Saturday, July 30, 2022

LEASING CO-TENANCY

            In June 2003, JJD-HOV Elk Grove leased space to Jo-Ann Stores, consisting of 35,000 SF in a commercial shopping center. The initial term was 10 years, with four options to extend of five years each.

            Base monthly rent started at $36,548 per month, increasing every five years. At the time of the dispute base rental was approx. $43,000 per month.           

            The Lease contained a co-tenancy provision obligating JJD to enter into leases with either three anchor tenants, or otherwise maintain an occupancy level of at least 60% of the gross leasable area of the Shopping Center. If the co-tenancy obligation is not met, then Jo-Ann can pay only Substitute Rent until the occupancy threshold is met. ‘Substitute Rent’ is the greater of 3.5% of Jo-Ann’s gross sales at that location, or $12,000 per month.

            Also, if the co-tenancy burden is not satisfied for a period of six months, then Jo-Ann could terminate the Lease.

             Jo-Ann invoked the co-tenancy provision twice before this claim. For several months in 2004 and 2005, Jo-Ann paid Substitute Rent until all three anchors, Jo-Ann, Sports Chalet, and Sacramento Food Coop, were open for business.

            Then, in 2007, a dispute arose over Jo-Ann’s right to pay Substitute Rent when the Coop was replaced by Grocery Outlet.

            The present dispute arose in 2018 when Jo-Ann informed JJD it would start paying Substitute Rent again because two anchors – Sports Chalet and Toys R Us – had both closed. Sports Chalet had closed in 2016, but presumably the subsequent closure of Toys R Us brought the shopping center’s occupancy load to below 60%.

            Jo-Ann proceeded to pay Substitute Rent until May 2020, when Scandinavian Designs opened in the former Toys R Us space. At that time, Jo-Ann returned to paying the full base rent provided in the Lease.

            JJD, offended by its own co-tenancy clause, asserted a complaint against Jo-Ann, claiming that the Substitute Rent provision is an unenforceable penalty and as a consequence, Jo-Ann is obligated at all times to pay full rental, regardless of occupancy loads and anchor tenants. JJD tabulates that Jo-Ann owes $638,293 in rent as of January 2021.

            The trial court ruled in favor of Jo-Ann. JJD appealed.

            JJD’s argument regarding an unenforceable penalty was centered around a theory of proportionality. If there is no proportional relationship between the forfeiture compelled and the damages that might actually flow from the failure to perform or satisfy a condition, then the provision must fail.

            An unenforceable penalty bears no reasonable relationship to the range of actual damages the parties could have anticipated when the contract was signed. How to know? The court must compare the value of the money forfeited or property transferred to the party protected by the condition, to the range of harm or damages anticipated to be caused that party by the failure of that condition.

            Although this is a close call for the appellate Court to make, the Court concludes that the co-tenancy provision is valid and enforceable as it is neither disproportionate nor a penalty. Jo-Ann wins again; JJD loses again.

            See JJD-HOV Elk Grove v. Jo-Ann Stores; Case Number C094190; California Court of Appeals 3rd District; June 28, 2022: https://casetext.com/case/jjd-hov-elk-grove-llc-v-jo-ann-stores-llc.

                                                                                    Stuart A. Lautin, Esq.*

 

 

* Board Certified, Commercial (1989) and Residential (1988) Real Estate Law, Texas Board of Legal Specialization

Licensed in the States of Texas and New York

  

Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.

Wednesday, June 29, 2022

MEDIATION

            On July 16, 2020, Alek Orloff and ACG 11519 Pecan Creek entered into a contract for the purchase and sale of real property. ACG agreed to sell and Alek agreed to purchase commercial property for $3.1 million. Alek deposited $31k as earnest money and closing was scheduled for August 10, 2020.

             Before closing, ACG determined that the prepay penalties in its mortgage were not in accordance with what ACG anticipated. ACG calculated a prepayment penalty of $80k. Arbor Agency Lending determined that the penalty was $630k.

             ACG attributed the difference to Arbor’s unilateral mistake. Unfortunately, Arbor sold the Note package to third parties, and as a consequence, the Note could not be corrected (reformed) by the Court.

            In anticipation of closing, Alek tendered closing funds and executed documents. In response, ACG’s broker sent a message to the effect that ACG would not be closing due to the miscalculated prepay premium.

            When ACG refused to perform, Alek asserted a lawsuit for breach of contract and specific performance. On December 16, 2020, the trial court entered an Order finding that ACG breached the contract.

            So ACG appealed.

            In its appeal, ACG asserts only one issue. The contract obligates both parties to mediate all disputes, before resorting to litigation. Since there was no mediation before Alek filed the lawsuit, ACG claims that Alek breached the contract.

            And that Alek’s breach of the contract excuses ACG’s refusal to close.

            The Appellate Court reviewed the contract and determined that pre-lawsuit mediation is mandatory. Since Alek offered no evidence that he complied with the mediation requirement, the order of the trial court is reversed and the matter is remanded for further proceedings.

            ACG wins this round; Alek Orloff loses, at least until mediation is concluded and the case is re-tried. See ACG 11510 Pecan Creek v. Orloff; Texas 7th District Court of Appeals; Cause Number 07-21-00096-CV; May 25, 2022: https://cases.justia.com/texas/seventh-court-of-appeals/2022-07-21-00096-cv.pdf?ts=1653568803.

            Lessons / Questions / Observations:

1.      Lesson. The Texas Association of REALTORS® had a purpose when they inserted a mandatory mediation clause in their contract forms. At least this one appellate court is willing to respect that purpose.

2.      Observation. It is the state-legislated policy of the State of Texas to encourage the “peaceable resolutions of disputes . . . through mediation.” See Chapter 154 of the Texas Civil Practice and Remedies Code: https://statutes.capitol.texas.gov/Docs/CP/htm/CP.154.htm.

3.      Questions. Texas courts may require mediation of their own volition; no formal motion is required to be filed by the litigants. Why did this trial court not require it, particularly after reviewing the contract and pleadings? Even if the court required mediation but no resolution was forged, would that have been enough to satisfy this Appellate Court since the mediation would have occurred after the lawsuit was asserted?

                                                                                    Stuart A. Lautin, Esq.*

 

 

* Board Certified, Commercial (1989) and Residential (1988) Real Estate Law, Texas Board of Legal Specialization

Licensed in the States of Texas and New York

  

Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.

Tuesday, May 31, 2022

HOW NOT TO EXTEND A LEASE

            In November 1997 James Caswell signed a long-term lease with AHTNA. James was the Tenant; AHTNA the Landlord. The Lease contained options for the Tenant to extend the lease term. There were two conditions to each option exercise. First, James could not extend if he was in default. Second, James had to furnish AHTNA a written option exercise notice at least 90 days prior to the expiration of the then-current lease term.

            Rent payments were timely tendered to AHTNA and each was accepted and processed. James failed to furnish notice of option exercise at the end of the primary term, but instead he remained at the Premises and continued to pay rent after the expiration of the term.

            In May 2018 AHTNA filed an eviction complaint against James, stating that James was unlawfully possessing the property. AHTNA alleged that since James had failed to furnish written notice of an option exercise, James had no present right to occupy any portion of the Property.

            In response, James argued that his continued possession of the Property was lawful because he had exercised a renewal option by furnishing a check in December 2017 with the memo “2018 annual lease” included in it. And that since AHTNA accepted the payment without complaint, the notice provision of the Lease requiring written option exercise notice is waived.

            A two-day eviction hearing was held in August 2019. The court granted an eviction judgment to AHTNA, finding that the original Lease term had expired, James had not furnished the required renewal notice, and AHTNA had not waived the notice requirement.

            James appealed.

            Without much discussion other than distinguishing between situations where a Landlord cashed 36 monthly rent checks without objection after the expiration of a lease term versus the one or two checks tendered by James to AHTNA, the Supreme Court determined that the option exercise notice requirement was not waived. The mere tender of a few rental payments after the date of Lease expiration would not have the effect of renewing or extending the Lease term.

            AHTNA wins again; James loses again. See Caswell v. AHTNA; Alaska Supreme Court, Case No. S-17866, May 20, 2022: https://scholar.google.com/scholar_case?case=8554620272696289214&q=caswell+v.+ahtna&hl=en&as_sdt=6,44&as_vis=1.

            Lessons / Questions / Observations:

1.      Observations. I didn’t tell you that this case comes to us from Alaska. I also didn’t tell you that this case involves a limestone-mining operation. Does that make a difference to your non-Alaskan commercial or residential application? The Alaskan Supreme Court did not reach any conclusions based on the use of the property.

2.      Lesson For Tenants and Subtenants: Read the Lease carefully and if written notice is required, furnish it exactly as stated to preserve your valuable extension / renewal rights.

3.      Lesson For Landlords and Property Managers: If written notice is required and not furnished, then you may be able to avoid lease renewals even if you accept a few rent payments after the term has expired.

4.      Question For Landlords and Property Managers. Have you considered revising your Leases to provide that the mere delivery of rent checks after term expiration, even if deposited by Landlord, will not serve to extend the lease term?

                                                                                    Stuart A. Lautin, Esq.*

 

 

* Board Certified, Commercial (1989) and Residential (1988) Real Estate Law, Texas Board of Legal Specialization

Licensed in the States of Texas and New York

  

Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.