Posts Tagged ‘lease’
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.
Under the New Jersey Workers’ Compensation Act, injured workers are assured of relatively swift and certain compensation payments in exchange for relinquishing their rights to pursue a potentially larger recovery in a common law action. This concept is known in legal circles as the “workers’ compensation bar.” This bar does not, however, preclude an injured employee from suing a third party for negligence that contributed to the accident.
Sometimes questions arise as to whom the workers’ compensation bar will be extended.
The New Jersey Supreme Court Requires Municipality to Negotiate With Commercial Tenant Who is Sole Condemnee in Eminent Domain Proceeding
On Wednesday of last week, St. Patrick’s Day, the luck of the Irish was with a commercial tenant who happened to be a defendant in a condemnation action in which the owner’s interest in the property was not being condemned. In Town of Kearny v. Discount City, the New Jersey Supreme Court dismissed a condemnation action filed by the Town of Kearny, because its designated developer, who was also the landlord, failed to engage in bona fide negotiations with the only remaining holdout tenant, even though the lease between the landlord and tenant contained a standard condemnation clause in which it bargained away its right to receive compensation in a taking. Under such circumstances, the Court ruled that the condemning authority has an obligation to engage in bona fide negotiations with the tenant in order to arrive at “just compensation” for the taking of the tenant’s leasehold interest in the property. In doing so, a condemning authority must provide the tenant with appraisals or an explanation of the value placed on the tenant’s interest. The Court’s pronouncement was reported in the Star Ledger, “N.J. Supreme Court gives commercial leaseholders more clout in negotiating eminent domain cases.”
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.
The Wall Street Journal recently reported that a total of $58.3 billion of the commercial-mortgage loans sliced and diced on Wall Street are currently delinquent. More than $1.4 trillion in commercial mortgages will come due by 2013, with as much as 65 percent of those deals finding it difficult to refinance. The delinquency rate of 8.58% is still nearly twice as high as the year-ago level of 4.8%. In New Jersey, the delinquency rate for borrowers of commercial mortgages increased to 7.65% in August 2010 from 0.52% in August 2008.1
The foregoing figures show that the fallout from the Great Recession continues to hit the commercial real estate industry hard, forcing some owners of office buildings, shopping centers, and industrial properties simply to walk away from their properties. What happens to a tenant who operates a business out of such a property? Put another way, what are the tenant’s rights vis-à-vis the lender and vice-versa? In New Jersey, a lender whose mortgage pre-dates a lease, and where the parties did not enter into a Subordination, Non-Disturbance & Attornment (SNDA) agreement, may repudiate the lease and consider the tenant a trespasser subject to eviction. A lender cannot, however, evict a tenant whose lease pre-dates the mortgage.
I blogged in an earlier post about the importance of including a well-drafted provision in commercial leases giving the landlord the right to remove, and dispose of, the tenant’s personal property left behind after an eviction.
Including a well-drafted provision in your commercial lease regarding the disposition of the tenant’s property will protect you not only from an angry tenant, but from other parties who may appear on the horizon. One such party in particular is seen more often than not in these difficult economic times: the dreaded bankruptcy trustee. In most instances where a tenant is unable to pay its rent, bankruptcy is a real possibility. Once a tenant files a petition, all of its assets are generally considered to be a part of the tenant’s “bankruptcy estate”, which the bankruptcy trustee is charged with administering. One of the bankruptcy trustee’s most important functions is to gather the debtor’s assets and sell them, with the proceeds then dispersed amongst the various creditors.
Anyone who owns rental property in New Jersey knows that this State is pro-tenant – at least with respect to residential tenancies. Commercial tenants, however, are not accorded the same “protective” approach most tenancy courts in New Jersey take toward residential tenants. For starters, unlike residential tenants, commercial tenants are obligated to leave the premises once their lease expires, unless the parties agree upon a new term, or an extension of the old term. In addition, courts are less hesitant to enforce a lease provision against a commercial tenant, even if it is considered onerous. After all, business is business and unless a lease term is against public policy or requires the doing of something illegal, courts, in a commercial setting, will enforce the lease.
Maybe because of this perception that commercial leases are “business” deals, many commercial landlords are of the mistaken impression that once a tenant fails to pay rent, they can simply avail themselves of what is known in legal circles as “self-help” and lock the tenant out of his rental space. As I pointed out in an earlier post regarding the process known as distraint, it is rarely a good idea for a landlord to do this. Under most circumstances, a court will look askance at such behavior unless the landlord can show a compelling reason for having done so – particularly in light of the fact that New Jersey has in place statutory provisions that allow for “summary” dispossess of a tenant who is in breach of its lease.
In the previous blog entry, I highlighted the need for commercial landlords to specify in their leases the manner in which the tenant’s personal property is dealt with upon termination of the lease, either by its terms or by way of court action (summary dispossess). Doing so gives the commercial landlord the flexibility needed to get the newly vacated space ready for re-letting.
George Carlin famously remarked how a house is just a pile of stuff with a cover on it. The same can be said for commercial rental units – they are simply places for businesses to keep their stuff. What happens to a business’s “stuff” after it leaves, or is evicted from, the premises can become a bone of contention and, dare I say it, lead to lawsuits. After all, a commercial landlord has an affirmative obligation to try and find a new tenant after its tenant leaves or is evicted. It can be very difficult for a landlord to show a unit to a prospective tenant when it is filled with the old tenant’s “stuff”. At the same time, a tenant may have a legitimate need for its “stuff” in order to continue doing business. In recognition of these competing concerns, the New Jersey Legislature passed a law a few years back regulating the disposal of a tenant’s “stuff” in such situations. The law states, in pertinent part:
A landlord of commercial or residential property, in the manner provided by P.L.1999, c. 340 (C. 2A:18-72 et al.), may dispose of any tangible goods, chattels, manufactured or mobile homes or other personal property left upon a premises by a tenant after giving notice as required by section 2 of P.L.1999, c. 340 (C. 2A:18-73), only if the landlord reasonably believes under all the circumstances that the tenant has left the property upon the premises with no intention of asserting any further claim to the premises or the property and:
- A warrant for removal has been executed and possession of the premises has been restored to the landlord; or
- The tenant has given written notice that he or she is voluntarily relinquishing possession of the premises.