In Good Faith, Would Your Agreements Say That A Party Can Act In Bad Faith?

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Would you write that a tenant’s or landlord’s consent was required but that consent could be withheld in bad faith? We don’t think so. We’ve never seen such. We doubt we ever will.

There is no need for a contract, such as a lease or mortgage, to say that the parties will act in good faith. The obligation to act in good faith and deal fairly with the other party or parties is implied by law into every agreement. As such, it is a contractual obligation, not a fiduciary duty. So, we think that, as a contractual obligation, it can be negated by a voluntary and knowing agreement between the parties to an agreement. That’s what expressly allowing one party or the other to act in bad faith would do.

Admittedly, we haven’t done any legal research that would support or undermine our thinking. That’s because we strongly doubt anyone ever included a “bad faith allowed” provision in their agreement. If any reader knows otherwise, let us and other readers know through the comment feature of this blog site. [Read more…]

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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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What Does Difluoromonochloromethane Mean To Landlords And Tenants?

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Today, Ruminations will seem to be discussing difluoromonochloromethane. Though it might seem that way, we’re actually using it as a proxy for a more general “suggestion.” But, that will need to wait.

Difluoromonochloromethane has been a remarkably useful chemical compound. If you know about it at all, you probably know it as “R-22.” If you do, then you can skip right over the next sentence. R-22 is a hydrochlorofluorocarbon-based refrigerant used in about half of this country’s commercial air conditioning systems. If has some other, less common, uses but when it comes to HVAC, it is “king.” Down the road, however, it will be abdicating its office. The process began a number of years ago, but the closer we get to 2020, the clearer this will be.

This refrigerant is an ozone-depleting substance. Regardless of any reader’s position about climate change or global warming, no one thinks that destroying atmospheric ozone is a good thing. So, 30 years ago, following a series of meetings in Montreal, lots of countries, the United States included, signed an international treaty. To implement that treaty, those countries, including the United States, embarked on separate programs to end the use of ozone-depleting substances.

Here’s a short translation of what the United States did with respect to R-22 starting in 1993. Manufacture or import of equipment using R-22 refrigerant after 2009 was banned. Production or import of R-22 is banned after 2019. [By the way, by 2030, the entire class of chemical compounds known as hydrochlorofluorocarbons will no longer be manufactured in, or imported to, the United States. [Read more…]

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How Much Insurance Coverage Does The Tenant Have For Damage To Its Leased Premises?

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There are general categories of “insurance.” One is “life and health.” The one we care about is property and casualty,” the industry shorthand for which is: “P&C.” For those of us in this business, the “P” means commercial property insurance. That makes the relevant insurance “commercial general property” insurance. Let’s use that name.

For our purposes, the “C” mainly means “liability” insurance, and that makes the relevant insurance “commercial general liability” coverage. That’s what “CGL” stands for. The “C” in this case stands for “Commercial,” not for any of those other words some of our colleagues insist on using despite your efforts to correct their error.

Most insureds, especially large insureds, will carry both a CGL policy and a commercial property insurance policy. In almost all, but not all, cases, each policy form will consist of the ones promulgated by the Insurance Services Office, Inc. (ISO) modified by multiple endorsement forms (also by the ISO), most of which limit (reduce) the promised coverage.

A meaningful number of small businesses, especially in industries with unique needs, will have “package” policies that combine the “P” and “C” in the same policy. For example, auto repair businesses are exposed to business-related risks associated with taking custody of property owned by others (i.e., property under their care, custody, and control). In addition, garage owners drive customer’s (expensive) cars and are expected to look to their own insurance, and not their customers’ insurance, in the case of an accident. “Package” or “Program” policies are not written on ISO forms. Each insurance company writes its own form, sometimes paralleling ISO language, but there is no guaranty of that. If you are at a small law firm, take a look to see if you have a combined policy. It might be labeled a “Businessowners Policy” or a “BOP.” [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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Who Should Pay To Replace the HVAC, Landlord Or Tenant?

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Should a tenant be required to pay for the replacement of pieces of the real property within or serving its leased premises? We don’t know. That’s because it isn’t a legal matter. It isn’t a moral matter. It isn’t a matter of logic. It isn’t a matter of fairness. It is part of the economics of the deal, one whose answer will be determined by the negotiating process.

At the end of the day, the issue isn’t about the “money,” it is about the risk – the uncertainty. Why does Ruminations dare to say it isn’t about the money when virtually every reader has already thought: “Are you out of your mind”? That’s because the “market” needs to make a profit one way or another. To assure there is a real estate market, the aggregate tenant rent at a property needs to be sufficient to generate that profit. In the aggregate, the industry will either generate acceptable investment returns or property values will drop to a point where an investment in property will “again” generate an appropriate return. [Read more…]

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Beware Of Boilerplate: Sword Or Shield?

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There is no shortage of commentary and reference material covering the drafting and negotiating of a real property lease. As a result, it is tempting to try to cover more ground or to go further than others have gone when analyzing a lease’s provisions. Ruminations will make a deliberate effort not to succumb to that temptation.

The scope of today’s posting is to look at four “boilerplate” clauses in a typical lease. If we get a positive response, we may cover a few more clauses over time.

What, really, is “boilerplate”? The word’s common meaning is a provision that is ordinary, common, and by implication generally acceptable. In reality, there are very few, if any, such clauses in a form lease. They may be ordinary and common, but they aren’t necessarily generally acceptable – especially to a tenant. No bias is intended today. Nonetheless, it is impossible to be entirely balanced as between a landlord’s concerns and a tenant’s concerns. After all, pre-printed forms are designed for sale to landlords, not tenants, and most leases begin on landlord-generated forms. [Read more…]

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Why We Can’t Write Damage/Destruction Clauses That Work

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No lease can be written that will answer every post-damage question that will arise. The “law” (whatever that is) provides some gap fillers, but not many. That’s because much of the case law concerns itself with answering epistemological questions – that is, “analyzing the nature of knowledge and how it relates to truth, belief, and justification.” Courts try to divine: “what would the parties have agreed-upon had they known this post-damage question would arise.”

The biggest single factor in determining how things will turn out after a fire, flood, explosion or some other damage-causing event is: do the landlord and tenant still love each other? Do they want to cooperate and get back in business together, or do they want to divorce. If they want to get the property restored as quickly as can happen so that the tenant’s cash register starts ringing and rent checks begin to flow again, they will make that happen and things will work out. If they each want to end the tenancy, they’ll make that happen pretty easily – the issue might be money, and if that is the case, believe it or not, money issues are the easiest to work out. Basically, if a landlord and its tenant share the same post-damage goal, they’ll work it out. [Read more…]

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