the justified expectations of the other party.”

Bad faith is sufficient to constitute a breach of the covenant of good faith and fair dealing includes conduct described as “inaction,” “subterfuge,” “lack of diligence,” “evasion of the spirit of the bargain,” and “abuse of power.”

A 2008 decision by a California court explains the effect of, and limit to, an agreement’s provision giving discretion to a party as to choosing to act or not to act. Here’s an edited version of the central holding of that decision:

There are two legal principles in some tension with each other that are at play with respect to [a] breach of covenant claim where, as here, a contract gives one party discretion and the second party accuses the first of abusing that discretion. The covenant of good faith finds particular application in situations where one party is invested with a discretionary power affecting the rights of another. Such power must be exercised in good faith. Second, however, the covenant cannot “be read to prohibit a party from doing that which is expressly permitted by an agreement” because, “as a general matter, implied terms should never be read to vary express terms.”

California courts have resolved the tension between these two propositions by “examining whether the contract gives the defendant merely the power to exercise discretion, or whether it gives the defendant the greater power to refrain from acting at all” and declining to apply the covenant in situations where the defendant has the power to refrain from acting altogether.

In the (co-tenancy) case we’ve described, there was no question that an economic turndown was the underlying reason why the landlord stopped development when the center reached half of the expected, hoped-for size. But, that fact alone did not protect the landlord from further legal proceedings. While its decisions “may have been motivated by legitimate business concerns, legitimate business concerns may coexist with bad faith.” Bad faith includes “actions motivated solely by a reassessment of the balance of advantages and disadvantages under the contract.” “A breach of the implied covenant of good faith and fair dealing arising out of an improper exercise of discretion turns on whether [the “accused” party”] exercised its discretion ‘for any purpose within the reasonable contemplation of the parties at the time of formation.’” So, even with a lease giving the landlord “discretion” to build a complete shopping center, the parties were ordered to trial for a factual finding as to whether the landlord acted in an objectively reasonable fashion “consistent with the parties’ contemplation at the time they signed the lease.”

The legal profession thanks the warring parties for their generous contribution.

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Wear And Tear: Easier Said Than Understood

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There are lots of comfortable phrases and concepts we all use without ever thinking about what they really mean or how they play out. One example is the well-worn formulation: “ordinary wear and tear excepted.” We see it all the time. Everyone writes it into their leases (and often into property acquisition contracts). To be sure, there are variations. One example is: “wear and tear, damage by fire or damage from any other cause covered by … insurance excepted.” Another is: “fair wear and tear and … excepted.” Regardless of how many words are used with any of these approaches, they all rely on the meaning of “wear and tear.”

Let’s start by trying to define “wear and tear.” Certainly, there are many perfectly fine ways to do so (and certainly there are “contorted” ways to do so if you don’t like the “result” of using a proper definition). Today, we’ll lift one from a 1969 [“time-honored”] decision from a California court:

The exception of ordinary wear and tear contemplates that deterioration will occur by reason of time and use despite ordinary care for its preservation.

The most common place we see an exception for “wear and tear” is in a lease’s surrender provision. What condition must the leased space be in when “returned” to the landlord? What does a tenant have to repair or restore that it didn’t have to repair or restore during the course of its tenancy? [Read more…]

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Attend Oxford University And Avoid Ambiguous Leases, Mortgages, And Other Agreements

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We just couldn’t pass up on this one even though newspapers across the country have brought it to the attention of the general public. We think we have a reader-relevant take on it, so our planned posting for this week will have to wait.

One of our the English language’s punctuation marks is highly educated – the Oxford comma. Ruminations uses the Oxford comma. Maybe you should as well. What is it? What does this 12th century city in central southern England, the City of Dreaming Spires, know about this particular punctuation mark? [Should we take a short pause, comma-like, to mention that there is a university there, one with 38 colleges? Not today. Oops, too late.]

The “Oxford comma” is the one placed before the “and” at the end of a serial list: “We use the Oxford comma when we list items such as A, B, and C.” [It’s known as the Oxford comma because it was traditionally used by printers, readers, and editors at Oxford University Press. To be clear, we aren’t talking about a list that includes the “printers, readers and editors at Oxford University.”] [Read more…]

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You Snooze; You Lose; Maybe; Probably

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What is in the water that many, too many, landlords drink? What can they be thinking? The same can be said (though not as often) about tenants, and we will do so. What is in the water that many, too many, tenants drink? What can they be thinking?

The subject is asking for money rightfully owed to those drinkers. It might be for taxes or it might be for operating expenses, percentage rent, insurance premiums, reimbursable expenses or refunds for the payment of any one or more of those. It might even be for other things such as overdue rent. Yes, why do rightfully billable charges or rightful claims go unbilled or unclaimed until years later when someone wakes up, often, but not always, a successor landlord or tenant?.

[If you] SNOOZE, you [can] LOSE. “Do not spend your days gathering flowers by the wayside, lest night come upon you before you arrive at your journeys end, and then you will not reach it. [Isaac Watts].

If you haven’t experienced the situation or been asked about the following situation yet, it is just that you haven’t been at this real property leasing thing long enough: After “X” years (“X” often being 5 or more) of failing to bill a tenant for taxes or other monies genuinely owed, a landlord sends out a (BIG) bill. Both the tenant and its landlord turn to trusted advisors and ask: “How far back can the landlord go and still have the right to collect what is owed?” [Read more…]

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For Want Of A Parenthesis A King’s Ransom Could Have Been Lost

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What is every document writer’s nightmare (or at least one of their nightmares)? How about a mere “typo”? “Typo,” short for “typographical error,” is (as all readers already know), “an error (as of spelling) in typed or typeset material.” Count both the “open” and “close” parentheses in the following recital from a 17-1/2 million dollar loan guaranty:

WHEREAS, NNN Cypresswood Drive, LLC, NNN Cypresswood Drive 1, LLC, NNN Cypresswood Drive 3, LLC, NNN Cypresswood Drive 4, LLC, NNN Cypresswood Drive 5, LLC, NNN Cypresswood Drive 6, LLC, NNN Cypresswood Drive 7, LLC, NNN Cypresswood Drive 9, LLC, NNN Cypresswood Drive 10, LLC, NNN Cypresswood Drive 11, LLC, NNN Cypresswood Drive 12, LLC, NNN Cypresswood Drive 13, LLC, NNN Cypresswood Drive 14, LLC, NNN Cypresswood Drive 17, LLC, NNN Cypresswood Drive 18, LLC, NNN Cypresswood Drive 19, LLC, and NNN Cypresswood Drive 20, LLC, each a Delaware limited liability company (as defined in the Security Instrument), the “Borrower”), have obtained a loan (the “Loan”) in the principal amount of Seventeen Million Five Hundred Thousand and No/100 Dollars ($17,500,000.00) from ….

The counts don’t match. Most likely you think there is a missing parentheses. Why aren’t you thinking that there is an extra one? [Read more…]

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Let There Be No More Blog Postings Similar In Concept To Ruminations; We Have An Exclusive

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Many businesspeople reach agreement as to a principle expecting that someone else will express it in words that can be understood, in a common way, by others. So, when it is agreed that a landlord will not allow any “diner similar in concept to the tenant’s diner,” what were the landlord and tenant agreeing-upon? We would think that the tenant didn’t want competition in the form of having another restaurant that drew on the same kind of customer base. Of course, every restaurant competes with every other one, but the marketplace distinguishes between Michelin 3-star establishments and burger joints. That’s a key point whenever an exclusive use restriction is on the bargaining table.

So, was the tenant thinking that some diners would be acceptable and others would not be acceptable? If so, how does one slice and dice the category: diners? [Read more…]

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