Getting Too Cute By Half After A Fire Cost A Landlord More Than $580,000 – How Not To Write A Lease

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Ruminations thinks that damage and destruction issues related to leased premises are the current “hot” topics among leasing attorneys. We say that because of the plethora of related programs scheduled at the October 16-20, 2013 International Conference of Shopping Centers (ICSC) Law Conference in San Diego. More about that later.

A just published court decision by a Texas District Court of Appeals illustrates a “drafting” issue and a post-fire “factual” dispute that, itself, may highlight a “drafting” failure. That case is captioned: Parkdale Shopping Center v. Dolgen of Texas, Inc. You can see it HERE.

In 2007, a shopping center extended its lease’s term for five years, until September of 2012. Two weeks later, its landlord proposed a complete remodeling of the shopping center, including adding a very large multi-goods retailer. This particular tenant, fearing competition from that kind of tenant, declined its Landlord’s offer to relocate it at the same property). Negotiations followed and the parties agreed that if the Landlord gave six months’ notice and paid $350,000, the tenant would “scat.”

So, you ask: “What does this have to do with damage and destruction?”

The fire that happened in June of 2009 would be link.

First, here’s kind of what the lease said:

If all or any portion of the demised premises … become[s] partially or wholly damaged by fire or other casualty such as to render them untenantable, this Lease shall, at the option of either party, terminate unless the demised premised [sic] can be repaired or restored within sixty (60) days. … Should the demised premises be damaged but remain tenantable, Lessor shall immediately repair the damage… .

This provision should ring all sorts of [fire?] bells in your head, but Ruminations isn’t going to put all of those [fires] out today. If you want to get some idea of what the provision might have said, click HERE. Today, we’re going to focus on the narrow issues arising out of this particular Texas fire.

After the fire, the landlord sent a notice terminating the lease because it “would not be able to ‘get [the] premises back in proper operating condition within the 60 days contemplated by the Lease.’” There were, however, two problems.

First, the fire occurred at a section of the shopping center remote from this tenant’s store and no flames, no water, and no smoke affected the tenant’s store. The store was closed on and off for short periods because of issues related to the fire, but you couldn’t tell why from inside the store itself. Why does this matter? Because, as the tenant argued and the court agreed, the fire did not make the store untenantable AND the lease read: “If all or any portion of the demised premises… .” [Emphasis, ours.]

Second, this raised a pair of related issues: (a) what is “untenantable”; and (b) even if the store was “untenantable,” was it really the “fire or other casualty” that caused that status? Unfortunately, as carefully as you might read the lease, you won’t get any help in figuring that out. Perhaps, that’s consistent with a “60 day” threshold.

Here are some “facts” about the damage.

1.         The landlord testified that the space was untenantable and could not be made tenantable in a 60- day time frame.

2.         An attorney for the tenant testified that the store was not damaged by the fire.

3.         An electrician hired by the tenant testified that the fire did not damage the store’s electrical service.

4.         After completing some repairs to the store not related to the fire, the electrician restored the store’s electrical service.

5.         The municipal electrical inspector ordered the store’s service to be cut-off.

6.         The store’s expert architect witness testified that the store was not damaged by the fire and was “still tenantable.”

7.         He also testified that the parking lot lights and site lighting were turned off because of fire damage to the electrical system.

8.         A municipal electrical inspector testified that on the day after the fire, the store’s electrical service was undamaged and that he had authorized it to be turned on.

9.         An email message from the landlord to the local utility company was presented to the court. In it, the landlord asserted that the utility company was not authorized to resume service to the store, and told it not to do so.

Obviously, “stuff” was going on here. The court concluded, as most readers would have, that the landlord did not have the right to terminate the lease using the damage/destruction provisions of the lease. The court’s fundamental reasoning was that “termination of the lease under the casualty provision would have been triggered by damage to the [] store only, not by damage to the shopping center generally.” It sidestepped the question as to whether damage to the parking lot lighting was a form of damage that would have made the store “untenantable” by finding that there was no evidence that the damage couldn’t have been repaired within 60 days.

Now, for our own thoughts.

We don’t know what to say about “60 days.” Unless there were (very) unusual circumstances, this wouldn’t seem to have made sense for a tenant, given that the time period was “mutual.” We start with the principle that a lease’s damage and destruction is not intended to be a disguised “escape hatch” for a bad business decision. Neither party should be able to nullify a poor leasing decision upon the serendipitous happening of a casualty. We’re going to talk “retail,” but this also is going to make sense for “industrial” and for any decent size “office” tenant. That having been said, what tenant could relocate a store within two months after a fire? [The way our industry is going, you could use all of that time to negotiate a lease, and you haven’t even found a location or adapted it for opening.] The ideal time period for a tenant to allow its landlord a casualty termination right is 30 days beyond the amount of time (for both landlord and tenant combined) it would reasonably take to get a new location up and running.

For a landlord, the “calculus” is a little more complicated. Ruminations assumes that a landlord should be honoring its choice of a particular tenant and shouldn’t try to use a casualty as a way to replace its originally chosen tenant. At least, that should be the basis for negotiating the lease’s casualty provision. So, if the major repair or reconstruction responsibility falls on the landlord, perhaps the landlord should not be entitled to terminate a lease in any situation where it will not be terminating every other lease in the same building or designated set of buildings (if not the entire property). Where the major repair or major reconstruction work must be done by a tenant, perhaps a landlord should only be permitted to terminate a lease if that (actual construction) work isn’t started within an agreed-upon time period (say, 60 or 90 days) or isn’t thereafter diligently prosecuted or isn’t completed with a given time period after it started (the time period being a function of the complexity of the store). Landlords can (and should) carry business interruption and expense coverage of 12, 18 or 24 months’ duration, and their tenants will be paying proportionate shares of the premium cost.

The lease in the case we’ve reported had to deal with the concept of a leased space being “tenantable.” Here, it appears that the only impediments to operating the store with the retail public were: (a) the external source of electricity may have been interrupted by the fire; and (b) the parking lot lights didn’t work (for whatever reason). While those deficiencies may have kept the store closed (or closed during evening hours), did they make the store “untenantable.” Don’t bother looking through dictionaries to find the answer. Dictionaries don’t know how to answer such a question even if lazy courts sometimes resort to them to bolster a conclusion already reached. Here, when the landlord argued that the space in question was “untenantable,” it was really just saying that the store couldn’t open for business to the public. Why that should have legitimately mattered to the landlord is a serious question. To us (and, we’re sure to you as well), it is clear the landlord wanted to get rid of this tenant for less than $350,000 so that it could redevelop the property with a large multi-goods tenant as its anchor.

Ruminations thinks a tenant’s right to terminate a lease following casualty damage should be based on when, if ever, it can reopen for business or when it and a defined number of other stores (or floor area) at the property can reopen. A landlord’s concern should be whether, following a fire or other casualty, the particular store can reopen within the kind of time limits we’ve proposed above or whether, within some reasonably long time period, the property, as a whole, will have enough stores open to keep the property as viable as it was before the casualty.

What were they thinking when the lease’s casualty termination right was based solely on the condition of the leased premises? We think the court interpreted that particular provision correctly. That’s what the parties agreed. But, is that what either party really wanted or should have wanted? Would the tenant have been happy being an orphan store at a burned down shopping center? Perhaps it would have if it were the kind of retailer that would have leased that size store at that part of the property had it been a free-standing, single tenant property. We didn’t see the site plan for this property, but the court’s opinion sure didn’t make it sound like it.

The same problem is face by a landlord. Major destruction calls for major rebuilding. Major rebuilding calls for modernization. And, that often  means rebuilding a different configuration than what was destroyed. Imagine a large building where one end is destroyed big time (one year or more to properly design, permit, and rebuild) and the far end from the fire damaged portion is capable of being restored in 60 or 120 days. How do you tear down the entire building, possibly reposition it, and rebuild for the future if the lease for a store at the remote end can’t be ended? The answers and solutions are a little too involved to be discussed in today’s already lengthy blog posting, so we’ll leave that an open question. But, basically, both the tenant and the landlord have interests that can be adversely impacted by a casualty that doesn’t happen to cripple a particular leased space.

There is a piece of the court’s opinion we’ve been unable to wrap our arms around, though we have an unauthoritative theory. The lower court jury awarded the tenant the $350,000 it would have gotten had the landlord, right up front, exercised the lease termination option. It also awarded another $230,000 in attorney’s fee and damages. The landlord absorbed its own attorney’s fees. The appellate court affirmed (agreed). In doing so, it accepted the jury’s (implicit) finding that the landlord’s “we are terminating your lease because of the fire” letter really meant “we are exercising our right to pay you $350,000 to terminate your lease” notice. Our theory is that the jury and the appellate court each told the landlord – “you got too cute by half and we’re going to give you what you wanted – a terminated lease. Here’s your invoice for $350,000. Next time you try something like this, think it out a little more carefully.” Regardless of what most losing parties think, judges and juries aren’t stupid – they know what’s going on. That had to sting, especially the extra $230,000 and what it, the landlord, spent on its own tab.

If you are coming to the Shopping Center Law Conference, please say hello. After all, we’re always looking for fresh ideas for Ruminations. One sure place to find us is by coming to our Thursday, October 17 program from 12:45 – 2:00 pm. What’s it called? – “Will Your Lease Stand Up To A Real Fire, Or Will It Be Collateral Damage? Reflections From After The Fact.” John Kim (of Westfield, the shopping center folks) and I look forward to seeing you there. There are a number of other programs connecting with the same range of issues, but we promise to be the most entertaining and that we’ll strive to be the most valuable one.


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