The Leasing Hotline

The district court found Meyers and Roberts jointly and severally liable for any outstanding rent obligation and entered judgment against them. The district court also held that Clark Properties had no duty to mitigate damages because it would have to find a tenant that would be willing to “cohabitate” with Roberts' existing business. Clark Properties collected $9000 from Roberts and the balance from Meyers. Roberts then brought an action against Meyers for contribution, indemnification, and breach of contract. Meyers claimed that Roberts had a duty to mitigate damages, which was a bar to his recovery. The district court disagreed, and the appellate court affirmed. The appellate court held that there was no authority imposing a duty on Roberts to mitigate damages. It further considered that even if there was a duty, Roberts had reasonably fulfilled it by working with Clark Properties to find another tenant for the limited use the space would allow.

ACCELERATION CLAUSE

An overbroad acceleration clause may render the provision an unenforceable penalty. IPC Retail Properties L.L.C. v. Oriental Gardens, Inc., No. 90,509, Court of Appeals of Kansas, March 12, 2004.

IPC and Oriental Gardens entered into a 5-year commercial lease agreement commencing December 2000. Chung Wang and Tony Ho were principals of Oriental Gardens and personally executed a guaranty for the performance of all obligations under the lease. Thereafter, Oriental Gardens failed to pay the November 2002 rent, and IPC notified Oriental Gardens that if the rent was not paid within 10 days, it would elect to terminate the lease as of December 2002. IPC also stated that the duty to pay rent survives the termination of the lease, and IPC would seek all past, present, and future sums due under the lease. Oriental Gardens failed to cure the November 2002 default, and IPC filed a petition against Oriental Gardens and Wang and Ho seeking to enforce its rights under the lease and guaranty.

After a trial, the trial court held that the guaranty signed by Wang and Ho was effective, and the acceleration clause in the lease was enforceable for past and future rents. It entered judgment in favor of IPC that included overdue rent and acceleration of future rent. Oriental Gardens and Wang and Ho appealed. Although the appellate court agreed with the trial court that the guaranty was valid and that IPC was entitled to terminate the lease and seek accelerated rent, it held that the damages awarded to IPC as accelerated rent were improper. It found that the accelerated rent provision was improperly treated as a liquidated damages clause. Although a stipulated liquidated damages amount in a lease may be appropriate, in this case it was improper to treat the accelerated rent provision as a liquidated damages clause because it applied to all breaches in the contract, regardless of how minor. Such a broad acceleration clause rendered the provision an unenforceable penalty.

CONDEMNATION

A government authority cannot maintain a condemnation action in association with an urban renewal program once the renovations in the area are completed and the subject property is removed from blight. In re: Arvada Urban Renewal Company v. Columbine Professional Plaza Association, Case No. 03SA329, Supreme Court of Colorado, March 1, 2004.

In 1981, the Arvada Urban Renewal Authority (AURA) was created to oversee the redevelopment of a blighted 500-acre area within the City of Arvada. The plan was scheduled to expire in 2006. The Crow-CISI development company purchased a 35-acre tract in the mid-1980s to create a large shopping center called the Arvada Marketplace that housed four anchor stores, including a Home Base store. Thereafter, another developer, Parker Ojala, purchased a 13-acre parcel adjacent to the Crow-CISI parcel in order to build an industrial park, which included lake property. Three years after the industrial park was completed, the Home Base store closed and the Arvada Marketplace eventually secured a letter of intent from Wal-Mart. Part of the conditions of the intended contract with Wal-Mart required Wal-Mart to acquire some portion of the lake property. Arvada Marketplace's management company requested that AURA exercise its condemnation powers to secure the lake property. AURA attempted first to discuss a purchase of the lake property from the industrial park owners, but when that failed AURA initiated a condemnation action.

The court held that AURA did not have the authority to initiate a condemnation action because the area in question no longer was affected by “blight” (slum) conditions. Even though the statutes regarding condemnation did not specify when blight conditions are removed, the court concluded that it was reasonable to interpret the legislature's intent of the removal of condemnation power once the blight conditions are eliminated as a result of the urban improvement. In this case, because the blight conditions had been cured by the development of the shopping center and the industrial park, AURA no longer had condemnation power over the lake property at issue.

WAIVER OF NOTICE

Where waiver of notice in a lease is ambiguous, summary judgment cannot be granted. A.Z.3. Inc. (d/b/a/ BCBG Max Azria), v. Tampa Westshore Associates, Case NO. 2D03-4438, Court of Appeal of Florida, Second District, March 3, 2004.

AZ3 and Tampa Westshore Associates (TWA) entered into a lease for space in various shopping centers. AZ3 was required to make its rent payments on or before the first of each month. AZ3 failed to make its March 2003 lease payment on time. TWA sent AZ3 a notice by certified mail demanding payment of $25,000 due or delivery of possession of the premises to the landlord within 3 days of the date of the delivery of the notice under the relevant Florida law. AZ3 paid the March 2003 rent within the 3-day period, but subsequently failed to make the rent payment due April 1, 2003. However, when TWA sent a notice to AZ3 for the unpaid April 2003 rent, it did not include an option of payment under the Florida statute. AZ3 paid the April 2003 rent within 3 days, but TWA refused to accept payment. Instead, it filed an action seeking possession of the premises, termination of the lease, and breach of lease damages. TWA argued that the lease contained a provision that expressly waived TWA's obligation to provide AZ3 with the statutory 3-day notice.

The trial court granted TWA's summary judgment motion, holding that the April notice was not insufficient because the lease unambiguously waived AZ3's right to the 3-day notice. The appellate court reversed and remanded for further proceedings. It held that the lease was not unambiguous and contained contradictory language regarding the notice requirement. It considered that the paragraph at issue first provided that TWA was permitted to enter the premises and dispossess AZ3 without notice. However, the same paragraph also contained the following “struck out” language: “AZ3 waives the service of notice of intent to renter.” Because this language was struck out, the appellate court concluded that AZ3 might have expected a service of notice of the landlord's intent to re-enter the premises.

PARTIAL PAYMENT

A partial payment of percentage rent based upon a “good faith guesstimate” is insufficient to avoid dispossession of the premises. Vinings Jubilee Partners v. Vinings Dining dba Garrison's, A03A2095, Court of Appeals of Georgia, Second Division, March 3, 2004.

The tenant, Garrison's, was in default of the lease after its failure to make additional percentage rent payments to the landlord, Vinings Jubilee. Vinings sent Garrison's notice of the default under the lease, which required Garrison's to pay the entire sum within 3 days. Thereafter, Vinings filed a dispossessory action. Garrison's made a partial payment of the rent due ($26,000) into court. During the trial, testimony by a principal of Garrison's established that only a “good faith guesstimate” in the sum of $30,323.31 was made regarding the amount of percentage rent due. The actual amount due to the landlord was $37,944.54.

The trial court held that because the partial payment was timely under the terms of the lease and the final payment was made shortly thereafter, it would not issue a writ of possession to the landlord. The appellate court reversed. It held that under the relevant Georgia statutes, Garrison's could not rely on a partial payment to avoid dispossession – even if it was made in good faith. Moreover, the trial court was not authorized to declare the breach immaterial. The appellate court awarded possession of the premises to the landlord.

PRELIMINARY INJUNCTION

A tenant was entitled to a preliminary injunction allowing it to open its store where the tenant and landlord entered into a valid lease allowing the tenant to sell any type of clothing, and the landlord's dispute arises from the type of clothing to be sold. D.B. Indy LLC d/b/a Harold Pener v. Talisman Brookdale LLC et al., Civil No. 04-1023 (PAM/RLE), U.S. District Court for the District of Minnesota, March 4, 2004.

Pener and Talisman entered into a lease agreement for Pener to operate a “men's, women's and children's clothing store” in the Brookdale Mall. Talisman claimed Pener represented that the bulk of the inventory would be fine men's suits. Thereafter, Pener started construction on the interior of the store, and Talisman discovered that Pener intended to feature casual “urban” clothing for a younger clientele. Talisman advised the contractors working on the interior of the Pener store to cease construction, and the premises were locked. Pener sought a preliminary injunction to open his store.

The court granted the preliminary injunction. It held that Pener was able to demonstrate a likelihood of success on the merits because he had a legitimate contract claim, as the lease did not limit the sale of clothing in his store to fine men's suits. It further held that Pener would suffer irreparable harm if he were unable to open his store because an unopened store reflected poorly on Pener's reputation and his ability to sell clothing. It concluded that when balancing the harms, Pener's right to occupy the premises based on a valid lease outweighed Talisman's right to block the opening based on his argument that it already had two other “urban” clothing stores located in the mall.

NOTICE

A tenant is not entitled to notice of a proposed sale or lease of premises involved in a bankruptcy proceeding where the tenant has no legal interest in the building, even if the end use of the building conflicts with the exclusivity terms of the tenant's lease. In re: Montgomery Ward LLC, Civil Action NO. 03-541-JJF, U.S. District Court for the District of Delaware, March 24, 2004.

The bankruptcy court ordered the debtor (Montgomery Ward) to sell all of its interests in its real property to KIMCO. This order included the subject property currently owned by Jantzen. The subject property was originally leased by Jantzen's predecessor in interest to the predecessor of Port Arthur pursuant to a ground lease. Then, the predecessor of Port Arthur subleased the premises to Montgomery Ward. The property in question included a building located in a shopping center that housed a tire and auto shop. Under the transfer, KIMCO was entitled to designate the end user of the leasehold and was under obligation to provide notice of any proposed sale or lease to nondebtor lessors and other interested parties.

KIMCO issued a notice identifying Target as the end user. Target then subleased the parcel back to Port Arthur, who entered into an agreement with Office Depot. Another tenant, Staples, filed a motion in bankruptcy court, claiming it did not receive notice of the designation of Target. It argued it would have objected to the proposed sub-sublease to Office Depot.

The bankruptcy court held it did not have jurisdiction over the issues raised by Staples. It held that a bankruptcy court does not have jurisdiction over a civil matter where the outcome does not conceivably have an effect on the debtor's estate. In this case, the relief Staples was seeking affected only its own finances and not those of the debtor. However, the bankruptcy court held it did have jurisdiction over whether Staples was entitled to notice. It held that Staples was not entitled to notice because it had no legal interest in the premises, even though its own lease stated it had an exclusive provision to be the only office supply store in the shopping center.

INDEMNIFICATION BY CO-TENANT

A tenant may maintain an action against a co-tenant for contribution, indemnification, and breach of contract; there is no duty for a co-tenant to mitigate damages. Roberts d/b/a/ Auto Color Concepts v. Meyers Enterprises d/b/a Modern Dent Repair, No. 4-117/03-1001, Court of Appeals of Iowa, March 10, 2004.

Meyers and Roberts each maintained their own businesses (Modern Dent Repair and Auto Color Concepts, respectively) but held themselves out collectively as Automotive Appearance Group and entered into a commercial lease with Clark Properties commencing June 1, 1999. The tenant on the lease was Auto Color Concepts/Modern Dent Repair, and both Meyers and Roberts signed the lease. They each agreed to pay half of the monthly rent. Thereafter, on March 1, 2000, Meyers vacated the premises and failed to pay his share of the monthly rent. Roberts continued to operate his business on the premises and continued to pay his half of the rent. Clark Properties then sued Meyers and Roberts for breach of contract and sought past due rent.

The district court found Meyers and Roberts jointly and severally liable for any outstanding rent obligation and entered judgment against them. The district court also held that Clark Properties had no duty to mitigate damages because it would have to find a tenant that would be willing to “cohabitate” with Roberts' existing business. Clark Properties collected $9000 from Roberts and the balance from Meyers. Roberts then brought an action against Meyers for contribution, indemnification, and breach of contract. Meyers claimed that Roberts had a duty to mitigate damages, which was a bar to his recovery. The district court disagreed, and the appellate court affirmed. The appellate court held that there was no authority imposing a duty on Roberts to mitigate damages. It further considered that even if there was a duty, Roberts had reasonably fulfilled it by working with Clark Properties to find another tenant for the limited use the space would allow.

ACCELERATION CLAUSE

An overbroad acceleration clause may render the provision an unenforceable penalty. IPC Retail Properties L.L.C. v. Oriental Gardens, Inc., No. 90,509, Court of Appeals of Kansas, March 12, 2004.

IPC and Oriental Gardens entered into a 5-year commercial lease agreement commencing December 2000. Chung Wang and Tony Ho were principals of Oriental Gardens and personally executed a guaranty for the performance of all obligations under the lease. Thereafter, Oriental Gardens failed to pay the November 2002 rent, and IPC notified Oriental Gardens that if the rent was not paid within 10 days, it would elect to terminate the lease as of December 2002. IPC also stated that the duty to pay rent survives the termination of the lease, and IPC would seek all past, present, and future sums due under the lease. Oriental Gardens failed to cure the November 2002 default, and IPC filed a petition against Oriental Gardens and Wang and Ho seeking to enforce its rights under the lease and guaranty.

After a trial, the trial court held that the guaranty signed by Wang and Ho was effective, and the acceleration clause in the lease was enforceable for past and future rents. It entered judgment in favor of IPC that included overdue rent and acceleration of future rent. Oriental Gardens and Wang and Ho appealed. Although the appellate court agreed with the trial court that the guaranty was valid and that IPC was entitled to terminate the lease and seek accelerated rent, it held that the damages awarded to IPC as accelerated rent were improper. It found that the accelerated rent provision was improperly treated as a liquidated damages clause. Although a stipulated liquidated damages amount in a lease may be appropriate, in this case it was improper to treat the accelerated rent provision as a liquidated damages clause because it applied to all breaches in the contract, regardless of how minor. Such a broad acceleration clause rendered the provision an unenforceable penalty.

CONDEMNATION

A government authority cannot maintain a condemnation action in association with an urban renewal program once the renovations in the area are completed and the subject property is removed from blight. In re: Arvada Urban Renewal Company v. Columbine Professional Plaza Association, Case No. 03SA329, Supreme Court of Colorado, March 1, 2004.

In 1981, the Arvada Urban Renewal Authority (AURA) was created to oversee the redevelopment of a blighted 500-acre area within the City of Arvada. The plan was scheduled to expire in 2006. The Crow-CISI development company purchased a 35-acre tract in the mid-1980s to create a large shopping center called the Arvada Marketplace that housed four anchor stores, including a Home Base store. Thereafter, another developer, Parker Ojala, purchased a 13-acre parcel adjacent to the Crow-CISI parcel in order to build an industrial park, which included lake property. Three years after the industrial park was completed, the Home Base store closed and the Arvada Marketplace eventually secured a letter of intent from Wal-Mart. Part of the conditions of the intended contract with Wal-Mart required Wal-Mart to acquire some portion of the lake property. Arvada Marketplace's management company requested that AURA exercise its condemnation powers to secure the lake property. AURA attempted first to discuss a purchase of the lake property from the industrial park owners, but when that failed AURA initiated a condemnation action.

The court held that AURA did not have the authority to initiate a condemnation action because the area in question no longer was affected by “blight” (slum) conditions. Even though the statutes regarding condemnation did not specify when blight conditions are removed, the court concluded that it was reasonable to interpret the legislature's intent of the removal of condemnation power once the blight conditions are eliminated as a result of the urban improvement. In this case, because the blight conditions had been cured by the development of the shopping center and the industrial park, AURA no longer had condemnation power over the lake property at issue.

WAIVER OF NOTICE

Where waiver of notice in a lease is ambiguous, summary judgment cannot be granted. A.Z.3. Inc. (d/b/a/ BCBG Max Azria), v. Tampa Westshore Associates, Case NO. 2D03-4438, Court of Appeal of Florida, Second District, March 3, 2004.

AZ3 and Tampa Westshore Associates (TWA) entered into a lease for space in various shopping centers. AZ3 was required to make its rent payments on or before the first of each month. AZ3 failed to make its March 2003 lease payment on time. TWA sent AZ3 a notice by certified mail demanding payment of $25,000 due or delivery of possession of the premises to the landlord within 3 days of the date of the delivery of the notice under the relevant Florida law. AZ3 paid the March 2003 rent within the 3-day period, but subsequently failed to make the rent payment due April 1, 2003. However, when TWA sent a notice to AZ3 for the unpaid April 2003 rent, it did not include an option of payment under the Florida statute. AZ3 paid the April 2003 rent within 3 days, but TWA refused to accept payment. Instead, it filed an action seeking possession of the premises, termination of the lease, and breach of lease damages. TWA argued that the lease contained a provision that expressly waived TWA's obligation to provide AZ3 with the statutory 3-day notice.

The trial court granted TWA's summary judgment motion, holding that the April notice was not insufficient because the lease unambiguously waived AZ3's right to the 3-day notice. The appellate court reversed and remanded for further proceedings. It held that the lease was not unambiguous and contained contradictory language regarding the notice requirement. It considered that the paragraph at issue first provided that TWA was permitted to enter the premises and dispossess AZ3 without notice. However, the same paragraph also contained the following “struck out” language: “AZ3 waives the service of notice of intent to renter.” Because this language was struck out, the appellate court concluded that AZ3 might have expected a service of notice of the landlord's intent to re-enter the premises.

PARTIAL PAYMENT

A partial payment of percentage rent based upon a “good faith guesstimate” is insufficient to avoid dispossession of the premises. Vinings Jubilee Partners v. Vinings Dining dba Garrison's, A03A2095, Court of Appeals of Georgia, Second Division, March 3, 2004.

The tenant, Garrison's, was in default of the lease after its failure to make additional percentage rent payments to the landlord, Vinings Jubilee. Vinings sent Garrison's notice of the default under the lease, which required Garrison's to pay the entire sum within 3 days. Thereafter, Vinings filed a dispossessory action. Garrison's made a partial payment of the rent due ($26,000) into court. During the trial, testimony by a principal of Garrison's established that only a “good faith guesstimate” in the sum of $30,323.31 was made regarding the amount of percentage rent due. The actual amount due to the landlord was $37,944.54.

The trial court held that because the partial payment was timely under the terms of the lease and the final payment was made shortly thereafter, it would not issue a writ of possession to the landlord. The appellate court reversed. It held that under the relevant Georgia statutes, Garrison's could not rely on a partial payment to avoid dispossession – even if it was made in good faith. Moreover, the trial court was not authorized to declare the breach immaterial. The appellate court awarded possession of the premises to the landlord.

PRELIMINARY INJUNCTION

A tenant was entitled to a preliminary injunction allowing it to open its store where the tenant and landlord entered into a valid lease allowing the tenant to sell any type of clothing, and the landlord's dispute arises from the type of clothing to be sold. D.B. Indy LLC d/b/a Harold Pener v. Talisman Brookdale LLC et al., Civil No. 04-1023 (PAM/RLE), U.S. District Court for the District of Minnesota, March 4, 2004.

Pener and Talisman entered into a lease agreement for Pener to operate a “men's, women's and children's clothing store” in the Brookdale Mall. Talisman claimed Pener represented that the bulk of the inventory would be fine men's suits. Thereafter, Pener started construction on the interior of the store, and Talisman discovered that Pener intended to feature casual “urban” clothing for a younger clientele. Talisman advised the contractors working on the interior of the Pener store to cease construction, and the premises were locked. Pener sought a preliminary injunction to open his store.

The court granted the preliminary injunction. It held that Pener was able to demonstrate a likelihood of success on the merits because he had a legitimate contract claim, as the lease did not limit the sale of clothing in his store to fine men's suits. It further held that Pener would suffer irreparable harm if he were unable to open his store because an unopened store reflected poorly on Pener's reputation and his ability to sell clothing. It concluded that when balancing the harms, Pener's right to occupy the premises based on a valid lease outweighed Talisman's right to block the opening based on his argument that it already had two other “urban” clothing stores located in the mall.

NOTICE

A tenant is not entitled to notice of a proposed sale or lease of premises involved in a bankruptcy proceeding where the tenant has no legal interest in the building, even if the end use of the building conflicts with the exclusivity terms of the tenant's lease. In re: Montgomery Ward LLC, Civil Action NO. 03-541-JJF, U.S. District Court for the District of Delaware, March 24, 2004.

The bankruptcy court ordered the debtor (Montgomery Ward) to sell all of its interests in its real property to KIMCO. This order included the subject property currently owned by Jantzen. The subject property was originally leased by Jantzen's predecessor in interest to the predecessor of Port Arthur pursuant to a ground lease. Then, the predecessor of Port Arthur subleased the premises to Montgomery Ward. The property in question included a building located in a shopping center that housed a tire and auto shop. Under the transfer, KIMCO was entitled to designate the end user of the leasehold and was under obligation to provide notice of any proposed sale or lease to nondebtor lessors and other interested parties.

KIMCO issued a notice identifying Target as the end user. Target then subleased the parcel back to Port Arthur, who entered into an agreement with Office Depot. Another tenant, Staples, filed a motion in bankruptcy court, claiming it did not receive notice of the designation of Target. It argued it would have objected to the proposed sub-sublease to Office Depot.

The bankruptcy court held it did not have jurisdiction over the issues raised by Staples. It held that a bankruptcy court does not have jurisdiction over a civil matter where the outcome does not conceivably have an effect on the debtor's estate. In this case, the relief Staples was seeking affected only its own finances and not those of the debtor. However, the bankruptcy court held it did have jurisdiction over whether Staples was entitled to notice. It held that Staples was not entitled to notice because it had no legal interest in the premises, even though its own lease stated it had an exclusive provision to be the only office supply store in the shopping center.