THE LEASING HOTLINE

ARBITRATION

An arbitration clause was limited to the issue of fair market value of the tenant's interest in the leased property. A lease with a hotel gave the landlord the right to purchase the tenant's interest in the hotel if the tenant elected to transfer its hotel business to a third party. In the event the parties could not agree on the fair market value of the interest, the lease required the parties to arbitrate. When the landlord decided to exercise its option to purchase, and the parties were unable to agree on the price, the hotel filed a demand for arbitration of that issue as well as several other disputes between the parties.

The landlord filed a motion to stay arbitration and the court concluded that the sole issue for arbitration would be the fair market value for the tenant's interest in the hotel, pursuant to the arbitration clause in the lease. The court subsequently stayed the arbitration when it found that the hotel had defaulted on the lease and the landlord had terminated it.

On appeal, the court held that the arbitration clause was extremely limited ' it applied only to the fair market value of the hotel's interest. Once the trial court determined that the tenant had defaulted and no transfer had occurred, no issue remained for arbitration. The court thus affirmed the trial court's arbitration order.

Meridien Hotels, Inc. v. MHI Leasco Dallas, Inc., No. 05-02-01058-CV, Tex.Ct.App., March 7, 2003.

ASSIGNMENT

An intermeddler was not a proposed assignee and thus was not entitled to sue the landlord for breach of the assignment provision in the lease. A 10-year commercial lease required the landlord's written consent for assignment, not to be unreasonably withheld. The tenant, Mercer, informed the landlord that it intended to sublease the premises and requested written consent. Court House Plaza was interested in subleasing and sent the lessors an offer to lease contingent upon purchase of the adjacent property from Mercer to build a condominium development. The lessors acknowledged receipt of several sublet offers in a letter to Mercer. Mercer entered an agreement with one of the offerees, who moved into the premises without the lessors' consent. Subsequently, Court House Plaza agreed to purchase the adjacent property, paid Mercer for the right to pursue the assignment of the lessor's premises, and signed an assignment/assumption agreement with Mercer. It also presented another proposed lease to the lessors to take assignment of the rights and obligations of the Mercer lease and stating that it intended to demolish the building on the premises. The agreement required the lessors to cooperate with and support Court House Plaza's planned development.

The lessors terminated Mercer's lease for breach of the assignment provision and conducted negotiations for the premises with Court House Plaza over a 2-week period, which ultimately failed. The lessors informed Court House Plaza that they would be entering into a lease with another party, refused to give consent for assignment or sublease by Mercer to Court House Plaza and commenced an unlawful detainer action against Mercer. Court House Plaza filed suit for breach of contract against the lessors, arguing that it was a third party beneficiary of the assignment provision. It sought a decree requiring the lessors 'reasonably to consider and to grant [their] request for their written consent to the Sublease and/or Assignment.' The trial court granted the lessor's motion for summary judgment on the grounds that Court House Plaza did not establish that it was a third party beneficiary. Court House Plaza appealed.

The appellate court examined the case cited by the appellant, but held that Court House Plaza was not a third party beneficiary of the assignment provision in the lease. It would, however, have standing to bring a declaratory relief action against the lessors if they unreasonably withheld consent to the assignment. The agreement that Court House Plaza submitted to the lessors was a proposed lease agreement that was unrelated to an assignment from Mercer. Thus Court House Plaza was not acting as a proposed assignee under the provision in the lease, and it was not entitled to have the lessors consider and approve it as an assignee. The appellate court affirmed summary judgment for the lessors.

Court House Plaza Co. v. Goodenough, H023883, Cal.Ct.App., Feb. 28, 2003.

BANKRUPTCY

Proof of 'the financial condition and operating performance' of an assignee under '365(b)(3) of the Bankruptcy Code includes the debtor's performance during the period of tenancy and a proportional comparison of the finances of the proposed assignee. Ames Department Stores moved to assume and assign the lease to one of its stores. The landlord, Weymouth Shopping Center Associates, objected to the motion on the grounds that Ames had failed to provide adequate assurance of future performance under '365(b)(3) and (f) of the Bankruptcy Code. The bankruptcy court approved the assumption and the landlord moved for emergency relief in the district court. The landlord argued that the bankruptcy court had erroneously relied on a financial statement covering a period after the debtor became a lessee, rather than the period three months prior to that date. The court held that the bankruptcy judge had used the proper financial statements and, furthermore, that it was reasonable for the judge to find the debtor's quarterly reports unreliable because of seasonal variations.

In addition, the district court rejected the landlord's argument that a finding of ”similarity' under '365 (b)(3)(A) requires that 'big box' tenants should be replaced by other 'big box' tenants.' The court distinguished a case cited by the landlord, finding that it did not 'stand for the proposition that a Bankruptcy Court cannot apply a proportional comparison of the financial health of the assignee and the Debtor.' The district court concluded that the cited decision did not rely on a construction of the statute to require the same gross profits and performance between the assignee and debtor. It thus affirmed the denial of the motion for emergency relief.

In re Ames Department Stores, Inc., M47 (DAB) S.D.N.Y., March 5, 2003.

LEASES

An injunction prohibiting loud music in a retail store must be drafted with specificity. Urban Outfitters, a retail store, had a lease that contained a clause requiring it to comply with all laws. A local ordinance provided that 'any loud or unreasonable noise [that] disturbs … another … shall be considered to be a noise disturbance and a public nuisance.' When Urban Outfitters began playing music, the other tenants in the building complained. Because the complaints could not be resolved, the landlord sued and the suit was removed to federal court. The jury found Urban Outfitters liable for nuisance, breach of contract and breach of the implied covenant of good faith and fair dealing. The court considered evidence of past noise complaints against Urban Outfitters in arriving at its judgment. It issued an injunction ordering the store to stop operating the sound system in a way that 'unreasonably interferes with other tenants' use of their space….' It further ordered Urban Outfitters to comply with the local noise ordinance.

Urban Outfitters appealed, arguing, inter alia, that the ordinance was unconstitutionally vague and facially overbroad; the injunction was impermissibly vague; and the court erred in admitting evidence of past noise complaints. The court upheld the constitutionality of the ordinance and the court's use of prior excessive noise problems. It did, however, consider Urban Outfitters' objection to the injunction. It found that the order did not comply with the Federal Rules of Civil Procedure's specificity requirement and vacated the order, remanding it to the district court for more precise drafting.

Howard Opera House Associates v. Urban Outfitters, Inc., Docket No. 02-7593, 2nd Cir., March 5, 2003.

REMEDIES

An acceleration clause in a lease was void as a penalty. The remedies provision in a 22-year lease gave the landlord the option of terminating the lease and collecting the remaining rent for the remainder of the term, less any amount from re-letting the premises. The tenant defaulted with 18 years left and returned the premises to the landlord. The landlord sued for the remaining rent ' $865,596. (He later re-let the premises and acknowledged that any rent received from the new tenant would offset the payment due from the original tenant.) Both the landlord and tenant moved for partial summary judgment. The tenant argued that the acceleration clause was an unenforceable penalty, and the landlord had terminated the lease when he sought recovery under that paragraph, thereby terminating the tenant's obligations. The trial court held the clause unenforceable and the landlord appealed.

The appellate court affirmed, finding that the provision failed to assess future market conditions, future rental value and the probability of re-letting the premises. It noted that the landlord had attempted to collect 18 years of unaccrued rent, but there was no evidence that these up-front payments reasonably related to the landlord's actual future damages. Nor did the provision reduce the future rent to present value or require the landlord to try to re-let the premises upon the tenant's default. The appellate court also affirmed the trial court's failure to grant the landlord summary judgment on claims for repayment of rent reduction, taxes and insurance.

Nobles v. Jiffy Market Food Store Corp., A02A2342, Ga.Ct.App., Feb 27, 2003.

ARBITRATION

An arbitration clause was limited to the issue of fair market value of the tenant's interest in the leased property. A lease with a hotel gave the landlord the right to purchase the tenant's interest in the hotel if the tenant elected to transfer its hotel business to a third party. In the event the parties could not agree on the fair market value of the interest, the lease required the parties to arbitrate. When the landlord decided to exercise its option to purchase, and the parties were unable to agree on the price, the hotel filed a demand for arbitration of that issue as well as several other disputes between the parties.

The landlord filed a motion to stay arbitration and the court concluded that the sole issue for arbitration would be the fair market value for the tenant's interest in the hotel, pursuant to the arbitration clause in the lease. The court subsequently stayed the arbitration when it found that the hotel had defaulted on the lease and the landlord had terminated it.

On appeal, the court held that the arbitration clause was extremely limited ' it applied only to the fair market value of the hotel's interest. Once the trial court determined that the tenant had defaulted and no transfer had occurred, no issue remained for arbitration. The court thus affirmed the trial court's arbitration order.

Meridien Hotels, Inc. v. MHI Leasco Dallas, Inc., No. 05-02-01058-CV, Tex.Ct.App., March 7, 2003.

ASSIGNMENT

An intermeddler was not a proposed assignee and thus was not entitled to sue the landlord for breach of the assignment provision in the lease. A 10-year commercial lease required the landlord's written consent for assignment, not to be unreasonably withheld. The tenant, Mercer, informed the landlord that it intended to sublease the premises and requested written consent. Court House Plaza was interested in subleasing and sent the lessors an offer to lease contingent upon purchase of the adjacent property from Mercer to build a condominium development. The lessors acknowledged receipt of several sublet offers in a letter to Mercer. Mercer entered an agreement with one of the offerees, who moved into the premises without the lessors' consent. Subsequently, Court House Plaza agreed to purchase the adjacent property, paid Mercer for the right to pursue the assignment of the lessor's premises, and signed an assignment/assumption agreement with Mercer. It also presented another proposed lease to the lessors to take assignment of the rights and obligations of the Mercer lease and stating that it intended to demolish the building on the premises. The agreement required the lessors to cooperate with and support Court House Plaza's planned development.

The lessors terminated Mercer's lease for breach of the assignment provision and conducted negotiations for the premises with Court House Plaza over a 2-week period, which ultimately failed. The lessors informed Court House Plaza that they would be entering into a lease with another party, refused to give consent for assignment or sublease by Mercer to Court House Plaza and commenced an unlawful detainer action against Mercer. Court House Plaza filed suit for breach of contract against the lessors, arguing that it was a third party beneficiary of the assignment provision. It sought a decree requiring the lessors 'reasonably to consider and to grant [their] request for their written consent to the Sublease and/or Assignment.' The trial court granted the lessor's motion for summary judgment on the grounds that Court House Plaza did not establish that it was a third party beneficiary. Court House Plaza appealed.

The appellate court examined the case cited by the appellant, but held that Court House Plaza was not a third party beneficiary of the assignment provision in the lease. It would, however, have standing to bring a declaratory relief action against the lessors if they unreasonably withheld consent to the assignment. The agreement that Court House Plaza submitted to the lessors was a proposed lease agreement that was unrelated to an assignment from Mercer. Thus Court House Plaza was not acting as a proposed assignee under the provision in the lease, and it was not entitled to have the lessors consider and approve it as an assignee. The appellate court affirmed summary judgment for the lessors.

Court House Plaza Co. v. Goodenough, H023883, Cal.Ct.App., Feb. 28, 2003.

BANKRUPTCY

Proof of 'the financial condition and operating performance' of an assignee under '365(b)(3) of the Bankruptcy Code includes the debtor's performance during the period of tenancy and a proportional comparison of the finances of the proposed assignee. Ames Department Stores moved to assume and assign the lease to one of its stores. The landlord, Weymouth Shopping Center Associates, objected to the motion on the grounds that Ames had failed to provide adequate assurance of future performance under '365(b)(3) and (f) of the Bankruptcy Code. The bankruptcy court approved the assumption and the landlord moved for emergency relief in the district court. The landlord argued that the bankruptcy court had erroneously relied on a financial statement covering a period after the debtor became a lessee, rather than the period three months prior to that date. The court held that the bankruptcy judge had used the proper financial statements and, furthermore, that it was reasonable for the judge to find the debtor's quarterly reports unreliable because of seasonal variations.

In addition, the district court rejected the landlord's argument that a finding of ”similarity' under '365 (b)(3)(A) requires that 'big box' tenants should be replaced by other 'big box' tenants.' The court distinguished a case cited by the landlord, finding that it did not 'stand for the proposition that a Bankruptcy Court cannot apply a proportional comparison of the financial health of the assignee and the Debtor.' The district court concluded that the cited decision did not rely on a construction of the statute to require the same gross profits and performance between the assignee and debtor. It thus affirmed the denial of the motion for emergency relief.

In re Ames Department Stores, Inc., M47 (DAB) S.D.N.Y., March 5, 2003.

LEASES

An injunction prohibiting loud music in a retail store must be drafted with specificity. Urban Outfitters, a retail store, had a lease that contained a clause requiring it to comply with all laws. A local ordinance provided that 'any loud or unreasonable noise [that] disturbs … another … shall be considered to be a noise disturbance and a public nuisance.' When Urban Outfitters began playing music, the other tenants in the building complained. Because the complaints could not be resolved, the landlord sued and the suit was removed to federal court. The jury found Urban Outfitters liable for nuisance, breach of contract and breach of the implied covenant of good faith and fair dealing. The court considered evidence of past noise complaints against Urban Outfitters in arriving at its judgment. It issued an injunction ordering the store to stop operating the sound system in a way that 'unreasonably interferes with other tenants' use of their space….' It further ordered Urban Outfitters to comply with the local noise ordinance.

Urban Outfitters appealed, arguing, inter alia, that the ordinance was unconstitutionally vague and facially overbroad; the injunction was impermissibly vague; and the court erred in admitting evidence of past noise complaints. The court upheld the constitutionality of the ordinance and the court's use of prior excessive noise problems. It did, however, consider Urban Outfitters' objection to the injunction. It found that the order did not comply with the Federal Rules of Civil Procedure's specificity requirement and vacated the order, remanding it to the district court for more precise drafting.

Howard Opera House Associates v. Urban Outfitters , Inc., Docket No. 02-7593, 2nd Cir., March 5, 2003.

REMEDIES

An acceleration clause in a lease was void as a penalty. The remedies provision in a 22-year lease gave the landlord the option of terminating the lease and collecting the remaining rent for the remainder of the term, less any amount from re-letting the premises. The tenant defaulted with 18 years left and returned the premises to the landlord. The landlord sued for the remaining rent ' $865,596. (He later re-let the premises and acknowledged that any rent received from the new tenant would offset the payment due from the original tenant.) Both the landlord and tenant moved for partial summary judgment. The tenant argued that the acceleration clause was an unenforceable penalty, and the landlord had terminated the lease when he sought recovery under that paragraph, thereby terminating the tenant's obligations. The trial court held the clause unenforceable and the landlord appealed.

The appellate court affirmed, finding that the provision failed to assess future market conditions, future rental value and the probability of re-letting the premises. It noted that the landlord had attempted to collect 18 years of unaccrued rent, but there was no evidence that these up-front payments reasonably related to the landlord's actual future damages. Nor did the provision reduce the future rent to present value or require the landlord to try to re-let the premises upon the tenant's default. The appellate court also affirmed the trial court's failure to grant the landlord summary judgment on claims for repayment of rent reduction, taxes and insurance.

Nobles v. Jiffy Market Food Store Corp., A02A2342, Ga.Ct.App., Feb 27, 2003.