Group To Redevelop Campus to 630,000 SF of Office Space, 4 Parking Garages
The joint venture between Macfarlan Capital Partners and Buchanan Street Partners purchased four buildings on 44.5 acres at 20455 State Highway 249. The partnership purchased the buildings from Don Hand for a reported $32 million, or about $129 per square foot. Three of the buildings are office buildings totaling 232,000 square feet and the other is an industrial building totaling 249,000 square feet. The campus will be renovated for office use and will be called Centre at Cypress Creek. It will include three four-story office buildings and the industrial building will be converted to office space. The project will include more than 630,000 square feet and four parking garages. Brenda Pennington of Brenda Pennington Commercial Real Estate represented the seller, Don Hand of Greenwood Properties. For more infomation see ; www.houstonrealtyadvisors.net or www.houstonrealtyadvisor.com
Thursday, August 16, 2007
Monday, August 13, 2007
Tenant's Checklist of Silent Lease Issues
"Over-reimbursement
Do all of the tenants' percentages add up to 100%, or is the landlord being over-reimbursed for esclations? Are the anchor tenants paying their share, or is that share being shifted to the other tenants?
Multiple escalations
The lease should not allow multiple escalations that give the landlord duplicative recoupment of a cost increase, or double-count any charges included in operating expenses or elsewhere. For example, [for a shopping center,] the marketing director's salary should be either an operating expense or a charge to the marketing fund, but not both.
Lease termination during calendar year
Apportion escalations in the event that the lease terminates during a calendar year. Otherwise, the landlord could argue that annual calculation procedures obligate the tenant to contribute to an entire year's escalations. [Moderator's comment – that would be egregious.]
Free rent period
Does the free rent period apply to escalations or just base rent?
Waiver of escalations
Escalations should be deemed waived if not billed within a certain period.
Statement by professional
An independent managing agent or (better) a CPA should prepare the statement of operating expenses. Attach as a lease exhibit the landlord's operating expense statements for the preceding few years.
Ask the landlord to confirm that:
(a) these were the statements actually used for pass-
thrus to existing tenants; and
(b) future operating expenses will be calculated the
same way.
Time for revision
Set a time limit for the landlord's revisions to operating expense statements – and make that limit subject to a time of the essence qualifier.
Right to review and challenge
The tenant should have the rights to examine and question the landlord's operating expense calculations. Those rights should survive the termination of the lease. The lease should give the tenant reasonable time to:
(1) notify the landlord it wants to audit expenses;
(2) conduct and complete the audit; and
(3) specify if, & how it contests the landlord's
calculations.
Avoid any schedule that requires the tenant to provide more detail than is reasonable at any particular stage of the process. If the tenant discovers egregious errors, let the tenant reopen expenses from earlier years, even if the time to do so had otherwise expired."
from GlobeSt.com, August 30, 2006
"Many people mistakenly consider brokerage and transaction management one and the same. Some have described transaction management as brokerage on steroids, others call it managed brokerage, but each of these descriptions lacks certain foundational truths. So, what is transaction management?
First, the overarching textbook definition: transaction management is a consistent, repeatable, reportable, measurable process to coordinate multiple transactions in multiple markets and oversee the field execution of real estate deals. Transaction management has 4 dimensions.
First Dimension: Consistency.
Managing brokerage resources from various real estate firms alone can be difficult. Now imagine taking all the input from these disparate resources and trying to make them look uniform. It is next to impossible. However, it is the job of a transaction manager to provide the client with a consistent process. This requires two things. First, it requires frequent interaction between the transaction manager and the client to define what's needed. More important, providing a consistent process requires the use of standardized management tools.
These tools can include formal broker-engagement letters, standard listing agreements and scope-of-services templates, uniform market report formats and financial analyses. With these tools, the transaction manager can ensure that the field broker hits the ground running.
Moreover, the TM [Transaction Manager] can then continuously improve the process in place, making sure it remains viable for the client.
Second Dimension: Coordination.
Accountability for successful transaction management does not lie solely with the TM. Rather, it requires the management and oversight of several key contributors including the client corporate real estate department, the end user, legal department and field broker, among others. No matter how tactically astute a TM is, it is ultimately his ability to herd the cats that sets him apart from the also-rans. It is more than a typical project management mentality, and in this case you have to coordinate the efforts of individuals for whom real estate is akin to visiting the dentist.
Third Dimension: Communication.
It is the value you bring to the client that will make or break you as a service provider. However, communicating value has two parts. The first is measuring your performance against a set of criteria. Most service providers do this reasonably well and with good reason; their bonuses are tied to it. Where most service providers miss the mark is in giving their clients proof of value that they can communicate upward to their senior management. To be sure, there is a lot of self-promotion when selling the service but relatively little done on a daily basis after the account has been won. Without it the old saying, "what have you done for me lately?" comes into play.
Fourth Dimension: Time.
To make effective use of your time, you need to consider the service provider's professionalism. Transaction management is about hiring the right team with the right resources and the ability to free up your time for more strategic concerns.
When evaluating transaction management services, consider whether their process will save you time or require you to micromanage their efforts.
Consider whether the designation of responsibilities is clear or whether you'll be called in too often to arbitrate a disagreement among the provider, the broker and your own staff. Consider whether the service provider is willing to live or die by the ability to save you time and money."
For more information see: www.houstonrealtyadvisors.net or www.houstonrealtyadvisor.com
Do all of the tenants' percentages add up to 100%, or is the landlord being over-reimbursed for esclations? Are the anchor tenants paying their share, or is that share being shifted to the other tenants?
Multiple escalations
The lease should not allow multiple escalations that give the landlord duplicative recoupment of a cost increase, or double-count any charges included in operating expenses or elsewhere. For example, [for a shopping center,] the marketing director's salary should be either an operating expense or a charge to the marketing fund, but not both.
Lease termination during calendar year
Apportion escalations in the event that the lease terminates during a calendar year. Otherwise, the landlord could argue that annual calculation procedures obligate the tenant to contribute to an entire year's escalations. [Moderator's comment – that would be egregious.]
Free rent period
Does the free rent period apply to escalations or just base rent?
Waiver of escalations
Escalations should be deemed waived if not billed within a certain period.
Statement by professional
An independent managing agent or (better) a CPA should prepare the statement of operating expenses. Attach as a lease exhibit the landlord's operating expense statements for the preceding few years.
Ask the landlord to confirm that:
(a) these were the statements actually used for pass-
thrus to existing tenants; and
(b) future operating expenses will be calculated the
same way.
Time for revision
Set a time limit for the landlord's revisions to operating expense statements – and make that limit subject to a time of the essence qualifier.
Right to review and challenge
The tenant should have the rights to examine and question the landlord's operating expense calculations. Those rights should survive the termination of the lease. The lease should give the tenant reasonable time to:
(1) notify the landlord it wants to audit expenses;
(2) conduct and complete the audit; and
(3) specify if, & how it contests the landlord's
calculations.
Avoid any schedule that requires the tenant to provide more detail than is reasonable at any particular stage of the process. If the tenant discovers egregious errors, let the tenant reopen expenses from earlier years, even if the time to do so had otherwise expired."
from GlobeSt.com, August 30, 2006
"Many people mistakenly consider brokerage and transaction management one and the same. Some have described transaction management as brokerage on steroids, others call it managed brokerage, but each of these descriptions lacks certain foundational truths. So, what is transaction management?
First, the overarching textbook definition: transaction management is a consistent, repeatable, reportable, measurable process to coordinate multiple transactions in multiple markets and oversee the field execution of real estate deals. Transaction management has 4 dimensions.
First Dimension: Consistency.
Managing brokerage resources from various real estate firms alone can be difficult. Now imagine taking all the input from these disparate resources and trying to make them look uniform. It is next to impossible. However, it is the job of a transaction manager to provide the client with a consistent process. This requires two things. First, it requires frequent interaction between the transaction manager and the client to define what's needed. More important, providing a consistent process requires the use of standardized management tools.
These tools can include formal broker-engagement letters, standard listing agreements and scope-of-services templates, uniform market report formats and financial analyses. With these tools, the transaction manager can ensure that the field broker hits the ground running.
Moreover, the TM [Transaction Manager] can then continuously improve the process in place, making sure it remains viable for the client.
Second Dimension: Coordination.
Accountability for successful transaction management does not lie solely with the TM. Rather, it requires the management and oversight of several key contributors including the client corporate real estate department, the end user, legal department and field broker, among others. No matter how tactically astute a TM is, it is ultimately his ability to herd the cats that sets him apart from the also-rans. It is more than a typical project management mentality, and in this case you have to coordinate the efforts of individuals for whom real estate is akin to visiting the dentist.
Third Dimension: Communication.
It is the value you bring to the client that will make or break you as a service provider. However, communicating value has two parts. The first is measuring your performance against a set of criteria. Most service providers do this reasonably well and with good reason; their bonuses are tied to it. Where most service providers miss the mark is in giving their clients proof of value that they can communicate upward to their senior management. To be sure, there is a lot of self-promotion when selling the service but relatively little done on a daily basis after the account has been won. Without it the old saying, "what have you done for me lately?" comes into play.
Fourth Dimension: Time.
To make effective use of your time, you need to consider the service provider's professionalism. Transaction management is about hiring the right team with the right resources and the ability to free up your time for more strategic concerns.
When evaluating transaction management services, consider whether their process will save you time or require you to micromanage their efforts.
Consider whether the designation of responsibilities is clear or whether you'll be called in too often to arbitrate a disagreement among the provider, the broker and your own staff. Consider whether the service provider is willing to live or die by the ability to save you time and money."
For more information see: www.houstonrealtyadvisors.net or www.houstonrealtyadvisor.com
Wednesday, August 8, 2007
Lease Error analysis is a far more uncertain task.
"Even in the times when tenants are king, the landlord-tenant relationship is a delicate one. Neither party can afford to gratuitously irritate the other. Tenants should think twice before hiring a gunslinging stranger to challenge the income stream which the landlord is getting from his property… This is particularly so if the stranger has a contingency contract which means the consultant may claim a vested right to continue a challenge with which the tenant may not agree. It makes sense that the higher the contingency fee, the greater the risk for dispute between principal and agent.
Other issues which make contingent fee lease error challenges riskier
include:
· Consultants have significant incentive to oversell the no risk
aspect of the arrangement.
· If landlord wants to settle, the landlord may prefer a
non-cash quid pro quo as relieving tenant from burdensome lease covenant, resulting in a potential fee dispute with a contingent fee consultant.
· Even in cases when a landlord tries to settle a tenant
complaint with cash, which can be easily divided between the tenant and the consultant, it may be unclear as to whether the cash is new money or is money which landlord budgeted for tenant to induce renewal of the lease, or for some other purpose.
· The decision of how hard to push and when to settle can easily
be skewed in a contingent fee situation where the consultant has an incentive to score quickly and often – even if the amounts are less than might be obtained if the incentives were placed differently. The risks may go either way: a consultant may push too hard or not hard enough.
· A contingent fee consultant's aggressive assault may breed a
counterclaim by the landlord, resulting in the potential that the consultant recover 50% of his client's positive recovery, while the client is responsible for 100% of any liability which the party uncovers."
From Lease Audits: The Essential Guide, by Theodore Hellmuth, Esq.
For additional information about Lease Audits: contact www.houstonrealtyadvisors.net or www.houstonrealtyadvisor.com
Other issues which make contingent fee lease error challenges riskier
include:
· Consultants have significant incentive to oversell the no risk
aspect of the arrangement.
· If landlord wants to settle, the landlord may prefer a
non-cash quid pro quo as relieving tenant from burdensome lease covenant, resulting in a potential fee dispute with a contingent fee consultant.
· Even in cases when a landlord tries to settle a tenant
complaint with cash, which can be easily divided between the tenant and the consultant, it may be unclear as to whether the cash is new money or is money which landlord budgeted for tenant to induce renewal of the lease, or for some other purpose.
· The decision of how hard to push and when to settle can easily
be skewed in a contingent fee situation where the consultant has an incentive to score quickly and often – even if the amounts are less than might be obtained if the incentives were placed differently. The risks may go either way: a consultant may push too hard or not hard enough.
· A contingent fee consultant's aggressive assault may breed a
counterclaim by the landlord, resulting in the potential that the consultant recover 50% of his client's positive recovery, while the client is responsible for 100% of any liability which the party uncovers."
From Lease Audits: The Essential Guide, by Theodore Hellmuth, Esq.
For additional information about Lease Audits: contact www.houstonrealtyadvisors.net or www.houstonrealtyadvisor.com
Tuesday, August 7, 2007
Checklist considers lease negotiations from a landlord's perspective.
"The checklist is intended for major commercial space leases.
Off-Site Costs
Avoid limiting "operating costs" to those incurred physically within the particular building. The landlord may incur off-site operating costs, such as in a multi-use project (e.g. holiday decorations in a central plaza) or for off-site equipment, installations, traffic improvements, shuttle bus services, or the like to benefit the building.
CAM
Avoid the term CAM because operating cost escalations far more than common area maintenance.
Major Repairs
Do not necessarily limit multi-year amortization of large repair costs to capital items. Particularly if leases limit escalations or if the landlord is concerned about base years for new leases, the landlord may want the ability to spread major noncapital repair costs over multiple years.
Condition for Audit
The tenant may audit operating costs only if those costs increase more than a specified percentage over a specified prior year or base year.
Auditors
Prohibit contingent fee auditors. If the landlord agrees to reimburse audit costs (such as if the tenant's audit reveals a certain level of mistakes), then negate any reimbursement to contingent fee auditors.
Consider requiring a national CPA firm. Insist that such firm agree to notify the landlord of any undercharges or errors in the tenant's favor that the audit discloses.
Costs of Audit
Ask the tenant to pay for the landlord's out-of-pocket costs in connection with any audit of operating costs (e.g. photocopying, staff time, document retrieval, accountants' time spent answering inquiries).
Confidentiality
Require the tenant to sign a confidentiality agreement satisfactory to the landlord for any audit and its results before disclosing any records or information to the tenant or to a lease auditor. The agreement should, among other things, prohibit the tenant and its advisors from disclosing the existence of any audit or any of its results, particularly to other tenants in the building. Breach should be an incurable default under the lease.
Threshold for Payment
If overcharges (net of undercharges) total 3% or less of total annual operating costs (a general definition of materiality), then the tenant should not be entitled to any correction or any reimbursement of its audit costs. Define carefully the factor to which the 3% is applied. Use as large a number as possible. For example, refer to 3% of gross annual operating costs rather than 3% of the tenant's escalation payment.
Liability for Refunds
The landlord's liability for any refund of overpaid escalations should terminate after a specified number of years (and automatically upon any sale of the building?) to prevent open-ended obligations or issues upon a sale of the building.
Survival; Timing
Limit the time during which the tenant may challenge any escalation. Be careful – the tenant may try to make this reciprocal for the landlord's billings. All the tenant's obligations regarding escalations should survive the expiration or sooner termination of the lease." for additional information see: www.houstonrealtyadvisors.net or www.houstonrealtyadvisor.com
Off-Site Costs
Avoid limiting "operating costs" to those incurred physically within the particular building. The landlord may incur off-site operating costs, such as in a multi-use project (e.g. holiday decorations in a central plaza) or for off-site equipment, installations, traffic improvements, shuttle bus services, or the like to benefit the building.
CAM
Avoid the term CAM because operating cost escalations far more than common area maintenance.
Major Repairs
Do not necessarily limit multi-year amortization of large repair costs to capital items. Particularly if leases limit escalations or if the landlord is concerned about base years for new leases, the landlord may want the ability to spread major noncapital repair costs over multiple years.
Condition for Audit
The tenant may audit operating costs only if those costs increase more than a specified percentage over a specified prior year or base year.
Auditors
Prohibit contingent fee auditors. If the landlord agrees to reimburse audit costs (such as if the tenant's audit reveals a certain level of mistakes), then negate any reimbursement to contingent fee auditors.
Consider requiring a national CPA firm. Insist that such firm agree to notify the landlord of any undercharges or errors in the tenant's favor that the audit discloses.
Costs of Audit
Ask the tenant to pay for the landlord's out-of-pocket costs in connection with any audit of operating costs (e.g. photocopying, staff time, document retrieval, accountants' time spent answering inquiries).
Confidentiality
Require the tenant to sign a confidentiality agreement satisfactory to the landlord for any audit and its results before disclosing any records or information to the tenant or to a lease auditor. The agreement should, among other things, prohibit the tenant and its advisors from disclosing the existence of any audit or any of its results, particularly to other tenants in the building. Breach should be an incurable default under the lease.
Threshold for Payment
If overcharges (net of undercharges) total 3% or less of total annual operating costs (a general definition of materiality), then the tenant should not be entitled to any correction or any reimbursement of its audit costs. Define carefully the factor to which the 3% is applied. Use as large a number as possible. For example, refer to 3% of gross annual operating costs rather than 3% of the tenant's escalation payment.
Liability for Refunds
The landlord's liability for any refund of overpaid escalations should terminate after a specified number of years (and automatically upon any sale of the building?) to prevent open-ended obligations or issues upon a sale of the building.
Survival; Timing
Limit the time during which the tenant may challenge any escalation. Be careful – the tenant may try to make this reciprocal for the landlord's billings. All the tenant's obligations regarding escalations should survive the expiration or sooner termination of the lease." for additional information see: www.houstonrealtyadvisors.net or www.houstonrealtyadvisor.com
Friday, July 27, 2007
What do Corp. R.E. Executives Think???
"Corporate real estate executives at 16 major corporations across a range of industries were queried about the use and role of real estate in their companies. The findings were consistent with experience in prior-years surveys, but unexpected in 3 areas:
1. The main issue that corporate real estate groups
face in leading-edge companies is at the business-unit level more than the senior corporate level, e.g. participation in critical planning processes, meetings and key decision making.
2. The need for flexibility has become paramount
because of the rapid pace of change of all types in global companies, and local and regional companies. The real estate group is challenged to respond to change, but also to proactively work with the business executives on the real estate implications of change, considering both a financial flexibility component and a physical flexibility component.
3. The needs of the real estate groups to use their
service providers more effectively, as they outsource or partner more of the real estate function. There is a critical need for corporate real estate groups to strengthen their capabilities in both capturing and analyzing strategic metrics as well as property metrics.
Business real estate is the real estate that is used by business to carry out their mission and strategy.
Real estate business is the plan, design, finance, market, develop, build, manage and ultimately recycle of the real estate." fro more information see; www.houstonrealtyadvisors.net
or www.houstonrealtyadvisor.com
1. The main issue that corporate real estate groups
face in leading-edge companies is at the business-unit level more than the senior corporate level, e.g. participation in critical planning processes, meetings and key decision making.
2. The need for flexibility has become paramount
because of the rapid pace of change of all types in global companies, and local and regional companies. The real estate group is challenged to respond to change, but also to proactively work with the business executives on the real estate implications of change, considering both a financial flexibility component and a physical flexibility component.
3. The needs of the real estate groups to use their
service providers more effectively, as they outsource or partner more of the real estate function. There is a critical need for corporate real estate groups to strengthen their capabilities in both capturing and analyzing strategic metrics as well as property metrics.
Business real estate is the real estate that is used by business to carry out their mission and strategy.
Real estate business is the plan, design, finance, market, develop, build, manage and ultimately recycle of the real estate." fro more information see; www.houstonrealtyadvisors.net
or www.houstonrealtyadvisor.com
The Paperless Lease
here were those folks who said it could never be done. The idea of presenting and concluding lease terms via a simple, standardized automated process over the Internet was just too unrealistic for most professionals in our industry.
from RealcommAdvisory, August 31, 2006
"The excuses were wide ranging - too complicated, needs the human touch, each situation is different, could never get all the parties to agree on the process, tenants would never go for it, too expensive to automate...the list goes on. Up until now the excuses may have been legitimate but that has all changed.
In order to head off the naysayer we need to clarify one thing early on in the conversation. Automating the lease process is complex and there are a number of situations where automation is not practical in the foreseeable future. For example, a 50,000 sq. ft. law firm or that 100,000 retail space are now, and will be for the foreseeable future, deserving of the traditional leasing process.
Okay, now that it's been said, let's focus on the simple, redundant, not-so-unique leases that we often find:
(1) in the multifamily world,
(2) with small office space,
(3) with many industrial incubators, and
(4) a handful of retail situations.
Just these categories alone make up a large number of today's leasing transactions.
This automated process is not applicable to the larger more complex leases we find in our industry, at least not yet. This automated transaction is, however, perfectly suited for the millions of leases done annually where the terms and conditions are fairly static and the legal issues and far more simplistic." for more inforamtion see: www.houstonrealtyadvisors.net
or www.houstonrealtyadvisor.com
from RealcommAdvisory, August 31, 2006
"The excuses were wide ranging - too complicated, needs the human touch, each situation is different, could never get all the parties to agree on the process, tenants would never go for it, too expensive to automate...the list goes on. Up until now the excuses may have been legitimate but that has all changed.
In order to head off the naysayer we need to clarify one thing early on in the conversation. Automating the lease process is complex and there are a number of situations where automation is not practical in the foreseeable future. For example, a 50,000 sq. ft. law firm or that 100,000 retail space are now, and will be for the foreseeable future, deserving of the traditional leasing process.
Okay, now that it's been said, let's focus on the simple, redundant, not-so-unique leases that we often find:
(1) in the multifamily world,
(2) with small office space,
(3) with many industrial incubators, and
(4) a handful of retail situations.
Just these categories alone make up a large number of today's leasing transactions.
This automated process is not applicable to the larger more complex leases we find in our industry, at least not yet. This automated transaction is, however, perfectly suited for the millions of leases done annually where the terms and conditions are fairly static and the legal issues and far more simplistic." for more inforamtion see: www.houstonrealtyadvisors.net
or www.houstonrealtyadvisor.com
Friday, July 20, 2007
What if Large Shopping Center Tenant goes DARK?
Where a lease clause provides that tenant may terminate its lease if an identified co-anchor fail or cease to lease and pay rent for its store in the Shopping Center... the tenant has the right to terminate where the co-anchor assigns its lease, even where the co-anchor's lease had no operating covenant.
from DIRT
"The tenant's lease specifically identified that there was a co-anchor lease and that the continued leasing and payment of rent for [co-anchor's] store is part of the consideration to induce [Tenant] to lease and pay rent for its store. According to the parties who negotiated this lease, the purpose of the clause was to give assurance to Tenant that the co-anchor would continue to bear its share of the Center's costs during the period of Tenant's lease. At the time it entered into this lease, Tenant was fully aware that the co-anchor's lease was freely assignable and contained no operating covenant.
Jenkins v. Eckerd Corp., 913 So. 2d 43 (Fla. App. 2005)
On the other hand, the Tenant's lease negotiator testified that in clauses of this sort that he had negotiated, usually the parties stipulate if they intend the reference to the cotenant in question to include the cotenant's successor and assigns. Obviously the clause in question did not include that language.
Of course, what happened was that the co-anchor assigned its lease to another grocery store operator, which in fact continued to operate a grocery store and to pay rent. The assignor/co-anchor remained liable for such rent. The Tenant's lease had also passed through several hands, and the present assignee, Eckerd, concluded that it was not desirable to continue to operate at this location and therefore, one year after the co-anchor assigned, Eckerd invoked the termination right described above.
Landlord argued that the co-anchor, as assignor, remained fully liable on the lease, and that, consequently, the only conceivable purpose of the clause - to insure that the operating costs be covered - was satisfied. Landlord argued that, although the language of the termination right appeared to be ambiguous, in context it was in fact ambiguous because it did not identify what happened when the co-anchor assigned.
In the alternative, the Landlord argued that the failure of the co-anchor to continue
to be the one actually paying the rent was an immaterial breach. The Landlord noted
that the Restatement of Contracts referred to immaterial conditions also as excused if the invocation of the breach:
(a) Will involve extreme forfeiture or penalty, and,
(b) Its existence or occurrence forms no essential part of the exchange for the promisor's performance..
The appeals court panel ruled, 2-1, in favor of Tenant, with a strong and detailed dissenting opinion.
In the view of the majority, the language of the clause was unambiguous, and therefore so was the condition that Tenant was entitled to expect - the continued leasing and payment of rent by the co-anchor.
Consequently, the failure of the co-anchor to continue in the premises was material, as it was the performance for which the Tenant bargained.
A very strong dissent argued point by point against this position.
Comment: In the editor's view (J. Patrick Randolph, Professor of Law,
UMKC School of Law), this is a very close call, especially on the first argument - that, in context the language of the lease was inherently ambiguous when it failed to address what would happen if the co-anchor assigned. The majority placed the responsibility for addressing the issue directly on the landlord, who knew that assignment was a distinct possibility. As Landlord failed to do anything to protect itself against this eventuality, Landlord should suffer the consequences.
Central to the editor's conclusion on this point would be more and clearer evidence of trade practice with respect to this issue. The only witness, who had negotiated for the tenant, said that in such clauses the parties always stipulate if they intend to withhold the Tenant's kick out right in the event of an assignment by the identified cotenant.
The editor agrees that this would be common practice in the more traditional cotenancy clause where the identity of the Tenant is critical because the clause is designed to protect a Tenant from the loss of good will due to its association in the Center with the other identified tenant. But in this case, it was apparently not disputed that good will was not the issue - the original Tenant sought only to protect itself from an insufficiency in maintenance funds resulting from a failure of rent from the co-anchor's space. If this is the case, then the parties might not think to mention assignment because what they were focused on would be interruption in the rent flow. This would not happen in the event of assignment, so they wouldn't talk about assignment one way or the other.
The editor believes the type of cotenancy clause involved in this lease is relatively unusual, and that it likely is difficult to generalize about trade practices about this. Absent a clear trade practice, the editor tilts, ever so slightly, to Landlord's side. But the editor always believes that people should live with the language of their agreements. So it's very close. The editor simply believes that the language of the agreement needed further clarification as applied.
Subsequent question on DIRT:
Was there any discussion in the case or decision of the lapse of one year from the assignment by the co-anchor and the exercise of the termination right by tenant's last assignee? For more information see: www.houstonrealtyadvisors.net
or www.houstonrealtyadvisor.com
from DIRT
"The tenant's lease specifically identified that there was a co-anchor lease and that the continued leasing and payment of rent for [co-anchor's] store is part of the consideration to induce [Tenant] to lease and pay rent for its store. According to the parties who negotiated this lease, the purpose of the clause was to give assurance to Tenant that the co-anchor would continue to bear its share of the Center's costs during the period of Tenant's lease. At the time it entered into this lease, Tenant was fully aware that the co-anchor's lease was freely assignable and contained no operating covenant.
Jenkins v. Eckerd Corp., 913 So. 2d 43 (Fla. App. 2005)
On the other hand, the Tenant's lease negotiator testified that in clauses of this sort that he had negotiated, usually the parties stipulate if they intend the reference to the cotenant in question to include the cotenant's successor and assigns. Obviously the clause in question did not include that language.
Of course, what happened was that the co-anchor assigned its lease to another grocery store operator, which in fact continued to operate a grocery store and to pay rent. The assignor/co-anchor remained liable for such rent. The Tenant's lease had also passed through several hands, and the present assignee, Eckerd, concluded that it was not desirable to continue to operate at this location and therefore, one year after the co-anchor assigned, Eckerd invoked the termination right described above.
Landlord argued that the co-anchor, as assignor, remained fully liable on the lease, and that, consequently, the only conceivable purpose of the clause - to insure that the operating costs be covered - was satisfied. Landlord argued that, although the language of the termination right appeared to be ambiguous, in context it was in fact ambiguous because it did not identify what happened when the co-anchor assigned.
In the alternative, the Landlord argued that the failure of the co-anchor to continue
to be the one actually paying the rent was an immaterial breach. The Landlord noted
that the Restatement of Contracts referred to immaterial conditions also as excused if the invocation of the breach:
(a) Will involve extreme forfeiture or penalty, and,
(b) Its existence or occurrence forms no essential part of the exchange for the promisor's performance..
The appeals court panel ruled, 2-1, in favor of Tenant, with a strong and detailed dissenting opinion.
In the view of the majority, the language of the clause was unambiguous, and therefore so was the condition that Tenant was entitled to expect - the continued leasing and payment of rent by the co-anchor.
Consequently, the failure of the co-anchor to continue in the premises was material, as it was the performance for which the Tenant bargained.
A very strong dissent argued point by point against this position.
Comment: In the editor's view (J. Patrick Randolph, Professor of Law,
UMKC School of Law), this is a very close call, especially on the first argument - that, in context the language of the lease was inherently ambiguous when it failed to address what would happen if the co-anchor assigned. The majority placed the responsibility for addressing the issue directly on the landlord, who knew that assignment was a distinct possibility. As Landlord failed to do anything to protect itself against this eventuality, Landlord should suffer the consequences.
Central to the editor's conclusion on this point would be more and clearer evidence of trade practice with respect to this issue. The only witness, who had negotiated for the tenant, said that in such clauses the parties always stipulate if they intend to withhold the Tenant's kick out right in the event of an assignment by the identified cotenant.
The editor agrees that this would be common practice in the more traditional cotenancy clause where the identity of the Tenant is critical because the clause is designed to protect a Tenant from the loss of good will due to its association in the Center with the other identified tenant. But in this case, it was apparently not disputed that good will was not the issue - the original Tenant sought only to protect itself from an insufficiency in maintenance funds resulting from a failure of rent from the co-anchor's space. If this is the case, then the parties might not think to mention assignment because what they were focused on would be interruption in the rent flow. This would not happen in the event of assignment, so they wouldn't talk about assignment one way or the other.
The editor believes the type of cotenancy clause involved in this lease is relatively unusual, and that it likely is difficult to generalize about trade practices about this. Absent a clear trade practice, the editor tilts, ever so slightly, to Landlord's side. But the editor always believes that people should live with the language of their agreements. So it's very close. The editor simply believes that the language of the agreement needed further clarification as applied.
Subsequent question on DIRT:
Was there any discussion in the case or decision of the lapse of one year from the assignment by the co-anchor and the exercise of the termination right by tenant's last assignee? For more information see: www.houstonrealtyadvisors.net
or www.houstonrealtyadvisor.com
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