Commercial Leasing LAW & STRATEGY®

Volume 30, Number 5 • November 2017 The Lease Is After a Hurricane: Can the Property Manager Fully Executed Be Blamed for a Lessee’s Losses?

You Are Done, Right? By Janice G. Inman

By Mark Morfopoulos he recent decision in Sears Roebuck & Co. and Kmart Corp. v. W/S Lebanon LLC, 2017 U.S. Dist. LEXIS 143902 (D. N.H. 9/6/17) (Sears and Kmart), After a lease is fully executed, Tseems timely in light of the fact that commercial landlords, tenants and many attorneys may be tempted their insurance providers are grappling with the problems caused by the ex- to think that their role in the treme wind and rain of hurricanes. In the Sears and Kmart case, the hurricane leasing “process” is over. How- in question was 2011’s Hurricane Irene, which roared up the east coast and then ever, depending on the capabili- lingered over New England as a tropical storm, depositing flooding rains over ties of your client to understand several states, including New Hampshire. and administer the terms of the Kmart Corp. had an ongoing long-term lease with landlord Windalier West Leba- lease, not paying attention to non, LLC. Windalier, in turn, had a property management contract with K.G.I. Prop- “post-lease” signing details may erties, LLC, which ended a month before two rivers in the vicinity of the Kmart shop- be a perilous proposition. ping plaza flooded, damaging the building Kmart occupied, as well as its contents. Failure to Deliver When the management contract with K.G.I. ended, Windalier entered into a similar property management agreement with Keypoint Partners, LLC. Keypoint was there- The Premises By a fore in charge of the property’s management when the flooding actually took place. Certain Date Kmart brought suit against Windalier, K.G.I. and Keypoint for, inter alia, breach of Some leases state that the contract and negligence. All defendants moved for summary judgment on these claims. “commencement date” begins Breach of Contract on the date the lease is signed. Kmart alleged in its brief to the U.S. District Court for the District of New Hamp- Many other leases, however, shire that the damage it suffered in the flooding was “proximately caused by Windal- provide that the commencement ier, K.G.I. and Keypoint’s breach of their duties” under the contract between Windal- date will be determined as of the ier and Kmart.” However, all parties agreed that K.G.I. and Keypoint were not parties date the premises is delivered to the lease between Kmart and Windalier. Thus, the court found that Kmart’s breach with certain “landlord’s work” of contract claims against K.G.I. and Keypoint must fail as a matter of law. substantially completed. Realizing that a contract between Kmart and its landlord was not one between it To make sure that the landlord and the landlord’s property management firms, the plaintiff pivoted a bit, theorizing diligently proceeds with the work that Kmart was a third-party beneficiary of the property management agreements that it is obligated to perform prior between Windalier and its two property managers. Under their agreements with to delivery, attorneys who repre- Windalier, the property managers had promised to “continually operate and manage sent tenants often ask that a clause the Property consistent with good, sound, and prudent management practices and be inserted in the lease stating that continued on page 2 if the landlord does not turn over the space to the tenant on or be- In This Issue fore a certain date (often referred Lessee Losses to as the “Outside Date”), the ten- After a Hurricane...... 1 ant will have the right to abate the After the Lease rent one day for every day that the Is Signed...... 1 premises is not delivered to the tenant. If such date is specifically Modified Anchor mentioned in the lease, it is imper- Tenants...... 3 ative that this date be calendared. Surviving the

continued on page 6 Retail Shift...... 5 PERIODICALS Hurricane Damage In Sears and Kmart, the property managers’ promise to “continually continued from page 1 operate and manage the Property Commercial Leasing LAW & STRATEGY® consistent with standards of compa- consistent with good, sound, and rable properties in the same area.” prudent management practices and The court, however, refused to en- consistent with standards of compa- EDITOR-IN-CHIEF ...... Janice G . Inman tertain this argument because it was rable properties in the same area” EDITORIAL DIRECTOR . . . . . Wendy Kaplan Stavinoha GRAPHIC DESIGNER ...... Rajnish Kumar Ranjan raised too late in the game. Stated did not qualify as language demon- BOARD OF EDITORS Judge Joseph Normande LaPlante: strating that the parties to the man- agement contracts intended to con- ADAM LEITMAN BAILEY . . . Adam Leitman Bailey, P .C . “Kmart has premised its [third-party New York beneficiary] claim on a breach of fer a direct benefit on Kmart or to CONSUELO BOYD . . . . . Roosevelt University the Kmart-Windalier agreement. No- grant Kmart the right to sue based Chicago upon breach of those agreements. GLENN A . BROWNE . . . . Braun, Browne & Associates, P .C . where in the Complaint does Kmart Riverwoods, IL raise or reference the property man- In addition, other passages in the MARISA L . BYRAM . . . . . Lewis, Rice L .L .P . agement contracts. Kmart has not agreements between Windalier and St . Louis the two property management com- ELIZABETH COOPER ...... JLL sought to amend its Complaint to Washington, DC panies affirmatively showed that the reflect this new theory of the case, D . ALBERT DASPIN . . . . . Daspin & Aument, LLP and now — with trial looming on property managers were expected Chicago IRA FIERSTEIN ...... Seyfarth Shaw, LLP the horizon — is too late to do so.” to act for the benefit of the landlord, and not the tenant. For example, the Chicago Even still, Judge LaPlante went on JAY A . GITLES ...... Seyfarth Shaw, LLP to discuss what the outcome would property managers were required by Chicago have been had Kmart’s third-party the contracts to maintain general li- JOHN G . KELLY ...... Bean, Kinney & Korman, P .C . ability insurance to cover any harm Arlington, VA beneficiary theory been timely made: STEPHEN K . LEVEY . . . . . Hirschel, Savitz, Parker and from their acts or omissions, and to Kmart would still have lost its claim. Hollman name Windalier as an additional in- Gaithersburg, MD In order to be deemed a third-par- sured. These contracts also provided JAMES H . MARSHALL . . . . Daspin & Aument, LLP ty beneficiary of a contract in New that, except as stated elsewhere with- Chicago Hampshire, a plaintiff must estab- MARK MORFOPOULOS . . Wachtel Missry LLP in them, “everything done by [the lish either: 1) that the contract calls New York property manager] under this Agree- JEFFREY H . NEWMAN . . . . Sills Cummis Radin for the promisor to perform a duty ment shall be done on [Windalier’s] Tischman Epstein & Gross that will satisfy an obligation owed Newark, NJ behalf, and all obligations or expens- by the promisee to the third party; LYDIA Y . PILCH ...... Goldman Sloan Nash & Haber es incurred pursuant to this Agree- Toronto or 2) that the contract terms inform ment shall be for the account of, and M . ROSIE REES ...... Pircher, Nichols & Meeks the promisor that one of the motiva- Chicago at the expense of” Windalier. tions of the contract is to benefit the PAUL ROBEZNIEKS . . . . . Robeznieks Professional For all the above reasons, the court third party. Further, under Brooks Corporation, PC summarily dismissed Kmart’s con- Lake Oswego, OR v. Trustees of Dartmouth Coll., 161 tract breach claims against the two JANE SNODDY SMITH . . . Norton Rose Fulbright N.H. 685, 697, 20 A.3d 890 (2011), Austin, TX property management companies, New Hampshire’s highest court has while permitting the breach of con- stated, “[I]t is not enough that the tract claim against landlord Windal- contract manifests the parties’ in- ier to go forward. (The court also Commercial Leasing Law & Strategy® (ISSN 0898-5634) is tention to confer upon a third party published by Law Journal Newsletters, a division of ALM . observed in a footnote that even if the benefit of the promised perfor- © 2017 ALM Media, LLC . All rights reserved . No reproduction of any Kmart could have proven it was an portion of this issue is allowed without written permission mance. Rather, the contract must from the publisher . Telephone: 800-756-8993 intended beneficiary of the property Editorial e-mail: wampolsk@alm .com show that the parties considered Circulation e-mail: customercare@alm com. management contract in force at the the third party’s legal status and Reprints: www .almreprints .com time of the hurricane, it certainly intended to confer upon him a right could not have done so concern- Commercial Leasing Law & Strategy P0000-227 to sue the promisor.” According to Periodicals Postage Pending at Philadelphia, PA ing the K.G.I. property-management POSTMASTER: Send address changes to: Brooks, unless there is a clear mani- ALM contract that had terminated a month 120 Broadway, New York, NY 10271 festation that the parties to a con- previous to the hurricane.) tract intended to confer a right to Negligence sue on a third party, that third party The court, citing to Estate of Josh- Published Monthly by: is only an “incidental beneficiary” of Law Journal Newsletters ua T. v. State, 150 N.H. 405 (2003), the contract and has no standing to 1617 JFK Boulevard, Suite 1750, Philadelphia, PA 19103 observed that, to state a claim of neg- www .ljnonline .com sue for any breach of the contract. ligence against the property man- Janice G. Inman is Editor-in-Chief agement companies, Kmart would of Commercial Leasing Law & be required under New Hampshire Strategy. continued on page 7 2 Commercial Leasing Law & Strategy ❖ www.ljnonline.com/ljn_commleasing November 2017 The Modified lease under more favorable terms be- occupied by in-line tenants. With cause they are the anchor. the number of potential department Anchor Tenant The underlying rationale for treat- stores/anchors decreasing over time In Enclosed ing an anchor tenant or a depart- (i.e., there simply are not as many ment store differently from other as there once were), landlords have Regional Malls tenants in an enclosed regional mall sought to redefine the concept of is that this tenant is deemed to bring department store/anchor by incor- A Tenant’s Perspective traffic to the shopping center and porating the concept of Modified to create a synergy with the in-line Anchor Tenant into the co-tenancy By Glenn A. Browne tenants, so that shoppers obtain a provision. cross-section of goods during their While, in general, tenants would As traditional department stores visit to the enclosed regional mall. like to see higher occupancy levels and so-called “anchor” tenants in For that reason, in-line tenants are at a shopping center (as opposed to enclosed regional malls are closing often willing to agree that landlords closed department stores), tenants stores and limiting their expansion will treat anchors and department should be very careful in determin- in the marketplace, landlords are stores differently, both in their con- ing whether a Modified Anchor Ten- seeking alternatives to the tradi- tributions to operating costs and ant will be permitted to replace a tional department store or anchor real estate taxes, and in the rights department store/anchor in order store to occupy space in their shop- provided to these types of tenants. to “cure” a co-tenancy violation un- ping centers. (“Anchor tenants” can However, if a Modified Anchor der its lease. In particular, a tenant be defined as those selling a wide Tenant does not need to consist of may seek to limit the use of a Modi- assortment of goods and occupying one tenant selling a varied array of fied Anchor Tenant in the following more than a certain number (e.g., goods — which replacement ten- ways: 50,000) of contiguous square feet ancies may or may not attract the 1. By providing that no more of floor area.) These anchor-tenant same consumer traffic to the shop- than one Modified Anchor alternatives — referred to in this ping center that all parties contem- Tenant will be permitted to article as “Modified Anchor Ten- plated — in-line tenants may not “cure” a co-tenancy violation ants” or “MATs” — are often defined be as willing to concede that these caused by the closure of a de- as follows: A collection of multiple MATs should be treated differently partment store/anchor; tenants that in the aggregate occupy when it comes to shared costs and 2. By not allowing the closure of the lesser of: landlord-granted rights. the department store/anchor 1. Fifty percent (50%) of the As a result of these issues, tenants located closest to the tenant’s square footage occupied by negotiating their leases should an- premises to be cured by the the former anchor on the first ticipate the possibility of MATs tak- addition of a Modified Anchor level of the enclosed mall; or ing over a department store or other Tenant; 2. At least [xxx] square feet of anchor tenant’s space, and should 3. By not allowing the tenant’s space. fully address the ways that instal- competitors to be included One of the key elements in this lation of Modified Anchor Tenants within the Modified Anchor definitional term is that the MAT could impact: Tenant; and does not need to occupy the same 1. Co-tenancy clauses; 4. By making sure that the Mod- square footage that the anchor ten- 2. Operating costs and real ified Anchor Tenant occupies ant was supposed to occupy when estate taxes; at least as much square foot- the in-line tenants’ leases were orig- 3. Competition within the en- age as what is required under inally negotiated, nor does this MAT closed regional mall; and the tenant’s lease to qualify need to consist of only one tenant. 4. The retail environment of the as a department store/anchor If a tenant has an existing lease that enclosed regional mall. (i.e., if the definition of a de- was negotiated with the understand- partment store/anchor un- ing that a department store or other Co-Tenancies der the tenant’s lease is that anchor store was going to be in op- In enclosed regional malls, tenants the department store/anchor eration within the mall, replacement may seek to incorporate into their must occupy at least 50,000 of such with a Modified Anchor Ten- leases the concept of a co-tenancy contiguous square feet, then ant creates fundamental problems. (i.e., the right to adjust the amount the Modified Anchor Tenant After all, anchor tenants frequently of rent that the tenant pays, if cer- tain department stores or anchors must similarly occupy at least Glenn A. Browne, a member of and certain in-line tenants are not 50,000 contiguous square Commercial Leasing Law & Strat- open for business). Typically, these feet). egy’s Board of Editors, is a partner co-tenancies are tied to the clo- Since a co-tenancy provision in Braun, Browne & Associates, P.C., sure of department stores/anchors is designed to protect a tenant’s Riverwoods, IL. and the closure of square footage continued on page 4 November 2017 Commercial Leasing Law & Strategy ❖ www.ljnonline.com/ljn_commleasing 3 Modified Anchors However, if a department store/ center, in order to coincide with anchor is replaced by a group of ten- what “actual” common-area main- continued from page 3 ants comprising a Modified Anchor tenance costs are for that particular occupancy cost by adjusting its rent- Tenant, then, conceptually, those shopping center once the Modified al structure if certain conditions oc- tenants will be paying their pro Anchor Tenant is added. cur (e.g., a certain number of depart- rata share of common area mainte- Competition ment stores/anchors not being open nance costs and real estate taxes. If Tenants should be very careful to for business), the tenant should not a particular tenant’s lease states that determine whether the “curing” of a lose sight of the fact that the substitu- department stores/anchors are ex- co-tenancy violation by the addition tion of in-line tenant square footage cluded from the denominator used of a MAT that includes competitors may not promote the same amount to calculate common area mainte- to the tenant’s specific use will be a of sales and may not promote the nance costs and real estate taxes valid means for the landlord to cure same business environment as if the and if the Modified Anchor Tenant the co-tenancy violation. Since the department store/anchor had been is considered a department store/ point and purpose of a co-tenancy replaced by another traditional de- anchor for purposes of the lease, provision is to implement a modi- partment store/anchor. Most tenants this could result in an unreasonable fied rent structure based upon va- consider occupancy at an enclosed windfall for the landlord; the land- cancies at the shopping center, a regional mall by department stores/ lord will be receiving common area tenant needs to carefully evaluate anchors to be intrinsic to the success maintenance costs and real estate whether the addition of “competi- of the shopping center and the indi- taxes from the tenants represent- tors” is a reasonable way to solve vidual tenant’s business. Therefore, a ing the Modified Anchor Tenant, but the problem of vacancies at the tenant should be very careful to tai- will also be receiving a “full share” shopping center. lor the use of a Modified Anchor Ten- of common area maintenance costs While a tenant may have other ant to address the concerns that the and real estate taxes from the ten- protections under its lease pertain- tenant has based upon a co-tenancy ants whose denominator used to ing to competitors being added to violation. calculate their pro rata share will the shopping center (e.g., the tenant By incorporating certain of the “exclude” the square footage occu- may have an “exclusive” clause un- concepts outlined above, a tenant pied by the Modified Anchor Tenant. der its lease that will reduce its rent- can restrict the loss of multiple an- As a result, if a tenant does accept al obligation if competitors are add- chors (or at least trigger the co-ten- the concept of a Modified Anchor ed to the shopping environment), a ancy provision if multiple anchors Tenant, the tenant should specifi- tenant may still want to determine are closed at the enclosed regional cally state that the square footage whether the addition of competitors mall), as well as lessen the direct of the Modified Anchor Tenant is is an acceptable method for curing impact of the closure of anchors in not excluded from the denominator a co-tenancy violation. A tenant may close proximity to the tenant’s prem- used to calculate the tenant’s pro want to state that no more than one ises. Further, the tenant may attempt rata share of common area mainte- of the tenants comprising the MAT to protect the size of anchor tenant nance costs and real estate taxes. may engage in sales that are com- that was originally negotiated with Further, if tenants at an enclosed petitive with the tenant’s permitted the landlord or contemplated in the regional mall are paying common use, and that that tenant may not oc- letter of intent. area maintenance costs based upon cupy more than a certain number of Common Area Maintenance a fixed amount — which is subject square feet of space. to fixed increases e.g.( , 4% annual Costs/Real Estate Taxes Maintaining the Generally, department stores and escalations of this charge) — then, Retail Environment anchor tenants will not pay their once again, a landlord may be re- Of a Shopping Center pro rata share of common area ceiving an unreasonable windfall if One concern a tenant should have maintenance costs and real estate the landlord is collecting common- with a landlord implementing a taxes. In-line tenants accept this area maintenance costs from each Modified Anchor Tenant is whether concept because these department of the tenants based upon a fixed the use of the leased area compris- stores/anchors will bring customer amount with fixed increases, while ing the Modified Anchor Tenant is traffic to the shopping center. In or- at the same time collecting com- “retail” in nature. Examples of non- der to establish this concept in an mon-area maintenance costs from individual tenant’s lease, a landlord tenants that used to be excluded retail uses include schools, post of- will deem the department store/an- as department stores/anchors from fices, military recruitment centers, chor square footage to be “exclud- paying for common-area mainte- hotels and other similar non-tradi- ed” from the denominator used to nance costs. A tenant should seek to tional tenants to the shopping center calculate the tenant’s pro rata share have its common-area maintenance mix. Tenants may want to consider of common area maintenance costs costs adjusted if a Modified Anchor whether this concept is consistent and real estate taxes. Tenant is instituted at a shopping continued on page 6 4 Commercial Leasing Law & Strategy ❖ www.ljnonline.com/ljn_commleasing November 2017 Surviving the a certain named anchor or a major replaced “by another similar major tenant closes its doors and is not tenant occupying at least ninety Retail Shift replaced by a similar tenant. The percent (90%) of the leased prem- violation of a co-tenancy provision ises.” Cato closed its doors and its Balancing Creative Uses with typically allows a tenant to pay re- 3,680 square feet of retail space was Co-Tenancy Provisions duced rent or perhaps to terminate filled by Daystar Bible Book Store. the lease altogether. These disputes Shoe Show argued that a “similar Part Three of a often involve interpreting common major tenant” must be a national Five-Part Series terms under unique circumstances. or regional ladies’ fashion apparel Is the Replacement Anchor retailer, while the shopping center By Kelly D. Stohs Tenant a ‘Similar Tenant’? interpreted “similar major tenant” and David P. Vallas A California case last year ad- to mean a retailer with a significant dressed what constitutes a “similar” market presence to drive customers Shopping centers are not dying. replacement tenant under the terms to the shopping center. The retail landscape is changing, of a co-tenancy provision after a The court explained that “similar” however, and so too are shopping shopping center owner found a cre- means something less than identical, centers. Retail stores have been clos- ative use to fill an empty space. See but the lease provided no guidance ing at a breakneck pace, and Wall RadioShack Corp. v. Azusa Pacific about how “similar” a replacement Street seems to think the worst is Univ., 2016 WL 3640370, B262107 tenant must be to avoid triggering the yet to come. Investors are more (Ct. App. Cal. June 30, 2016). Ra- co-tenancy provision. The shopping negative on the retail industry than dioShack’s lease allowed it to termi- center owner further argued that it at any time since September 2008, nate its lease or pay reduced rent satisfied the co-tenancy requirement according to Bespoke stats on the if a major tenant in the shopping because it leased 20,000 square feet average percentage of shares of re- center closed its doors and was not of space in the center to clothing store tailers being shorted. replaced with a “similar tenant.” The Goody’s five years earlier, but after The volume of store closings is lease defined “similar tenant” as one Shoe Show had opened its doors. challenging shopping center owners occupying all of the same leasable The court rejected this argument be- to evolve. Industry expert Michael cause the co-tenancy provision re- Glimcher reportedly noted that the area that was occupied by the vacat- quired specifically that the premises mall is becoming more about things ed major tenant, selling “the same or occupied by Cato be replaced by a to do than about things to buy. higher quality of goods” and having similar tenant, and Goody’s did not Shopping center owners have re- equal or better foot traffic. occupy any portion of Cato’s former sponded by finding creative uses for When the shopping center re- premises. vacant spaces and ways to enhance placed discounter Big Lots — which Similarly, in Old Navy, LLC v. Cen- the customer experience. sold a wide variety of merchan- ter Developments Oregon, LLC, No. Some shopping centers have split dise, including packaged food and former anchor space into as many beverages, toys, furniture, clothing, 3:11-472, 2012 WL 2192284 (D. Or. as 20 smaller stores. Others have housewares, and small electronics 2012), the court granted summary converted these spaces into hot — with a fitness center selling ancil- judgment for retailer tenant Old spots for attractions and commu- lary items such as water, snacks and Navy when the shopping center nity events. Some big-box vacancies t-shirts, RadioShack complained owner replaced “key store” tenant have been converted into movie that a fitness center was not a “simi- GI Store — a retail sporting goods, theaters, concert or entertainment lar tenant” because it sold goods of clothing, and auto parts chain — venues, museums, classrooms, fit- lesser quality. The court disagreed, with a grocery store, in violation of ness gyms, grocery stores, or even explaining that the lease did not a co-tenant provision. residential apartments or offices. limit the meaning of the term “simi- How Is Occupancy Shopping center owners should lar tenant” to only a “retail tenant.” Percentage Calculated The results have not been so posi- beware, however, that creative uses Under a Co-Tenancy may implicate co-tenancy provi- tive for shopping center owners Provision? sions in the leases of their other in other cases. In Shoe Show, Inc. v. One-Gateway Assocs., LLC, No. Co-tenancy disputes may also tenants. Co-tenancy provisions gen- arise over how the percentage of erally give a tenant certain rights 1:10CV13, 2015 WL 5674876, at *8 occupancy is calculated, particularly in the event that the occupancy of (M.D.N.C. Sept. 25, 2015), the court when the terms of a co-tenancy pro- the shopping center falls below a affirmed reduced rent for retailer vision are ambiguous. certain threshold, or in the event Shoe Show because of a co-tenan- cy violation. The co-tenancy provi- The lease in Best Buy Stores, L.P. Kelly Stohs is a business litigator at sion in that case called for reduced v. Manteca Lifestyle Center, LLC, 859 Polsinelli. David Vallas is also an at- rent in the event women’s apparel F.Supp.2d 1138 (E.D. Cal. 2012), torney at the firm. retailer Cato closed and was not continued on page 6 November 2017 Commercial Leasing Law & Strategy ❖ www.ljnonline.com/ljn_commleasing 5 Retail Shift 997 N.E.2d 1093 (Ind. App. 2013), the when filling dark spaces with cre- co-tenancy provision allowed Claire’s ative uses. Likewise, drafters of re- continued from page 5 to terminate its lease if the occupancy tail leases should carefully draft provided that Best Buy must only level fell below “70% on the non-de- co-tenancy provisions with the fore- pay the full monthly rent if, “sixty partment retail store tenants” for one sight that shopping centers will con- percent (60%) (not including Best year. The court rejected the shopping tinue to evolve; they should consider Buy) of the gross leasable area of center owner’s argument that occu- whether co-tenancy should be tied to pancy should be calculated based on a specific named retailer; to a specific the Shopping Center are [sic] open the percentage of gross leasable area type of retailer, like women’s appar- and operating at the Shopping Cen- leased because the co-tenancy pro- el; or simply to a retailer that has a ter … .” The parties disagreed as to vision specifically defined the occu- proven track record of driving foot the meaning of “gross leasable area pancy level as the percentage of ten- traffic. They should also strive to de- of the Shopping Center,” disputing ants. The co-tenancy provision also fine common lease terms like “similar whether it should be defined by the contained the clause, “notwithstand- tenant” in order to avoid any doubt site plan or other portions of the ing anything to the contrary con- about how similar a “similar” retailer lease that suggested a building must tained in this lease,” which precluded must be, and they should be clear be fully constructed to be added any consideration of lease provisions about whether occupancy is based to the gross leasable area. Deny- that appeared to be in conflict. Thus, off of gross leasable area or the num- ing Best Buy’s motion for summary the court held that Claire’s properly ber of tenants, regardless of size. judgment, the court concluded that terminated its lease under the co-ten- There is no doubt that the retail the co-tenancy provision was sus- ancy provision when the number of landscape has shifted and will con- ceptible to at least two interpreta- tenants occupying the shopping cen- tinue to shift. As shopping centers tions, and that the ambiguities in ter fell below 70%. evolve, owners must be aware of the the co-tenancy provision must be Seek Clarity impact of co-tenancy provisions and resolved through extrinsic evidence. These cases are stark reminders avoid the rigidity of loosely drafted In Claire’s Boutiques, Inc. v. that shopping center owners should language. Brownsburg Station Partners LLC, be mindful of co-tenancy provisions —❖—

Modified Anchors not have an entrance onto the en- Conclusion closed area, but rather only has an By carefully analyzing the concept continued from page 4 entrance to the exterior of the shop- of the Modified Anchor Tenant, a ten- with how the tenant envisioned that ping center. This type of addition to ant should be able to restrict some of a co-tenancy could be cured. For in- the shopping center may have little the negatives that might flow from the stance, if a tenant is in the business benefit to the tenants inside, since departure of an anchor tenant from of selling children’s clothing, adding the people entering the Modified an enclosed regional mall, address a post office or college to the en- Anchor Tenant (e.g., college or post implications that could be created by closed regional mall may not be an office) may never actually enter the the addition of a MAT, and tailor the acceptable Modified Anchor Tenant, enclosed regional mall or create any use of a MAT so that it still provides since people attending the college additional customer traffic. A ten- a benefit to the individual tenant and or visiting the post office may not ant should therefore be certain that the landlord by increasing the occu- become shoppers within the retail all tenants comprising the Modified pancy at the enclosed regional mall, environment. Anchor Tenant have entrances onto while at the same time limiting cer- This problem is further exacer- the enclosed regional mall and, gen- tain potential negatives associated bated if the addition of the MAT erally, have “retail” uses associated with the inclusion of the MAT. to the enclosed regional mall does with their tenancies. —❖— Fully Executed? that the landlord is working diligent- high holdover fees if it fails to vacate ly to deliver the premises to tenant its existing space on or before the continued from page 1 with landlord’s work in substantially expiration date of its existing lease, Landlords should insist that if completed condition, adding such this may also be a reasonable re- such a clause is added, the provi- landlord-friendly language is a fair quest. On the other hand, if a land- request. sion should be subject to “tenant lord is investing a large sum to build Many tenant’s will also ask that delays” and force majeure events out the space, the landlord may be if the lease is not delivered within reluctant to agree to such a provi- (with both of such terms being de- a certain number of days following sion. The parties often compromise fined elsewhere in the lease so that the Outside Date, that it shall have their meanings are clear). Since the the further right to terminate the by agreeing to a “drop dead” date goal of the parties is to make sure lease. Especially if a tenant is facing continued on page 7 6 Commercial Leasing Law & Strategy ❖ www.ljnonline.com/ljn_commleasing November 2017 Fully Executed? lease. These dates have a nasty habit lease also provides that “time is of of creeping up on a landlord, and the the essence” in exercising these op- continued from page 6 results could be very costly. Keeping tions, the failure to exercise such far enough into the future so as to track of these dates is, therefore, very rights could result in the forfeiture make it very unlikely that this “nu- important. of the option. In many instances, clear option” could be used. Burn-Down of Security this loss could have disastrous con- sequences. For example, if a tenant Failure to Satisfy Other Deposit/Letter of Credit forfeits a renewal option for a fixed Although tenants may be required Delivery Conditions rental amount where the market rent to post a cash security or a letter of Delivering the space on or before a on the option date is substantially credit to ensure the faithful perfor- particular date with all landlord work higher than the option rent provided mance by the tenant of its obliga- substantially completed is rarely the for in the lease, the tenant would lose tions under the lease, some leases only instance where delivery condi- the opportunity to lock in the below- contain a provision stating that if the tions must be satisfied by a date cer- market rental rate that was bargained tenant is not in default beyond no- tain. If the landlord is financing the for when the lease was signed. tice and cure periods for a particular property, the landlord may need to ob- Moreover, a tenant will be bet- period of time following the com- tain the approval of its lender within a ter prepared in the event the land- certain number of days after the lease mencement date of the lease — i.e., lord actually decides to exercise an is signed before the lease is effective. three years — the security will be option to relocate the premises or If a tenant is investing large sums per- reduced. If a tenant does not keep terminate the lease if it keeps track forming leasehold improvements, it track of such a date, don’t count on of such dates beforehand and dis- may require that the landlord obtain the landlord doing so for the ten- cusses them with the landlord well a subordination and non-disturbance ant’s benefit. Similarly, if the lease before the date set in the lease. requires that the landlord pay the agreement from the landlord’s lender All Adverse Consequences tenant to fund tenant improvements (and a recognition agreement from the Are Preventable which are to be performed on some condominium and/or the ground les- In the event a landlord or ten- future date within the premises, a sor if the premises is subject to a con- ant fails to keep track of certain key tenant would be wise to calendar dominium regime or a ground lease) dates, that party can expose itself to the date(s) to make sure that the within a certain number of days after monetary penalties and/or having its payments are timely made. the lease is signed. In a shopping cen- leasehold rights terminated. The good ter setting, leases may have a co-ten- Miscellaneous Options Held news, however, is that the possibility ancy provision where another tenant By Landlord and Tenant of such occurrences happening can must open for business within the cen- A lease may have one or more op- be greatly reduced, and in many cases ter before a certain date or penalties tions, which may be held by either completely eliminated, by simply cal- will accrue to the landlord. A landlord’s the landlord or the tenant. Examples endaring the event well in advance. failure to satisfy those conditions could of leasehold options include renewal, Dates that may seem very far result in a day-for-day abatement of expansion, termination and reloca- away can come up faster than ex- rent, or even the right to terminate the tion options. Each of these options pected, especially if you are keeping usually contain a provision that they track of a large number of leases at Mark Morfopoulos, a member of must be exercised on or before a cer- the same time. Taking the time to this newsletter’s Board of Editors, is tain date (in the case of renewal and calendar key dates should not be an an attorney in the real estate depart- expansion options) or after a certain optional exercise, because failing to ment at Wachtel Missry LLP. Reach date (in the case of termination and do so is risky business. him at [email protected]. relocation options). Especially if the —❖— Hurricane Damage “to operate, manage, maintain, in- duties that arise thereunder to the spect, control, repair and replace parties in privity of contract with continued from page 2 the Kmart Building, underground one another. Sisson v. Jankowski, law to show that the property man- utility installations, storm sewers, 148 N.H. 503 (2002). Without priv- agement companies: 1) owed Kmart Landlord Common Areas, and park- ity between Kmart and the manage- a duty; 2) breached that duty; and ing areas with reasonable care and ment companies, Kmart could not 3) that their breach of duty was the to otherwise ensure that the Kmart therefore prove that any duties were proximate cause of Kmart’s injuries. Building was not subject to damages owed to it in the normal way. Kmart’s claims alleged that the that could be avoided with the exer- Seeking to overcome this prob- contracts among the landlord, ten- cise of reasonable care.” However, lem, Kmart cited to the 2012 New ant and management parties gave when a contract is the basis for a re- Hampshire Supreme Court decision rise to a duty on the part of the land- lationship, New Hampshire law, like in Mbahaba v. Morgan, 163 N.H. lord and management companies that of other jurisdictions, limits the 561 (N.H. 2012). There, the State’s November 2017 Commercial Leasing Law & Strategy ❖ www.ljnonline.com/ljn_commleasing 7 Hurricane Damage non-liability in Sargent). In the floodwater damage control was not Sears and Kmart case, however, contemplated by the lease agree- continued from page 7 Kmart was a sophisticated com- ment, and nothing in the Sargent high court held that “a party without mercial tenant and was as aware exceptions to landlord non-liability a direct contractual duty who none- that the nearby rivers could flood, applied, the property managers had theless possesses the knowledge as were the landlord and property no legal responsibility for Kmart’s and authority of a landlord may be managers. losses under New Hampshire law. held liable for his own negligence.” None of the other Sargent excep- Across the country, stories like this Mbahaba itself relied on Sargent tions was applicable in the case of will play out over the coming years v. Ross, 113 N.H. 388 (N.H. 1973), rising flood waters, either. Thus, the as landlords, insurers, tenants and the New Hampshire Supreme Court court found Mbahaba inapplicable property managers seek to recover their losses and/or minimize their case in which the previously valid and concluded that because Kmart own legal responsibility for dam- doctrine of landlord non-liability in had not identified any contractual age caused by this year’s hurricanes. tort was curtailed, instead allowing or common law duty owed to it by Lease agreements, property man- landlords to be held responsible in the property managers, the property agement contracts and state laws tort if an injury occurred: 1) because management defendants’ motions will be pored over and analyzed of a hidden danger in the property for summary judgment on the negli- once more. Going forward, in plac- that the landlord, but not the ten- gence claims must be granted. es where natural disasters are likely ant, was aware of; 2) On property Conclusion — which is just about everywhere leased for public use; 3) In an area Hurricane Irene flooded the — landlords and tenants should be of the property retained under the Kmart store, and the property man- reminded by this year’s events to landlord’s control, such as a com- agers in charge of the leased prem- consider what happens when hurri- ises cannot be held liable. Had mon area; or 4) Because something cane, flood, blizzard, earthquake or Kmart’s injuries been more attrib- on the premises was negligently re- tornado damage occurs. The time to paired by the landlord. utable to the landlord’s and prop- address the issues of who will bear That Mbahaba case, however, erty managers’ actions — if, for in- the costs of clean-up, repair and lost concerned a property manager with stance, an obviously rotten tree in business in these situations is ide- knowledge of lead paint in a resi- an area maintained by the landlord ally during lease negotiations. dential rental home and a child who (through its property managers) —❖— ingested the paint. The issue in that had not been removed and the tree case was primarily one of the prop- pierced the roof of the Kmart store The publisher of this newsletter is not engaged in rendering legal, accounting, financial, investment advisory or other erty manager’s superior knowledge, when Hurricane Irene blew through professional services, and this publication is not meant to constitute legal, accounting, financial, investment advisory and the fact that the landlord was — the outcome in Sears and Kmart or other professional advice. If legal, financial, investment renting out a known dangerous would likely have been quite dif- advisory or other professional assistance is required, the services of a competent professional person should be sought. property (exception #1 to landlord ferent. But since responsibility for

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8 Commercial Leasing Law & Strategy ❖ www.ljnonline.com/ljn_commleasing November 2017