Blog Archive

Monday, July 9, 2018

Retail Tenant Remedies for Violations of Exclusives, and the Rogue Tenant Exception


 
In shopping center leases, retail tenants often negotiate for exclusive use covenants—i.e., agreements by the landlord not to lease, or otherwise
allow the occupancy of, other space in the remainder of the shopping center for uses that compete with tenant. The exclusive use rights are integral to the retail tenant’s conduct of its business, and to the value of its leasehold, within the center. If, for example, a home goods store commits to paying rent on a location for five (5) or ten (10) years (or longer), and to investing significant capital in planning, permitting and constructing a new store site, it needs to have assurances that its investment and future sales will not be compromised by the landlord leasing other space in the center to another home goods competitor.

From the tenant’s perspective, it is also important that its exclusive be enforced through a stronger enforcement mechanism than ordinary default remedies, which often include only the “nuclear option” of terminating the lease if the Landlord fails to cure the breach (and sometimes do not even allow for that remedy).

From the tenant’s perspective, it is also important that its exclusive be enforced through a stronger enforcement mechanism than ordinary default remedies, which often include only the “nuclear option” of terminating the lease if the Landlord fails to cure the breach (and sometimes do not even allow for that remedy). If, for instance, another home goods store offered the landlord 150% over market rent to lease space next to the existing tenant, the landlord could have the incentive to accept the competitor’s higher rent offer even if it means breaching the original tenant’s lease; even if the original tenant exercised its termination rights, the landlord would have essentially “traded up” by replacing one home goods tenant in the center with another home goods tenant paying higher rent. The original tenant could also file a lawsuit to enjoin the breach of its exclusive, but lawsuits are time consuming and expensive, and with exclusive use covenants there are always vagaries that make the outcome uncertain (e.g., arguments that the competing tenant’s use is not proscribed by the original tenant’s exclusive use language, and the general inclination of courts to construe use restrictions narrowly with a preference against restricting the underlying property). Accordingly, in order to address the landlord’s temptation (and to remove the economic incentive) to breach the tenant’s exclusives, tenants with sufficient bargaining leverage will often demand special remedies in the event the landlord violates the tenant’s exclusive. It is common, for instance, for the tenant to have the right to either terminate the lease or pay 50% rent (or some other significant rent reduction) while the violation continues. As this is a self-help remedy that tenant can enforce on its own (without having to file a lawsuit), it is easy and efficient to implement—the tenant simply reduces its monthly rent payments by 50%.

Faced with these potentially severe consequences, responsible landlords take care to avoid violating the existing tenant’s exclusives. The landlord can control this by (obviously) refraining from leasing other space in the center to tenants who would clearly violate the existing tenant’s exclusives. Less obviously, the landlord can carefully draft the permitted use clauses in new tenants’ leases to not only ensure that it does not permit a use that would violate the existing tenant’s exclusive, but also ensuring that the new tenant cannot make future changes in use (for example, as a result of an assignment of the lease or a sublease to another user) that could violate those existing exclusives. The landlord cannot, however, control another tenant’s decision to nonetheless engage in a use that is not permitted (or even prohibited) under its lease. This is what is commonly referred to as a “rogue tenant.” While the landlord cannot immediately control the rogue tenant’s bad behavior in engaging in a prohibited use under its lease, the landlord nonetheless becomes exposed to the severe penalties for the violation of the existing tenant’s exclusives.

For that reason, landlords often try to negotiate an exception to the implementation of the original tenant’s exclusive use remedies, if the violation is caused by a rogue tenant (a so-called “rogue tenant carve out”). The landlord argues that it should not suffer the severe consequences for violations that are caused by a third party (the rogue tenant) over whom the landlord has no control. However, from the original tenant’s perspective, it still requires protection against its business being severely affected by a competing business, regardless of whether the landlord is complicit in creating that competition or whether landlord is, in some sense, “innocent.” To the existing tenant, it is simply a matter of allocating the risk between the landlord and the original tenant. Both parties may be “innocent,” but one of the parties has to bear the risk of the consequences of a rouge tenant competing with the existing tenant’s business. If the original tenant is large tenant or otherwise has significant bargaining leverage, its response may well be that this is simply a risk that the landlord must bear. As a compromise, the parties might draft a rogue tenant carve out that is conditioned upon the landlord taking affirmative actions to stop the rogue tenant from continuing the violating use. After all, the rogue tenant’s actions are not entirely out of the landlord’s “control”; the landlord will have its own remedies against the rogue tenant for breaching the terms of its lease, such as declaring the tenant in default, exercising default remedies, seeking an injunctive or other equitable relief to stop the violating use by judicial action, or even seeking eviction of the rogue tenant. The original tenant will expect the landlord to exercise those remedies, and to aggressively pursue them, as a condition to its forbearance in exercising its remedies for violation of the exclusive use rights. At the other end of the continuum, if the bargaining leverage is more equal, the landlord may negotiate for a simpler rogue tenant carve out that simply precludes the original tenant from exercising its remedies at all if the violation is caused by a rogue tenant.

There are a myriad of other gradations in between these ends of the continuum, and many variants on how the rogue tenant carve out can be drafted. Accordingly, this is a ripe area for negotiation during the drafting of a shopping center lease, and well-represented parties will negotiate a variant that is appropriate and consistent with the business dynamics of the deal, the nature of the tenant’s business, and relative bargaining positions of the parties.

Originally posted June 30, 2018 on tlawmtm.com:
http://lawmtm.com/retail-tenant-remedies-violations-exclusives.html

Tom is a former REBA President and principal of the firm (Moriarty Troyer & Malloy LLCand chair of its Commercial Real Estate Department. Tom has over 20 years of experience in representing Fortune 500 companies, national and local banks, retailers, shopping center owners, and investors in all facets of acquisition, development, operation and leasing of commercial real estate throughout the country.

Friday, June 29, 2018

Unintended Consequences of Rule Enforcement


 
They say that good fences make good neighbors. In the condominium context, good rules make good neighbors by setting forth what constitutes acceptable
conduct and lending a certain level of predictability to community living. However, the rules, when enforced, can also lead to angry unit owners who feel unfairly restricted from acting freely in their home or on the property they share with others. This can become especially problematic when such feelings lead to contentious disputes between unit owners and either the association and/or property manager. What is the recourse when tensions rise to such a degree that a unit owner engages in hostile or abusive conduct in response to rule enforcement?

They say that good fences make good neighbors. In the condominium context, good rules make good neighbors by setting forth what constitutes acceptable conduct and lending a certain level of predictability to community living.

By definition, condominiums require individuals—who, otherwise would likely be strangers—to live in close proximity to one another and share land and possibly more, such as walls, utilities, stairways, hallways, etc. So that this may be successful, each unit owner’s interest is taken subject to the limitations set forth in the condominium’s governing documents which address conduct within common areas as well as the interior of individual units. For example, most condominiums prohibit any conduct that causes a nuisance or that otherwise negatively impacts unit owners’ ability to use and enjoy the property, such as playing loud music late at night or smoking a cigarette in a unit or even in front of a shared exterior entrance. It could also include improperly disposing of trash and recycling or failing to maintain the property to acceptable standards. Depending on the nature of the conduct and the layout of the condominium, the impacted or complaining party may be another unit owner or it may be the association as a whole.

To protect the rights of the association and all other unit owners effectively, rules must be enforced. To that end, an offending owner can be fined for violative conduct. In some instances, it may be the board that communicates with the owner, or it may be the property manager’s responsibility to enforce the rules. Regardless of the messenger, however, a unit owner who receives a warning or fine for a violation, may feel that they have been treated unfairly or that their rights as a property owner have been unlawfully impeded upon, and this can lead to contentious disputes. In the worst cases, unit owners who feel wronged may resort to harassing behavior toward members of the board and/or property management. When tasked with the difficult task of rule enforcement, it is important to know when such behavior rises to the level where it is possible to obtain a civil harassment order.

The law concerning harassment varies from state to state, and the standard can be quite high because protective orders can have significant collateral consequences for a defendant. In Massachusetts, a protective order against civil harassment may be sought pursuant to Massachusetts General Laws Chapter 258E. Under the statute, a civil harassment prevention order is appropriate only where an individual has committed three or more acts of willful and malicious conduct (1) which were aimed at a specific person, (2) with the intent to cause fear, intimidation, abuse, or property damage, and (3) which actually caused said fear, intimidation, abuse, or property damage.

Often, the easiest step in the analysis to overcome is whether the conduct was “aimed at a specific person.” Even if acts are made toward property, a court will look at the timing and scope of the conduct to determine whether the underlying purpose of the conduct was to target a specific person. As to the third step, the court will consider the cumulative pattern of harassment as opposed to the results of each individual act separately. Whether the acts were willful and malicious, however, may be more difficult to establish.

For a court to grant a harassment prevention order, the actor must have actually intended to cause fear, intimidation, abuse, or property damage, and the conduct must have been sufficiently malicious. The only directive provided by the statute is that malicious conduct is “characterized by cruelty, hostility or revenge.” Thus, courts must make a fact-based, case-by-case determination. It is insufficient for the actions to have been merely disruptive, upsetting, or logistically and financially problematic. On the other hand, verbally attacking someone, threatening one’s job, threatening to relentlessly harass, refusing to leave an area, and physical aggression (or the threat thereof) may be deemed intentionally malicious sufficient to warrant a protective order. However, each situation will be unique, and there is not bright line rule.

Of course, the hope is that circumstances never reach the point where a board member or property manager needs to seek a harassment prevention order from the court. Because disputes with unit owners often arise out of a lack of understanding, misinformed expectations, or poor communication, it is important to maintain an open dialogue regarding rules and possible violations and establish a fair and transparent procedure for addressing noncompliance that you can apply with consistency for all unit owners.

Originally posted June 30, 2018 on tlawmtm.com: http://lawmtm.com/unintended-consequences-rule-enforcement.html

Janelle received her J.D. from Northeastern University School of Law where she was Editor-in-Chief of the Northeastern University Law Review and a teaching assistant for the property law and legal research and writing programs. During law school and prior to joining Moriarty Troyer & Malloy LLC, Janelle was a federal judicial intern for the Honorable Denise J. Casper, U.S. District Court, District of Massachusetts.

Friday, June 15, 2018

Planning for the Future



In many conversations over the years, I have heard trustees remark about their pride over not having raised the monthly condo fee
during their long tenure on the Board.  While I understand this sentiment, a flat monthly fee over a long period of time is almost always a mistake and it is a mistake that the ownership could pay a large price for in the future.

Over time, the cost of pretty much everything increases.  Are you paying the same price for electricity that you were in 2010?  How about that plowing contract?  My guess is that the price keeps going up and up.  I recently read that the floods in Houston and Florida, disasters in Puerto Rico and Massachusetts, as well as the wildfires in California have resulted in damages of over $300 billion.  It doesn’t take too much imagination to predict that insurance companies will make up for losses by raising premiums.  As costs rise so should the monthly fee because if your fee is not rising, that means your association is putting less into reserves.

Let’s take a step back.  The annual budget for every association should include all costs paid by the condominium.  Such items include, master insurance, management fees, common utilities, landscaping, snow removal and general maintenance.  The annual budget should also include a line item for reserves.  Generally speaking, reserves should be about 10% of the annual budget.  Reserves are the condominium’s savings account for when capital repairs and replacement are needed.

For ABC Condominium Trust and its flat monthly fee, I suspect that their reserve account, if any, is paltry at best.  What happens when the roof needs replacement?  What happens when it’s time to tear up the pot-hole laden parking lot and re-pave?  If the money is not available in your reserve account the simple answer is that the owners are going to get hit with a very large special assessment.  While these owners may have been pleased over their low monthly fee, they will be irate over the $10,000 bill that is due in 30 days.

The key to avoiding situations like this is proper planning.  Board members and managers want to properly budget so that the association is putting aside funds via reserve contributions so that the reserve can pay, or at least reduce, the direct costs to owners for large-scale capital projects.  

Proper planning requires an examination of all the common elements to determine the useful life and costs of replacement.  Elements such as: the roof, siding, parking areas, HVAC equipment, elevators, the pool, clubhouse and tennis courts.  The list goes on and on.  Most individuals do not have the expertise to properly estimate the useful life left in the various common elements of their building as such expertise is simply not commonly possessed.  The best way to plan for the future is through use of a reserve study. 

A reserve study by a qualified engineer will predict the useful life of all common elements and create a plan for funding the future replacement of each such element.  The study will allow the board to raise funds sufficient to cover their condominium’s particular needs in a thoughtful and well-planned way. 

Let’s go through a very simple example.  In a 10 unit building, a new roof will cost $25,000.  The roof will need to be replaced in 5 years.   If planning starts now, each owner must contribute $41.67 extra each month for the next 60 months in order to raise the full $25,000.  The reserve study will thus allow the Board to properly budget the upcoming roof cost into the annual budget for the next 5 years.

Will condominium fees increase after a reserve study is done?  Almost certainly yes.  But it is far better to pay a bit more per month over a number of years rather than come up with thousands of dollars at one.  A recent study showed that only 39% of Americans have enough money saved to cover a $1,000.00 emergency.  Such a finding should give pause to boards who wish to rely on special assessments to fund capital projects. Special assessments are difficult to collect given that the Massachusetts Condominium Statute specifically excludes them from the priority lien.  Unpaid special assessment can therefore wreak financial havoc on the condominium and result in owners having to pay more to cover their neighbors’ inability to pay.

Going back to the roof example above, would you prefer to pay $42 a month for 5 years or $2,500 due in 30 days?  Almost certainly the majority of owners will prefer the monthly charge due to the inability to come up with the lump sum.  Imagine an even better option, however.  For those boards planning ahead from day one, that $25,000 roof charge can be planned for and paid over 15 or 20 years, not 5.  The increase to the monthly fee over 20 years is a mere $10.42.

Whether or not your particular association needs a reserve study, the board should annually discuss future projects and make sure that funds are being set aside to fund them through the annual budget.  As the saying goes, an ounce of prevention is worth a pound of cure.  There is one possible safety net if your association does not have sufficient funds for major repairs and that is through an association loan.  I would encourage you to contact your legal counsel regarding the ability of your association to borrow money from a lender paid over 5, 10 or 15 years or more.

Dean is a REBA member and partner in Marcus, Errico, Emmer & Brooks’s Condominium Practice Group, where he focuses his practice on lien enforcement and rules enforcement matters. Dean additionally drafts condominium document amendments and resolutions and works closely with Boards regarding document interpretation and general condo governance issues.