Why Are Obnoxious Holdover Rents Enforceable?

Print

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…]

Print

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

Print

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.

Print

When Will I Hear Back From You?

Print

To beat a dead horse is to “waste effort on something when there is no chance of succeeding.” A memorial service for today’s effort will be announced shortly.

We’ve written this before: what has happened to actually discussing open points of negotiation? Is it because it is now much too easy to deal impersonally one with another? Long ago, the only practical way to get a negotiation completed during the lifetime of the negotiators was to meet in person or pick up the phone.

Now, we will digress. There is an expression: “Riding the circuit.” Wikipedia has the following entry:

Riding circuit is the practice of judges and lawyers, sometimes referred to as circuit riders, travelling to a regular series of locations in order to hold court there. Circuit riding has mostly been abolished, but the term remains in the name “circuit court”, commonly applied to levels of court that oversee many lower district courts.

Here’s a practical description of how that worked. Imagine a “circuit” that covered nine counties, each with its own county seat. That circuit had a single judge, one who would “hold court” four or more weeks each year in each of those county seats. In effect, the entire court would move around the circuit from city to city. But, it wasn’t only the judge who rode the circuit (yes – on a horse), his clerks traveled with him. And, so did those lawyers who appeared before the judge. They stayed in the same hotels; they ate all three daily meals together; they drank together; they negotiated settlements with each other.

We who negotiate agreements used to do the same. If we were in the same locality, we’d meet in one another’s office or over a meal. More often, there was no geographic proximity, but there was a telephone. Of course, we used the mails. We would send a draft agreement by mail and, days later (if we were lucky), the postal carrier would return with a copy of the same document. This time, it had handwritten comments. We won’t labor on. You know the drill. It was like playing chess by mail.

Then, along came a technical innovation: the fax machine. Though invented in 1843, it wasn’t until the early 1980s that the time it took to transmit pages fell to where it became practical for broad commercial use. Now, a written document could be received as quickly as could the human voice. But, while it replaced mail service with a faster means of communication, it was still a one-way communication. The recipient didn’t have to respond immediately as was expected on a telephone call (or at a meeting). Further, it was still the same iterative process, one that circled in on a mutually satisfactory result. By means of this repetitive process, we looked for convergence – the more back and forth, the closer we came to the final result.

Email and document comparison technology made the process even more convenient. Document sharing software, when trusted by adversaries, more so. But, all we have done is to further enable the iterative process. We can now go back and forth, faster, even to argue over a single word. It takes little time and no “personal capital” to do so, so why not? There is no keeping a “straight face” by email.

Today, we have even more advanced communications technology than email. Video conferencing is free and universally available. The iterative process can take place in a single face-to-face “meeting.” Let’s call it “one and done.” It’s not the same thing as meeting, over a meal, at the hotel across the street from the stable where we board our horses while visiting our county seats. It is, however, the functional equivalent.

Yet, who among us are negotiating our agreements electronically, cara a cara? Why not? Have we become accustomed to avoiding personal contact? Are we unwilling to take positions in person, ones we can hide behind in an email message or bury inside a redlined document?

In all fairness, some segments of our real estate community encourage or even insist upon meeting by telephone. Typically, they are the purer business segments – the investment bankers or the serious commercial real estate brokers. This process drives the underlying transactions. Ironically, it seems that the larger the transaction, the faster it moves.

What is Ruminations suggesting? It’s simple – when you get someone’s proposed agreement, pick up the phone – suggest a “meeting” by Skype, Facetime, Zoom or whatever. And, after the social niceties, start off by saying: “Here’s where I have a problem.”

If you want to discuss today’s or any week’s blog posting, call us at 973.744.0288.

Print

Words Are The Skin Of A Living Thought

Print

“A word is not a crystal, transparent and unchanged; it is the skin of a living thought and may vary greatly in color and content according to the circumstances and time in which it is used.” [Justice Oliver Wendell Holmes, Jr. in Towne v. Eisner, 245 U.S. 418 (1918).] We have loved that quote for nearly 40 years. It tells a lot about the agreements we write.

Consider the word: “maintain.” We looked at how web-based dictionaries define it. According to www.merriam-webster.com, it means: “to keep in an existing state (as of repair, efficiency, or validity).” https://www.ldoceonline.com/dictionary offers that “maintain” means to: “look after something: to keep a machine, building, etc. in good condition by checking and repairing it regularly.” www.collinsdictionary.com similarly offers: “If you maintain a road, building, vehicle, or machine, you keep it in good condition by regularly checking it and repairing it when necessary.” www.lexico.com (powered by Oxford) agrees when it tells us that “maintain” means to: “keep (a building, machine, or road) in good condition by checking or repairing it regularly.” [Read more…]

Print

Read It Or Lose It, Or How Access Was Lost

Print

You don’t have to be in the retail property industry for very long before you first come across an access agreement. After all, not all properties are sitting right out there on a prime highway. A plot might be developable if it could be moved to a spot right along the “best” road, but it doesn’t work that way. So, deals are made allowing those traveling to and from one property to cross over an adjoining property. Often, these arrangements are mutual; sometimes they are not.

When we come across such an arrangement for the first time, we probably read the documents pretty carefully. Likely, when we get to our fifth or tenth such agreement, we skip over the boilerplate. One of those provisions is the one that reads something like: “will be binding upon and inure to the benefit of ….” After all, these provisions aren’t much more than, “blah, blah, blah.” We’ve seen them many times before and they are always the same – until they aren’t. That’s what a car dealer discovered about a combined access and sign license with the following provision: [Read more…]

Print

I Just Got A Tax Or CAM Bill Three Years Late

Print

A common question we get (or see) has to do with very, very late billings for taxes or common area charges. Though one would think that a landlord would be anxious to send timely, periodic bills, for some reason, some don’t. If any reader can explain the advantage a landlord gets by sending a bill for three years of charges in one fell swoop, please do so. Otherwise, we’ll continue to think it’s crazy. If nothing else, tenants and leases turn over. Go chase a tenant whose store or even whose business closed years earlier. [Read more…]

Print

What Makes An Agreement’s Provision Illusory Or An Unenforceable Penalty?

Print

What would you think if Ruminations told you that it is perfectly fine in California for a tenant to terminate its lease if a co-tenancy condition isn’t met, but not to exercise a rent waiver, even if it hasn’t opened its store? Well, we’re telling you that based on our seeing a January 12 court decision from a California Court of Appeal. That’s how we began our February 1, 2015 blog posting, where we introduced readers to a California court decision lots of us now refer to as the “Grand Prospect Partners” case. [See that posting by clicking: HERE.] Two months ago, Grand Prospect Partners came up in a Nevada court decision and, there, the court had no trouble with the validity of the agreed-upon rent reduction. [See that one by clicking: HERE.]

Well, “it’s déjà vu all over again,” a Yogiism, except that it’s Oklahoma’s turn to deal with the appropriateness of a termination remedy for a co-tenancy failure. The case also gives us a chance to look at some conventional lease language through the eyes of a court. To begin with, (with some editing) this is how the court summarized a lease’s co-tenancy clauses: [Read more…]

Print

Knowledge Is Power. Get Some.

Print

There is a story about a brilliant legal scholar who, after penning an outstanding legal analysis, would turn it over to his students for review and editing. He was asked why he would have young students do the editing instead of doing the work himself. After all, what could they know that he didn’t? How could they, even collectively, know better than he could know? He had a simple response: his students, at that moment, were engaged in the process of learning the very subject matter in the paper. Because their learning was “active,” they were more knowledgeable at that moment. The information was fresh in their minds. [Read more…]

Print