Problematic Lease Provisions: The Top Three Offenders

Both landlords and tenants of commercial property must be careful in preparing and signing leases. Beyond the financial considerations of the agreement, both parties must consider how to protect themselves before, during and after the term of the lease. Although every commercial lease is unique, there are three provisions that often create the most problems for landlords and tenants: self-help repossession provisions, restrictive covenants, and repair provisions.

Self-Help Repossession: Friend or Foe?

Determining whether self-help repossession is a viable option depends on whom you ask. Self-help is the process of evicting a commercial tenant without resort to the judicial dispossessory procedure (usually a state statutory procedure). It is typically accomplished by a landlord locking the doors to the tenant's space and retaking possession. Many landlords are hesitant to exercise this remedy (despite the fact that a provision allowing it is, in some form or another, in most standard commercial leases). However, the remedy of self-help has been specifically authorized by many states, provided that the lease contains language permitting the landlord to exercise it.

The risks associated with self-help primarily arise from the landlord's seizure, retention and/or disposal of the tenant's property in the space. A prudent landlord would, therefore, also include clear language in the lease that details the landlord's responsibilities related to the tenant's property in the event of a self-help eviction.

Those responsibilities should not include “removing the property from the premises and putting it on the street.” The landlord should take great care to make an inventory of the property remaining in the space and store it securely until the tenant is able to retrieve it. Although it may be tempting for a landlord to try to sell the property to satisfy any past-due rent, this is not advisable. Tampering with the tenant's property frequently opens the door for a conversion or theft claim by the tenant against the landlord (again, careful wording in the lease will greatly impact these rights).

Despite self-help's bad reputation, there are actually certain circumstances (discussed below) in which it can be very useful to a commercial landlord. For obvious reasons, tenants tend to disagree. Practically speaking, it is probably not advisable for a landlord with an operating tenant in a fully stocked space to engage in self-help. The difficulty and costs associated with the protection of the tenant's property will most likely negate any advantage the landlord gained by the exercise of self-help.

However, if there is little to no property remaining in the space (where, for example, a tenant has abandoned or partially abandoned the space and is no longer operating), self-help is an option to consider. In these circumstances, the landlord would be required to engage in minimal, if any, efforts to secure the tenant's property and the landlord gets the space back immediately, without having to resort to the cost and delays associated with a court proceeding for eviction. A landlord in this situation would not get a judgment against the tenant for the past-due rent without filing a separate lawsuit at some point, but if the landlord has a replacement tenant ready to move into the space, the landlord's priority is likely to get the space back quickly and worry about obtaining a money judgment against the tenant later.

From a tenant's perspective, avoidance of this type of provision in a commercial lease is ideal because it can put the tenant in a situation where it not only has no space in which to operate but, at least temporarily, has no property with which to run its business.

The Risky Business of Restrictive Covenants

Restrictive covenants do just what they say ' they put some type of restriction on the parties' obligations under the lease. These provisions can be risky and problematic from a commercial landlord's perspective because often, a breach of a restrictive covenant enables the tenant to terminate the lease or reduce rent, and the violation of these types of covenants is not always within the landlord's control to prevent. There are two primary types of restrictive covenants that often arise in commercial leases ' exclusivity provisions and co-tenancy clauses.

Exclusivity Provisions

Exclusivity provisions give particular tenants exclusive rights to operate certain businesses in shopping centers. Careful drafting of these provisions is very important because they are strictly construed by courts due to their restrictions on the landlord's free use of its land (a right that courts hold paramount throughout the country).

Inquiries about the force and effect of exclusivity provisions are often fact-intensive and potential ambiguities abound. This has created a variety of results in different courts, often directly contradictory to each other, so it is very difficult to predict how these provisions will be interpreted.

For example, one court found that a lease providing that the tenant would operate a drugstore was also intended to mean that the tenant would not be allowed to compete in the sale of food products with another tenant that opened a supermarket. Belvidere South Towne Center, Inc. v. One Stop Pacemaker, Inc., 370 N.E.2d 249 (Ill. App. 1977). Another court found that a lease restricting the tenant's use of the premises to a drugstore business and for no other purpose entitled the tenant to operate a grill or soda fountain in connection with the operation of the drug store. Jeter v. Windle, 319 S.W.2d 825 (Ark. 1959).

There are also a number of commonly used terms that quickly become problematic if and when the parties need to attempt to enforce them. For example, an attempted prohibition on nuisance through the prohibition of any “noxious or offensive trade or activity” has been held to be too vague, indefinite and uncertain for enforcement. Seckinger v. City of Atlanta, 100 S.E.2d 192 (Ga. 1957). A permitted use of the sale of “ladies apparel” has been interpreted to include the sale of unisex clothing. Convert-A-Bed, Inc. v. Salem , 360 So.2d 605 (La. App. 1978). A tenant's exclusive right to sell “groceries” did not include the exclusive right to sell beer. Purity Stores, Ltd. v. Linda Mar Shopping Center, Inc., 177 Cal. App. 2d 568 (1960). Another court has held that the term “groceries” did not include non-food items such as soap, matches and paper napkins. Winn-Dixie Stores, Inc. v. 99 Cent Stuff-Trail Plaza, LLC, 811 So.2d 719 (Fla. Dist. Ct. App. 3d 2002). Other terms that have routinely caused trouble are “fast-food restaurant,” “family-style restaurant” and “pornography.”

Drafting Tips

In light of these potential pitfalls, how should parties protect themselves from dealing with an ambiguity issue down the road when drafting these provisions?

1. Be specific. Use examples in the lease to define or illustrate any terms, even if both the landlord and the tenant have an understanding between themselves as to what the terms mean. For example, the parties may include a restriction on the operation of another fast-food restaurant and include the following clarifying language: “A coffee shop, cookie store, candy store, ice cream store, 'smoothie' store or similar business may be located within the retracted area. In no event shall a quick service restaurant such as Panera Bread be considered to be a 'fast-food' restaurant for purposes of this lease.” Do not be afraid to name specific restaurants, in this example, that illustrate what the term is not meant to encompass.

2. Include landlord representations. It is also advisable, from the tenant's perspective, to request that the landlord include representations in the lease concerning the presence or absence in the shopping center of other exclusives or use restrictions in other tenants' leases. Under Pennsylvania law, a shopping center tenant operating a supermarket was held to have notice when it entered into its lease of another tenant's exclusive right in its lease to operate a pharmacy, where a memorandum of that lease was recorded. J.C. Penney Co., Inc. v. Giant Eagle, Inc., 85 F.3d 120 (3d Cir. 1996). It is much easier for the landlord to make a representation regarding the other exclusives at play in the shopping center than for a prospective tenant to search the real estate records itself to try to uncover that information (some of which may not be recorded).

3. Co-Tenancy Requirements. The second type of restrictive covenant is a co-tenancy requirement. These requirements solely benefit commercial tenants and can actually accelerate any negative trends in the amount of leased space in, and profitability of, a shopping center, sometimes even leading to the shopping center's demise in extreme situations.

These provisions typically allow a tenant to terminate its lease in the event a certain percentage of the shopping center becomes vacant and remains so for some period of time. The provisions can be especially harmful to landlords attempting to open new centers during economic downturns. Where the initial tenants in the new development have co-tenancy requirements in their leases, one tenant's failure to occupy and operate its premises may permit the other tenants to vacate or terminate their leases.

Landlords should, therefore, be extremely careful when agreeing to these types of provisions and should only agree to them where absolutely necessary (usually with major anchor tenants).

Repair and Maintenance: Pass the Buck, or Share and Share Alike?

A landlord ordinarily has no duty to repair commercial premises, absent some statutory or contractual obligation to do so. In fact, if a lease requires the tenant to maintain and repair the premises, without specifying further, but is silent with respect to the landlord's obligations, the tenant may be required to make any and all maintenance and repairs to the premises, both ordinary and extraordinary, including expensive structural repairs.

This is unquestionably a harsh result and potentially a grossly unfair burden for the tenant, so often, the parties will agree to a repair and maintenance provision that places some obligations on both parties. These provisions usually require the tenant to make or pay for minor repairs and maintenance, or “ordinary” repairs, and require the landlord to make or pay for major capital expenses or “extraordinary” repairs to the property.

Needless to say, problems arise when these provisions are not explicitly drafted. For example, numerous disputes have arisen about whether the landlord or tenant is responsible for certain expensive repairs such as the repair and replacement of HVAC units, roofs, parking lot repair and maintenance, wiring, elevators, etc. Typically, in these situations, the lease provision at issue failed to define a key term, such as “repair,” “maintenance,” “structural,” “extraordinary,” or “ordinary wear and tear,” sufficiently. As a result, it is often left to a court to interpret the term and the parties' intentions with respect to their repair and maintenance obligations. The parties then run the risk of the court interpreting the provision in a way possibly not intended by either or both of the parties.

Again, the key with repair provisions is to be as specific as possible. Clearly define and delineate the parties' respective obligations regarding the maintenance and repair of the property, including not only the interior of the property, but also any and all buildings, structures, and improvements on the property.

Conclusion

Although it can be tedious during the negotiation process, when the parties are usually excited about the prospect of entering into a business relationship together, it is important for both parties to remember that what may seem like “detail overkill” on the front end can become critically important if a problem ever arises under the lease. Being aware of the issues that are associated with these three types of provisions will give both commercial landlords and tenants the ability to negotiate the most favorable terms in their commercial leases, which is ultimately the goal of both parties.

Jill R. Johnson is a commercial litigator with Chamberlain Hrdlicka (Atlanta), who counsels clients with landlord/tenant and real estate disputes. She may be reached at 404-588-3574 or by e-mail at [email protected].

Both landlords and tenants of commercial property must be careful in preparing and signing leases. Beyond the financial considerations of the agreement, both parties must consider how to protect themselves before, during and after the term of the lease. Although every commercial lease is unique, there are three provisions that often create the most problems for landlords and tenants: self-help repossession provisions, restrictive covenants, and repair provisions.

Self-Help Repossession: Friend or Foe?

Determining whether self-help repossession is a viable option depends on whom you ask. Self-help is the process of evicting a commercial tenant without resort to the judicial dispossessory procedure (usually a state statutory procedure). It is typically accomplished by a landlord locking the doors to the tenant's space and retaking possession. Many landlords are hesitant to exercise this remedy (despite the fact that a provision allowing it is, in some form or another, in most standard commercial leases). However, the remedy of self-help has been specifically authorized by many states, provided that the lease contains language permitting the landlord to exercise it.

The risks associated with self-help primarily arise from the landlord's seizure, retention and/or disposal of the tenant's property in the space. A prudent landlord would, therefore, also include clear language in the lease that details the landlord's responsibilities related to the tenant's property in the event of a self-help eviction.

Those responsibilities should not include “removing the property from the premises and putting it on the street.” The landlord should take great care to make an inventory of the property remaining in the space and store it securely until the tenant is able to retrieve it. Although it may be tempting for a landlord to try to sell the property to satisfy any past-due rent, this is not advisable. Tampering with the tenant's property frequently opens the door for a conversion or theft claim by the tenant against the landlord (again, careful wording in the lease will greatly impact these rights).

Despite self-help's bad reputation, there are actually certain circumstances (discussed below) in which it can be very useful to a commercial landlord. For obvious reasons, tenants tend to disagree. Practically speaking, it is probably not advisable for a landlord with an operating tenant in a fully stocked space to engage in self-help. The difficulty and costs associated with the protection of the tenant's property will most likely negate any advantage the landlord gained by the exercise of self-help.

However, if there is little to no property remaining in the space (where, for example, a tenant has abandoned or partially abandoned the space and is no longer operating), self-help is an option to consider. In these circumstances, the landlord would be required to engage in minimal, if any, efforts to secure the tenant's property and the landlord gets the space back immediately, without having to resort to the cost and delays associated with a court proceeding for eviction. A landlord in this situation would not get a judgment against the tenant for the past-due rent without filing a separate lawsuit at some point, but if the landlord has a replacement tenant ready to move into the space, the landlord's priority is likely to get the space back quickly and worry about obtaining a money judgment against the tenant later.

From a tenant's perspective, avoidance of this type of provision in a commercial lease is ideal because it can put the tenant in a situation where it not only has no space in which to operate but, at least temporarily, has no property with which to run its business.

The Risky Business of Restrictive Covenants

Restrictive covenants do just what they say ' they put some type of restriction on the parties' obligations under the lease. These provisions can be risky and problematic from a commercial landlord's perspective because often, a breach of a restrictive covenant enables the tenant to terminate the lease or reduce rent, and the violation of these types of covenants is not always within the landlord's control to prevent. There are two primary types of restrictive covenants that often arise in commercial leases ' exclusivity provisions and co-tenancy clauses.

Exclusivity Provisions

Exclusivity provisions give particular tenants exclusive rights to operate certain businesses in shopping centers. Careful drafting of these provisions is very important because they are strictly construed by courts due to their restrictions on the landlord's free use of its land (a right that courts hold paramount throughout the country).

Inquiries about the force and effect of exclusivity provisions are often fact-intensive and potential ambiguities abound. This has created a variety of results in different courts, often directly contradictory to each other, so it is very difficult to predict how these provisions will be interpreted.

For example, one court found that a lease providing that the tenant would operate a drugstore was also intended to mean that the tenant would not be allowed to compete in the sale of food products with another tenant that opened a supermarket. Belvidere South Towne Center, Inc. v. One Stop Pacemaker, Inc. , 370 N.E.2d 249 (Ill. App. 1977). Another court found that a lease restricting the tenant's use of the premises to a drugstore business and for no other purpose entitled the tenant to operate a grill or soda fountain in connection with the operation of the drug store. Jeter v. Windle , 319 S.W.2d 825 (Ark. 1959).

There are also a number of commonly used terms that quickly become problematic if and when the parties need to attempt to enforce them. For example, an attempted prohibition on nuisance through the prohibition of any “noxious or offensive trade or activity” has been held to be too vague, indefinite and uncertain for enforcement. Seckinger v. City of Atlanta, 100 S.E.2d 192 (Ga. 1957). A permitted use of the sale of “ladies apparel” has been interpreted to include the sale of unisex clothing. Convert-A-Bed, Inc. v. Salem , 360 So.2d 605 (La. App. 1978). A tenant's exclusive right to sell “groceries” did not include the exclusive right to sell beer. Purity Stores, Ltd. v. Linda Mar Shopping Center, Inc. , 177 Cal. App. 2d 568 (1960). Another court has held that the term “groceries” did not include non-food items such as soap, matches and paper napkins. Winn-Dixie Stores, Inc. v. 99 Cent Stuff-Trail Plaza, LLC, 811 So.2d 719 (Fla. Dist. Ct. App. 3d 2002). Other terms that have routinely caused trouble are “fast-food restaurant,” “family-style restaurant” and “pornography.”

Drafting Tips

In light of these potential pitfalls, how should parties protect themselves from dealing with an ambiguity issue down the road when drafting these provisions?

1. Be specific. Use examples in the lease to define or illustrate any terms, even if both the landlord and the tenant have an understanding between themselves as to what the terms mean. For example, the parties may include a restriction on the operation of another fast-food restaurant and include the following clarifying language: “A coffee shop, cookie store, candy store, ice cream store, 'smoothie' store or similar business may be located within the retracted area. In no event shall a quick service restaurant such as Panera Bread be considered to be a 'fast-food' restaurant for purposes of this lease.” Do not be afraid to name specific restaurants, in this example, that illustrate what the term is not meant to encompass.

2. Include landlord representations. It is also advisable, from the tenant's perspective, to request that the landlord include representations in the lease concerning the presence or absence in the shopping center of other exclusives or use restrictions in other tenants' leases. Under Pennsylvania law, a shopping center tenant operating a supermarket was held to have notice when it entered into its lease of another tenant's exclusive right in its lease to operate a pharmacy, where a memorandum of that lease was recorded. J.C. Penney Co., Inc. v. Giant Eagle, Inc. , 85 F.3d 120 (3d Cir. 1996). It is much easier for the landlord to make a representation regarding the other exclusives at play in the shopping center than for a prospective tenant to search the real estate records itself to try to uncover that information (some of which may not be recorded).

3. Co-Tenancy Requirements. The second type of restrictive covenant is a co-tenancy requirement. These requirements solely benefit commercial tenants and can actually accelerate any negative trends in the amount of leased space in, and profitability of, a shopping center, sometimes even leading to the shopping center's demise in extreme situations.

These provisions typically allow a tenant to terminate its lease in the event a certain percentage of the shopping center becomes vacant and remains so for some period of time. The provisions can be especially harmful to landlords attempting to open new centers during economic downturns. Where the initial tenants in the new development have co-tenancy requirements in their leases, one tenant's failure to occupy and operate its premises may permit the other tenants to vacate or terminate their leases.

Landlords should, therefore, be extremely careful when agreeing to these types of provisions and should only agree to them where absolutely necessary (usually with major anchor tenants).

Repair and Maintenance: Pass the Buck, or Share and Share Alike?

A landlord ordinarily has no duty to repair commercial premises, absent some statutory or contractual obligation to do so. In fact, if a lease requires the tenant to maintain and repair the premises, without specifying further, but is silent with respect to the landlord's obligations, the tenant may be required to make any and all maintenance and repairs to the premises, both ordinary and extraordinary, including expensive structural repairs.

This is unquestionably a harsh result and potentially a grossly unfair burden for the tenant, so often, the parties will agree to a repair and maintenance provision that places some obligations on both parties. These provisions usually require the tenant to make or pay for minor repairs and maintenance, or “ordinary” repairs, and require the landlord to make or pay for major capital expenses or “extraordinary” repairs to the property.

Needless to say, problems arise when these provisions are not explicitly drafted. For example, numerous disputes have arisen about whether the landlord or tenant is responsible for certain expensive repairs such as the repair and replacement of HVAC units, roofs, parking lot repair and maintenance, wiring, elevators, etc. Typically, in these situations, the lease provision at issue failed to define a key term, such as “repair,” “maintenance,” “structural,” “extraordinary,” or “ordinary wear and tear,” sufficiently. As a result, it is often left to a court to interpret the term and the parties' intentions with respect to their repair and maintenance obligations. The parties then run the risk of the court interpreting the provision in a way possibly not intended by either or both of the parties.

Again, the key with repair provisions is to be as specific as possible. Clearly define and delineate the parties' respective obligations regarding the maintenance and repair of the property, including not only the interior of the property, but also any and all buildings, structures, and improvements on the property.

Conclusion

Although it can be tedious during the negotiation process, when the parties are usually excited about the prospect of entering into a business relationship together, it is important for both parties to remember that what may seem like “detail overkill” on the front end can become critically important if a problem ever arises under the lease. Being aware of the issues that are associated with these three types of provisions will give both commercial landlords and tenants the ability to negotiate the most favorable terms in their commercial leases, which is ultimately the goal of both parties.

Jill R. Johnson is a commercial litigator with Chamberlain Hrdlicka (Atlanta), who counsels clients with landlord/tenant and real estate disputes. She may be reached at 404-588-3574 or by e-mail at [email protected].