Vacation and Abandonment of Industrial Premises

The recent economic crisis has caused a number of tenants to vacate or abandon industrial space. In fact, the problem is so bad that it has been reported that the Obama administration is considering a proposal to raze entire industrial districts and return the land to nature. Tenants vacating or abandoning their leased space can create a number of problems for industrial landlords. To prevent these problems, it is imperative that all landlords include in their leases provisions prohibiting tenants from vacating or abandoning their leased space. Each such instance should be deemed to be an event of default.

The problems such clauses seek to prevent is the first focus of this article. A series of recommendations are then offered for industrial landlords to protect their properties and their bottom lines.

Vandalism and Deterioration

Vacant and abandoned industrial space can lead to vandalism and a general deterioration of a property. Such sites may also become an unattractive eyesore and nuisance. When an industrial property becomes vacant and poorly monitored, it becomes subject to criminal activity. Abandoned industrial properties are frequently vandalized and often become littered with broken glass and other garbage. At its most extreme, this phenomenon takes the form of illegal “fly dumping,” whereby debris, perhaps including hazardous waste, is dumped onto a vacant site. Vermin, odor, and health problems may also be the direct result of fly dumping or littering. Industrial sites are targets, because they are often standalone buildings in remote locations.

Lowered Property Values and Subsequent Compliance Issues

Such problems also have the effect of lowering surrounding property values. The ill-will created in the surrounding community might result in political backlash, causing building code and other regulatory compliance issues with which the property owner may not have to contend otherwise.

Compounding the property owner's problem is the jeopardizing effect the vacancy or abandonment has on the insurance coverage for the site. For instance, the model insurance forms drafted by the Insurance Services Office and the American Association of Insurance Services do not cover any losses due to theft, water damage, broken glass, or vandalism occurring after an industrial facility has been vacant for more than sixty days. Additionally, damage due to any other cause during a period of such vacancy will result in recovery being reduced by 15%.

What Constitutes Vacation Or Abandonment?

While the vacation or abandonment of a property already constitutes events of default under many leases, there have been disputes over what constitutes such situations. Industrial landlords might be surprised to learn that vacation and abandonment are very distinct acts, with separate proof required for each. While courts and legal commentators at times conflate the terms or get them backwards, relevant case law illustrates the distinction.

Vacation

To define vacation, many courts have simply reached to the dictionary for assistance. For example, in Saul Subsidiary II Ltd. P'ship v. Venator Group Specialty, Inc., 830 A.2d 854, 861 (D.C. 2003), the court used Black's Law Dictionary to define “vacate” as “to move out; to make vacant or empty; to leave; especially, to surrender possession by removal; to cease from occupancy.” The court then pointed out that, in the realm of real property, “the term 'vacate' has a settled and relatively narrow meaning.”

In this context, to “vacate” is the physical act of leaving an industrial building empty, without occupants or other contents. The courts are less likely to hold that an industrial property has been vacated to the extent people or a substantial amount of valuable property, or both, remain at a site. Two helpful cases illustrate the standard courts apply in determining whether a “substantial” amount of property remains and, therefore, whether an industrial building has been vacated.

In Catalina Enters. v. Hartford Fire Ins. Co., 67 F.3d 63 (4th Cir. 1995), an industrial warehouse had been left empty for five months, except for one piece of scaffolding, a hand truck, and an office work table. Further, the heat, most circuit breakers, and the security system had been turned off. The court held that this constituted a vacancy, writing that “[V]irtually no building could be considered vacant if the notion of vacancy is defeated by the existence of a paper clip, a stray pencil, or a light bulb.” Since this case arose in the context of construing a fire insurance policy, the court reasoned that the warehouse in question was more likely to develop fire hazards that would go undetected or, if a fire did occur, it would burn for a longer period of time before the fire department was called. Similarly, in Cameron v. Frances Slocum Bank & Trust Co., 824 F.2d 570 (7th Cir. 1987), where the lease stated an industrial building was to be used as a water pumping station, a tenant who used the property solely for storage was deemed to have vacated the property. Although the court in this case did not speak of a fire risk, it noted that the property had fallen prey to vandalism, overgrown shrubbery and broken windows.

Courts differ on how important the element of intent is in finding that a vacancy exists. For example, it probably does not make sense to say that a momentarily absent tenant should be deemed to have vacated a property. On the other hand, some courts have held that the question of intent is immaterial to a finding of vacancy. Based on this view, it would not matter whether a tenant wished never to return, to come back after waiting out the recession, or to sublease. Similarly, most courts have held that no specific amount of time must elapse for a vacancy to occur. PRC Kentron, Inc. v. First City Center Associates, II, 762 S.W.2d 279, 283 (Tex. Ct. App. 1988). From this perspective, the dispositive ' indeed, the only ' inquiry relevant to a finding of vacancy is whether or not the industrial premises have been left substantially empty. Accordingly, a tenant may understandably want to indicate in its lease that a vacancy has not occurred until a specified time has passed, say 30 days. If such is the case, it is critical for landlords to ensure that during such a gap period, specific security measures are in place and insurance coverage is not adversely affected.

It is generally more difficult for a landlord to prove to a court that a tenant has abandoned its space. For example, in King v. Petroleum Servs. Corp., 536 P.2d 116, 120 (Alaska 1975), the court held that an industrial warehouse was vacant, but not abandoned, when a tenant stopped paying rent but left personal property behind. In Tenn-Tex Properties v. Brownwell Electro, Inc., 1987 Tenn. App. LEXIS 2938 (Tenn. Ct. App. 1987), the Court of Appeals of Tennessee ruled that a manufacturing plant had not been abandoned because the tenant still conducted some business on the premises, maintained security and utility services and left behind inventory valued at more than $20,000.

The difference between vacation and abandonment lies in the requirement of intent, which is secondary to the vacancy question, but is considered of paramount importance in the case of abandonment. This intent to give up one's interest in the property and never again reassert it must be shown by clear and convincing evidence. For instance, evidence of a desire to sublease vacated space reflects an intention not to abandon the space. Moreover, whereas courts have held that the question of time is immaterial for a finding of vacation, a finding of abandonment requires an intent to be gone forever. When this intent conjoins with an external act to evidence that intention, an abandonment is typically found to have occurred. In King, therefore, the court ruled that the tenant's mere vacation became an abandonment when he said in a telephone conversation, “[Y]ou aren't going to get any more money from me.” At that point, the tenant's intent to abandon the leased premises became clear.

Abandonment

Surprisingly, however, it appears that the bar may be set lower in terms of acts found to evidence abandonment, than is the case for evidence of vacation. For example, whereas the key to vacation is the premises being substantially barren, abandonment has been found to exist in a case where a tenant was merely preparing to move out or was in the process of moving out. Mason v. Schumacher, 439 NW2d 61 (Neb. 1989). Therefore, while it might be helpful conceptually to describe vacation as a precursor to or the “lesser included offense” of abandonment, there are cases at the margins where this framework might begin to break down.

Effective Steps

There are a number of simple and effective steps that industrial landlords can take to protect themselves from the consequences of the vacation or abandonment of industrial property. Industrial landlords should include in each lease provisions that guard against these problems. One such provision would be a default clause making it absolutely clear that consideration under the lease includes not merely payment of rent, but a material physical presence by the tenant to ensure the security, cleanliness and safety of the premises to protect against the problems outlined above. Industrial landlords should require that a minimum number of personnel be present during normal working hours, and not simply furniture, fixtures, and equipment. Indeed, all industrial landlords must work hard to contract around the legal quirk that the presence of personal property ' with nary a human being in sight ' might be enough to avoid a court finding that a vacancy exists, as it is the lack of people present in often remote locations that gives rise to problems.

In the Courts

Courts are generally willing to enforce such provisions, even when the requirements in question are quite idiosyncratic. For example, in Glen Southern, Inc. v. Marshall County, 967 So. 2d 1256, 1260-61 (Miss. Ct. App. 2007), the tenant agreed to use an industrial building “in connection with the operation of its manufacturing plant ' with the intent to furnish employment to persons in and about the County of Marshall during its occupancy thereof.” When the tenant then subleased the premises for use as a warehouse, the court ruled that an abandonment had occurred. Aside from the application of these lease provisions, there are other actions that all landlords should take to guard against the harmful effects of tenant vacation or abandonment.

Conclusion

Quite simply, all landlords should regularly visit the properties they own. To prevent such problems as fly dumping, vermin, and vandalism, there is no substitute for a personal viewing. Industrial landlords should also require their tenants to install automatic fire alarms, security systems, and sprinklers to protect against damage in the event that a vacancy or abandonment goes undetected.

For a particularly high-risk property, an industrial landlord might wish to require the continuous presence of a particular minimum number of security guards. Likewise, it is incumbent upon all industrial landlords to be aware of their specific policy language and limitations regarding vacancy and abandonment.

Paul R. Diamond, a member of this newsletter's Board of Editors, is a Partner at Wildman, Harrold, Allen & Dixon LLP. Adam Murad was a Summer Associate at the firm.

The recent economic crisis has caused a number of tenants to vacate or abandon industrial space. In fact, the problem is so bad that it has been reported that the Obama administration is considering a proposal to raze entire industrial districts and return the land to nature. Tenants vacating or abandoning their leased space can create a number of problems for industrial landlords. To prevent these problems, it is imperative that all landlords include in their leases provisions prohibiting tenants from vacating or abandoning their leased space. Each such instance should be deemed to be an event of default.

The problems such clauses seek to prevent is the first focus of this article. A series of recommendations are then offered for industrial landlords to protect their properties and their bottom lines.

Vandalism and Deterioration

Vacant and abandoned industrial space can lead to vandalism and a general deterioration of a property. Such sites may also become an unattractive eyesore and nuisance. When an industrial property becomes vacant and poorly monitored, it becomes subject to criminal activity. Abandoned industrial properties are frequently vandalized and often become littered with broken glass and other garbage. At its most extreme, this phenomenon takes the form of illegal “fly dumping,” whereby debris, perhaps including hazardous waste, is dumped onto a vacant site. Vermin, odor, and health problems may also be the direct result of fly dumping or littering. Industrial sites are targets, because they are often standalone buildings in remote locations.

Lowered Property Values and Subsequent Compliance Issues

Such problems also have the effect of lowering surrounding property values. The ill-will created in the surrounding community might result in political backlash, causing building code and other regulatory compliance issues with which the property owner may not have to contend otherwise.

Compounding the property owner's problem is the jeopardizing effect the vacancy or abandonment has on the insurance coverage for the site. For instance, the model insurance forms drafted by the Insurance Services Office and the American Association of Insurance Services do not cover any losses due to theft, water damage, broken glass, or vandalism occurring after an industrial facility has been vacant for more than sixty days. Additionally, damage due to any other cause during a period of such vacancy will result in recovery being reduced by 15%.

What Constitutes Vacation Or Abandonment?

While the vacation or abandonment of a property already constitutes events of default under many leases, there have been disputes over what constitutes such situations. Industrial landlords might be surprised to learn that vacation and abandonment are very distinct acts, with separate proof required for each. While courts and legal commentators at times conflate the terms or get them backwards, relevant case law illustrates the distinction.

Vacation

To define vacation, many courts have simply reached to the dictionary for assistance. For example, in Saul Subsidiary II Ltd. P'ship v. Venator Group Specialty, Inc. , 830 A.2d 854, 861 (D.C. 2003), the court used Black's Law Dictionary to define “vacate” as “to move out; to make vacant or empty; to leave; especially, to surrender possession by removal; to cease from occupancy.” The court then pointed out that, in the realm of real property, “the term 'vacate' has a settled and relatively narrow meaning.”

In this context, to “vacate” is the physical act of leaving an industrial building empty, without occupants or other contents. The courts are less likely to hold that an industrial property has been vacated to the extent people or a substantial amount of valuable property, or both, remain at a site. Two helpful cases illustrate the standard courts apply in determining whether a “substantial” amount of property remains and, therefore, whether an industrial building has been vacated.

In Catalina Enters. v. Hartford Fire Ins. Co. , 67 F.3d 63 (4th Cir. 1995), an industrial warehouse had been left empty for five months, except for one piece of scaffolding, a hand truck, and an office work table. Further, the heat, most circuit breakers, and the security system had been turned off. The court held that this constituted a vacancy, writing that “[V]irtually no building could be considered vacant if the notion of vacancy is defeated by the existence of a paper clip, a stray pencil, or a light bulb.” Since this case arose in the context of construing a fire insurance policy, the court reasoned that the warehouse in question was more likely to develop fire hazards that would go undetected or, if a fire did occur, it would burn for a longer period of time before the fire department was called. Similarly, in Cameron v. Frances Slocum Bank & Trust Co. , 824 F.2d 570 (7th Cir. 1987), where the lease stated an industrial building was to be used as a water pumping station, a tenant who used the property solely for storage was deemed to have vacated the property. Although the court in this case did not speak of a fire risk, it noted that the property had fallen prey to vandalism, overgrown shrubbery and broken windows.

Courts differ on how important the element of intent is in finding that a vacancy exists. For example, it probably does not make sense to say that a momentarily absent tenant should be deemed to have vacated a property. On the other hand, some courts have held that the question of intent is immaterial to a finding of vacancy. Based on this view, it would not matter whether a tenant wished never to return, to come back after waiting out the recession, or to sublease. Similarly, most courts have held that no specific amount of time must elapse for a vacancy to occur. PRC Kentron, Inc. v. First City Center Associates, II , 762 S.W.2d 279, 283 (Tex. Ct. App. 1988). From this perspective, the dispositive ' indeed, the only ' inquiry relevant to a finding of vacancy is whether or not the industrial premises have been left substantially empty. Accordingly, a tenant may understandably want to indicate in its lease that a vacancy has not occurred until a specified time has passed, say 30 days. If such is the case, it is critical for landlords to ensure that during such a gap period, specific security measures are in place and insurance coverage is not adversely affected.

It is generally more difficult for a landlord to prove to a court that a tenant has abandoned its space. For example, in King v. Petroleum Servs. Corp. , 536 P.2d 116, 120 (Alaska 1975), the court held that an industrial warehouse was vacant, but not abandoned, when a tenant stopped paying rent but left personal property behind. In Tenn-Tex Properties v. Brownwell Electro, Inc., 1987 Tenn. App. LEXIS 2938 (Tenn. Ct. App. 1987), the Court of Appeals of Tennessee ruled that a manufacturing plant had not been abandoned because the tenant still conducted some business on the premises, maintained security and utility services and left behind inventory valued at more than $20,000.

The difference between vacation and abandonment lies in the requirement of intent, which is secondary to the vacancy question, but is considered of paramount importance in the case of abandonment. This intent to give up one's interest in the property and never again reassert it must be shown by clear and convincing evidence. For instance, evidence of a desire to sublease vacated space reflects an intention not to abandon the space. Moreover, whereas courts have held that the question of time is immaterial for a finding of vacation, a finding of abandonment requires an intent to be gone forever. When this intent conjoins with an external act to evidence that intention, an abandonment is typically found to have occurred. In King, therefore, the court ruled that the tenant's mere vacation became an abandonment when he said in a telephone conversation, “[Y]ou aren't going to get any more money from me.” At that point, the tenant's intent to abandon the leased premises became clear.

Abandonment

Surprisingly, however, it appears that the bar may be set lower in terms of acts found to evidence abandonment, than is the case for evidence of vacation. For example, whereas the key to vacation is the premises being substantially barren, abandonment has been found to exist in a case where a tenant was merely preparing to move out or was in the process of moving out. Mason v. Schumacher , 439 NW2d 61 (Neb. 1989). Therefore, while it might be helpful conceptually to describe vacation as a precursor to or the “lesser included offense” of abandonment, there are cases at the margins where this framework might begin to break down.

Effective Steps

There are a number of simple and effective steps that industrial landlords can take to protect themselves from the consequences of the vacation or abandonment of industrial property. Industrial landlords should include in each lease provisions that guard against these problems. One such provision would be a default clause making it absolutely clear that consideration under the lease includes not merely payment of rent, but a material physical presence by the tenant to ensure the security, cleanliness and safety of the premises to protect against the problems outlined above. Industrial landlords should require that a minimum number of personnel be present during normal working hours, and not simply furniture, fixtures, and equipment. Indeed, all industrial landlords must work hard to contract around the legal quirk that the presence of personal property ' with nary a human being in sight ' might be enough to avoid a court finding that a vacancy exists, as it is the lack of people present in often remote locations that gives rise to problems.

In the Courts

Courts are generally willing to enforce such provisions, even when the requirements in question are quite idiosyncratic. For example, in Glen Southern, Inc. v. Marshall County , 967 So. 2d 1256, 1260-61 (Miss. Ct. App. 2007), the tenant agreed to use an industrial building “in connection with the operation of its manufacturing plant ' with the intent to furnish employment to persons in and about the County of Marshall during its occupancy thereof.” When the tenant then subleased the premises for use as a warehouse, the court ruled that an abandonment had occurred. Aside from the application of these lease provisions, there are other actions that all landlords should take to guard against the harmful effects of tenant vacation or abandonment.

Conclusion

Quite simply, all landlords should regularly visit the properties they own. To prevent such problems as fly dumping, vermin, and vandalism, there is no substitute for a personal viewing. Industrial landlords should also require their tenants to install automatic fire alarms, security systems, and sprinklers to protect against damage in the event that a vacancy or abandonment goes undetected.

For a particularly high-risk property, an industrial landlord might wish to require the continuous presence of a particular minimum number of security guards. Likewise, it is incumbent upon all industrial landlords to be aware of their specific policy language and limitations regarding vacancy and abandonment.

Paul R. Diamond, a member of this newsletter's Board of Editors, is a Partner at Wildman, Harrold, Allen & Dixon LLP. Adam Murad was a Summer Associate at the firm.