Archive for the ‘Breach of Lease’ Category
As I may have mentioned or alluded to in previous posts, commercial landlords are not free to simply evict a tenant once the tenant does something in violation of the lease. At a minimum, in those instances where the tenant has failed to pay rent, a landlord must file a summary dispossess complaint. In cases of defaults other than for the nonpayment of rent, a Notice to Quit and Demand for Possession must first be served on the tenant and the quit date must pass before an eviction complaint may be filed.
The proper service of a Notice to Quit is critical. Without it, the court will not have jurisdiction to hear the tenancy case. Many commercial landlords have seen their cases dismissed at trial based on the improper service (or lack thereof) of a statutorily required Notice to Quit. Below is a chart outlining the various causes for eviction in a commercial setting together with the Notice to Quit requirements for each. I will post later as to some of the issues that crop up relating to these various causes for eviction.
Your tenant has just breached its lease and moved out of the premises. You determine that both the tenant or guarantor (if there is one) has assets to pursue, and you proceed into suit.
While the suit is pending, you hire a realtor to market the space, because your lawyer told you that you had to undertake reasonable steps to mitigate your damages. Your listing agreement with the realtor is for an initial term of 6 months, and the listing automatically renews unless either party gives 30 days’ notice of cancellation. Every 6 months, you dutifully renew the listing agreement assuming that the realtor is doing what is reasonable to try and move the space.
By the time you go to trial (over 2 years later), your realtor still has failed to generate a buyer or a tenant. Nevertheless, you and your attorney are confident you will prevail, because, you hired a realtor to re-let or sell the premises, after all.
At trial, your realtor simply testifies to the usual realtor activity, i.e., placing signs in the windows and online marketing. Although the realtor testifies as to the “asking” price, your attorney fails to elicit any testimony from you or your realtor as to the “fair market” price for the property. At the conclusion of the trial, you are hit with a bombshell: the court has decided to toss your damage claim, because you have failed to prove that your efforts to re-let the premises were reasonable.
One of the negotiating points of any lease deal is whether the tenant will personally guarantee the lease. Many small start-up businesses are quickly formed with little capital. If the tenant’s business fails, the landlord is left to try and relet the space and maybe pursues the tenant for damages. I say “maybe” only because in many instances pursuing the breaching judgment-proof tenant is an exercise in futility.
An extra level of security, of course, is to have a principal or principals of the tenant personally guarantee the tenant’s performance under the lease. Many landlords, desirous of leasing space, will only push so hard for a guarantee in these relatively difficult economic times. Informed tenants know this and will resist signing a guarantee. How do you break the impasse?
It is not unusual for me to get a call from a commercial landlord battling with a tenant who is in arrears asking whether it is OK to accept a check from the tenant for less than the rent that is owed. Typical of most answers in the law, I tell them it depends. Initially, it is important to distinguish between “receipt” of rent and “acceptance” of rent. If a tenant simply mails in a check to the landlord, who holds it or brings it to court then that check will be deemed as only having been received by the landlord – not accepted. The reasons underlying this distinction are clear – any tenant behind on rent or otherwise in default of the lease could get out from under the default by simply mailing a check to the landlord. A landlord’s mere receipt of rent should have no impact on the status of the tenant’s default.
NJ Biz reports: On Monday, Hartz Mountain Industries terminated its lawsuit against Economic Development Authority over its award of $102.4 million in Urban Transit Hub tax credits to Panasonic Corp. of North America, allowing the electronics company to move its headquarters from Hartz’s Harmon Cove development in Secaucus to a new office tower Matrix Development Group and SJP Properties will build at 2 Riverfront Center in Newark . Hartz’s President and COO Emanuel Stern stated that the litigation was abandoned, because it “would have been costly and time consuming and we have decided focusing our efforts on marketing the site to a new user is a better use of those resources.”
UPDATE: Secaucus also drops lawsuit against EDA. NJ Biz: Secaucus withdraws Panasonic lawsuit, removes final stumbling block for move to Newark
On July 7, 2011, the New Jersey Appellate Division affirmed a trial court ruling that where a lease requires a tenant to operate a “quality jewelry store” in a “first class and reputable manner,” the landlord has an implied obligation to maintain the shopping center in a good condition.
In Wallington Plaza LLC v. Taher, the trial court concluded that while the lease obligated tenant to sell only quality jewelry, it also imposed a responsibility on the landlord to keep the premises in a reasonable condition as a tenant would expect if he had to operate a first-class business to make prospective customers welcome. According to the tenant, during the years immediately preceding tenant vacating the premises, the shopping center’s parking lot fell into disrepair. More importantly, many key tenants closed and vacated the shopping center. The tenant, faced with considerably reduced traffic and an unattractive setting, vacated his store. The landlord sued for 6 months rent.
NJ BIZ reports: Panasonic is officially moving its headquarters to Newark despite lawsuit its current landlord Hartz Mountain has against the New Jersey Economic Development Authority over tax credits awarded to Panasonic. Mayor Cory Booker and Lt. Governor Kim Guadagno were on hand for the lease agreement signing.
In good times and in not so good times, a well drafted and negotiated commercial lease will contain various exit strategies available to the landlord and tenant. These strategies will come in handy in situations where a tenant’s business is booming causing it to grow out of its current space (good times) or where the space is too big or expensive for the tenant to continue because business has dropped off considerably (not so good times).
Exit strategies can include the following:
- Contraction rights
- Right to go dark
- Right to expand
Below is a very brief overview of how each of the foregoing strategies operates.
When entering into a commercial lease, one of the more important terms negotiated between the parties pertains to the manner in which the landlord will recoup its operating expenses. After all, commercial landlords are in business to make money. Without addressing its operating expenses, a landlord’s return on investment would be whittled away to nothing. While the more sophisticated players in the industry are thoroughly familiar with the various techniques available, many tenants – and some landlords – are not so well informed. What follows is a brief primer on some of the various methods utilized to protect the landlord’s return on its investment.
The most common form of commercial lease is the triple net lease. In a triple net lease, the tenant is responsible for its proportionate share (i.e. tenant’s square footage divided by the total building square footage) of property taxes, insurance, common area maintenance and utilities. These charges, commonly knows as “CAM, tax, and insurance” expenses, are in addition to the tenant’s base rent and any other expenses associated with the tenant’s occupancy (i.e. utilities, garbage collection, cleaning services and the like). Many leases will estimate these charges for a particular year, and then reconcile the amounts with the actual charges incurred for the year. If the tenant paid too much in a particular year, the tenant will get a credit toward rent. If the tenant paid too little, it will receive an invoice from the landlord for the difference – usually payable as additional rent.
Another common form of commercial lease is what is known as a “base year lease.” A base year lease is often employed in office leases where the landlord is cognizant of his return on investment in the building taking into account current income and expenses. The “base year” is typically the calendar year in which a tenancy commences. Unlike the triple net lease, the tenant in a base year lease reimburses the landlord for its share of the landlord’s operating expenses only to the extent they exceed the amount of those expenses for the base year. While the concept of a base year is relatively simple to understand, it is critical for any tenant entering into a base year lease to gain an understanding of the history of the landlord’s operating expenses so that it may plan its budget accordingly. Also, a tenant should consider negotiating that the base year be projected a period of time in advance in order to protect itself from having to experience a rent increase shortly after commencing its term in those instances where the term commences relatively shortly before the base year ends.
Another type of lease used most often in multi-tenant and single tenant office buildings, as well as industrial and retail properties is the “gross lease.” In the gross lease, the landlord pays for taxes, insurance, and maintenance. The landlord collects a fixed base rent and pays the operating expenses out of them. Many of these types of leases will, however, contain an “escalation clause”, which typically requires the tenant to pay increases in operating expenses and tax increases over a base year figure or expense stop.
It is important that a tenant shopping for space have a basic understanding of how operating expenses are to be handled in their lease so as to avoid any unpleasant surprises down the road with regard to rent increases.
Commercial landlords are occasionally confronted with a situation where one of their tenants is not abiding by the lease. Some commercial landlords feel that they can simply lock the tenant out of its space as result of any breach under the lease. This is not the case under New Jersey law. Any landlord who resorts to self help risks being sued by a tenant for any number of causes of action, including, but not limited to, wrongful eviction, trespass, and breach of contract.