Are You Tired Of Arguing About Percentage Rent For Internet Sales?

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We think too much time has been wasted over the issue of “internet sales” in the context of percentage rent. A long time ago, Ruminations shared some thoughts about the principles behind what should and what shouldn’t be treated as part of a tenant’s gross sales for percentage rent purposes. That blog posting can be seen by clicking: HERE. In that posting, we promised that the “whole subject of “internet” and similar sales will be tackled by Ruminations, but not today.” That was then; this is now.

Today, breaking with our tradition (as can be verified by reading our 329 previous blog postings), we’ll be “record” short and still suggest a practical approach to handling this over-argued, over-negotiated issue. It is based on our belief that if the “location” or the “symbiosis” of the landlord’s project (read that: shopping center) added value to a sale, and if the tenant agreed to pay percentage rent in the first place, then orders placed at the store or paid for at the store or fulfilled using the store’s inventory, should be credited as a sale from the store.

Now, if we wanted to write this posting using our usual 1500 to 2500 words, we would offer a definition for “gross sales.” After all, it seems to us that no two lease forms use the same definition. It also seems that most leases use a definition of gross sales drafted by a committee. For those unfamiliar with this disparaging characterization, it is derivative of this figure of speech: “A camel is a horse designed by committee.” [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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Health Care Is Like A Shopping Center (A Continuation)

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We’re not sure that last week’s blog posting was a satisfying one for more than a small part of the Ruminations audience. Long-term readers will know that we are not deterred by that. After all, for those that have not yet reviewed our page-end disclaimer, here it is, moved to the top:

Disclaimer: Ruminating and rambling can easily be confused. There are a lot of dictionary meanings for “ruminating.” Our favorite (today) is: “to turn a matter over and over in the mind.” That sounds a lot like “rambling.” For that reason, no one should mistake anything written on this blog as resembling legal advice, even when written by an attorney —not the original blog entries, and not any comments. This blog is intended to be a discussion board for concepts–some flaky, some not–that affect Retail Real Estate Law. Please join that discussion.

We think that understanding underlying principles, such as the issues involved in allocating operating expenses, makes for better deals, better documents, and better agreements. And, to the extent each party has bargaining power, the real driver of an agreement’s business terms, knowledge is power. [Read more…]

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Shopping Centers Are Like Health Care

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There may be a connection between our national health care (insurance) policy and our industries’ approach to back-charging for common area expenses (operating costs) and real estate taxes. Oh, come on – isn’t this a craven attempt on the part of Ruminations for topical relevance? Read on and judge for yourself.

Wikipedia provides as good an explanation of “community rating” as one will find anywhere. For its relatively short entry on the subject, click: HERE. For those who don’t want to leave the page, take a look at this:

Community rating is a concept usually associated with health insurance, which requires health insurance providers to offer health insurance policies within a given territory at the same price to all persons without medical underwriting, regardless of their health status. [Read more…]

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Did You Get My Letter?

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We’ve always wondered about an aspect of giving “notice,” but never having faced the particular issue, never went beyond “wondering.” Then, last week, we came across a Massachusetts Appellate Court’s decision touching on the issue. Ruminations can’t say that the outcome was very satisfying. So, we thought we’d toss it out for readers to think about. [That doesn’t mean we won’t share some of our observations, just that we don’t really have a conclusion (yet).]

Here’s the setup. A lease had a self-extension provision. Its term would roll over, a year at a time, unless either the landlord or tenant gave a “don’t do it again” notice. The particular provision read exactly as follows: [Read more…]

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Who’s On First? Keeping Track Of Basic Facts

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Please don’t ask for the central theme of today’s blog posting. We’ve done so already and came up empty-headed. The closest we’ve come is that we’re writing about how a stitch in time saves nine.

The genesis of today’s subject is a very simple case that reached a California appellate court. It probably isn’t worth looking at, but for those compelled to do so, the February 2, 2017 decision can be seen by clicking: HERE.] The court was confronted with a situation where, on its face, the signatory to an indemnification agreement was not authorized to sign the agreement on behalf of the indemnitor (the one who would have to pay). There was no indication that the document was signed with the intention of fooling anyone. It appears that the person signing the agreement was confused or ignorant as to “who” should have done the signing. We’ll explain.

There were two limited liability companies. One was the sole manager of the second. We’ll call the first company, the parent, and the second, the child. The parent had a managing member. He was the kind of person who breathes, unlike, say, Citizens United. He could sign on behalf of the parent, but when signing for the child, the “proper” signatory would be “by parent, as sole member of child, by breathing person, as managing member of parent.” Get it? If not, then realize that the “person” who could sign for the child was the parent. But, because the parent was an entity who could not hold a pen, a “real” person needs to sign on behalf of the parent. [Read more…]

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Rights Of First Refusal Transmogrify Into Purchase Options

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Rights of first refusal create difficult situations. For that reason, knowing landlords resist granting them. Unknowing ones don’t know not to resist. Then again, “resist” doesn’t mean never. So, like it or not, there are plenty of leases with such a provision.

We’ve written about rights of first refusal and alternatives to such provisions. If you’d like to get on the same page as those who have seen what we’ve written in prior blog postings, click: HERE and HERE.

A few weeks ago, we came across a case that gives a pretty good explanation about what a first of right refusal is and what it becomes. But, we’re getting ahead of ourselves. First, here’s the story.

A landlord owned two adjacent parcels. One was tenanted by a quick service restaurant, the other by a discount store. The quick service restaurant had the earlier lease and that lease gave it a right of first refusal to purchase both parcels. The later (in time) discount store lease had a purchase option (not a right of refusal). The option was exercisable during the last two years of the lease term, but was expressly subject to the right of first refusal in the quick service restaurant’s lease. Got it so far? [Read more…]

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We Can Waive Claims, Not Subrogation

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What’s an “evergreen”? An evergreen contract is one that automatically renews unless one party or the other affirmatively terminates it. An “evergreen” blogging topic is one that never dies; one that we can visit over and over. The topic of insurance waivers of subrogation is such an “evergreen.”

We just reviewed a March 22, 2017 decision from a United States District Court sitting in New Jersey. Let us tell you some things about it. It has a twist. [You can see it yourself by clicking: HERE.]

Allegedly “unsupervised, untrained, and unlicensed maintenance workers” employed by a residential landlord were accused of misusing (our euphemism) an acetylene torch and thereby setting a fire that destroyed tenants’ property. The tenants’ insurance company paid the losses and sued the landlord for recovery.
The landlord (almost certainly, the landlord’s own insurance company) responded that each tenant-insured had waived and released it from liability for such a fire. [Read more…]

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