Drafting a More Effective Default Clause

Chronic Nonpayment

One needed addition to a default clause should be the ability to cancel a lease for the frequent delinquency of rent payments, commonly referred to as a chronic nonpayment of rent termination clause. Forced to commence a nonpayment proceeding to collect rent, a tenant may delay and avoid paying the rent for a number of months, or in some cases years. Including the time it takes to obtain a court date, to request shortened adjournment periods, and a resolution by settlement, trial, or default in the case of a nonappearance, the earliest a property owner can usually obtain an eviction will be a few months after it commenced the nonpayment process. Even after an eviction is scheduled, state law mandates that the tenant be given 10 days to pay the amount of rent owed to avoid eviction.

For many property owners, this cycle of late or nonpayment repeats continuously, and in many cases, perennially. To further enhance the frustration, many cases result in empty tenancies with thousands of uncollectible dollars, not to mention the wasted energy, time, and money participating in the collection process.

As a result, practitioners should include in their default clauses a termination of the tenancy for the chronic nonpayment of rent. A chronic nonpayment clause terminates the tenancy upon multiple defaults in the timely payment of rent. A typical clause will terminate the tenancy once a tenant fails to pay the rent in a timely fashion more than three times in a year. The third default will allow the termination of a lease.

Despite court challenges, New York courts have held that a chronic nonpayment of rent clause is enforceable. Indeed, one New York court has even held that, where the parties' agreement permits it, a lease may be terminated upon a single default in the timely payment of rent. (Grand Libertie Cooperative, Inc. v. Billhaud, 126 Misc2d 961, 487 NYS2d 250 (App. Term, 1st Dept. 1984). Although the tenant in that case contended that the provision was violative of public policy, the court enforced the lease provision explaining that, when a lease between two commercial parties contains a conditional limitation for nonpayment of rent, it shall be enforced in the absence of a showing of fraud, exploitive overreaching, or other unconscionable conduct on the part of the landlord.

Nevertheless, although this decision has been unanimously followed and its holding has been cited in a number of recent default clause cases in New York, it may be prudent for the implementation of such a clause to be less draconian. The purpose of such a clause ' preventing an excessive number of nonpayment cases and collection problems ' can be met by a termination of the lease after an excessive number of defaults in a year. If this advice is not heeded, courts may look for ways to frustrate enforcement.

For example, one way for a court to avoid enforcement would be to dismiss a case where the landlord has failed to serve a notice pursuant to the requirements of the lease. Consequently, where the landlord seeks such a drastic result as acceleration of the full term's rent, the landlord should carefully adhere to the type of notice provided for by mutual agreement in the lease.

A landlord's pursuit of a more tolerant policy will also increase the ability of negotiating such a provision into the lease without objection.

Rent Acceleration Clauses

When used properly, a rent acceleration clause provides another formidable mechanism to ensure the timely payment of rent. Upon a default in the payment of rent, a properly drafted acceleration clause permits a landlord to collect all of the monies due under the lease without having to wait for the lease to expire. Carefully drafted rent acceleration clauses are generally enforceable in 19 states (Alabama, Alaska, Connec-ticut, Delaware, Florida, Georgia, Illin-ois, Iowa, Kansas, Louisiana, Massa-chusetts, Michigan, Minnesota, New York, Pennsylvania, South Carolina, Tennessee, Texas, and Virginia).

Even where such clauses are enforced, the courts generally hold that rent acceleration will be permitted only where there is a default in the payment of rent, and rent acceleration will not be allowed for a non-rent-related default. Moreover, courts that enforce rent acceleration clauses are careful to see that enforcement does not provide the landlord with the windfall of a double rent recovery ' payment of the accelerated rent from the defaulting tenant and rent payments from a new tenant during the balance of the period remaining on the lease of the tenant who defaulted.

In some states (eg, Georgia), the courts hold that the enforceability of a rent acceleration clause depends on whether the clause provides a mechanism whereby the accelerated rent payment may be deemed a reasonable estimate of actual damages (eg, by discounting the balance of the rent payments due to present value). In other states (eg, Alabama, Florida, New York), the courts hold that if a tenant submits payment for the full term of the lease under a rent acceleration, the tenant may remain in possession.

As with chronic nonpayment clauses, even one default in the payment of rent may effectuate an acceleration clause (eg, Florida, New York). However, as noted above, in order to accomplish such a default, all of the details and requirements of the lease must be strictly adhered to by the landlord.

Additional Rent

Another small addition to a default clause that greatly influences the ability for a property owner to collect any monies owed under the lease occurs when the lease refers to amounts due as 'additional rent.' Ergo, monies owed under lease clauses involving taxes, attorneys' fees, security deposits, letters of credit, and insurance should be deemed additional rent and drafted into the commercial lease.

For example, taking the security deposit to satisfy arrears may result in the landlord's loss of the security money through the end of the term of the lease, unless the lease specifically provides that a failure to replenish depleted security within a specified time shall be deemed a failure to pay additional rent under the lease.

This small addition to a lease permits a property owner to obtain an eviction by way of a summary proceeding, as well as a possessory and money judgment, if these 'additional rent' payments are not made, instead of having to commence a superior court action where the expense and time limitations may not justify such an action and certainly will not lead to an eviction upon a successful determination.

'Additional rent' clauses have been enforced in New York and Michigan. There are no reported cases involving 'additional rent' in other jurisdictions, so there is no reason for practitioners representing landlords in other states not to attempt to negotiate such clauses on behalf of their clients.

Omission of Cure Periods

Courts in New York have also approved the elimination of the standard 'notice to cure' normally placed in default clauses in commercial leases. Such an omission takes away a tenant's ability to prevent a property owner from terminating a lease if the lease terms are violated. Of course, a property owner that chooses to exercise such an option may still have to persuade a court that the tenant's conduct or lack of conduct existed and violated the lease. However, the omission of a cure or correction period in a lease provides a property owner with a powerful tool against one of the most paralyzing tenant weapons ever created by a court ' the Yellowstone injunction, a distinctly New York remedy, but one that tenants in other jurisdictions might yet seek from their courts.

The equitable relief provided by a Yellowstone injunction prohibits a property owner from terminating a tenancy and freezes any eviction efforts that may have commenced. It also tolls any correction period until the parties have had a chance to litigate fully whether a violation has occurred. Such injunctive relief provides an invaluable tool for a commercial tenant.

First, a Yellowstone injunction permits tenants to cure any violations even after the litigation is completed. Second, the case will be tried in New York's trial court, the Supreme Court, where the action may take years to complete and which will provide the tenant with an excessive period of time to cure any violation. Third, without a 'cure' period, a tenant's opportunity to commit knowingly blatant transgressions of the lease will decrease as the reality of the termination of the lease and eviction increases.

Where the lease precludes the tenant from seeking injunctive relief, the question of whether the lease was violated will be tried in a summary proceeding without the time impediments of discovery and the lengthy timeline of a trial court matter. In order to obtain a Yellowstone injunction, New York courts have unanimously required that such an injunction be applied for before the notice to cure expires. Without a notice to cure, more than one court has rejected a tenant's request for a Yellowstone or similar injunctive relief.

In one case where the lease failed to include a cure provision, the tenant argued that the lease was unconscionable because the absence of a cure period precluded him from seeking a Yellowstone injunction to stay the lease's forfeiture. The court held that a cure period was not required and noted that, while it might have precluded defensive tactics such as seeking a Yellowstone injunction prior to the expiration of the lease, it was part of the fully negotiated contract between represented parties, and it was not contrary to public policy to enforce the provisions of the lease under these circumstances. In another case in which a commercial lease lacked a cure period, the court noted that the purpose of a Yellowstone injunction is to toll the running of a cure period in the landlord's notice to cure. In the case at hand, there was simply no 'cure' period for the court to toll or stay, and the tenant's efforts to seek injunctive relief were denied.

Although these proposed provisions will have to be negotiated and agreed to by the parties, and many adaptations, compromises, and creative solutions may be included, this article should assist in the preparation of better default clauses in commercial leases.

Adam Leitman Bailey is a member of the New York Bar and a partner in The Law Firm of Adam Leitman Bailey, P.C., where his practice is concentrated in commercial and residential real estate law.

Attorneys are making too much money litigating disputes between commercial landlords and tenants. Even the most frequently used 'standard form' leases permit tenants to stall and strangle property owners. Moreover, these same leases leave tenants without proper recourse when property owners fail to follow written commitments. Instead of blaming the judicial system, a judge, a landlord, or tenant ' to paraphrase Shakespeare ' it is time that we practitioners recognize that the fault is not in our stars but in our leases. Because they are the enforcement provision in a commercial lease, default clauses must be revised and developed to better meet the needs of landlords and tenants under the judicial system.

By taking advantage of equitable judicial relief, tenants have been able to avoid having to follow their lease terms, and poorly drafted provisions have permitted tenants to avoid timely payment of their rent and other monies owed under the lease. However, by drafting lease terms 1) that terminate a lease for the chronic nonpayment of rent, 2) that omit any cure period for lease violations, and 3) that make all monies owed under the lease 'additional rent,' many of these problems may be eliminated.

Courts in several states have produced very favorable decisions permitting the parties to negotiate lease terms freely without the imposition of an intrusive judiciary. For example, in New York, even lease provisions producing harsh results for one side consistently have been enforced 'no matter how unwise it might appear to a third party.'

Chronic Nonpayment

One needed addition to a default clause should be the ability to cancel a lease for the frequent delinquency of rent payments, commonly referred to as a chronic nonpayment of rent termination clause. Forced to commence a nonpayment proceeding to collect rent, a tenant may delay and avoid paying the rent for a number of months, or in some cases years. Including the time it takes to obtain a court date, to request shortened adjournment periods, and a resolution by settlement, trial, or default in the case of a nonappearance, the earliest a property owner can usually obtain an eviction will be a few months after it commenced the nonpayment process. Even after an eviction is scheduled, state law mandates that the tenant be given 10 days to pay the amount of rent owed to avoid eviction.

For many property owners, this cycle of late or nonpayment repeats continuously, and in many cases, perennially. To further enhance the frustration, many cases result in empty tenancies with thousands of uncollectible dollars, not to mention the wasted energy, time, and money participating in the collection process.

As a result, practitioners should include in their default clauses a termination of the tenancy for the chronic nonpayment of rent. A chronic nonpayment clause terminates the tenancy upon multiple defaults in the timely payment of rent. A typical clause will terminate the tenancy once a tenant fails to pay the rent in a timely fashion more than three times in a year. The third default will allow the termination of a lease.

Despite court challenges, New York courts have held that a chronic nonpayment of rent clause is enforceable. Indeed, one New York court has even held that, where the parties' agreement permits it, a lease may be terminated upon a single default in the timely payment of rent. ( Grand Libertie Cooperative, Inc. v. Billhaud , 126 Misc2d 961, 487 NYS2d 250 (App. Term, 1st Dept. 1984). Although the tenant in that case contended that the provision was violative of public policy, the court enforced the lease provision explaining that, when a lease between two commercial parties contains a conditional limitation for nonpayment of rent, it shall be enforced in the absence of a showing of fraud, exploitive overreaching, or other unconscionable conduct on the part of the landlord.

Nevertheless, although this decision has been unanimously followed and its holding has been cited in a number of recent default clause cases in New York, it may be prudent for the implementation of such a clause to be less draconian. The purpose of such a clause ' preventing an excessive number of nonpayment cases and collection problems ' can be met by a termination of the lease after an excessive number of defaults in a year. If this advice is not heeded, courts may look for ways to frustrate enforcement.

For example, one way for a court to avoid enforcement would be to dismiss a case where the landlord has failed to serve a notice pursuant to the requirements of the lease. Consequently, where the landlord seeks such a drastic result as acceleration of the full term's rent, the landlord should carefully adhere to the type of notice provided for by mutual agreement in the lease.

A landlord's pursuit of a more tolerant policy will also increase the ability of negotiating such a provision into the lease without objection.

Rent Acceleration Clauses

When used properly, a rent acceleration clause provides another formidable mechanism to ensure the timely payment of rent. Upon a default in the payment of rent, a properly drafted acceleration clause permits a landlord to collect all of the monies due under the lease without having to wait for the lease to expire. Carefully drafted rent acceleration clauses are generally enforceable in 19 states (Alabama, Alaska, Connec-ticut, Delaware, Florida, Georgia, Illin-ois, Iowa, Kansas, Louisiana, Massa-chusetts, Michigan, Minnesota, New York, Pennsylvania, South Carolina, Tennessee, Texas, and Virginia).

Even where such clauses are enforced, the courts generally hold that rent acceleration will be permitted only where there is a default in the payment of rent, and rent acceleration will not be allowed for a non-rent-related default. Moreover, courts that enforce rent acceleration clauses are careful to see that enforcement does not provide the landlord with the windfall of a double rent recovery ' payment of the accelerated rent from the defaulting tenant and rent payments from a new tenant during the balance of the period remaining on the lease of the tenant who defaulted.

In some states (eg, Georgia), the courts hold that the enforceability of a rent acceleration clause depends on whether the clause provides a mechanism whereby the accelerated rent payment may be deemed a reasonable estimate of actual damages (eg, by discounting the balance of the rent payments due to present value). In other states (eg, Alabama, Florida, New York), the courts hold that if a tenant submits payment for the full term of the lease under a rent acceleration, the tenant may remain in possession.

As with chronic nonpayment clauses, even one default in the payment of rent may effectuate an acceleration clause (eg, Florida, New York). However, as noted above, in order to accomplish such a default, all of the details and requirements of the lease must be strictly adhered to by the landlord.

Additional Rent

Another small addition to a default clause that greatly influences the ability for a property owner to collect any monies owed under the lease occurs when the lease refers to amounts due as 'additional rent.' Ergo, monies owed under lease clauses involving taxes, attorneys' fees, security deposits, letters of credit, and insurance should be deemed additional rent and drafted into the commercial lease.

For example, taking the security deposit to satisfy arrears may result in the landlord's loss of the security money through the end of the term of the lease, unless the lease specifically provides that a failure to replenish depleted security within a specified time shall be deemed a failure to pay additional rent under the lease.

This small addition to a lease permits a property owner to obtain an eviction by way of a summary proceeding, as well as a possessory and money judgment, if these 'additional rent' payments are not made, instead of having to commence a superior court action where the expense and time limitations may not justify such an action and certainly will not lead to an eviction upon a successful determination.

'Additional rent' clauses have been enforced in New York and Michigan. There are no reported cases involving 'additional rent' in other jurisdictions, so there is no reason for practitioners representing landlords in other states not to attempt to negotiate such clauses on behalf of their clients.

Omission of Cure Periods

Courts in New York have also approved the elimination of the standard 'notice to cure' normally placed in default clauses in commercial leases. Such an omission takes away a tenant's ability to prevent a property owner from terminating a lease if the lease terms are violated. Of course, a property owner that chooses to exercise such an option may still have to persuade a court that the tenant's conduct or lack of conduct existed and violated the lease. However, the omission of a cure or correction period in a lease provides a property owner with a powerful tool against one of the most paralyzing tenant weapons ever created by a court ' the Yellowstone injunction, a distinctly New York remedy, but one that tenants in other jurisdictions might yet seek from their courts.

The equitable relief provided by a Yellowstone injunction prohibits a property owner from terminating a tenancy and freezes any eviction efforts that may have commenced. It also tolls any correction period until the parties have had a chance to litigate fully whether a violation has occurred. Such injunctive relief provides an invaluable tool for a commercial tenant.

First, a Yellowstone injunction permits tenants to cure any violations even after the litigation is completed. Second, the case will be tried in New York's trial court, the Supreme Court, where the action may take years to complete and which will provide the tenant with an excessive period of time to cure any violation. Third, without a 'cure' period, a tenant's opportunity to commit knowingly blatant transgressions of the lease will decrease as the reality of the termination of the lease and eviction increases.

Where the lease precludes the tenant from seeking injunctive relief, the question of whether the lease was violated will be tried in a summary proceeding without the time impediments of discovery and the lengthy timeline of a trial court matter. In order to obtain a Yellowstone injunction, New York courts have unanimously required that such an injunction be applied for before the notice to cure expires. Without a notice to cure, more than one court has rejected a tenant's request for a Yellowstone or similar injunctive relief.

In one case where the lease failed to include a cure provision, the tenant argued that the lease was unconscionable because the absence of a cure period precluded him from seeking a Yellowstone injunction to stay the lease's forfeiture. The court held that a cure period was not required and noted that, while it might have precluded defensive tactics such as seeking a Yellowstone injunction prior to the expiration of the lease, it was part of the fully negotiated contract between represented parties, and it was not contrary to public policy to enforce the provisions of the lease under these circumstances. In another case in which a commercial lease lacked a cure period, the court noted that the purpose of a Yellowstone injunction is to toll the running of a cure period in the landlord's notice to cure. In the case at hand, there was simply no 'cure' period for the court to toll or stay, and the tenant's efforts to seek injunctive relief were denied.

Although these proposed provisions will have to be negotiated and agreed to by the parties, and many adaptations, compromises, and creative solutions may be included, this article should assist in the preparation of better default clauses in commercial leases.

Adam Leitman Bailey is a member of the New York Bar and a partner in The Law Firm of Adam Leitman Bailey, P.C., where his practice is concentrated in commercial and residential real estate law.