When Commercial Leases Don’t Mean What They Say

By: Barry M. Shulman

So you’re presented with a Commercial Lease, say a business retail tenant in a shopping center. You’re perhaps a Landlord, or a Tenant. You carefully review all of the terms and have no problem with their clarity. They’re explicit and unambiguous. What you might not realize is that there can be a third and silent party to the lease who may have other ideas – the Court, if there’s a law suit—which can amend even the plainest terms on the basis (called equity) of unfairness.

A couple of examples: In a 2011 case involving a discount clothing store in New York City called Daffy’s, the Tenant gave late notice of its desire to renew. The Lease terms were plain as to when the Lease needed to be renewed (1 year before expiration). The 1 year date was missed by 4 days. The Court, noting the Tenant’s “Good Will”, allowed for the late renewal date, saying that not to do so would be unfair to the Tenant. The wording was plain, yet the Court swept it away finding that the Tenant had acted properly and that not to permit the delayed notice date would be unfair – reversing years of strict interpretation by Courts. Perhaps well drafted language in the Lease explaining why holding to the date was so important, could have better justified the renewal terms.

Another example, existing in New York State is called the Yellowstone Injunction, named after a certain Yellowstone Shopping Center in Forest Hills, N.Y. Basically it means that if the Tenant is delayed in payment and has breached its lease obligations, and if there’s a cure period in the Lease (providing for example, if the Tenant hasn’t paid rent, its time to do so may be extended by a stated number of days), and if the Landlord can thereby obtain a forfeiture of the Lease, the Tenant can seek relief despite the terms of the Lease if the Tenant can show a few things – (1) that it is bound by a commercial lease, (2) that it has received a notice of default, a notice to cure or the threat of an injunction, (3) that the Tenant has requested an injunction against ending the Lease prior to both termination of the Lease and the period to cure and (4) that it is prepared and has the ability to cure the alleged default by any means short of vacating the Premises. This is a much easier course of action than if a tenant sought a preliminary injunction with all the required Court showings including that it can succeed on the eventual merits. Thus even though there’s a commercial lease with breach and cure rights limited in time, the Court can step in and give more time, without even a showing as an application for a preliminary judgment might require (that it might eventually win on the merits). Again out of a sense of fairness.

Lastly, might be the issue of when a holdover tenancy is considered to be liquidated damages (enforceable) or a penalty (not enforceable). If a tenant fulfills its Lease obligation in every respect except that it doesn’t vacate at the end of the Lease Term, many leases provide that the Landlord can charge holdover rent, which often is a better landlord remedy than a costly and inefficient eviction. The problem is that the amount of holdover rent, while clear, may be considered in retrospect to be excessive and therefore unfair and unenforceable – a penalty. For example, if the Tenant holds over and by doing so, the Lease clearly allows the Landlord a 300% charge for holdover rent, it is likely that such percentage will not be enforced if found by a Court to be unfair and excessive; 125%, on the far other hand, may be considered fair. What about a number in between? A good draftsperson could include language whereby the Lease justifies why an increased charge is supportable and a higher charge enforceable – liquidated damages. The worry here again is that even though a landlord and a tenant may clearly agree in a lease to terms that are absolutely clear and not subject to interpretation, still there might be an unexpected result because of Court involvement enforcing only when it considers that there’s fairness.

Tags: , , , ,