Chapter 10Commercial Leases

Provisions in a Commercial LeaseExample – Actual Lease from Property I Own

Define premises Set term/termination Rent

– CAM– Sinking Fund– CPI Adjustment

Permitted Use Assignments/Subleasing Maintenance Alterations Right of Entry Utilities Waiver/Indemnify (injury

on premises)

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Insurance Default Quiet

Enjoyment Improvements Noncompete

Lack of Statutory Protections for Commercial Lessees

A model law exists but no states have fully enacted it.

Most commercial lease law is common law – interpreting leases.

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End-of-Chapter Q 5: Oral Statements v. Written Contract. • A mall landlord said that Dos Coyotes, Starbucks and Baskin-Robbins

would rent in the mall by the end of 1998. • Tenant leased land based on these assurances. • Dos Coyotes, Starbucks and Baskin-Robbins never leased space but

another ice cream store and coffee shop did.• Tenant wants out based on fraud.• Lease said: “Lessee does not rely on the fact nor does Lessor represent

that nay specific lessee of…type or number of Lessees shall during the term of this Lease occupy any space in the Shopping Center.”

Ethical Issue: Overstating Selling Points.“This is an ideal location that really brings in the pedestrian traffic.” The previous tenant did so well on her grosses here.”

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Consider 10.1 – Oral Statement of Exclusive Use of a Parking Lot• Cheung-Loon owns a bar called Primo’s Bar and Grille and he leased a parking lot for his patrons. The

landlord said he would have exclusive use. Later, the landlord leased access to another business causing a lack of parking space.

• Issue: Is the oral statement enough?

Pruo v. Neil Enterprises (#5)987 A2d 935 (Vt 2009)Exculpatory Clauses

Lease of Booths in Antique Mall. Puro (coin sales) and Yoken (jewlerey) leased space from Neil Enterprises in an antique mall with 400 booths.

Stolen Merchandise. Thieves broke in an stole merchandise from Puro and Yoken. Puro lost $25,293 and Yoken lost $31,698.

Alarm Sounded. The alarm sounded and police were notified, but by the time they arrived the thieves had fled.

Exculpatory Clause. “…shall not be held liable from any cause, whatsoever, including but not limited to fire or theft, it being understood that that the extend desired and at [the dealer’s] option, that his property shall be insured by the undersigned dealer/licensee.”

General Manager Assurances. The general manager said that the mall had “video cameras everywhere” and that he lived with “minutes of the mall.” A handbook also included extensive security measures, but also the disclaimer.

Issue: Is the exculpatory clause valid?

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Richard Barton Enterprises, Inc. v. Tsern (#6)928 P2d 368 (Utah 1996), P. 216Right to Offset Rent in Commercial Lease

Constructive Eviction? Freight Elevator Broken. Barton rented two-story building for use as an antiques

dealership. Large antiques cannot be stored on the first floor so need the freight elevator. The elevator did not work and Barton repeatedly told Tsern that is a condition to the rental.

Lease Term. Lease said the freight elevator “must be in good working order.” Facts of Elevator. Barton took possession Dec 1 but elevator did not work.

– On Jan 9, the elevator was repaired but only worked until Jan 24. The city then shut it down for violations.

– Barton suggested a rent abatement for lack of use of the elevator. Tsern refused and a lawsuit resulted.

Offset Rent? Do residential rules such as warranty of habitability apply to commercial leases? Or, the ability to offset rent against another lease violation? Should they?

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Consider 10.2 – Warranty of Habitability in Commercial Lease? • Medical Space Lease. • Problems. The air conditioning did not work and the roof leaked.

This resulted in stained tiles and rotting, mildewed carpet. Pets and rodents invested the office.

• Tenant Moved Out. • Issue: Can the tenant stop paying rent?

Start here Thursday – this slide is a bit of review

Bijan Designer for Men v. St Regis Sheraton Corporation (#X)536 NYS2d 951 (1989), p. 219Constructive Eviction

Bijan Rents from Regis. Bijan rents space from St. Regis with doors on street, main floor lobby and second floor mezzanine. Bijan said it would put the rent into an escrow.

St. Regis closed hotel and lobby for 14-18 months for renovations to meet the Landmarks Preservations Committee requirement to be designated as a New York landmark.

Eviction? Lease Language:

– For Defendant: The lease permits the hotel to “make such decorations, repairs, alterations, improvements or additions as lessor may deem necessary or desirable either to the Hotel or the demised premises… the rent shall in way abate while [these changes] occur.

– For Plaintiff. The first floor of the premises shall have access to the Hotel’s main lobby” and “the second floor shall have access to the Hotel’s mezzanine.”

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Lease Terms (con’t)

Fixtures and alterations Operations: Hours and Holidays Common area expenses and management Free speech issues and demonstrations

– Mall of America – Case where Mall kicked out animal rights protestors

– four people stood in mall and carrying signs and distributing leaflets directed against fur sales.

– The Mall is “Akin to a town square” especially because the taxpayers put in $186 million for the mall.

– Lower court ruled it must be open to protestors

Consider 10.6, p. 230. Mall Rats. How to handle teen agers in malls.

Common Area Maintenance Formula

XTotal costsTotal costs

Amount tenant pays in CAMAmount tenant pays in CAM

Square feet tenant rents

Total square footage maintenance

Square feet tenant rents

Total square footage maintenance

=

Types of Rent Clauses

Gross rent ($16 square foot for 4,500 square foot building– versus $6,000/month)

Triple net rent (taxes, insurance, maintenance) Flat rent or fixed rent Percentage rent Combinations of above CPI adjustment clauses CAM (Common Area Maintenance costs)

Circle K Corporation v. Collins (#7)98 F3d 484 (9th Cir 1996) aff’d 127 F3d 904, cert. denied 522 US 1148 (1998), p. 223

Lottery tickets as “gross sales” Percentage Rent. Lease language: “Lessee shall pay annually as

hereinafter provided as additional rent, the amount, if any, by which two percent (2%) of Lessee’s “gross sales” (as hereinafter defined) exceeds the guaranteed minimal annual rent plus the sum of the real estate taxes and insurance premiums on the leased premises for such year. Such rent is hereinafter referred to as “percentage rent.”

Gross Receipts. Gross receipts of every kind and nature originating from sales and services on the demised premises, whether on credit or for cash, in every department operating on the leased premises, whether operated by Lessee, or by a Sub lessee, or concessionaire excepting therefrom any rebates and/or refunds to customers….

Attempted Lease Modification. “Lessor …do hereby accept and agree to allow participation in the Arizona Lottery…agree to exempt and exclude any commissions and computation of sales … from percentage rents.

Issue: 2% of Gross Receipts or Profits from Lottery Ticket Sales? Money Orders. This was the closest comparison in the lease and it was

excluded from gross sales. 12

Another Percentage Rent Example

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Consider 10.3, p. 224. • Sears leased space from Honey Creek Square, Inc. The lease

provided for only a percentage based rent with no minimum.• 3% of Sales. Not to exceed;$8 million over three year. • Net Sales Defined. Sales on the premises except:

• Sales for divisions not located on the premises• The amount of taxes collected/paid (sales tax and

otherwise)• Returns and allowances• Delivery, rental, service and installation charges• Amounts in excess of sales price for charges (interest) on

credit cards or credit purchases• Sales through its catalogue• Policies of insurance sold on premises (Dean Witter)• Sales made through its commercial or Industrial Sales

teams• Should The Below Be Included? Sears did not include the

following in determining the rent:• Alteration sales• Gift wrapping• Bike set-up• Auto labor• Service contracts • Service sale centers.

Yet Another Percentage Rent Example

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End-of-Chapter Q 4, p. 240• 20 Year Lease with Percentage Rent. In 1975, A&P

rented space in a 20 year lease that provided for a fixed rent plus an additional 1% of sales in excess of $10,356,000.

• Percentage Rent Starts in 1979. A&P did not have sufficient sales to have to pay the 1% until 1979.

• In 1980 A&P Ceases Operations and Subleases. In 1980 A&P ceased operations and subleased the building to Dunham’s. Dunham’s lease provided for a percentage of 2% after sales exceeded $3,000,000, which it never has.

• A&P Pays Base Rent – No Percentage Rent. A&P continued to pay the base monthly rent to the landlord.

• Lawsuit for Percentage Rent. The landlord sued for the additional percentage rent.

• What’s the result?

Sublease to

Safety and Liability

Notice of criminal activity Foreseeable actions Security Lighting

Pichardo v. Big Diamond, Inc. (#X)215 SW3d 479 (Tex App 2007), p. 228

Car speeds away from gas station without paying for gas, ran a red light and seriously injured an innocent party.

Is the gas station liable? Is the landlord, Diamond, liable? Plaintiffs argue that the gas station should have required pre-payment for gas.

Does the fact that a criminal activity was involved impact the decision?

Foreseeability?

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Considre 10.5 – Parking Lot Rape• Women raped in parking lot when she parked in her assigned spot for her job at her job.• Parking lot had deteriorated with cots for homeless people in the ramp and lights were out in some spots

including where she was raped. • Is the landlord liable?

ADA

Need for public accommodation Allocation of responsibility and

costs between landlord and tenant on ADA compliance

Security Lighting

Consider 10.7, p. 231. 7-Eleven Access. • Customer sued – he lived 550 miles from the 7-Eleven but used it

periodically.• No van-accessible parking• The striping outl9ining the disabled parking space was faded• No sign designating the location of the wheelchair ramp• The wheelchair ramp was too steep• The store aisles were too narrow• The entry mat obstructed entry to the store• Disabled patron were denied access to the employees-only restrooms, • The floor space was obstructed by merchandise and • No general directional signs indicating the nearest accessible store

entrance.

Another ADA Case

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Quadriplegic moviegoer• AMC theater located in the basement of Union Station in Washington DC• The only wheelchair seating available is situated at the very back of the theater, in the last row, the farthest

from the screen. By relegating him to inferior seating in the back of the theater when he goes to a movie it deprives him of full and equal enjoyment.

• The theater argues it’s a safety hazard to allow wheelchairs into the general seating area. To dangerous to have wheelchairs mixed in with general in case of a fire. However, no theater fire in 50 years. Only certain of the emergency exits has wheelchair ramps and the designated wheelchair seating is near those.

Winchell v. Schiff (#x)193 P3d 946 (Nev 2008), p. 253Contract Clause: Landlord Right to Access

Lease of Cold Storage Unit. Winchell owned and operated a cold storage business CGL Seafood, Inc. Winchell rented a cold storage warehouse from Schiff.

Access to cold storage unit by landlord. The agreement allowed Schiff to enter the storage space at any reasonable time for inspection or maintenance purposes.

Landlord Accessed Unit. Schiff’s property manager became concerned the Winchell may have abandoned the facility and turned the power off leaving behind unrefrigerated fish. He tried to contact Winchell but failed. Schiff hired a lock smith and enter the warehouse and found it in order.

Tenant Returned and Found Items Stolen. Winchell returned from the trip and noted the locks had been changed and that between $30,000 and $45,000 of inventory had been stolen. This caused him to break contracts and ultimately his business failed. Jury awarded $210,000.

Issue: Winchell also sued in trespass and conversion. Was the landlord allowed to enter premises? Should the landlord have to pay for stolen good? Demise of the business? 19

Summit Towne Centre, Inc. v. Shoe Show of Rocky Mountain, Inc. 828 A2d 995 (Pa 2003), p. 235 (in general book material – not a separate case)Contract Clause: Requirement of Store to Remain Open

Shoe Store Lease. A lease states that the lessee must operate a shoe store – does it?

Business Failed. Shoe Show ran the store from 1992 until 2000 but shut it down after that even though the lease continued.

Continued to Pay Rent But Closed Shoe Store. Shoe Show did continue to pay rent.

Issue: Landlord sued for injunction to make the Shoe Show remain open.

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Mark-It Place Foods, inc. vl. New Plan Excel Realty Trust (#X)156 Ohio App 3d, 804 NE2d 979 (Ohio App 2004), p. 239Contract Clause: Restrictive Covenant on Business Type

Exclusive right to sell food. Mall developed gave exclusive right to sell food to one tenant – Festival Foods.

Contract Language: “sell or offer for sale groceries, meats, poultry, seafood, dairy products, fruits, vegetables or baked goods, provided these providers do no be deemed to prohibit a restaurant serving prepared food.”

Wall Mart was key tenant and although it always

Issue: Is this acceptable under antitrust laws? Factors court reviewed

– Relevant geographic and product markets– Availability of alternative sites– Significance of competition elimination by

the clause– The scope of the restrictive covenant, and – The economic justifications of the

restrictive covenant.21

Restrictive Covenants on Property Use

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End-of-Chapter Q1– Walgreens has a lease in a mall the prevents another pharmacy. The mall lost its anchor tenant and can replace it with a deep discount chain that will rent 100,000 square feet but wants 12,000 of that to be a pharmacy, about the same size as Walgreens. Can Walgreens win an injunction? Or, should monetary damages be enough?