Liquidated Damages: How Much Is Too Much?

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Imagine a landlord delivers promised space 84 days beyond the target delivery date, and the tenant gets 755 days of rent credit. That’s a little over two years’ of free rent for a delay of a little less than three months. Is that appropriate? Is it lawful? Is it a proper measure of damages? Is it a penalty imposed on the landlord? At the end of March, a federal judge in Pennsylvania, applying New Mexico law, answered the legal questions. She ruled that the 755-day rent credit was an acceptable approximation of damages and was not an unenforceable penalty. Ruminations has no argument with the court because, when it comes to whether an agreed-upon damages provision in a lease is enforceable, the unvarying answer is: “It depends.” [Read more…]

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How Gross Are “Gross” Sales? And More.

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A few weeks ago, we wrote about the distinction between “rights” and “remedies,” but in somewhat theoretical or even esoteric terms. Today, we’ll present a situation that demonstrates a practical intersection of the two. Our story comes from an April 24, 2020 decision from the Appellate Division of the Supreme Court of New York. [That’s New York’s name for its intermediate appellate court.]

Imagine a mall with approximately 150 tenants. One of those tenants (and possibly others) was listed as a “Named Retail Tenant” or as a “Suitable or Successor Replacement Anchor Store,” a “Required Tenant” or “Upscale Tenant” in the “co-tenancy” provisions within the leases of many other tenants at the mall. Basically, if this “Named Retail Tenant” left the mall, dominos could fall. [Read more…]

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Rights Without Remedies: Moratoriums And Real Estate

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If blog postings, law firm memorandums, newspaper articles, televised pundits, and the like were effective medications for COVID-19 infections, this crisis would be over. Without even asking readers, we know that all of you are inundated with reliable [and less than reliable] information and guidance about this virus and how to deal with it. Unfortunately, more and more, it seems like we’re hearing Arthur “Guitar Boogie” Smith and Don Reno performing “Feudin’ Banjos” on their seminal 1955 recording. We don’t play the banjo. Therefore, we won’t be joining the COVID-19 legal advice band today.

 

One thing, however, bothers us more than the many others. We’ve seen a lot of words speculating on what “laws” were needed. Some opinions have been sage. Many have been uninformed. What bothers us is that much of what we are reading ignores or blurs the difference between “rights” and “remedies.” Almost all lawyers know the following; many of our other readers may not. One way to explain what is going on is to use an example that comes right out of our current news. An increasing number of jurisdictions are legislating (or administratively imposing) rent relief for (usually only residential) tenants. [Read more…]

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Why Are Obnoxious Holdover Rents Enforceable?

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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…]

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

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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.

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Co-Tenancy Rights – Use Them Or Lose Them

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It’s been a while since we wrote about rules of contract construction or about the consequences of dilatory behavior. Now, we’ve just seen a September court decision from the United States District Court for the District of Minnesota that gives us a good opportunity to cover both. As a bonus, it deals with a lease’s continuing co-tenancy provision.

The co-tenancy provision was pretty typical. In principle, to be an “Anchor Tenant” meant almost any “large, well-known national or regional retail store.” A co-tenancy failure was where certain identified space at the shopping center lacked such an Anchor Store for 120 days. Absent such an Anchor Store for that period, and if certain other conditions existed, the tenant with the continuing co-tenancy right could begin to pay “Alternative Rent” equal to the lesser of the lease’s stated rent or 3% of its gross sales. None of that was at issue at the Minnesota shopping center. The landlord agreed that the tenant’s co-tenancy right had been triggered and that it would be entitled to pay Alternative Rent, but for one issue. It claimed the tenant waited too long to exercise its right to the reduced rent. It wasn’t because an Anchor Tenant was found for the empty space. It was because the now-gone Anchor Tenant had vacated at the end of July 2016 and the claiming tenant, after paying full rent for 30 months, made a $250,000 retroactive claim in January 2019 for excess rent paid. [Read more…]

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Don’t Believe What I Told You Clauses

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Here’s a story with a few different lessons. One aspect of it won’t be of great utility to our readers, so we’ll get it out of the way right now. The tenant in this story appeared to sign a lease without counsel and without fully reading it. We don’t think that aspect casts any shade on the lessons we’ll be covering, but keep the tenant’s approach in mind as you read the rest of today’s blog posting.

The owner of a successful chain of quick-service, ethnic restaurants developed a new concept – a mall restaurant that would sell gourmet hot dogs. W.C. Fields might have called those “Gourmet Tube Steaks,” but that’s for another industry’s blogs. He honed in on a large mall, one that only had three remaining spaces in what appeared to be its food court (though the court never explicitly identified it as such). One of the existing tenants in that food court was a well-known, national, premium hamburger quick-service restaurant. No, it wasn’t the one with the golden arches. Although that hamburger restaurant sold hot dogs, they were only a sideline. So, this was of no concern to the owner’s gourmet hot dog plans. [Read more…]

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Are Waivers Enforceable?

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Are waivers enforceable? It depends. How unsatisfying is that answer? Generally speaking, absent duress or coercion, parties can waive what would otherwise be their right. How does one know if there is (was) coercion? Well, some situations, such as an actual gun to the head, are easy to identify. Others are not so simple. When it comes to agreements between commercial parties, there is a presumption that they are grown-ups, able to protect their own interests. The “bigger” they are, the less likely a cry of “coercion” will rule the day. Representation by an attorney will dull a party’s claim that it was improperly forced to agree to a waiver (or other contract terms). When courts reject a party’s plea that it was coerced, you’ll often see the “deal” as having been between “sophisticated parties that negotiated at arm’s length with apparent care and specificity, and represented by competent counsel.” All of those factors concern themselves with the character of the parties and how they arrived at their agreement. [Read more…]

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