Commercial Leasing LAW & STRATEGY®
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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: [email protected] show that the parties considered Circulation e-mail: [email protected] 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.