1. Arbitration
On
March 15, 2001, 175 Broad Street LLC (landlord) entered into a five-year lease
with The Nead Organization, Inc. (tenant) for 12,017 SF in a commercial
building. The lease was amended and extended in September 2005.
The
holdover provision stated that if Nead continued occupancy after March 31, 2011
without the Landlord’s consent, then Nead would pay double the amount of base
rent.
Nead
was evidently not ready to vacate by the end of the stated lease term. Nead
actually paid double rent from April through July 2011, but then stopped paying
rental altogether. Nead ultimately vacated the premises on August 16, 2011.
175
Broad sued Nead for breach of the lease. 175 Broad alleged that Nead vacated
the premises without proper notice, failed to pay rental and other charges,
neglected to remove fixtures and failed to restore the premises to its original
condition. 175 Broad alleged total damages of $224,468.
Shortly after 175 Broad filed its
lawsuit, Nead asked the court to dismiss the complaint, citing a mandatory
arbitration provision contained in the lease. 175 Broad defended by claiming
that the arbitration provision was not intended to cover money disputes.
The
court agreed with Nead and dismissed the lawsuit. 175 Broad appealed.
The Court of Appeals reviewed the
arbitration section closely, which stated: “All disputes under this Lease,
other than those relating to the payment of rent or other charges by Tenant,
must be submitted to arbitration.”
Concluding that a part of the dispute
related to rent but other claims did not, the Court of Appeals agreed that,
regardless, the case must be dismissed to allow the parties to pursue
arbitration.
The tenant Nead won and the lawsuit
was dismissed. See 175 Broad Street,
LLC v. The Nead Organization, Inc.; Docket No. A-3600-11T4; Superior
Court of New Jersey – Appellate Division; January 10, 2013.
The results of the arbitration were
not publicized.
2. The Pain of Non-Payment
N.
Providence LLC leased property to The Great Atlantic & Pacific Tea Company,
Inc. Some of you will recognize the tenant as “A&P.” In the Lease, A&P
promised to construct a new grocery store for itself in the shopping center,
and Providence agreed to pay A&P a construction allowance of $1.9 million
within 90 days following the date that A&P opened its store.
A&P
opened for business on September 24, 2010, thereby giving Providence 90 days or
until December 23, 2010 to pay the construction allowance. Providence secured a
loan from UBS and advised A&P that it was ready to fund the $1.9 million
allowance.
All
was proceeding well. Until A&P filed bankruptcy on December 21, 2010. UBS
informed A&P it was prepared to fund the construction allowance as soon as
A&P assumed the Lease in the context of the bankruptcy proceeding.
A&P
then assumed the Lease. Six months later. On June 22, 2011.
The
first obvious result was that the construction allowance wasn’t funded within
the 90-day window. The second not-so-obvious result was that A&P withheld
all rent and other charges from December 23, 2010 (the last day to properly
fund the construction allowance) until September 29, 2011 – being the date the
allowance was finally paid.
Providence filed a lawsuit against
A&P, claiming that the $1.9 million allowance must be reduced by the amount
of rent withheld. The court ruled for A&P in holding that the Lease plainly
stated no rental was due until the construction allowance was paid.
Providence appealed.
It took 20 pages for the appellate
court to decide that indeed A&P had the right to withhold rent payments to
Providence. And that A&P’s bankruptcy filing and delayed receipt of the
construction allowance had saved A&P a substantial sum. See The Great Atlantic & Pacific Tea
Company, Inc. . N. Providence, LLC; Case No. 13-CV-5588 (CS); United
States District Court – Southern District of New York; April 28, 2014.
And this makes me wonder if the
A&P bankruptcy filing was followed by Providence’s bankruptcy filing. How
many landlords can survive without rental payments for nine months relative to
a ‘big box’ lease?
Lessons
learned:
1. I
am not a big fan of arbitration and usually I work to delete the provision
regardless of the side I am representing. Yes a case can be resolved faster in
arbitration, but at significantly greater expense and then the winner receives
an “Award” which is unenforceable without filing litigation too. I prefer
litigation over arbitration. But even when arbitration is appropriate, be
careful how the provision is drafted to avoid unintended results.
2.
The
A&P case involved two uber-sophisticated parties, yet the offset /
abatement language wasn’t as clear as it might have been to prevent this
catastrophic result. Lawyers and parties cannot think through every possible
scenario. Such as the tenant’s bankruptcy that delayed the landlord’s
construction allowance payment and the unintended results that followed.
3.
Do
you see the relationship between these two cases? I should have captioned this
article *Unintended Consequences*.
