- Potential problems: Most of the time, the parties to a lease tuck it away in a drawer or filing cabinet soon after it is executed. They’d like to avoid reading it or even looking at it. Nevertheless, they’ll run to that drawer as quickly as their feet will carry them when a potential dispute arises. They read it then – often for the very first time, occasionally with considerable difficulty, and now and then sorely in need of expert advice. Oftentimes these lease provisions are hard to understand because they are drafted in the context of customs and usage of the real estate industry that can be understood only by an expert familiar with these customs and usage; and oftentimes there are large amounts of money at stake.
- Cost-of-living increases: Cost-of-living increase clauses are a good example. These clauses are used occasionally by the parties to ground leases, shopping center leases, and office space leases to cope with rising long-term expenses and inflation issues. Cost-of-living increase provisions are complex, but lease drafters often neglect important details with the expectation that custom and usage will fill in the details. Details often neglected include precise references to statistical benchmarks on which the increases are based and the way increases are to be calculated. To draft an appropriate complaint or answer, lawyers bringing a lawsuit on behalf of the landlord or tenant with respect to a cost-of-living provision often need expert advice on interpreting the lease and background information needed.
- Percentage rent clauses: percentage rent clauses are additional sore spots. To draft one correctly, lawyers need to define how percentage rent should be calculated. Many do so incoherently and some ineptly. Occasionally, chain stores and landlords dispute the calculations bitterly. Lawyers who litigate these disputes will need expert advice on industry customs and usage.
- Use clauses: shopping centers are most effective when the stores in the centers provide a wide variety of merchandise and offer customers a broad range of retailing methods from which to choose.
I. The device used by shopping center owners to accomplish this goal resides in their leases. Use clauses and exclusive clauses are effective tools to accomplish these objectives. II. The use clause regulates many aspects of the tenant’s business in the demised premises including the products the tenant is entitled to sell and, in some cases, the way they are sold. Conversely, the exclusive clause requires the landlord to prohibit other tenants from selling some types of merchandise and, in some cases, the method of selling merchandise. Use clauses are often drafted loosely and are subject to interpretation. III. For example a supermarket lease might state that the tenant may use the demised premises as a supermarket and for no other purpose and the exclusive clause might prohibit the landlord from permitting any other tenant from using its premises as a supermarket. Although supermarkets affect the lives of almost everybody, it’s not so easy to classify one store or another as a supermarket. - The question whether a store is a supermarket depends on many factors that aren’t obvious to many landlords, tenants, or the attorneys they select to litigate their dispute.
- Is a store properly classified as a supermarket because it sells food? Can you appropriately classify a farmers market as a supermarket? Would a food market that sells only a tiny amount of frozen food lose its status as a supermarket because of the puny size of the frozen food department?
- When not prohibited by law, has liquor been customarily sold in supermarkets and (before the age of supermarkets) in grocery stores?
- The answers to these questions require a knowledge of the supermarket business model and how this supermarket business model was conceived and developed, knowledge easily obtained from experts in the field but not so easily obtained otherwise.
IV. Here’s another example. Some department store lease use clauses provide that the tenant may use the demised premises as a discount department store and others prohibit the tenant from using the demised premises as a discount department store? - What is a discount department store? Can a store be called a discount department store merely because some of its prices are lower than prices charged by other stores?
- These questions come to mind when department store leasehold estates are assigned. Sometimes the landlord will try to block the assignment asserting that the prospective assignee’s existing stores sell merchandise at lower prices than other stores or at a discount. Are the landlord’s assertions appropriate?
- Actually, the word discount refers to a very specific type of store that was established in the aftermath of World War II when manufacturers had the legal right to set the prices charged for their products by retail stores. These prices were called list prices, and consumers shopping in conventional stores had no choice but to pay the list price. Nevertheless, discount stores sold price fixed-priced merchandise at a discount (less than the list price). So the discount was the amount by which the list price exceeded the discount store price.
V. What about restaurant use clauses? The recent growth of the sandwich shop business has engendered disputes concerning distinctions among types of sandwiches. These disputes arise from restaurant lease exclusive clauses that prohibit the landlord from leasing other space in the shopping center to another tenant that serves similar sandwiches. How do you decide whether one sandwiches similar to another? Is it the bread that makes the difference? If so, is a ham sandwich similar to a roast beef sandwich because both are on rye bread? These questions and others like it are usually beyond the expertise of litigation attorneys and they need to look for advice from retail leasing experts. - Validity of guarantees: Lease and contract guarantees are subject to special rules that don’t apply to normal contracts. These special rules also apply to tenants that assign their leasehold estates to other persons. For most of the twentieth century, courts tended not to enforce a lease guarantee if the landlord and tenant amended the lease. In the case of a lease assignment courts regarded the assignor as a guarantor and tended to release the assignor from liability to the landlord if the landlord and the assignee amended the lease. More recently, in some states, these doctrines were modified so that guarantors and lease assignors were released from liability only if the amendment significantly affected their rights. Who’s to decide whether the effect of an amendment on a guarantor or lease assignor is significant? That’s certainly a place where an expert can be handy.
- Feasibility studies: after buying land, executing a construction contract, and executing leases for a considerable portion of the projected buildings, a real estate developer might ask whether the project makes sense. After all that work, the developer will have no reward without investing considerable sums of money to continue transforming the vacant land into a profitable and thriving shopping center or office building. Should he or she do so? That depends on the cost of construction and other costs of developing the project as well as the income stream to be derived from the leases. Most developers are in a position to calculate the cost of development and the income stream by themselves without expert assistance but some cannot. To accomplish this task professionally, the developer or a professional assisting the developer needs to review every lease to calculate the prospective revenue to be derived from the lease and the expenses to be incurred in the course of complying with the landlord’s obligations under the lease. The construction contract and other contracts with professionals and institutions underlying the construction and other development activities need to be analyzed as well. After that, the developer or a professional assisting him or her should create a pro forma balance sheet and statement of operations to illustrate the net cost to the developer after giving effect to mortgage financing and the net cash flow to be derived by the developer from the project after giving effect to mortgage principal and interest payments.
- Professional expertise: With professionals who can draw on more then fifty years experience in lease negotiation and drafting, the Halper firm is well-suited to assist him him litigation attorneys contesting the interpretation of lease provisions and the validity of guarantees as well as aiding prospective developers by creating feasibility studies.
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