Tenant Leasing Illustrated – June 2018 – Avenging Landlord Defaults

Although most commercial leases do not include a specific landlord default provision, recently we have seen a number of leases which provide long notice and cure rights for landlord defaults. As written, some even require tenants to waive valuable enforcement remedies.

In today’s issue, we provide seven suggestions for commercial tenants when addressing landlord default provisions.

Avenging Landlord Defaults

Marvel’s latest, Avengers Infinity War, is, well, a marvel.

As of this writing it has grossed over $1.8 Billion, is the largest superhero film in history and sits behind only three other movies in total gross income: Avatar, Titanic and Star Wars: The Force Awakens (having passed Jurassic World and made those dinosaurs history).

I do not understand any of it.

Oh, I have seen an Iron Man here, a Hulk there, but there are more plots and characters than a Game of Thrones reunion.

There is Iron Man, Hulk, Thor, Black Panther, Captain America, Hawkeye (I think from M*A*S*H), along with a cast of A-list actors a mile long.

It seems that everyone but Mighty Mouse and Underdog get into the action.

My son Adam, who majored as an undergraduate in X-Men and now is working on a graduate degree in Marvel has gamely tried to explain this all to me, even providing a web based complete guide to the Marvel Cinematic Universe.

I read 120 page leases before breakfast but my eyes rolled back into my head trying to absorb this convoluted new universe.

Maybe I should stick to movies like Castaway: Tom Hanks and a volleyball, one character, one deserted island – I think I can follow.

The Martian. Matt Damon stuck on Mars and yes, a bunch of people are trying to help bring him home, but it is basically Matt Damon stuck on Mars.

All of these plots and characters seems like a bit of overkill.

As you might imagine, commercial leasing has its own form of overkill and that is the default section.

Many leases provide that if a tenant even thinks about not paying rent the landlord can take the tenant’s first born and obtain a lien on the guarantor’s bodily organs and we have talked in the past about how to protect commercial tenants with adequate notice and cure rights and equitable landlord remedies.

But what about landlord defaults?

No doubt they are truly infallible creatures, but for all the attention given to tenant defaults commercial leases do not focus much on landlord defaults.

Perhaps landlord default is alluded to when a lease removes a potential remedy by providing that rent must be paid without offset, and tenants can often obtain limited abatement rights if the landlord fails to provide basic services or make required repairs.

Yet, although nothing limits a tenant’s right to seek common law remedies for its landlord’s breach of the lease, there is no specific landlord default provision in most commercial leases and common law remedies can require a great deal of time and expense.

Recently, we have seen a disturbing trend where some leases attempt to limit such common law tenant remedies by providing landlords with long notice and cure rights for landlord defaults or even require tenants to waive enforcement abilities altogether.

This seems like overreaching; if a tenant defaults, the landlord has numerous enforcement options, and tenants should not be required to waive their relatively limited rights.

Follow these seven suggestions if your landlord attempts to expand its protections in the event of a landlord default:

  • Call a default a default. Some leases provide that the landlord is not in default during its cure period. But you should clearly indicate that a default has occurred, even if not yet an “event of default” until your landlord fails to cure within the cure period. You may need to avail yourself of other remedies triggered by such default so the cure period should not mask the default.
  • Do not waive valuable rights. You should not be waiving important and negotiated rights and, even if you provide your landlord with extra time to cure, the ability at some to point exercise (or threaten to exercise) these remedies may be necessary to force your landlord to meet its obligations.
    • Do not waive rights under your lease or applicable law to terminate unconnected to the default (e.g., due to casualty or condemnation) or in the event of a wrongful eviction (constructive or actual) by your landlord. These rights are imperative if your premises are no longer suitable for the conduct of your business and the conditions causing this unsuitability are not remedied or remediable in a reasonable period of time.
    • Do not preclude rights to withhold or abate rent or to set-off any claim or damages against rent as a result of any default by your landlord or breach of its obligations.
  • Lawsuits are not the answer. Do not limit your remedies to actions for damages or for injunctive or declaratory relief. These remedies may be of some benefit but can be costly, time consuming and difficult to achieve.
  • Beware extended cure rights. It is not unreasonable to afford your landlord a notice and cure period in which to address defaults (e.g., 15, 20 or 30 days). But leases sometimes afford the landlord extensions beyond its stated cure period which should be limited to defaults that by their nature cannot be cured within the initial cure period (e.g., exclude monetary defaults) and your landlord should be required to commence the cure within the original cure period and diligently prosecute such cure to completion within some prescribed time period.
    • As tenants, we request that there be no cap on these “due diligence extensions” for our non-monetary defaults since the landlord is not damaged by the delay and the potential loss of our tenancy is too extreme a remedy for such a default, but landlord default provisions with no cap are not necessarily appropriate. If the default affects your use and enjoyment of the premises, there may be a point where you need more than abatement and should be entitled to terminate.
  • Address mortgagee/superior lessor cure rights. You should note that leases often allow a landlord’s mortgagee or superior lessor additional time to cure a landlord’s default. In order to cure a default, the mortgagee or lessor needs additional time to obtain possession of the property and/or appoint a receiver and we are not averse under the right conditions to providing some additional time to cure (e.g., 30 days) plus some further specified “due diligence time” (e.g., 60, 90 or 120 days) if the mortgagee or lessor agrees in writing during the initial cure period to cure such defaults once it controls the property.
  • Landlord liability limitations. Also note that many leases limit the landlord’s liability to its interest in the property. This limitation should be expanded to cover proceeds from rent, casualty and condemnation awards, etc., but is not unreasonable and in practice not a huge give since most owners use single purpose entities to own individual properties.
  • Prevailing party provision. Most leases allow the landlord to recover costs incurred to enforce the provisions of the lease. You should not only limit these provisions to instances in which you are in default after the expiration of applicable notice and cure periods, but also provide that you can recover your costs incurred due to your landlord’s default.

The only superhero named Thor that I know plays for my NY Mets, although I think my guys need to ease up on the kryptonite cocktails and like all other good little league teams focus on not messing up the batting order… but I digress. Follow the six suggestions above and you will be faster than a speeding landlord default clause and be able to leap tall lease provisions in a single bound.