Kevin F. Jursinski is recognized as one of Southwest Florida's premier attorneys. He has concentrated his 30 years of practice in the area of business and real estate law in Naples and Fort Myers. As an AVยฎ rated attorney by Martindale- Hubbell, Kevin has been recognized by his peers as attaining the highest levels of professional excellence, skill and integrity.

Kevin is only the second attorney, out of approximately 93,000 licensed attorneys in the State of Florida, who is dual certified by the Florida Bar in Real Estate and Business Litigation. Additionally, he is one of only a handful of Florida Board Certified Real Estate Attorneys in Fort Myers, Florida who is also skilled as a commercial litigator. He has successfully tried numerous cases, by both bench and jury trials, as well as effectively arbitrated business and real estate-related matters. When disputes arise, he is fully prepared to negotiate, mediate, arbitrate or litigate to reach a resolution that is in his clients' best interests.

Clients rely on Kevin to handle business and real estate contracts from the initial stages of negotiation and drafting through the actual closing of the transaction. Because of his significant litigation knowledge and experience, Kevin takes a proactive view toward contract drafting and negotiation with the aim of avoiding litigation.

Kevin is a graduate of Kent State University (B.A. Criminal Justice) and graduated in the top 15 percent of his class at Ohio Northern University Pettit College of Law (J.D. 1980). He is admitted to practice in all Florida state courts and the U.S. District Court for the Middle District of Florida. He is a certified circuit court mediator as well as a state-qualified arbitrator, handling only real estate and business-related issues. In addition, he is regarded as one of the top attorneys in the State of Florida in the field of gaming and entertainment law as it relates to the use of video games, arcade amusement centers and game promotions.

Kevin is a member of The Florida Bar's sections on: Real Property, Probate and Trust; Business Law; Entertainment, Arts and Sports Law; and City, County and Local Government Law. He is a 30-year member and agent of Attorneys Title Insurance Fund and a Florida licensed real estate salesman for the past 30 years. He has been listed as a Florida Super Lawyer by Super Lawyerยฎ Magazine in 2010, 2011 and 2012.

The Law Office of Kevin F. Jursinski & Associates is composed of experienced, proven and successful attorneys. Real estate, foreclosure, business litigation, and construction law matters are the law firm's exclusive areas of concentration. Each member of our firm has extensive experience in complex legal real estate matters. For expert assistance in your legal affairs, contact The Law Office of Kevin F. Jursinski & Associates. www.kfjlaw.com

 

OUR COMMERCIAL REAL ESTATE RECOVERY: LEASE WORKOUTS AND PITFALLS


BY KEVIN F. JURSINSKI, ATTORNEY AT LAW

The commercial real estate economy in Florida is showing signs of recovery. No longer are landlords forced only with a decision to evict a tenant. Now, there are opportunities available to both landlords and tenants to remedy defaults. Given the changing real estate economy, many tenants realize that even though they are in default, they may have the opportunity to revitalize their business and would like to remain in occupancy. In these situations, the landlords and tenants have the opportunity to resolve pending disputes through a business solution rather than litigation. This can be accomplished by restructuring the lease. However, the landlord and tenant must be aware of their respective rights and the failure to recognize these rights could result in unintended consequences from such workout. Here is a quick primer:

Lease Default: 1.If a lease is in default, the landlord should have identified the defaults existing and specified those in writing.

2. If suit has been initiated, the landlord and tenant can still resolve their dispute by a settlement stipulation which could be approved by the Court.

3. If no suit has been filed and the landlord has made arrangements with the tenant to pay a reduced rent then, again, landlord and tenant should identify these arrangements in writing.

4.If a prospective workout is going to be entered into, the parties should deal with how they treat the past due defaults, fees and expenses and whether those fees are either: a) forgiven, b) reduced or c) recaptured and structured in the lease format.

5. Any such lease restructuring should be in writing, signed by both landlord and tenant with both landlord and tenant’s revised lease modifications specified in writing and witnessed by two (2) witnesses who need to subscribe to the executed lease amendment.

Landlord’s Lien:

Overarching this entire resolution is the fact that under Florida Law, Florida Statute 83.08, the landlord has a statutory lien against all “…property of the lessee or his or her Sublessee or assigns, usually kept on the premises. This lien shall be superior to any lien acquired subsequent to the bringing of the property on the premises leased.”

What this means is that the statutory landlord’s lien also need not be filed to be perfected. Rather, the statutory landlord’s lien attaches at the commencement of the tenancy or as soon as the tenant’s personal property is brought on to the leased premises and is superior to a subsequently created chattel lien. Beason-Simmons v. Avion Technologies Inc., 662 So.2d 1317 (4th DCA 1995).

The landlord must be cognizant of this right in doing a lease workout and could lose that right as described below.

Pitfalls on Lease Workouts:

Oftentimes when a lease is in default and a great deal of details have gone by, landlord and tenant sometimes agree simply to do a brand new lease. The problems that can result with the landlord and tenant simply doing a “clean slate” approach for a new lease are as follows:

Loss of Landlords LienAs indicated above, a new lease only provides the landlord with a first lien priority from the date of the new lease. Any intervening judgments, liens, encumbrances, or claims by third parties against the tenant’s property would then elevate third parties, if properly perfected, over the landlord’s lien which would then be relegated to the start date of the new lease. The parties must be keenly aware of avoiding this situation.

GuarantorsFlorida Statute 725.01 requires that any guarantee of another person’s debt must be in writing to be enforceable. The guarantor of a lease that has been terminated and replaced with a new lease has no liability on a subsequent agreement if that guarantor does not obligate itself to that new lease agreement. Many times, landlords believe that language in a guarantee allowing for continuation of the guarantee for an amendment would allow for continuing guarantee obligations but the landlord needs to be extremely cautious and it would be far better to require that new guarantees be executed to avoid any issue of a claim by guarantor that they have been released.

Extension of Time PeriodsThe tenant should recognize that the tenant has a limited time period from the old lease. Notwithstanding the possibility of a brighter future, a new lease might result in the tenant having a longer term lease than the previous obligation. The tenant should be fully aware of all of these rights and negotiate those specific rights, as well as other terms and conditions, for the new lease just as they had done so (hopefully) under the old lease.

 

Kevin F. Jursinski, Esq.
Kevin F. Jursinski, P.A.
Kevin F. Jursinski and Associates, P.A.
15701 S. Tamiami Trail
Fort Myers, Florida 33908
PH (239) 337-1147
FAX (239) 337-5364
Kevin@kfjlaw.com
www.kfjlaw.com

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PRACTICAL TIPS FOR COMMERCIAL LANDLORDS AND TENANTS IN IDENTIFYING THE REALITIES OF PROSPECTIVE LEASE DEFAULTS:
GUARANTY OF COLLECTION v. PAYMENT; LIMITATION ON LENGTH OF GUARANTY - STRUCTURED GUARANTIES TO LIMIT LIABILITY OF THE COMMERCIAL TENANT
BY KEVIN F. JURSINSKI, ATTORNEY AT LAW

 

In today's uncertain economic times, many commercial landlords are finding it difficult to have tenants sign long-term leases. Many commercial tenants are reluctant to commit to long-term leases, especially when they are being asked to personally guaranty these leases, in light of the fact that it is hard to predict, for both the commercial landlord and tenant, future economic expectations. This results in many commercial landlords being unable to effectively capture tenants on long-term leases.

In addition to the ability to do a "kick-out" clause, tenants may also be able to convince a landlord to allow them to vacate the premises prior to the end of the lease. Such is the case when the landlord insists on a personal guaranty of the tenant. The tenant can always request that either:

(a) the guaranty of the lease is the guaranty of collection rather than payment which can minimize and mitigate some of the expenses of the personal guarantor of the lease; and

(b) in conjunction with, or in the alternative to a guaranty of payment, rather than an absolute guaranty, the commercial tenant can also ask for a limited time period for a guaranty of the debt liability. Let's look at the differences between the two.

The Guaranty of Collection v. Absolute Guaranty

Certainly the landlord wants to have a right to have protection in the event he is not able to collect the rent against the tenant, especially when it is a single asset LLC or Corporation whose only assets may be those assets contained at the premises.

In such case, a landlord is going to want to have a specific guaranty by a principal with credit worthiness. The principal, however, does not want to be on the hook for the full and absolute guaranty especially given the fact that, under Florida law, Florida does not have the Single Action Rule in effect as many states do. What the single action rule indicates is that a guarantor may face direct liability on the guaranty with no offsets, or assets of the company, or the ability of the landlord to collect, etc. A scenario in which this would result is where there is a commercial five (5) year lease which, for simplification purposes, requires payments of $50,000 per year. At the end of the second year, the tenant defaults. The guarantor of this lease signing an absolute guaranty might find himself or herself in a position, if they are financially well off, for the landlord simply to take steps to sue the guarantor on the guaranty in conjunction with the suit on the lease for $200,000 (four (4) years at $50,000 per year) seeking to collect against the guarantor for the accelerated balance of the rent based upon the damages under the lease before taking any steps to liquidate his damages against the assets of the company or seek to collect against the company. In such circumstances, the guarantors would be jointly and severally liable for the full amount due under the lease and the landlord would not have had to take any efforts to collect against the tenant.

Oftentimes in a commercial or retail setting, there is an offset to the landlord's damages by the landlord exercising its rights under Florida Statute 83.08 to exercise distress for rent written levy on a tenant's personal property which would be offset against the amount due under the lease. A condition under the lease agreement and/or by Florida Law, a commercial landlord may, upon breach, retake possession of the premises for the account of the tenant, and if so, to take commercially reasonable steps to re-let the premises and provide the tenant with a credit against any re-letting of the premises. The case law is not clear that a commercial landlord has to extend the same duty to a guarantor, but even assuming arguendo it does, the guarantor still is liable for the full debt on the lease with no obligation on the landlord's part to effectuate collection. The solution to this is to have a limited guaranty of collection v. payment. This guaranty of collection would require the landlord to first exhaust its remedies and liquidate its claims against the tenant and its property before pursuing collection of the guaranty for the balance due.

Limited Duration of Guaranty - Alternatively, there can be an agreement made that for a period of time during the lease, the guarantor will be absolutely liable for lease payment obligations due and owing under the lease and after a certain specific time, the guarantor's obligations under the lease would be extinguished. It is important to note that most guaranties guarantee the obligation of the tenant for "all rights, duties and obligations under the lease". This means that a guarantor signing an absolute guaranty guaranties not only the payments due under the lease but all performance obligations such as repair, maintenance, damages, injury, casualty losses and the like. This is far in excess of what generally most guarantors anticipate or believe is their obligation.

Therefore, carving out a guaranty that identifies only a guaranty of the specific payments, and better yet, guarantying not only the payments, but guarantying the payments only after the landlord exercises duty to collect against the tenant and exercises his rights to offset, minimize and mitigate his damages. Then and in such event, the guarantor's obligations would either be eliminated or would be reduced is preferable.

For example, at the end of two (2) years, the guarantor's liability could be eliminated; or alternatively, it would then decrease so that the maximum liability of the tenant would be reduced to an agreed upon remaining balance of months for payment obligations only. The limitation of the guaranty; or alternatively, the restructuring of the guaranty from an absolute guaranty to a guaranty of payment is yet another way for the commercial tenant to structure a lease in today's uncertain economic times.

Sometimes, the diminishing guaranty is also construed as an "evergreen guaranty" which provides the tenant will personally guaranty a set number of months or years commencing upon default by a tenant. This could mean that for the first three (3) years of the lease, the guarantor would agree to provide a guaranty of monthly lease payments for twelve (12) months after the default or some other format which tries to cap the exposure to the guarantor. Many tenants fail to realize that a guaranty of a five (5) year lease calling for a $50,000 per year annual lease could mean that the guaranty is for a guaranty in excess of $250,000 which includes not only rent, taxes, insurance, maintenance, re-letting costs, attorneys' fees, additional court costs and expert fees, all of which could be sought as against the guarantor. Therefore, the fact that the lease only calls for rent of $4,000 per month should not be looked upon as the exposure, rather the exposure should be the full balance due under the lease, which as indicated above,, on a five (5) year lease, could be well in excess of $300,000 on a monthly lease payment that only calls for $4,000 a month.

Again, in structuring these guaranties, limitations of guaranties, evergreen guaranties, etc., a qualified real estate attorney's advice should be sought to assist the commercial tenant accordingly, as well as the commercial landlord in structuring a fair and reasonable lease, especially given the fact that most commercial landlords have to engage in such activities based upon market realities.

Kevin Jursinski
Kevin F. Jursinski and Associates, P.A.
15701 S. Tamiami Trail
Fort Myers, Florida 33908
PH (239) 337-1147
FAX (239) 337-5364
kevin@kfjlaw.com
www.kfjlaw.com

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PRACTICAL TIPS FOR COMMERCIAL LANDLORDS AND TENANTS IN IDENTIFYING THE REALITIES OF PROSPECTIVE LEASE DEFAULTS: KICK-OUT" CLAUSE
BY KEVIN F. JURSINSKI, ATTORNEY AT LAW
 

 

In today's uncertain economic times, many commercial landlords are finding it difficult to have tenants sign long-term leases. Many commercial tenants are reluctant to commit to long-term leases, especially when they are being asked to personally guaranty these leases, especially in light of the fact that it is hard to predict, for both the commercial landlord and tenant, future economic expectations. This results in many commercial landlords being unable to effectively capture tenants on long-term leases and leaves tenants weary of these leases, all of which results in a stagnant market place. Here are some suggestions to break the road blocks starting with this month's suggestion of a "kick-out" clause.

As indicated above, many tenants are reluctant to commit to a three (3) to five (5) year or longer lease term because of their inability to project out issues relating to the economy and where they will be at in the next several years. The answer: a "kick-out" clause.

"Kick-Out Clause" - A "kick-out" clause is a provision in a commercial lease which allows a tenant to reduce their financial risk of a long-term lease while at the same time allows the landlord a vehicle to entice tenants to enter into the lease and some incentive on the back end in regard to the "kick-out" clause such as a payment option for the tenant exercising the lease.

Essentially a "kick-out" clause will work as follows:

A tenant is interested in accepting a commercial premises and the landlord is interested in having a tenant commit to a five (5) year lease. The Landlord may be advancing certain monies to the tenant for build-out which the landlord wants to recapture.

The tenant does not want to be stuck in a lease in the event they are unable to perform. As such, the parties can create a "kick-out" clause which identifies the fact that the tenant could exercise a right to vacate the premises after a certain period of time based upon factors such as:

(a) tenant is unable to meet certain expectations as far as sales or productivity;

(b) the tenant simply cannot continue operations because of an economic downturn; and

(c) the landlord and tenant can identify a time period in which, at the very least, the landlord's resold improvements will be amortized before the kick-out; or alternatively, there will be a provision in which the landlord can recapture the tenant build-out based upon a provision in which the tenant has to pay a certain amount for a restructure and right to the "kick-out" clause.

An example of restructuring is a five (5) year lease in which the tenant has a right, after meeting all obligations under the lease for a period of two (2) years (or three (3) years) to notify the landlord that it intends to vacate the premises predicated on (a) the tenant not meeting certain financial goals in its sales (this is applicable to a retail establishment and must be also accompanied by verification of gross sales provided for in the lease) or (b) the tenant simply not being able to continue on in operations for a whole host of economic reasons.

The landlord and tenant would structure the "kick-out" clause so that if the landlord advanced tenant improvements which it intended to recapture that, at such time as he exercised the unamortized portion of the tenant improvement, would be a payment made by the tenant to the landlord for recapture of the premises.

Example of "kick-out" clause on a five (5) year lease - An example of this is a five (5) year lease in which the landlord and tenant agree that the tenant improvements will be amortized in the lease and after the third year, those advanced expenses will have been recaptured by the landlord. Assuming expenses of $30,000 for the build-out and the expenses would be recaptured at $10,000 a year. Tenant would be given the right, after two years of faithful performance of the lease, (the lease not otherwise being in default) to exercise its right within a period of time from 60 days prior to the end of the two (2) year period to notify the landlord of its intent to cancel the lease. The tenant would have to provide the landlord with notification prior to the tenant vacating the premises. Tenant would have to vacate the premises in accordance with the terms and conditions of the lease would have to have all payments made under the lease current at the time of vacation and the tenant would have to then pay any unamortized portion of the tenant improvements.

Using our example of a three (3) year recapture for tenant improvements of $30,000 at $10,000 per year and the tenant electing to exercise its option to vacate the premises at the end of the second year, the tenant would need to provide appropriate notification to the landlord prior to the end of the two (2) year lease and also make sure that all other obligations under the lease were met, no defaults existed, the premises were surrendered to the landlord in the same condition they were received less normal wear and tear, and lastly, that the remaining unamortized tenant improvement amount, which in our scenario was $10,000, was paid to the landlord as the "kick-out" clause payment obligation.

"Kick-out clauses" have been successfully utilized by major national tenants. It's harder for a smaller tenant to utilize a "kick-out" clause in normal economic times. However, in current economic times when the market is soft for rentals, many landlords may now be more receptive and apt to consider a "kick-out" clause for a smaller tenant based upon logical business like terms and conditions as outlined hereinabove. This is one factor that many tenants should consider in evaluating their rights and duties.

Both the commercial landlord and commercial tenant should be aware of this provision and seek the assistance of a qualified real estate attorney experienced in commercial leasing to assist them in addressing the particulars of a "kick-out" clause so that there would be no uncertainty, the clause would be clear and ambiguous, and as importantly, if there are any disputes over the "kick-out" clause, a third party trier of fact; i.e., the Court, could easily identify the terms and conditions of the "kick-out" clause, the factors allowing for the exercise of the "kick-out" clause and whether there was appropriate compliance by the landlord and tenant so that the party seeking to enforce the "kick-out" clause would be in a position to do so without significant problems.

Kevin Jursinski
Kevin F. Jursinski and Associates, P.A.
15701 S. Tamiami Trail
Fort Myers, Florida 33908
PH (239) 337-1147
FAX (239) 337-5364
kevin@kfjlaw.com
www.kfjlaw.com

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QUIET ENJOYMENT OF LEASE PREMISES v. CONSTRUCTIVE EVICTION
THE LINE HAS BEEN BLURRED


BY KEVIN F. JURSINSKI OF
KEVIN F. JURSINSKI AND ASSOCIATES

 

This article addresses the issue of "Quiet Enjoyment of Lease Premises" and the impact and effect of the interpretation of quiet enjoyment based upon a recent appellant court decision emanating from a case in the 20th Judicial Circuit, Coral Wood Page Inc. v. GRE Coral Wood, L.P., 71 So. 3d 251 (2d DCA 2011) ("Coral Wood Page"). Coral Wood Page has blurred the lines of quiet enjoyment and constructive eviction so that landlords need to exercise extra caution in regard to how they conduct themselves in dealing with commercial tenants and operational disputes.

To see how the lines have blurred, one must first look at the definition of "quiet enjoyment" which has historically, focused on addressing the issue of the tenant's claim of title to the subject premises. In the Supreme Court case of Hankins v. Smith, 138 So. 494 (Fla. 1931), the Court indicated:

"The ordinary lease of realty raises an implied covenant that the Lessee shall have the quiet and peaceable possession and enjoyment of the leased premises, so far as regards to the Lessor, or any asserted title to the leased premises, superior and paramount to that of the Lessor."

Again, as most real-estate practitioners know, a lease is a conveyance of real estate much like a deed; only the lease is for a specific limited period of time, where a deed is a perpetual conveyance of the underlying full fee. In Coral Wood Page, the Appellate Court had blurred the line between quiet enjoyment and constructive eviction. Constructive Eviction essentially is efforts by the Landlord to either actively or constructively interfere with the actual physical use of the premises versus the concept of quiet enjoyment which relates to, as indicated above, the title of the subject premises rather than the physical use of the premises.

The Appellate Court, in reversing what this author would suggest was sound reasoning by the trial court in Coral Wood Page, indicated as follows: "On appeal, GRE (Landlord) challenges the legal sufficiency of tenants' first affirmative defense based on the alleged breach of the covenant of quiet enjoyment"¦" ""¦GRE argues that the tenants could not maintain this defense without proving the claim of constructive eviction. That is incorrect. As this Court has recognized, a tenant may claim damages based on a breach of the implied covenant of quiet enjoyment even where the landlord's actions did not rise to the level of eviction and the tenant remained in possession. Carner v. Shapiro, 106 So. 2d 87, 89 (2d DCA 1958)."

The author believes that the Appellate Court again got it wrong for several reasons.

1. Carner v. Shapiro is not a case involving quiet enjoyment. Carner v. Shapiro is a Court of equity granting damages based upon the interference in the use of the premises of the tenant's operation of his business by the landlord.

2. Carner v. Shapiro does not stand for the fact, as cited by the 2d DCA, that a breach of "implied covenant of quiet enjoyment" exists even where the landlord's actions did not rise to the level of constructive eviction and the tenant remained in possession.

3. In Carner v. Shapiro, the Court held that if a tenant seeks to enjoin the actions of the landlord which are interfering with the use rights/title of the tenant, but the tenant does not vacate the premises, the tenant, nonetheless, still has a cause of action for damages from such interference. It is consistent and logical since most leases identify specific use rights of the tenant and if those use rights are interfered with, it is nothing more than a breach of contact with resulting damages arising from the landlord's actions.

In the author's opinion, The Coral Wood Page Court did not properly construe the holding in Carner v. Shapiro. If the Court read the holding in Carner v. Shapiro, it would have also noted the comments made by the 2d DCA in 1958 in rendering its decision in Carner v. Shapiro, which indicated:

"Authorities are in conflict concerning the necessity of abandonment by the tenant, and our Supreme Court has not passed on the precise point"¦" (Identifying the fact that at the time there was still some uncertainty in the area of constructive eviction and the requirement of a tenant to abandon the premises as a precursor for constructive eviction).

That observation on the state of the law may have been true in 1958 when Carner v. Shapiro was decided, however, the Coral Wood Page case failed to review a line of cases, coincidentally established by the 2d DCA which followed Carner v. Shapiro which clarified the issue of constructive eviction. In both of the cases of Richards v. Dodge, 150 So. 2d 477 (2d DCA 1963) and Sentry Water Systems, Inc. v. ADCA Corporation, 355 So. 2d 1255 (2d DCA 1978), the 2d DCA clearly identified the element "constructive eviction can constitute a breach of the covenant of quiet enjoyment implied in the lease" in Richards v. Dodge.

Further, Richards v. Dodge cited 32 Am.Jr., Landlord and Tenant §§ 245, 265 (1955), and set forth that "generally, abandonment of the premises within a reasonable time after the landlord's wrongful act is a necessary element of constructive eviction".

In reality and in practicality, the reason for the Coral Wood Page decision was the fact that the 2d DCA has historically been the most adamant about reversing Summary Judgments and most appellate practitioners will recognize that the 2d DCA is apt to reverse almost any Summary Judgment if the least scintilla of fact is available in the case. That is clearly not the standard Fla. Rules of Civil Procedure 1.510 which is interpreted to indicate "Summary Judgment should be granted on a Fla. Rule of Civil Procedure 1.510(c) where the pleadings, depositions, answer, interrogatories and admissions on file, together with affidavits if any, show that there is no change of issue as to any material fact." Henry v. Alfonso, 650 So. 2d 644, 645 (2d DCA 1995).

In the Coral Wood Page case, the only fact that is in dispute is raised by an affirmative defense which indicated that the landlord was guilty of having security officers in the parking lot which was claimed by the Defendant to be an interference with the Defendant Tenant's use of the premises.

It is the author's opinion that the more proper holding would have been that if this raised a genuine issue of fact then the issue would need to be tried on the matter of damages for breach of contract by the Landlord but not for the Appellate Court to rule that these facts supported a blurring of the line between constructive eviction and implied covenant of quiet enjoyment since (a) the tenant never met the elements necessary for constructive eviction since the tenant did not vacate the premises and (b) the title of the premises were never interfered with by the landlord.

While the 2d DCA may have identified a specific fact upon which it could deny Summary Judgment, it was not based upon the theory of law that quiet enjoyment can be founded upon the Landlord interfering with common areas not part of the leasehold estate.

Kevin Jursinski
Kevin F. Jursinski and Associates, P.A.
15701 S. Tamiami Trail
Fort Myers, Florida 33908
PH (239) 337-1147
FAX (239) 337-5364
kevin@kfjlaw.com
www.kfjlaw.com

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IMPROPER ACTIONS OF LANDLORDS WHICH CAN CREATE EXPOSURE TO DAMAGES, FEES AND COSTS


BY KEVIN F. JURSINSKI OF
KEVIN F. JURSINSKI AND ASSOCIATES

 

In today's real estate marketplace, especially in the commercial leasing arena, many commercial landlords are suffering from high vacancy rates, defaults in rents, late payments by tenants and other actions which creates stress and pressure upon these landlords. Sometimes these outside influences cause commercial landlords or property managers to engage in activities which they otherwise would not have considered, such as locking out tenants, improperly interfering with the tenant's activities, eliminating access to utilities, or improperly disposing of tenant's personal property. All of these actions can create significant exposure to commercial landlords and result in damages, fees and costs which might far exceed what the landlord could claim for non-payment of rentals. What follows is an identification of certain identified activities of the landlords, the repercussions of such activities and a huge potential damage exposure for landlords if they engage in imprudent conduct.

Classic Lockout A lockout is the action of the landlord which is taken based upon the landlord's mistaken belief that, in light of a tenant's breach of the lease, the Landlord has the right to change the locks or preclude the tenant from access to the premises. A derivation of this lockout is one that landlord constructively locks out the tenant by terminating utilities which are being provided by the landlord to the premises, etc.

There is only one narrow circumstance in which a commercial landlord can lock out a tenant without Court Order and that will be discussed later in this article. As a rule, a landlord should not in any way interfere with the use of the premises by the tenant. In further articles we will discuss constructive eviction, quiet enjoyment, but for purposes of this article a lockout would be construed as a specific act of the landlord precluding the tenant from making use of the premises.

Notwithstanding the fact that a tenant may be in material breach of the lease for a non-payment of rent, non-payment of a monetary obligation of the lease, failure to observe rules and regulations or engaging in conduct which is violation of the lease, the landlord is not entitled to change the locks, block the tenant from access or interfere with a tenant's operation of its business at the premises.

Damages From Lockout Many landlords believe that if a tenant has breached a lease by non-payment of rent they can lock the tenant out and the Landlord's expense, at worst, would be the tenant claiming that they would not have to pay rent for the time period in which the lockout occurred. Landlords working under these assumptions are sadly mistaken. One of the early cases on the unlawful lockout and damages is Harvey B. Ardell, DDS vs Henry B. Milner, 166 So2d 714 (3rd DCA 1964). In this case the Court addressing the elements available to a commercial landlord in the non-residential tenancy statute indicated that "as to damages, in the event of unlawful eviction, the lessee is entitled to recover general damages which would be the difference between the market value of the lease and the rent payable under it, and for loss of profits provided these losses can be ascertained with a reasonable degree of certainty."

This theory of damages has evolved in the Ed Rost v Marvin Bowling, 861 So2d 1246 (2nd DCA) the Second District Court of Appeals cited that the holding in Ardell vs Milner for the proposition that a tenant may recover general damages as indicated above, but also citing Young v Cobbs, 83 So2d 417, 419, a Florida Supreme Court case from 1955, and then the Rost Court indicated further that "in addition, a tenant may be able to recover damages "˜for losses that are the natural, direct and necessary consequences of the breach when they are capable of being estimated by reliable data, and are such as should reasonably have been contemplated by the parties' citing Moses v Autuono, 56 Fla. 499, 47 So. 925, 927, a Florida Supreme Court case from 1908.

Interestingly enough, the Ardell case was a case involving a dentist and another case involving a dentist WSG West Palm Beach Development, LLC vs. Perrin L. Blank, DDS, 990 So2d 708 (4th DCA 2008) further enlarged and enhanced the damage that could be obtained by a tenant. A close reading of the WSG West Palm Beach Development, LLC vs. Perrin L. Blank, DDS case would indicate a vast array of contract damages both general and special could be obtained by a tenant if they could be established and prove with a reasonable degree of certainty and to have been anticipated by the parties.

A landlord under current Florida law could face damages by a tenant from a lockout which can be significant and can include:

a. Breach of the lease of quiet enjoyment;
b.Breach of the warranty on the lease for possession;
c. Tortuous interference with tenant's business;
d. Loss of prospective profits of tenant's business;
e. Loss of prospective client base;
f. Damages incurred by tenant in being forced to relocate their business;
g. Loss of use of their inventory for a period of time (for example in a situation where there is a restaurant, food store or the like, significant claim can arise in regard to perishable items);
h. Commission lease expenses for reletting expenses incurred by the tenant;
i. Loss of claimed benefit of the leasehold improvements;
j. Increased cost of operations for rent at a new location;
k. Increased advertising costs.

In short, a landlord is sadly mistaken if it believes that the only damages it could sustain by an unlawful lockout would be for the ability of the landlord to claim rents.

Narrowly construed activities of a commercial landlord and taking possession. Only under the specific provisions provided for in Florida Statute 83.05 should the landlord retake possession and that is based upon specific abandonment of the premises by the landlord and in such event only after your actual knowledge of abandonment or alternatively statutory presumption of constructive abandonment based upon some very narrow circumstances. The specific Statute indicates the following:

""¦(2)The landlord shall recover possession of rented premises only: (a) In an action for possession under s. 83.20, or other civil action in which the issue of right of possession in determined;(b) When the tenant has surrendered possession of the rented premises to the landlord; or (c) When the tenant has abandoned the rented premises. (3) In the absence of actual knowledge of abandonment, it shall be presumed for purposes of paragraph (2)(c) that the tenant has abandoned the rented premises if: (a) The landlord reasonably believes that the tenant has been absent from the rented premises for a period of 30 consecutive days; (b)The rent is not current; and (c) A notice pursuant to s. 83.20(2) has been served and 10 days have elapsed since service of such notice."

As such under a narrow scenario the landlord could technically "lockout" the tenant but it would have to be premised on the fact that the tenant had actually or by statute abandoned the premises. A landlord seeking to pursue an action under this very narrowly construed exception needs to seek legal advice because failure to strictly comply with the Statute could create a significant exposure to damages by the tenant.

The only other potential exception, and again this would be narrowly construed and not to be undertaken without conferring with legal counsel, would be in a situation that a tenant was engaging in unlawful or illegal activities or activities which the landlord would consider to be dangerous. In such event it still would most likely be the better approach to seek the assistance of the Court and an emergency temporary injunction hearing to enjoin the conduct of the tenant rather than for the landlord to undertake actions which could be construed as Common Law Lockout.

With that said, and in next month's column, we will discuss issues which aren't quite as blatant as a lockout, and those include constructive eviction and breach of quiet enjoyment.

Kevin Jursinski
Kevin F. Jursinski and Associates, P.A.
15701 S. Tamiami Trail
Fort Myers, Florida 33908
PH (239) 337-1147
FAX (239) 337-5364
kevin@kfjlaw.com
www.kfjlaw.com

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CONSTRUCTION LIENS AFFECTING COMMERCIAL LANDLORD'S PROPERTY TENANT IMPROVEMENTS


BY KEVIN F. JURSINSKI OF
KEVIN F. JURSINSKI AND ASSOCIATES

 

Commercial landlords and property managers should be keenly aware of the impact and effect of construction liens based upon tenant improvements. Specifically, in today's current economic climate in which many landlords are letting tenant inducements for tenants to take occupancy of premises, both the tenant's and the landlord's property could be subject to construction liens. Even more compelling is the fact that there has been a recent change in the controlling Florida Statute on this particular subject, Florida Statute 713.10, which alters slightly the rights, duties and obligations of the parties in regard to tenant improvements. I previously wrote on this subject and the following is a refresher and update on the issue of construction liens for tenant improvements which may impact the tenant's property or the landlord's property.

Here is a background and refresher on this particular subject:

If the tenant contracts for certain work to be performed by the general contractor, the general contractor may provide a Notice to Owner to the landlord claiming that the contractor is looking to the real property for the work contracted for by the tenant. If the tenant is authorized to perform such work, which generally arises under the lease agreement (and in fact may often be a leasehold obligation by the tenant per the lease, the "Pith of the Lease") then the contractor argues that this contractual obligation creates an authorized agency relationship between the tenant and the landlord to contract for such services and subjects the landlord's interest to a construction lien in the event that the contractor is not paid.

As indicated, given these turbulent economic times, there are numerous defaults occurring, tenants failing to maintain operations and evictions. However at the same time, such tenants are leaving behind a number of unpaid bills inclusive of bills for improvements made to the subject premises. The case of A. N. Drew, Inc. v Frenchy's World Famous Cajun Café, Inc., et al., 517 So.2d 766, 1988 Fla. App. indicates that in the event that the leasehold improvements are being contracted for by the tenant and are the "Pith of the lease" (roughly interpreted as being a central component of the lease) then in such event the landlord's real property interest may be subject to the tenant's claim. This issue, which has always faced landlords, is even more compelling in today's marketplace. The question that needs to be answered is:

"What can a landlord or real property manger do to prevent the landlord's real property from being subjected to a construction lien in the event of a tenant's default and non payment of its contractor?"

When a tenant is doing build-out of the lease premises, there may be a problem as to the payment to the contractor, subcontractor or material supplier. The problem arises when a contractor, laborer or material supplier attempts to assert a construction lien against the landlord's interest in the premises as a result of work being performed by the tenant in accordance with the contract. The landlord should be advised to comply with Florida Statute §713.10, which requires that all leases contain the language identified in Florida Statute 713.10 or a memorandum be recorded in the Public Records of the County where the construction is taking place, indicating a restriction on liens being implemented as against the interest of the landlord to the subject premises.

The prior version of Florida Statute 713.10 indicated the elements for a commercial landlord to protect its interest in reference to construction liens.

Effective October, 2011 there has been a new revision of the Statute which slightly alters the rights, duties and obligations of the landlord and provides that in order for a landlord to be relieved of liability for a construction lien it must do the following:

The revised Statute provides for recordation of the lease or memorandum before the recording of the Notice of Commencement. It also requires a statement that the majority of leases at the building/center contain the disclaimer. Further, an entire new Section was added that states:

""¦3. Any contractor or lienor under contract to furnish labor, services, or materials for improvements being made by a lessee may serve written demand on the lessor for a copy of the provision in the lease prohibiting liability for improvements made by the lessee, which copy shall be verified under s. 92.525. The demand must identify the lessee and the premises being improved and must be in a document that is separate from the notice to the owner as provided in s. 714.06(2). The interest of any lessor who does not serve a verified copy of the lease provision within 30 days after demand, or who serves a false or fraudulent copy, is subject to a lien under this part by the contractor or lienor who made the demand if the contractor or lienor has otherwise complied with this part and did not have actual notice that the interest of the lessor was not subject to a lien for improvements made by the lessee. The written demand must include a warning in conspicuous type in substantially the following form:

 

WARNING

YOUR FAILURE TO SERVE THE REQUESTED VERIFIED COPY WITHIN 30 DAYS OR THE SERVICE OF A FALSE COPY MAY RESULT IN YOUR PROPERTY BEING SUBJECT TO THE CLAIM OF LIEN OF THE PERSON REQUESTING THE VERIFIED COPY."

The key point on all of this is for the landlord (if it wants to protect itself from construction liens), to be diligent in providing such notification and recording its position in the Public Records of the County where the construction is taking place.

There are certain circumstances in which a construction lienor will pursue the tenant's improvements at the premises and the potential lease agreement since they have an inherent financial benefit to the construction lienor to impress the lien against the tenant's interests. The purpose of the statute is to afford protections to the commercial landlord who doesn't want the landlord's real property interest to be subject of such lien.

Kevin Jursinski
Kevin F. Jursinski and Associates, P.A.
15701 S. Tamiami Trail
Fort Myers, Florida 33908
PH (239) 337-1147
FAX (239) 337-5364
kevin@kfjlaw.com
www.kfjlaw.com

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CONDITIONAL SALES AGREEMENTS, LANDLORD'S LIEN, AND UCC-1


BY KARA JURSINSKI OF
KEVIN F. JURSINSKI AND ASSOCIATES

Due to the various issues currently affecting our real estate market, many landlords are faced with the reality of a defaulting tenant. One of the more frequent issues that has arisen is the remedies the landlord has in collection of the tenant and the enforcement the landlord has against any equipment left at the premises when the tenant vacates.

The common situation is as follows: Tenant "goes dark", involuntarily vacating the premises and leaving Landlord with a claim for damages for past due rentals due and accelerated rentals for the balance of the lease term plus interest, costs, and attorneys fees. Tenant, however, leaves equipment or personal property on the premises and Landlord wishes to maintain possession of the equipment and other personal property to offset its damages or, alternative, use as a tenant inducement when Landlord seeks to relet the premises to a third party. A problem arises when a third party vendor contacts Landlord seeking possession of the equipment on the premises, claiming they have a superior interest in the equipment.

Under Florida law, a Landlord has a statutory Landlord's Lien under Florida Statute 83.08. The statute reads:

"Every person to whom rent may be due "¦ shall have a lien for such rent upon the property found upon or off the premises leased or rented, and in the possession of any person, as follows: Upon all other property of the lessee or his sublessee or assigns, usually kept on the premises. This lien shall be superior to any lien acquired subsequent to the bringing of the property on the premises leased."

A Landlord's Lien is not required to be filed or recorded in order to be perfected. The lien attaches at the commencement of the tenancy or as soon as the property is brought onto the premises. Beason-Simons v. Avion Techs., 662 So. 2d 1317 (Fla. 4th DCA 1995). Therefore, Florida's Landlord's Liens are superior to all of the right, title, and interest of a third party. However, the Landlord's Lien is not superior to a UCC-1 filing from the third party vendor, so long as the UCC-1 filing predates that of the commencement of the lease (the Landlord's Lien date).

In an increasingly common scenario, the third party vendor does not have a filed and perfected UCC-1 interest in the equipment, but rather, merely has a conditional sales agreement. A conditional sales agreement is described as "payment is due and demanded on the delivery to the buyer of goods or documents of title, his right as against the seller to retain or dispose of them is conditional upon his making the payment due." Beason-Simons v. Avion Techs., 662 So. 2d 1317 (Fla. 4th DCA 1995). In other words, the third party vendor will retain ownership of the equipment until the balance is paid in full. This "scheme" on the part of the vendor and defaulted tenant has frustrated the efforts of many landlords in these situations. Many unknowing landlords, for fear they would be interfering with the third party's rights to the equipment, simply turn over the equipment to the vendor and forfeit their rights and interest.

As the Court observed in Fla. E. Coast Properties, Inc. v. Best Contract Furnishings, Inc., 593 So. 2d 560 (Fla. 3d DCA 1992), the seller of equipment could have protected itself by perfecting its security interest under the UCC-1 before delivery to the premises, thereby trumping any Landlord's liens. However and unless the seller of said equipment filed a UCC-1 before the commencement date of the lease, these "conditional sales agreements" do not constitute a perfected security interest in the equipment and the Landlord's Lien is superior.

This technicality is extremely critical to note for commercial landlords at this time. In a time where collectability of the landlord's rental damages from tenant can be difficult, if not impossible, the ability of the landlord to seek recourse on unperfected equipment to offset the damages can be essential.

As an additional remedy, many landlords take an additional step by filing a UCC-1 against any unperfected property at the commencement of the lease to further protect their interest from any third parties. The UCC-1 interest, coupled with the statutory lien, provides the landlord an undisputed ability to proceed forward to foreclose its interest in the equipment in order to sell or lease to third party tenants.

Kara Jursinski
Kevin F. Jursinski and Associates, P.A.
15701 S. Tamiami Trail
Fort Myers, Florida 33908
PH (239) 337-1147
FAX (239) 337-5364
kara@kfjlaw.com
www.kfjlaw.com

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REDUCE THE RISK


BY JASON W. HOLTZ ESQ. OF
KEVIN F. JURSINSKI AND ASSOCIATES

Real estate professionals, including commercial leasing agents, are always at risk of being sued for professional malpractice or misconduct. Fortunately, liability under the numerous causes of action can be mitigated through careful preparation of listing agreements, contracts and disclosures. This article will discuss the types of liability to which commercial leasing agents are exposed, and strategies to minimize the risk of lawsuit.

Commercial leasing transactions frequently involve large sums of money, and therefore, a commercial leasing agent's potential liability in a lawsuit is also substantial. Causes of action to pursue damages against a leasing agent include common law claims such as simple negligence as well as statutory actions including Real Estate licensing law and the Florida Deceptive and Unfair Trade Practice Act ("FDUPTA").

FDUPTA is a statutory tort claim that can be brought against leasing agents and property managers. FDUPTA is a serious professional liability concern because the damages and claims can be subscribed and can include attorney fees. Furthermore, the statute is broad and the terms are applicable to numerous factual scenarios common to commercial leasing and property management.

The Florida Deceptive and Unfair Trade Practice Act "FDUPTA" provides as follows:

Unfair methods of competition, unconscionable acts or practices, and unfair or deceptive acts or practices in the conduct of any trade or commerce are hereby declared unlawful. See Florida Statutes Section 501.204(1).

The prohibited practices are extremely broad, as demonstrated by the expansive terms, i.e. "unfair acts", which exposes virtually any alleged misconduct to FDUTPA lawsuit. There is an apparent exclusion of real estate activity to FDUTPA claims, but the exception is uncertain and should not be relied upon as an absolute shield to liability. The exception reads as follows:

501.212 Application."”This part does not apply to: (6) An act or practice involving the sale, lease, rental, or appraisal of real estate by a person licensed, certified, or registered pursuant to chapter 475, which act or practice violates s. 475.42 or s. 475.626.

Despite the exclusion of certain real estate activity from this statute, Florida Statute §475.42 is not the primary disciplinary statute, and is not an exhaustive list of potentially alleged unfair acts by a leasing agent. Furthermore, under FDUTPA, the exposure to risk is not limited to the Plaintiff's claim for ordinary damages; it includes a provision for prevailing party attorney fees. Given the risk associated with FDUPTA, proper preparation and risk management is a necessity.

The risk of suit can be mitigated by sound practices and procedures in regard to document preparation, strategic use of listing and representation agreements and proper transaction file documentation.

Careful preparation of agreements can reduce and indemnify against the risk of lawsuits. Listing agreements must be prepared to harmonize the protections provided by an indemnification agreement with any other terms such as dispute resolution. Additionally, as in most matters, proper documentation of a transaction file will mitigate against the risk of professional liability. This includes completion and retention of agency disclosures, listing agreements, contracts and correspondence.

Documents are the best evidence of the factual circumstances that give rise to lawsuits. Liability can be reduced and even avoided entirely if a clear record of the facts can be presented in opposition to a potential plaintiff's initial demand. This is a practice that will reduce liability and the potential expense of fees associated with defending a lawsuit.

In conclusion, there is a wide range of actions to which a leasing agent is exposed. The actions include potential liability for damages associated with the transaction including attorney's fees. Although the risk of lawsuit cannot be eliminated, it can be substantially reduced and defrayed through the proper use and preparation of listing agreements and contracts, and the retention of client related documents.

Jason W. Holtz, Esq.
Kevin F. Jursinski and Associates, P.A.
15701 S. Tamiami Trail
Fort Myers, Florida 33908
PH (239) 337-1147
FAX (239) 337-5364
JasonH@kfjlaw.com
www.kfjlaw.com

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THE FLORIDA COMMERCIAL COMMISSION LEASING ACT: HOW TO PROTECT YOUR RIGHTS TO YOUR COMMISSION


BY JASON W. HOLTZ ESQ. OF
KEVIN F. JURSINSKI AND ASSOCIATES

Commercial Leasing Commissions can be difficult to collect, but a 2005 Law has equipped Real Estate Professionals a powerful tool to make collections easier. This article will address the problems faced by the commercial leasing agents with commission collection and the way Florida's Commercial Lease Commission's Lien Act empowers agents to enforce their commission agreements.

Unlike traditional real estate closings, where an escrow agent disburses funds held in trust according to the terms of a settlement statement, lease agreements can be closed without a means to ensure commission payment. This arrangement puts leasing agents in the undesirable position of seeking collection after services have been fully rendered.

Leasing agents in the current market are experiencing this problem on a regular basis, and tens of thousands of earned commission go uncollected.

In 2005 the Florida Legislature passed a bill which addresses this problem. The law is called the Florida Commercial Leasing Commission Lien Act ("FCLCLA")(Florida Statute §475.803). The law empowers real estate agents to record, and ultimately foreclose, a lien for unpaid commissions due on a leasing agreement.

The benefits of this statute depend upon strict adherence to specific disclosures and notice deadlines. A discussion of these requirements must begin with the leasing agreement. Form leasing agreements should be used with caution. Although they provide convenience, their terms may compromise leasing agents' legal remedies.

§475.803 requires that a specific disclosure be provided to the property owner at the time of executing the listing agreement.

Without evidence of this notice, the leasing agent will not be able to utilize the lien process to facilitate collection of their commissions.

Beyond the required FCLCLA disclosure, the other provisions to the standard exclusive right to lease agreement must be planned to harmonize with the FCLCLA relief. For example, the alternate dispute resolution provision requiring arbitration may jeopardize a leasing agent's rights under the FCLCLA.

The recommended procedure for leasing agreement preparation is to work with an attorney to customize the terms of the listing agreement to ensure that all necessary disclosures are included in appropriate addendums, and that the terms of the contract best protect the interests of the leasing agent in regard to earning and actually collecting their commission.

Jason W. Holtz, Esq.
Kevin F. Jursinski and Associates, P.A.
15701 S. Tamiami Trail
Fort Myers, Florida 33908
PH (239) 337-1147
FAX (239) 337-5364
Jason@kfjlaw.com
www.kfjlaw.com

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PAROL EVIDENCE ALLOWED IN THE EVENT OF AMBIGUITIES IN THE LEASE


BY KEVIN F. JURSINSKI, ATTORNEY AT LAW

In the event of an ambiguity in the lease itself, the Court may hear oral testimony (parol evidence) to allow the Court to make a correct determination of the true intent of the parties. If for some reason the intent is not properly expressed in the written document, the Court would need to look at the entire agreement and where necessary consider parol evidence. Landis v. Mears 329 So 2d. 323 (2DCA 1976). Florida Law is clear that the Court cannot accept extrinsic evidence simply to rewrite a written document for the parties Peach State Roofing, Inc. v. 2224 South Trail Corp. 3 So. 3d 442 (2DCA 2009). This is notwithstanding the fact that there may be a situation in which one of the parties has entered into a rather one sided agreement (barring the defense of unconscionability or some other defense). Notwithstanding the underlying ruling that a court generally cannot rewrite a contract for party, the Court can, in situations in which there is ambiguity, accept parol evidence to reflect the intent of the parties. Dynamic Homes, Inc. v. Rogers 331 So. 2d. 326 (4DCA 1976).

LATENT AMBIGUITIES V. PATENT AMBIGUITIES. The difference between a "patent" ambiguity and a "latent" ambiguity is summarized in Landis v. Mears 329 So 2d. 323 (2DCA 1976) as follows:

"The rule differentiating between patent and latent ambiguities in respect to admitting parol evidence has been criticized and even discarded in a number of jurisdictions. See, 30 Am.Jur.2d, Evidence, § 1073. Still, Florida courts have adhered to the distinction and ordinarily allow parol evidence where there is a latent ambiguity and reject it where there is a patent ambiguity. Carson v. Palmer, 1939, 139 Fla. 570, 190 So. 720; Ace Electric Supply Co. v. Terra Nova Electric, Inc., Fla.App.1st 1973, 288 So.2d 544; City of Hollywood v. Zinkil, Fla.App.4th 1973, 283 So.2d 581. See also, City of St. Petersburg v. International Assoc. of Firefighters, Fla.App.2d 1975, 317 So.2d 788. The reasoning runs like this: A "latent" ambiguity exists where a document is rendered ambiguous by some collateral matter. In such instances it is essential for the court to hear that matter to render a proper interpretation

Where, however, the ambiguity is patent, to admit evidence would be improper since it would, in effect, allow the court to rewrite the contract for the parties by supplying information the parties themselves did not choose to include.

We recognize the classic distinction between patent and latent ambiguities as a basis of the court determining whether or not to hear parol evidence; nevertheless, that distinction is not relevant here since the court was only interested in determining the capacity of the parties who entered the agreement rather than in varying or supplying any terms to the agreement. This case is controlled by the principle that where, as here, there is an ambiguity on the face of a contract as to the capacity of parties and their relationship with one another and the surrounding circumstances when they entered into the agreement, the court is proper in receiving parol evidence."

It is always a less than a clear situation to determine if parol evidence could be allowable and whether the ambiguities are "latent" or "patent". The overarching theme on these concepts in regard to proper lease execution is to have the commercial lease properly prepared and executed using the following format.

1. The entity or business in which the lease is in should be properly described in the lease.

2. The signature block should have a specific and identifiable designation indicating that is being executed by an authorized representative of the company.

3. An authorized representative of the company should in fact sign this lease in that person's representative capacity.

4. The representative capacity should be clearly stated in the lease.

5. , The lease should have two specific witnesses who should witness the signature of the representative of the company and if possibly, have the signature notarized with the person signing it being specifically designated as having signed the document and with their signature acknowledged being specifically identified utilizing a standard notarization format and paragraph as well as the fact that as a person specific capacity being contained in such notary acknowledgment. The same holds true for guarantees, generally in a corporate guaranty we are looking at an individual signing the document guaranteeing the interest of a business entity, but on certain occasions, an additional business entity can in of itself be guaranteeing the debt of an affiliated business entity. Again, the same proper procedure should be followed for such execution on the guaranty

Kevin F. Jursinski, Esq.
Kevin F. Jursinski, P.A.
7800 University Pointe Drive, Suite 200
Fort Myers, Florida 33907
(239) 337-1147
(239) 337-5364
Kevin@kfjlaw.com

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EXECUTION OF LEASE DOCUMENTS AND SIGNATORS


BY KEVIN F. JURSINSKI, ATTORNEY AT LAW

 

Oftentimes in regard to the execution of commercial leases, clients are requesting that the lease be in the name of an LLC or some type of business entity. This is done for a number of reasons, inclusive of liability for the parties. In fact, generally it is a preferred method for a tenant to take the leasehold interest to avoid personal liability, notwithstanding the fact that there maybe insurance obtained by the tenant for its operation of the premises.

When a lease is entered into with an LLC or other type of entity, the most likely requirement of all sophisticated business clients is that the tenant execute the lease in the capacity of the entity (either as president of a Florida Corporation, managing member of an LLC, or managing partner of a limited liability partnership, etc.) In addition thereto, most sophisticated landlords use a sound business approach and require the principal or principals of the Florida Entity to sign a personal guaranty. Landlord issues may arise, both in the execution of the underlying lease, and subsequently in the execution of the guaranty. This newsletter will focus on problems arising from the execution in both of those scenarios.

PREPARATION OF THE LEASE - AMBIGUITIES CONSTRUED AGAINST MAKER

Generally commercial landlords draft their own leases. I am amazed that many of the commercial property managers that I deal with, and who contact our office, expect there to be a standard "form" commercial lease. Unlike residential leases in which the Florida Supreme Court has approved a form which is generally focuses on basic concepts such as occupancy and rent per month, a commercial lease significantly more detailed. A commercial lease should contain business specific provisions in the lease. Commercial property managers who believe there is a "one form fits all lease" should reconsider that position. With that said, and as indicated above, the lease needs to be clear and concise, since any ambiguity in the lease is going to be construed against the maker Sterling J. Planck, Sr. v. Southport Boat Storage and Sales, Inc. 387 So. 2d 440 (4DCA 1980). This rule is even more pronounced when the drafter is in a position of trust or greater personal knowledge, such as a commercial landlord. Id.

INTENT AS TO THE NAME OF THE TENANT AND THE GUARANTORS

In most circumstances, when dealing with a commercial lease, the commercial tenant will be a business entity. The business entity should be in existence and the name of the entity should be verified by having to check the name of the entity and its status on www.sunbiz.org to determine:

1. The exact legal name of the entity;

2. The principals of the entity, and their designation (such as the designated manager);

3. The existence of the corporate entity, since a corporate entity that is dissolved does not have the authority to engage in executor contracts such as leases.

DESIGNATION OF SIGNATOR

A signature block for a commercial lease should also identify specifically the entity that is designated as the tenant, as well as the representative with authority who is signing on the behalf of the business entity/tenant.

SIGNATURE AND CAPACITY OF SIGNOR

In certain circumstances both the lease as well as the guaranty may be inappropriately signed. For example: a lease could be in the name of "ABC, LLC" and based upon the review of www.sunbiz.org and the public records of State of Florida, the managing member of ABC, LLC is "Jane Smith". Jane Smith should then sign in the capacity as "manager". The best approach would be for her to sign as "Jane Smith, as manager". The same concept applies if she was signing "Jane Smith, as president" of a Florida Corporation.

If the document is signed without the designation of the person signing in their representative capacity, then the presumption under Florida Law is that the person signing the document would be signing in their individual capacity. Betz v. Bank of Miami Beach 95 So. 2d. 891 (Fla. 1957). This proves to be even more problematic when the lease drafter is the one who improperly signs the lease. If that occurs, we end up having either:

a.Not the appropriate corporate/business representative signing the document and not binding the business entity, or;

b. The person signing without the "descriptio personae" being personally liable), neither is the intended result.

ISSUES WITH IMPROPERLY SIGNED LEASES

In addition to the possible unenforceability of the lease by either the landlord or the tenant based upon the lack of proper execution, there is also an issue of the person signing the document as being personally liable for the obligation of the lease, be it as commercial landlord or commercial tenant. This not only has a significant bearing on issues as it relates to obligations under the written lease for various contractual rights, but also creates a potential issue in the event that there is any liability or insurance claims as arising out of the operation of the lease against the landlord, tenant or both. An improperly signed lease can create some significant personal liability when none was originally intended.

As indicated above, and consistent with the landlord's intent to obtain an individual's personal guaranty for a business entity's lease, the landlord should have a separate and distinct written lease guaranty to be executed by the president or the principal who the landlord is relying upon to provide additional security for the payment of the corporate debt. Often times, the lease ends up being signed improperly.

Using the same scenario above with the lease being an ABC, LLC, often times it is overlooked that the guaranty, to be done by Jane Smith in an individual capacity ends up being signed by Jane Smith with some type of descriptio personae behind her name such as "Pres.", "Mgr." or some other designation. Once that happens, then it raises the issue for the commercial landlord whether there was an intent by the person signing it to be personally liable for the debt because the person did not sign only in their individual name (this is just the mirror image of the corporate lease being signed in an individual capacity), which then allows for a claim that no personal liability was intended. This creates guaranty enforcement issues. Malt v. Carpet World Distributors 763 So. 2d. 508 (4DCA 2000).

Kevin F. Jursinski, Esq.
Kevin F. Jursinski, P.A.
7800 University Pointe Drive, Suite 200
Fort Myers, Florida 33907
(239) 337-1147
(239) 337-5364
Kevin@kfjlaw.com

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ISSUES FOR THE COMMERCIAL LANDLORD AND TENANT

PART 4 - PASS THROUGHS AND RESULTS OF COMMERCIAL LEASE AUDITS OR REVIEWS


BY KEVIN F. JURSINSKI, ATTORNEY AT LAW

 

In a lease audit, the professional lease audit company that is retained will utilize a format and procedure to conduct its lease audit. The lease audit by the tenant also should remain confidential in the event that the Tenant does not want to disclose certain findings of the lease audit. In addition thereto, many leases indicate that in the event that the landlord incurs expenses as a result of the lease audit, and in the event that the lease audit does not generate any discrepancy over a certain percentage (i.e. the lease audit after all expenses are incurred does not indicate the landlord has produced billing in excess of a certain specific percentage deferential) then in such event, the commercial tenant would also be responsible for the payment of the expenses incurred by the commercial landlord for such audit.

The commercial tenant should be alert when it hires the appropriate professional representation in negotiating the initial lease as well as in the lease administration. The expenses are significant and the commercial tenant should be well aware of his or her rights and duties under the lease and extremely cognizant about identifying the overall expenses that a tenant actually will be incurring for the commercial premises. This needs to be done to ensure that the expenses actually match up, the expenses to be incurred with the actual expenses that legally are the tenant's responsibility under the lease.

This establishes the issue for both the commercial landlord and commercial tenant that both have to be diligent in regard to identifying specific rights since annual lease payments can pass when neither the commercial landlord or commercial tenant are acting upon those lease payments which creates the potential argument for waiver or estoppel for future review. Often time both the lax commercial landlord and/or commercial tenant who do not address these issues can be faced with defenses to present enforcement of their legal rights when they ultimately realize that there have been errors or corrections which need to be undertaken.

Another example of this is the case of Western World, Inc. v. Dansby 603 So. 2d 597 (1st DCA 1992). In this case issues arose in regard to the ability of the commercial landlord to terminate the lease. A number of fact issues were raised based upon a determination due to the incorrect payment of; amount of rent, the failure to provide annual reports and payment of pass through expenses. That case not only went up on appeal, but was remanded and was again referred back to the trial court. The issues of waiver and estoppel were in place as well as the application of the contractual provisions indicating that a specific contractual waiver on one instance of default does not constitute a waiver of other instances of default. Many of the issues raised could have been corrected by an adjustment or revision to the lease prior to execution to avoid problems both for the commercial landlord and tenant as to improper payments and incorrect billings.

An example of an omission or error in common area maintenance pass through which negatively affected the landlord is the previously cited case of Miracle Center Associates v. Scandinavian Health Spa, Inc. 889 So. 2d 877 (3rd DCA 2004). This case amazingly had a tortuous time that ultimately resulted in more than ten years from the time of the initial error to the time of the review. The Appellate Court's decision was denied by the Florida Supreme Court Case Miracle Center Associates v. Scandinavian Health Spa, Inc. The brief overview of this case is a situation in which the tenant Scandinavian Health Spa leased specific space at a mall and in addition to the fixed monthly rental, was required to pay a proportion share of the annual common area expenses. The proportion share of the tenant's expenses was based upon the ratio of the gross floor area of the tenant space to the gross "leasable" floor area of the entire complex.

The Court in Miracle Center Associates also cited the Florida Supreme Court Case Thomas N. Carlton Estate v. Keller 52 So 2d 131,133 (Fla. 1951) in which it held that a "waiver may be inferred from conduct or acts putting one off his guard and leading him to believe their right has been waived."

Further the Miracle Center Associates v. Scandinavian Health Spa, Inc. cited the Supreme Court case Gilmin v. Butzloff 22 So 2d 263 (Fla. 1945) indicating that the Supreme Court made it clear that a party may waive any right to which he or she is legally entitled, including those secured by contract. As such, in the Miracle Center Associates v. Scandinavian Health Spa, Inc. case, the appellate Court confirmed and ratified the trial court's determination in conclusion that Miracle Center Associates, commercial landlord, long term inaction qualifies as a waiver. This is a situation in which a commercial lease error actually negatively effected over ten (10) years of common area maintenance. Therefore caution and diligence are the watchwords to both the commercial landlord and commercial tenant to fully review and identify all aspects of the commercial lease as identified in this series of articles.

 

Kevin F. Jursinski, Esq.
Kevin F. Jursinski, P.A.
7800 University Pointe Drive, Suite 200
Fort Myers, Florida 33907
(239) 337-1147
(239) 337-5364
Kevin@kfjlaw.com

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NET LEASES AND COMMON AREA MAINTENANCE CHARGES: ISSUES FOR THE COMMERCIAL LANDLORD AND TENANT

PART 3 - COMMERCIAL LEASE AUDITS IN REGARD TO COMMON AREA MAINTENANCE CHARGES


BY KEVIN F. JURSINSKI, ATTORNEY AT LAW

 

Lease Audit: As indicated in the prior section of this article the calculation and allocation of lease expenses, especially when it also includes an escalation clause, becomes complicated. Errors of omission or commission sometimes occur (both by commercial landlord and commercial tenant) and these errors need to be identified with particularity. One way to do so is for a tenant to turn to a commercial lease audit. Commercial lease Audits are prepared by various companies specializing in such services. In such cases, these lease audit specialists first review the legal instruments between the parties and then identify the specific cost items which form the basis for the calculation and allocation of common are rent pass throughs, and a annual escalation clause in particular. The focus on most lease audits is to identify the errors which occur in commercial lease payments in regard to both identification and calculation of expenses and pass throughs. Sometimes fundamentally the lease audits discover that their errors occurred due to the inclusion of expenses that fall outside the scope of "normal repairs maintenance and operations".

Often times the "management fee" for the operational expenses include fees such as the hiring of an onsite manager whose primary goal is to procure new tenants for the location. Other areas that lease audits can identify are expenses for items such as financing costs, ownership costs, building depreciation or capital improvements which should not be passed through as a specific operational expense of the center. There also has to be a full and thorough review of the lease which identifies the "base year" of the lease. As such, any appropriate audit should be conducted and identified early in the term of the lease to establish a base line from the standpoint of operational expenses and identification since errors can be compounded if not identified early on.

It is also important to note that if lease errors are overlooked (and this is applicable both to the commercial landlord and commercial tenant), in certain cases those commercial lease errors can be considered waivers. Again, under certain circumstances, the waiver can amount to a legal defense for the enforcement of future actions based upon the theory of waiver (see discussion below Miracle Center Associates v. Scandinavian Health Spa, Inc. 889 So. 2d 877 (3rd DCA 2004)).

In the Miracle Center Associates v. Scandinavian Health Spa, Inc. case the facts disclosed that in each calendar year from 1989 to 1999 (a ten year period) the landlord delivered to the tenants written estimates of the proportionate share of common area costs showing the gross floor area of the tenant space at 27,935 square feet and the total leasable floor area of the center at 182,072 square feet. This established the tenant's proportion share of the common area cost as being calculated as 15.34% (27,935 square feet of lease space as the numerator with 182,072 square feet as the denominator) which is a consistent formula based upon the assumed facts accepted by both the landlord and tenant and acted upon by the landlord in initiating and sending a full ten years of lease bills. However, after a suit was initiated, surprisingly by the tenant, the landlord filed a counterclaim alleging that during such ten (10) year period and as a result of a computer generated error; the landlord has inadvertently failed to conclude 31,940 square feet in a proportionate shared calculation.

Based upon the facts of the initial case, this was a running track which was not included in the leasable space calculation. In that particular case, the omission and self admitted error by the landlord cause the landlord itself to lose the ability to collect that rent during the period of time when it failed to properly bill the tenant. The Court identified again the issue of waiver citing Torres v. K. Site 500 632 So 2d 110,112 (3 DCA 1994) in which the appellate court indicated "a party may waive any rights to which he or she is legally entitled, by actions of conduct, warranting an inference that a known right has been relinquished."

 

Kevin F. Jursinski, Esq.
Kevin F. Jursinski, P.A.
7800 University Pointe Drive, Suite 200
Fort Myers, Florida 33907
(239) 337-1147
(239) 337-5364
Kevin@kfjlaw.com

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NET LEASES AND COMMON AREA MAINTENANCE CHARGES: ISSUES FOR THE COMMERCIAL LANDLORD AND TENANT

PART 2 - IDENTIFICATION AND CALCULATION OF LEASE PASS THROUGH EXPENSES IN A NET LEASE


BY KEVIN F. JURSINSKI, ATTORNEY AT LAW

 

 

Part I of this series addressed the definitional and operational aspects of various types of leases including a traditional gross lease together with the various permutations of net leases. This article will address the issue of proper and appropriate pass through expenses and how they are calculated and the use of commercial lease audits to identify proper and appropriate commercial lease pass through expenses.

The fundamental concept of a "net lease" is to identify those specific expenses which pass through to the tenant. The lease should provide the tenant with an accounting annually and an opportunity to perform a commercial lease audit to establish that the pass through expenses being charged to the tenant are in fact accurate and verifiable. This ensures the tenant is paying only those sums that have been identified in the lease as a pass through expense.

In the simple example of a stand alone building with a net lease requiring base rent and a pass through of only real property taxes, the tenant does not even need a commercial audit, but rather can easily identify the pass through amount by a search of the public records as to the actual real estate tax bill for the stand alone commercial property and then calculate its monthly contribution to pay such contribution for the tax bill. In the example of the stand alone building where the annual real estate tax bill is $2,400.00, the commercial tenant can verify that the 1/12 monthly pass through expense for the prior year would have been at $200.00 per month based upon a $2,400.00 annual tax bill which would reflect the agreed upon base rent plus the $200.00 per month pass through expense of tenant's contribution to pay real estate taxes for the premises.

Identifiable and verifiable calculations for pass through expenses become more blurred and difficult when the pass through expenses are not verifiable from the public records and require application of percentage ownership interest of a particular commercial center with specific billings which may in fact overlap each other. By way of example, in contrast to the simple net lease on a stand along building with base rent and real estate taxes, take the example of a commercial lease of a shopping center in which the common area expenses are identified as the tenant's proportional amount for all operational expenses of the center. This may include real property taxes, insurance, maintenance, repairs, common area maintenance, security, management fees, marketing fund, commercial center premises promotional expenses, reserve fund and other identifiable pass through expenses.

This is an example of a broad brushed pass through expense in which the landlord is passing along every potential expense the landlord would incur for the operation of the center or expenses which are even related to the operation of the center. Under such circumstances, the tenant needs to be provided with accurate information. The tenant should first verify and establish the tenant's actual percentage lease space versus the entire center to obtain a base percentage to calculate the tenant's obligation. This initial calculation is further compounded by the fact that there are various definitions of percentage space which can be actual lease space, leasable space, rentable space, gross leasable space or additional common areas allocated to the tenant.

Example: A tenant in a 100,000 square foot center may have the physical use of only 10,000 square feet, but based upon the formula and format for its particular lease premises, the have attributed to the tenant a percentage of the contribution which requires it to pay more than the simple 10% that it occupies against the outstanding total sum of the pass through expenses. This is an example of a contractual obligation in which the tenant needs to be aware of since a court will not disturb an agreed upon negotiated contractual term barring fraud in the inducement or some other legal defense. (See Part IV of this series). In addition to identifying a specific contractual percentage of the pass through expenses, the tenant needs to identify those expenses with particularity to make sure that:

a. Those expenses are identified in this lease;

b. Those expenses can be attributed to the definitional aspects of a lease provisions relating to the pass through expenses and;

c. The calculations are based upon the percentage and actual costs and that the amounts are adequately calculated.

Often times the landlord and tenant dispute the common area maintenance charges that are included in the lease based upon vague and ambiguous language which has a number of interpretations. This will render the contractual language ambiguous and requires the interpretation of such language by the Court. (Again, see Part IV of this article).

It should be recognized that lease negotiations and various lease revisions, together with any amendments as well as schedules and exhibits, can create an instrument which is significant in length for the average layman, sometimes in excess of fifty (50) pages or even longer for more sophisticated commercial leases. When the first invoice appears, the tenant or the tenant's agent assigned to review the invoices (such as internal accounts payable manager, accountants, etc.) needs to be able to identify all aspects of the lease, its application and pass through expenses as against the actual bills being received.

In today's troubled real estate economy, sometimes the issues are overlooked, such as situations in which real estate taxes (for one of the few times in Florida) are actually dropping based upon the landlord's efforts to reduce such real estate taxes and the employment by the landlord of attorneys or real estate property tax advisors to reduce. Often times the cost to relieve the landlord of such real estate liability are pass through, but the actual cost savings are not passed through to the tenant. Again, this may be from oversight by the landlord or in certain cases where the landlord is looking at the common area maintenance cost as a profit center.

One other area that the tenant needs to be concerned about in paying its proportional rent is to make sure whether the proportionate share of its obligation is negotiated based upon "gross leasable space" or "gross lease space". This distinction can be significant, and is especially pronounced in today's troubled real estate times when vacancies are on the rise especially in Florida.

By way of example, using our 100,000 square foot center of which that the tenant occupies 10% and its lease is based upon proportionate pass through expenses on gross leasable space, then in such event the tenant is always going to pay pass through rent based upon the aforementioned example, 10% as the attributable common area maintenance pass through expenses.

However, if instead of the term, "gross leasable space" the term "gross leased space" (which is only slightly different in spelling but significantly different in application) was applied, then in such event, and with a 50% vacancy rate at the premises, the tenant would actually be paying two times the amount of pass through rent. In such example, the 100,000 square foot center, being only 50% leased up, the tenant's 10% leased space would be numerator and the overall gross leased space (50,000 square feet) would the denominator. The tenant would be paying 1/5 or 20% of all the common area maintenance pass through expenses under a gross leased space pass through provision even though it occupies only 10% of the entire center.

This is a trap for the unwary commercial tenant who overlooks this particular term and is beneficial to the commercial landlord since the commercial landlord will always continue to pass through 100% of the operational expenses of the center even if the center is only marginally occupied. This can have a devastating effect on the unwary commercial tenant and is even more of a trap in today's real estate economy.

 

Kevin F. Jursinski, Esq.
Kevin F. Jursinski, P.A.
7800 University Pointe Drive, Suite 200
Fort Myers, Florida 33907
(239) 337-1147
(239) 337-5364
Kevin@kfjlaw.com

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NET LEASES AND COMMON AREA MAINTENANCE CHARGES: ISSUES FOR THE COMMERCIAL LANDLORD AND TENANT

PART I- FUNDAMENTALS OF THE GROSS LEASE V. NET LEASE CONCEPTS


BY KEVIN F. JURSINSKI, ATTORNEY AT LAW

 

FUNDAMENTALS OF THE GROSS LEASE V. NET LEASE CONCEPTS

 

This newsletter will be comprised of four (4) separate installments identifying the concepts of net leases and common area maintenance charges which impact and affect the rights of commercial landlords and tenants. These issues are even more significant in today's current troubled real estate times since both the commercial landlord and commercial tenant are looking to cut costs and expenses as well as maximize their respective savings and sometimes those negate efforts run counter to each other. Further and dependent upon the structure of a lease, both the landlord and tenant need to verify the methods of calculating contributions under various net lease arrangements and leases. Common Area Maintenance charges are often times calculated utilizing concepts or formulas which are not consistent with the lease agreement itself or follow Florida law. Those issues will likewise be identified and discussed.

1.Gross Lease v. Net Lease. Most commercial leases are net leases with some contributions by the commercial tenant towards the operational costs of the subject lease premises. This differs from the gross lease concept which essentially indicates that the tenant pays a fixed flat fee on a monthly basis to cover an agreed upon and negotiated monthly lease payment. These gross leases are generally fixed for one (1) year and escalate on an annual basis, all of which is negotiated by the commercial landlord and tenant at the commencement of the lease.

A net lease differs from a "gross lease" also refereed to as "full service lease". The fundamental concept of either a gross lease or a full service lease is that under either the gross lease or full service lease the lease agreement would cover all taxes, insurance, maintenance, utilities and rent. Under a "gross lease" or "full service lease" the tenant pays a predetermined lease each month without any adjustments for increases in the operational costs of the commercial property or pass throughs for any specific expenses incurred by the landlord.

2. Various Permutations of Net Leases. A net lease is broadly defined and differentiated from a gross lease in that under a net lease scenario, the landlord and tenant negotiate a basic fair market value rent for the property, (base rent) and then negotiate all or a percentage of the operational costs of the center, predicated on differing theories and a formula for allocating contribution. The net lease can be identified as "a single net lease", a "dual net lease" or a "triple net lease".

a.Net Lease: One classic definition of a net lease is a situation in which a lease is put in place and the tenant and landlord agree on a base monthly rent for the premises. Potentially there will be annual increases based upon a fixed percentage as well as payment by the tenant of an identifiable cost expense for the subject lease premises. This net lease or single net lease may have the tenant paying for the real estate taxes for the building (assuming it is a free standing building) or alternatively, the tenant may be paying a percentage of the real estate taxes based upon the proportionate amount of the tenant space in relation to the building. The identifying sum can be passed through to the tenant. Example: Base rent $2,500.00 per month with additional past through expenses of $200.00 per month based upon taxes of $2,400.00 per year for total monthly rent for a total monthly rent of $2,700.00 plus tax.

b.Double Net Lease. This, among other permutations, would indicate the same format that is a base monthly rental payment where a tenant is paying a proportion amount for the attributable real property taxes and property insurance. Again, both the real property taxes and the property insurance are identifiable fixed sums that are allocated to the property in the form of a specific building with identifiable annual property tax bill in and annual insurance cost billable monthly. Alternatively, a tenant may pay a proportion amount of the annual tax bill and property insurance based upon 15% of the occupancy.

c.Triple Net Lease. This is a common format a commercial lease. Both the net lease and permutations of the double net lease are in the market place for smaller buildings and are subject to negotiations between the commercial landlord and commercial tenant. In comparison and in contrast to the full service lease and distinguishable from the net lease or double net lease, a triple net lease requires a tenant to carry base rent while also incurring the cost for the apparitional maintenance of the property.

Sometimes the triple net leases are referred to as a "NNN" (Net/Net/Net) which represents the fact that the triple net lease provides that the tenant actually pays all costs and maintenance associated with the building. This enables the landlord to recover from the tenant, in the form of triple net rent, all costs associated with the operational aspects of the premises and also an agreed upon base rent for return on its investment. The triple net lease generally is represented by net cost as to property taxes, insurance and maintenance as indicated.

With the triple net lease, the landlord also will pass along additional expenses such as utilities, property management fees, and other fees that can be negotiated and may be attributable through the ownership, management, maintenance or promotion of the specific property. One example of a pass through shopping center lease would be a contribution to a marketing fund where fees are not directly attributable to the actual costs of operation of the premises, but contribute to the overall goal of the tenant, to wit: generation of additional retail customer traffic which arguably benefits all tenants at the center.

In each lease negotiation between the commercial landlord and commercial tenant, the components of triple net leases need to be fully negotiated and calculated so that the commercial tenant can identify the true cost of leasing commercial premises. Arguably, the commercial landlord (if in fact calculations are identified specifically) will recapture from that tenant all of its operational cost of the particular lease premises or 100% of its operational costs for the proportion amount of the lease premises, together with an agreed upon base rent rate which is consistent with the current lease market as well as the landlord's projected return on investments. The commercial tenant however needs to be more particular in regard to identifying specific lease payments. These lease payments need to be identified so that the tenant can know what its total overhead expenses are for the lease premises which are far greater than base rent. Many tenants fail to take this into consideration and simply accept an estimated budget for the pass through without identifying specific caps or the basis for evaluating the pass through expenses.

3.Negotiated Caps on Pass Through Expenses. Some tenants with negotiating leverage are able to negotiate with the landlord a specific cap for annual pass through expenses so that the commercial tenant can identify and estimate the total "all in" expenses for both base rent and pass through expenses so that the tenant would absorb or be charged for the commercial lease premises. This allows a commercial landlord and tenant to negotiate a specific fixed fee ("cap") which gives a commercial tenant specificity and a maximum annual sum so that in the event of substantial increase and operational expenses, utilities or management fees, the tenant is now powerless and does not have to absorb all such increases.

Several examples of this would be a situation in which the commercial landlord decides to pay a premium management fee for the premises or fails to negotiate the best rates for insurance policies, maintenance expenses and the like. The fact that the commercial landlord does not operate their commercial property in the most efficient manner should not be passed onto the tenant. The commercial landlord, without any caps on expenses, does not have the pure economic incentive to reduce operational expenses since all of those operational expenses are ultimately passed along through the tenant. The only true economic factor is that the landlord ultimately would not be providing the best lease to the tenant in relation to other comparable property, and might lose the tenant in the future to another commercial property. This is small solace to the commercial tenant who has to suffer through years of inefficient management by a commercial landlord only to vacate the subject premises to find a better commercial lease deal.

4. "Management Fees" Pass Throughs. Another area for concern for commercial tenants is the "management fee" pass through language contained in the standard commercial landlord's lease. If in fact the commercial landlord can pass through whatever management fee it decides to incur at the premises, then in such event the commercial tenant may be subject to paying proportionally a higher commercial property management fee then would normally be chargeable. In many instances, commercial landlords themselves utilize this fee to tack on a property management fee for themselves or an affiliated entity which may not be truly reflective of property management, but in fact acts as a profit center for the commercial property owner.

By way of example, a typical commercial property manager working independent of a commercial property owner may charge $0.75 cents per square foot for an annual property management fee for a 100,000 square foot center. The annual cost for the property management would be $75,000.00. The property manager in such scenario would be responsible for overseeing the entire operational aspects of the center which might also include a marketing budget, maintenance, expenses, repairs, utilities as well as tenant issues inclusive of assisting with tenant communications and negotiations. Often times with a "captured" management company or a management fee that the commercial landlord sets up for itself or some unrelated entity, management fees begin to balloon which allows the commercial property owner to utilize the commercial property management fee pass through aspect as a "profit center" to supplement the lease payments.

An example of a property manager passing through a "commercial property management fee" could be a situation whereby the fee is higher than the $0.75 cents per square foot as a result of separately charging for the salary of its commercial property manager and then including affiliated charges. These charges are redundant in nature and balloon the overall pass through common area maintenance expenses and increase the overhead cost for the commercial tenant. This is an immediate economic pitfall for the tenant but also exposes the commercial landlord to potential claims from the tenant based upon a number of theories such as unconscionability, violation of Florida Unfair and Deceptive Trade Practice Act (FUDTPA) and other theories which may be established by an aggrieved tenant.

(See Part III and IV of this series regarding commercial landlord and tenant legal rights remedies and issues).

Kevin F. Jursinski, Esq.
Kevin F. Jursinski, P.A.
7800 University Pointe Drive, Suite 200
Fort Myers, Florida 33907
(239) 337-1147
(239) 337-5364
Kevin@kfjlaw.com

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Parking Issues For Commercial Tenants - Part II


BY KEVIN F. JURSINSKI, ATTORNEY AT LAW

 

Traditional and current parking lot issues between Landlord and Tenants as a result of the current real estate economy.

In last month's Newsletter we spoke about the manner and method in which a commercial Tenant can protect its interest in regard to parking spaces which may affect its business. This month's Newsletter will address case law and some of the traditional parking problems and how the Courts construed them and some new problems that have arisen as a result of the fact that commercial Landlords have now resorted to utilizing their parking spaces for income producing events such as car shows, promotional events, onsite parking for a fee and other fee generating activities.

Current problems have also arisen because many Landlords are cutting expenses which is reflected by lack of maintenance of the parking facilities creating a potential problem either in the form of reduced lighting, repair and maintenance which could result in the Landlord and Tenant being exposed for claims of personal injury or damages to personal property as a result of such shortcuts.

Here is an overview of cases and issues:

1. Permanent Diminution Of Parking Area:

A classic case of diminishment of parking is Jack Eckerd Corporation, Appellant v. 170170 Collins Avenue Shopping Center, Ltd. and Taco Bell Corporation, 563 So. 2d 103 (3DCA 1990). In that case, the Landlord, a shopping center, had a lease with a Tenant, which in this case was Eckerd Drug Store, which contained a restrictive covenant which prevented the Landlord from reducing the parking area by construction on an outparcel without the consent of the Tenant. The Landlord, nonetheless, and in violation of the restrictive covenant, entered into a new lease with Taco Bell, to build on the outparcel. This trial court initially ruled against the Tenant who sought a temporary injunction with a trial court finding that the modifications proposed to the parking area were reasonable and would not materially diminish the parking available to the drug store.

The Third District Court of Appeals in the case cited above indicated that in fact a Tenant is not required to prove irreparable damage if the Tenant has a restrictive covenant in its lease. I agree with the finding of the Third District Court of Appeals inasmuch as a trial court should not have placed itself in the position of determining whether diminution of parking spaces would affect a business' operation inasmuch as the Court should focus its attention on enforcing contractual provisions. This is a traditional case involving the Landlord who sought to build out as much of his parking lot as possible, either for prospective rent or prospective sale to third parties.

This is why it is even more important for the commercial Tenant (as indicated in last month's Newsletter), to identify the specific number of parking spaces it has and ideally to have some of those parking spaces reserved and identified for the Tenant and its customers with the appropriate tow away signage, all of which are designed to preserve and protect the major investment that the Tenant has in operating his business at the commercial space.

For a contrasting view on injunctive relief against a Landlord building into outparcels, please see Sacred Family Investments, Inc. v. Doral Supermarket, Inc., 20 So. 3d 412 (3DCA 2009).

2. Lack of Maintenance/Repair for Parking Fields:

Two areas that are creating issues that could be forthcoming given today's real estate downturn is the lack of maintenance and repair for parking lots. In the event, a parking lot is not fully maintained or repaired which could result in the Landlord reducing the amount of lighting, not replacing burned out lighting, failing to repair surface areas, trimming trees, et cetera, the result of such lack of maintenance can be that prospective Tenants might be exposed to injury or damage based upon the lack of repair or maintenance.

Initially and subjectively, prospective customers may choose not to frequent the Tenant's business because of shoddy parking facilities or unsafe parking facilities. Even more important, however, is the fact that Tenants might be exposed to liability from their business invitees or customers based upon a negligent failure as could be the Landlord based upon a negligent failure to repair a dangerous or defective condition.

3. Potential Lighting and Physical or Property Damage Due to Lack of Maintenance:

In the case of Franklin L. Smith v. Grove Apartments, LLC, 976 So. 2d 582 (3DCA 2007), the Landlord failed to maintain the parking lot and there were defective conditions in the parking lot as in the Grove Apartments case, the overgrown trees. In this particular case, the Tenant stated a cause of action against the Landlord for negligent failure to repair a dangerous or defective condition, with the Tenant alleging that the Landlord either had actual or constructive knowledge of the condition or of statutory code violation for sufficient time to make a correction with the Landlord failing to do so.

This type of situation may arise more often in today's real estate marketplace when commercial Landlords are cutting budgets and finding themselves in a cash crunch for common area maintenance especially when a significant percentage of their Tenants who normally would be paying pass through common area charges have vacated the premises or alternatively have ceased paying all or a portion of their rental. Again, this is a warning for both Landlords and Tenants because there are a number of causes of action and the failure to maintain can result in a number of problems for both the commercial Landlord and Tenant as specified above.

4.Temporary Use to Generate Income - New Issues in Today's Economy:

An interesting facet in today's real estate economy is activities that are undertaken by commercial Landlords, both in retail and office settings, to generate income or alternatively to generate customer traffic.

In retail settings, many commercial Landlords are sponsoring events which create additional foot traffic for the retain Tenants. However, this also creates a problem when the type of event sponsored is not conducive to a certain retail Tenant's business. In certain circumstances, certain retail Tenants have not supported a Landlord's actions in promoting events at the center.

Here is an example:

A commercial center contains a number of stores as well as a sports bar, a hardware store, ladies fashion dress store and sewing/fabric store. To generate return customer traffic, for at least some of the Tenants, the Landlord chooses to sponsor a monthly car show for hot rods and car enthusiasts. This most likely would attract those people who would be more apt to frequent a hardware store and a sports bar versus a high end ladies fashion store and/or a sewing and fabric center (Please - no offense to women or fashion aficionados).

With that said, these events may turn in to a success and a substantial portion of the parking lot may be taken by the car show event. Those attending the car show would be parking in customer parking spaces. Many of those people who frequent the car show might gravitate towards eating or drinking at the sports bar or stopping in at the hardware store but the chances are greater for them doing that than for that person to likewise to frequent the dress shop or sewing/fabric center. At the same time the car show is going on, however, there is a substantial impact upon customers who actually wanted to park and have easy access to the dress shop or the sewing/fabric center. These prospective customers might be inconvenienced by this activity. As such, that type of activity, by the commercial Landlord, even done in good faith, may in fact be detrimental to certain of their retail Tenants.

Likewise, in a commercial setting/office setting located in a desirable location there may be certain occasions or times per month where a portion of the parking lot could be utilized for offsite parking for either event. For example, if there are concerns, promotions or other monthly events occurring in the general area of the commercial parking lot, there may be a substantial overflow of cars from patrons of that event.

The Landlord might find themselves attracted enough to initiate on site "for pay" parking at its commercial parking lot. In doing so, the Landlord would be eliminating the available parking spaces for its very own commercial Tenants which might result in those commercial Tenants being damaged.

In such event and dependent upon the type of lease that was entered into between the commercial Tenant and the commercial Landlord (see last month's article on commercial Tenant clauses relating to parking spaces) and further based upon the impact and negative effect that such parking would have upon the commercial Tenant, the aggrieved Tenant might be in a position to claim damages or alternatively, claim injunctive relief to preclude the Landlord or modify the activities of the Landlord to avoid an ongoing damage to the prospective Tenant.

In all instances involving a commercial lease, both the commercial Landlord and the commercial Tenant should be fully aware of what they are signing when the lease is entered into and then conduct themselves in a commercially businesslike manner. Due to certain situations such as the downturn in the real estate economy, the Landlord may choose to alter their normal business practices which might cause damage to the Tenant's leasehold interests. "Drastic times call for drastic measures" could be applicable to the actions of the Landlord, but unfortunately that creates unintended consequences.

 

Kevin F. Jursinski, Esq.
Kevin F. Jursinski, P.A.
7800 University Pointe Drive, Suite 200
Fort Myers, Florida 33907
(239) 337-1147
(239) 337-5364
Kevin@kfjlaw.com

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Parking Issues For Commercial Tenants - Part I


BY KEVIN F. JURSINSKI, ATTORNEY AT LAW

While it is certainly important for residential Tenants to have a parking space or spaces for the occupants of the residential units versus parking at a less acceptable location, it is absolutely critical for commercial and retail Tenants to have adequate parking not only for the Tenants and staff but as importantly and possibly more importantly for the prospective customers, clients and business invitees.

This Newsletter will focus on some fundamentals of commercial parking with the following month's Newsletter to address specific case law and specific fact patterns which have occurred in the past, which may occur in the future and also will address some unique situations which are now occurring due to the troubled economic times. Some of those situations result from Landlords making use of parking space not only creating the traditional headache, i.e., selling off a portion of the outparcel, permanently removing a portion of the parking lot and parking facilities from the commercial Tenant but in today's economic times Landlords are generating sales, promotions, and doing "for pay" parking to third parties, outside parking and other issues, all of which may have an impact, both positive and negative, on a Tenant.

Let's start with the basics:

1.Commercial lease: It is fundamental for the Tenant to have the lease thoroughly reviewed by a real estate professional prior to the Tenant signing.

Unlike the residential tenancy statute, the commercial tenancy does not afford the Tenant with statutory protection as in the residential tenancy statute. One example is the fact that in residential tenancy statute there is a specific format and procedure for escrowing deposits, format for returning deposits and remedies if deposits are not returned. No such provision exists for commercial Tenants. The suggestion is that the legislature believes that commercial Tenants should be sophisticated enough to identify those issues by contract whereas a residential tenancy might not have the same ability.

The same holds true for the diligence of the commercial Tenant in regard to parking. Whether the commercial Tenant intends to utilize the premises for the operation of its business and does not count on clients to visit the facility, the Tenant nonetheless still must have adequate and substantial parking for its staff. Likewise, when the tenancy is for commercial office space, the Tenant not only has to consider this location for staff but also have to consider parking space for its prospective clients and business invitees.

When the space is retail, it becomes absolutely critical to attract potential walk-in retail customers that there be not only adequate but easily accessible parking for all prospective retail customers. In order to so the Tenant must specifically identify those particular parking spaces in its lease.

2.General Lease Provisions:

In most commercial leases there is a clause addressing parking, some more detailed than others. In general, the Landlord normally inserts in to the lease that there will be adequate parking to service the prospective use by the Tenant. The Landlord, as owner of a commercial building, when the building was completed and in order to get a certificate of completion, would have been required to have normal and necessary parking spaces to allow the building to be utilized for its prospective use.

From the time of the certificate of completion, however, through the time the Tenant would take occupancy, numerous changes could have occurred in reference to the building's usage. For example, it could have gone from a building which had normal or even minimal demands for prospective customer parking, i.e., an accounting office, an attorney's office (which would not normally have high volume clients) to a situation such as medical usage, in some instances dental usage and in the heyday of real estate, real estate offices in which the clients, customers (and potentially staff) resulting in a significant amount of real estate associates that would come in for in person, weekly or more often meetings).

This could cause a tremendous strain on the parking facilities at such buildings. In such situations, if the Tenant had not specifically negotiated for a specific designated number of spaces and ideally identified those specific spaces reserved for the Tenant parking issues could negatively impact the Tenant's business.

Example: A Tenant opens its office space in a retail type strip center and the lease simply generally indicates that it has the opportunity to utilize the overall parking field at the center. In the event the Tenant does not designate reserved parking spaces and/or spaces for its employees, the Tenant can find itself and/or his customers without any available parking spaces in close proximity to the Tenant's business and on certain occasions (such as a medical office opening next door and a real estate office opening on the other side). The Tenant can find itself on certain days without adequate parking for its prospective customers and in certain instances a lack of parking spaces even for its own staff.

3.Specific Identification of Parking Spaces for Employees and Customers

Ideally, the Tenant should identify specific parking spaces for the Tenant's use.

The first criteria would be for the Tenant to identify how many parking spaces would be allocable to that Tenant's particular unit. This would be based upon the current zoning, the Tenant's square footage use as well as the overall square footage of the particular building in which the space is leased. The Tenant then should specifically indicate that it would have identifiable parking spaces for its staff/employees which might be in a less desirable location than for customer parking but, at least, the Tenant would afford its staff/employees specific identifiable parking spaces.

The Tenant should then indicate that in close proximity to its location and based upon, again, the allocable parking spaces to its business, that there would be spaces specifically marked for customers or clients of that particular Tenant's office space reserved solely for their use.

Lastly, if the Tenant was able to secure such by written lease, the Tenant could also require the Landlord to post in a prominent conspicuous location to the parking spaces, parking signs indicating that the parking lot is reserved solely for the commercial Tenants and their employees and customer of this particular building or center and that parking in reserved parking spaces by unauthorized vehicles would be subject to towing pursuant to Florida Statute 715.07.

 

Kevin F. Jursinski, Esq.
Kevin F. Jursinski, P.A.
7800 University Pointe Drive, Suite 200
Fort Myers, Florida 33907
(239) 337-1147
(239) 337-5364
Kevin@kfjlaw.com

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Execution of Commercial Leases by Disinterested Witnesses and Initialing of Pages


BY KEVIN F. JURSINSKI, ATTORNEY AT LAW

 

Recently I had an inquiry in regards to the execution of a Commercial Lease by disinterested witnesses, or more particularly, the question was phrased:

"Can an interested party, i.e. a member of the LLC, tenant entity or affiliated entity, act as witness to the specific lease agreement in question?"

Florida has a line of cases as well as a specific statute indicating that in the execution of wills and specifically the witnesses to such instruments must be totally disinterested.

Edward Brennan and Terrence Brennan v. Estate of Edward J. Brennan, Jr. 35 Fla. L. Weekly D 1645 (5DCA 2010)

Cites Florida Statute §733.207 which provides:

"Any interested person may establish the full and precise terms of a lost or destroyed will and offer the will to probate. The specific content of the will must be provided by the testimony of two disinterested witnesses, or, if a correct copy is provided, it shall be provided by one disinterested witness."

A long standing concept in Florida Law which is that an interested person to a will, which results in that person receiving a conveyance or portion of the estate, should not be a witness to the will. This is based upon a number of theories, but essentially the fact is that the person executing the will must be deceased at the time the will is interpreted.

There are also questions of undue influence of a witness and/or question of the witness validating the mental capacity of the person executing the will. As such, Florida does not allow an interested party to be a witness to the will, and is quite specific on that particular point.

As to the Commercial Leases there is no specific statute like F.S.§733.207 in Florida relating to the fact that a witness to a contract is precluded from signing as a witness if the person has an interest in the actual subject matter of the contract. However commercial landlords, property managers as well as tenants would be cautioned to absolutely avoid such a situation.

Whenever it is called into question whether a lease was fully executed, was executed by the person (either in an individual capacity or a representative capacity) or whether there was something mentioned, something stated or represented as an inducement to the person executing the will the witnesses to the will might be called upon to provide testimony.

Clearly when a witness to a commercial lease is an interested party, for example an officer of the entity which is one of the contracting parties, etc., that testimony is going to be questioned by the trier of fact since the individual has an inherent bias or at least arguably it can be claimed that there is an inherent bias in favor of one of the parties to the lease.

As such and again, a specific and practical procedure for execution of commercial lease is to absolutely:

a. Provide two disinterested parties as witnesses to witness the execution of the lease on behalf of the landlord and;

b. Provide two disinterested parties to execute and witness the lease on behalf of the tenant.

c. Verify that the lease is executed by the actual entity or an individual who is a party to the lease, be it the Landlord or Tenant and;

d. Verify that if it is a recognized Florida entity, i.e. Corporation, LLC, etc. the person's actual capacity and authority to execute should be specifically identified. Example: John Smith as managing member of Commercial Tenant, LLC.

Initialing of pages: It is also highly suggested in the case of lease agreements that each and every page be initialed by the signator parties and further, in the event that there is any interlineations (a change in one of the terms handwritten in), that such change or interlineations likewise be initialed on the specific page in which the change appears.

Commercial parties to a written lease should make sure that they eliminate all possibilities of any questions as to the validity of the lease starting with the formal formalities of the execution. There are numerous other issues that arise in enforcement of a lease as to terms and conditions and various facts that can arise from the interpretation of the lease. At the very least, the parties to a commercial lease should eliminate any questions as to the enforceability of the lease from the practical standpoint of the proper and formal execution of the lease.

Kevin F. Jursinski, Esq.
Kevin F. Jursinski, P.A.
7800 University Pointe Drive, Suite 200
Fort Myers, Florida 33907
(239) 337-1147
(239) 337-5364
Kevin@kfjlaw.com

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DEBT OBLIGATIONS AND PERSONAL LIABILITY ON GUARANTIES WITH INARTFULLY DRAWN LEASES


BY KEVIN F. JURSINSKI, ATTORNEY AT LAW

 

Currently there is a significant increase in the amount of commercial lease litigation that is taking place due to many tenants defaulting on commercial leases. In commercial leases unlike residential, the lease is generally written so that the tenant is identified as an entity rather than an individual's name. This is done for a number of reasons which include insulation of the individual owners from liability for actions in regard to the underlying business operation, ease of transference of the business, tax reasons as well as reasons related to potential exposure of the business for tort claims as a result of injuries, etc.

In most instances however, when a landlord enters into a lease agreement with an LLC or entity, barring the entity being a significant national tenant or being substantially solvent, the landlord will require on such commercial lease that the tenant provide for a personal guaranty of one or more of the principals of the company to guarantee the payment of the debt obligations and any and all other obligations of the tenant under the lease.

We have recently had an article written on lease guaranties and formatting which appeared in my March, 2010 newsletter.

I want to focus now on issues that arise in many commercial leases which are inartfully drawn or executed improperly.

The specific instance I want to address is the example of a lease for premises to a certain identified entity (a Florida LLC, a Florida Corporation, etc.). This reference appears in the initial heading of the lease, but the signature block is not formatted in the same way and as such, the signature block contains either of these variations as the signature block:

1.The signature block shows the actual name of the entity with the signature designating the individual signing it as either the President, Managing Member or other authorized agency. In this particular scenario the lease (assuming there are two (2) witnesses for a lease in excess of one year), is enforceable against the entity.

2. A situation wherein the lease is structured in the name of an entity, but the signature block has no designation for the person signing. In such situation, the person signing it may sign either in its capacity (President, Managing Member, Authorized Agent), and designates same (signing with designation such as "John Smith as Managing Member"), or alternatively, signs the document without such designation. If it is the former, then in such event (and barring any additional lease language), the tenant would have signed in the specific identifiable capacity and would not be individually liable. If however, the tenant simply signs the lease without designating how the tenant is signing ("John Smith"), the tenant in fact simply signs the lease individually. This may create an ambiguity in the lease, but would lead to the initial position that without any designation as to a capacity of an individual to sign and without any indication of the authority to sign for the company, the individual simply executed the lease in their own name.

The last scenario would be a situation where although the lease is with an individual rather than have a separate individual guaranty, the lease would indicate, for example in one of the paragraphs that notwithstanding the fact that the lease is being entered into between landlord and tenant, the individual who actually executed the lease agreement on behalf of the tenant would also, by execution of this lease agreement be signing in not only capacity of the company, but also obligating that person individually to guarantee the performance of the lease.

This scenario came up in the case of Onderko vs. Advanced Auto Insurance, Inc., 477 So. 2d 1026 (2DCA 1985),

"Here, paragraph nineteen of each auto lease clearly states that the person signing on behalf of the corporation not only warrants his authority to do so but also accepts any joint and several liability with the corporation for rent and other amounts du the lessor. Although Capitano's name does not appear in the body of the leases, its provisions refer to him. When he signed in his representative capacity, as evidenced by his signature located below the typewritten name "Advanced Auto Insurance, Inc.," and after the word "by," he also became bound in his individual capacity under the terms of the leases. It would have made no difference had he added any descriptio personae beside his signature."

Signing a lease guarantee for the entity and then indicating that the signature was in a representative capacity may still lead to liability on the guaranty; Malt vs. Carpet World Distributors, Inc., 763 So. 2d 508 (4DCA 2000).

Further, reference is made back to our March, 2010 newsletter, identifying the scope and substance of guaranties (unconditional or guarantee of payment). Again, this has become significant due to the enforcement rights now undertaken by landlords as to tenants and the efforts of landlords to pursue viable recovery methods which include pursuing rights against those persons personally obligating themselves on leases.

Kevin F. Jursinski, Esq.
Kevin F. Jursinski, P.A.
7800 University Pointe Drive, Suite 200
Fort Myers, Florida 33907
(239) 337-1147
(239) 337-5364
Kevin@kfjlaw.com

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THE EFFECT OF COMMERCIAL FORECLOSURES ON COMMERCIAL TENANTS: PART II
ATTORNMENT AND NON-DISTURBANCE

BY KEVIN F. JURSINSKI, ATTORNEY AT LAW

 

Last month we discussed the current real estate economy, prospective commercial foreclosures and the impact and effect such trends would have on commercial tenants. We discussed attornment and subordination language in the lease which, when included, could negatively impact the interest of the tenant. This month we address non-disturbance language into a tenant's lease.

Initially, non-disturbance language in a lease is a tenant's way to avoid compromising its position and having its leasehold interest made inferior to and subject to the actions of the lender.

In addition thereto, the Commercial Tenant may want to make sure that not only does it have a non-disturbance clause in its lease as to avoid being impacted or negatively affected by a foreclosure, but the commercial tenant may also wish to consider inserting language precluding the tenant from being relocated.

Here is a brief overview of this topic:

Non-Disturbance- The tenant's way to avoid compromising its position. Many national tenants will require a non-disturbance agreement in place so that as long as the tenant is not in default of the lease and if the mortgage is foreclosed upon with the underlying commercial property being subject to such foreclosure, the following will be in place to preserve and protect the leasehold interest of the tenant:

1. The lender must acknowledge the existence of the commercial lease.

2. The lender cannot disturb the tenant's rightful possession or use of the subject lease premises provided such use is in accordance with the lease. The mortgagee or any prospective purchaser at a foreclosure sale must acknowledge the validity of the lease since such provisions may not be eliminated by foreclosure sale.

3. The tenant cannot be named as a party defendant to a lawsuit to have its interest foreclosed. If in fact suit is initiated, the commercial tenant would still have the right, based upon the contractual language contained in the lease agreement, to remove itself as a party defendant in any such foreclosure action, since they would not be a necessary or proper party to such action.

4. The foreclosing lender, or in fact any foreclosing purchaser at a prospective foreclosure sale, would need to assume the landlord's obligations under the lease which include the rights, duties and obligations the landlord owes to the non-defaulting tenant.

5. Insurance proceeds may also be disposed of in accordance with the lease interest and not in accordance with the language contained in the mortgage.

Many sophisticated commercial tenants also insert provisions that preclude the ability of the landlord to relocate the tenant. The location obtained by the tenant generally is favorable and is a location (especially in a retail setting) which suits the needs of the tenant and fits their business goals. Allowing the landlord to relocate the tenant to another less desirable location, even though comparable in size, space and features, could compromise that tenant's business, again especially in a retail setting.

It is important for a tenant to negotiate not only basic terms and conditions of the lease, but also be fully aware of the impact and effect of attornment and subordination language and non-disturbance provisions in a commercial lease which would affect that particular tenant.

Kevin F. Jursinski, Esq.
Kevin F. Jursinski, P.A.
7800 University Pointe Drive, Suite 200
Fort Myers, Florida 33907
(239) 337-1147
(239) 337-5364
Kevin@kfjlaw.com

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THE EFFECT OF COMMERCIAL FORECLOSURES ON COMMERCIAL TENANTS PART 1:
ATTORNMENT AND NON-DISTURBANCE
BY KEVIN F. JURSINSKI, ATTORNEY AT LAW
 

 

The Real Estate Market of 2010 has been generating a significant increase in commercial foreclosures which is affecting commercial tenants. In fact, commercial foreclosures seem to be on the increase and by all predictions there will be more commercial foreclosures in the coming years as a result of the following:

By all economic indicators and projections, the commercial real estate economy is heading on a course strikingly similar to the path of our residential real estate economy.

A vast oversupply of commercial property was financed and constructed from 2004 through 2008. And like the residential sector, commercial buildings constructed and financed were overvalued, exposing lenders to the extreme risks that come from unsustainable debt levels predicated on high occupancy and unrealistic projections for high rental rates.

Instead, commercial occupancy rates in Florida have dropped dramatically because of increased unemployment as a result of the collapse in residential real estate and the ripples from that. Lee County for instance, is now at the bottom of 100 U.S. Metropolitan areas in unemployment, leading the nation with more than 16% unemployment.

It's a vicious cycle. As vacancies increase, commercial property owners struggle to service mortgage debt, heightening more and more defaults. Nationally, $814 billion in commercial real estate loans will mature over the next three or four years, yet there are few if any sources for financing and refinancing. And as more loans default, foreclosures result further creating a downward spiral of commercial real estate prices, further putting out of reach any possible refinancing scenarios.

How Commercial Foreclosures Affect Commercial Tenants:

When a commercial foreclosure is initiated, the lender initiates suit to foreclose out the interest of the owner of the subject property. In case of commercial foreclosures the owner is not only the mortgagor who has defaulted on the payment obligation of the mortgage, but is also the landlord on the property. As Landlord, the owner has contractual rights with all of the existing tenants. In the event of a commercial foreclosure, the commercial lender has the opportunity (depending when the mortgage was put in place and what the terms and conditions of the existing lease contains) to eliminate the interest of the tenant at the commercial property. The impact and effect on the commercial tenant is significant. The Tenant could be exposed to having then leasehold interest foreclosed and losing occupancy especially if a tenant has a below market lease. In a foreclosure action the tenant may also face an uncollectable Landlord to answer for the tenant's damages.

Let's discuss the various scenarios inclusive of attornment and non-disturbance language.

2. Attornment language in a commercial lease:

"What the heck does attornment mean?"

In every commercial lease there is generally language in effect as to attorment.

Attornment is defined as follows:

Attornment: In English real property law, is the acknowledgment as to a new landlord by the existing tenant upon the alienation of land. As used in modern legal transactions, the term "attornment" refers to an acknowledgment of the existence of the relationship of landlord and tenant. A tenant often has duty under the tenant's lease, particularly in commercial leases, to provide an attornment upon request, and is required by a creditor or potential buyer of property from the landlord to establish the nature of existing encumbrances on and income streams flowing from a property, as a element of the due diligence process associated with the transaction.

Attornment is necessary in the event that the commercial owner of the property needs to obtain financing or refinance its mortgage and needs to continue to maintain priority for present or future commercial loans. In such case, the landlord must identify the fact that the tenant agrees to acknowledge the landlord/tenant relationship and subordinate its leasehold interest to the interest of the current or prospective mortgagee (lender).

This satisfies the needs of the commercial lender who wants to have an absolute first priority on the subject property and also empowers the landlord as a mortgagor to finance and refinance the property. It does have a negative impact on the tenants, especially in situations when the tenant has a very favorable lease.

Here is an example of how attornment can negatively affect a tenant who has a favorable lease: In our example a tenant signs a ten (10) year lease with a favorable lease rate which may in fact be substantially below market. Normally a foreclosing lender may want to keep all commercial tenants in place. However the more favorable the lease is to a tenant, the more inventive the landlord has to eliminate the lease. In such a situation, the tenant's lease (notwithstanding the contractual rights between the tenant and the landlord) can in fact be dislodged if in the future a commercial lender chooses to eliminate that tenant in the event of a foreclosure.

In our example it is a situation in which the commercial lender elects to foreclose out the interest of the landlord/defaulting mortgagor and recognizes the fact that there is an existing lease which creates a negative detriment to the property from a market value. Lenders are keenly aware that the value of the commercial property is predicated on the economic terms of the lease and the strength of the tenant, especially in situations in which the tenant may be a local tenant who has negotiated a below market lease which may have had a negative impact upon the eventual value of the subject property.

If in fact that particular lease has an attornment along with and subordination provision in it, the commercial lender might consider foreclosing out the interest of that existing tenant in the event there is below market rent if the commercial lender believes that in a foreclosure the property would be more valuable without the existing and below market tenant in place.

An example of attornment language without subordination language is:

"Tenant shall at any time and from time to time upon not less than ten (10) days prior notice by Landlord, execute, acknowledge and deliver to Landlord a statement in writing and in form and substance satisfactory to Landlord certifying that this Lease is unmodified and in full force and effect (or if there have been modifications), that the same is in full force and effect as modified and stating the modifications, and the dates to which the basic annual rent, additional rent and other charges have been paid in advance, if any, and stating whether or not to the best knowledge of the Tenant, Landlord is in default in the performance of any covenant, agreement or condition contained in this Lease and, if so, specifying each such default of which Tenant may have knowledge. Any such statement delivered pursuant to this paragraph may be relied upon by any prospective purchaser of the fee of the Building or the Project, or any mortgagee, ground lessor or other like encumbrance thereof or any assignee of any such encumbrances upon the Building or Project.

If any Superior Lessor or Superior Mortgagee shall succeed to the rights of Landlord hereunder, whether through possession or foreclosure action or deliver of a new lease or deed, then, at the request of such party (hereinafter referred to as "Successor Landlord"), Tenant shall attorn to and recognize each Successor Landlord as Tenant's landlord under this Lease and shall promptly execute and deliver any instrument such Successor Landlord may reasonably request to evidence such attornment. Upon such attornment, this Lease shall continue in full force and effect as a direct lease between Successor Landlord and Tenant upon all the terms, conditions, and covenants as set forth in this Lease except that the Successor Landlord shall not: (1) be liable for any previous act or omission of Landlord under this Lease; (2) be subject to any offset, not expressly provided for in this Lease, which theretofore shall have accrued to Tenant against Landlord: or (3) be bound by any previous modification of this Lease or by any previous prepayment, unless such modification or prepayment shall have been previously approved in writing by such Successor Landlord. The requirements of Tenant hereunder to attorn to and recognize a successor Landlord are subject to Tenant being provided with quiet enjoyment of the subject premises and without disturbance of any rights afforded to Tenant under this Lease agreement."

If a lease contains a subordination provision, subordinating the right of the commercial tenant to superior mortgages, then the tenant could have its leasehold interest foreclosed. A commercial tenant has to be keenly aware in its negotiations that although it has contractual rights identified as far as length of term, base rent and other lease terms, in a situation in which a tenant allows for an attornment together with subordination paragraph to be inserted into the lease, the tenant's position will be inferior to the lender who is in place at the time that the mortgage was put in place. They are also potentially inferior to even future lenders who can rely upon the attornment and subordination language to take priority over the tenant's position.

 

Kevin F. Jursinski, Esq.
Kevin F. Jursinski, P.A.
7800 University Pointe Drive, Suite 200
Fort Myers, Florida 33907
(239) 337-1147
(239) 337-5364
Kevin@kfjlaw.com

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Additional Problems Facing Commercial Property Managers During Troubled Economic Times:
Payment Arrangements by Tenant


BY KEVIN F. JURSINSKI, ATTORNEY AT LAW

 

A common occurrence facing property managers in their attempts to do lease default workouts is for the tenant to tender a partial payment. I have previously written on the subject of conduct being construed against the landlord and potentially modifying the lease agreement by the landlord's conduct and interaction with the tenant. See my June, 2009, commercial lease newsletter 

I have also previously addressed the procedure and format under Florida Statute §83.20, to provide notification to the tenants of a default in the lease and the demand for past due rentals as a precursor to enable the landlord to commence an eviction suit. See my March, 2007, commercial lease newsletter

A summary of those two articles indicates that the landlord:

a. Should provide that any agreement with the tenants be specifically set forth in writing, signed by both the landlord and tenant, and duly witnessed; and

b.Should provide that any demand for rent to trigger an eviction action must identify specifically "rent" (as defined under the lease) and demand only that amount then due and owing specifically in a written notification and provide the tenant with a minimum of three-days notice (pursuant to Florida Statute §83.20 or longer depending upon the lease). "Rent" for purposes of an eviction action is consideration paid, usually periodically, for use or occupation of property Cascella v. Canaveral Port Authority, 827 So. 2d 308 (5 DCA 2002).

Many commercial landlords now are faced with the problem of initiating demands for outstanding rentals. The tenant, either in a good-faith attempt or otherwise, then tenders less than the full amount demanded in order to cure the default without paying the full amount so demanded. For example: The tenant fails to pay two (2) months rent at a $1,000.00 per month. The rent as defined in the lease is for $1,000.00 together with late charges being construed as rent with the landlord then being able to recover a $1,000.00 for rent, $50.00 as late charge per month. With the lease payments in default per the above example, the tenant is responsible for paying $2,100.00 in "rent" which includes the base rent and the late charge construed as additional rental payments under the lease. (Note: In the event a late charge or other recovery item is not specifically defined as "rent" in the lease, it cannot be demanded pursuant to Florida Statute §83.20. Although it still may be due and owing to the landlord such additional cost items is defined as "rent" by the lease cannot act as a basis for a demand under Florida Statute §83.20)

Getting back to our example: the landlord issues a Florida Statute §83.20 notice demanding the tenant pay the two months rent of $2,100.00, within three days (not counting the day of service, weekends, or holidays) from the service of the Florida Statute §83.20 notice. The tenant, hoping to avoid being defaulted, tenders a payment of only one month rent without late charge, tendering in our example the sum of $1,000.00 against the demand of $2,100.00.

The non-residential statute in Florida, Florida Statute §§83.001 through 83.251, addresses specifically a waiver by the landlord in accepting full payment. Florida Statute §83.202 states as follows:

"Waiver of right to proceed with eviction claim.--The landlord's acceptance of the full amount of rent past due, with knowledge of the tenant's breach of the lease by nonpayment, shall be considered a waiver of the landlord's right to proceed with an eviction claim for nonpayment of that rent. Acceptance of the rent includes conduct by the landlord concerning any tender of the rent by the tenant which is inconsistent with reasonably prompt return of the payment to the tenant."

Without question, if the tenant had paid $2,100.00, accepted by the landlord (before or after the default) then in such event the landlord would be precluded from initiating an eviction action. In our case, however, the question then would arise: How is Florida Statute §83.202 construed when a tenant tenders only a partial payment in light of a demand for rent for the full amount. There are no specific cases directly on point. A case that partially addresses this particular point is the case of Philpot v Bouchelle, 411 So. 2d 1341 (Fla. 1st DCA 1982). In that case it states as follows:

 

"This court reversed the trial court and ordered a directed verdict for the lessor where the lessee was in default on its rent, but wished to exercise the option to purchase. The lessee in Philpot testified that he had substantially accomplished all the conditions of the lease and the option. The lessee, however, admitted that his rent payments [**12] and the payment on a required note had been late, but testified that the lessor had accepted the late rentals "graciously." There, this court held the lessor had not waived, by acceptance of tardy rental payments, the conditions necessary to the lessee's exercise of the option to purchase where the lease/option agreement provided as follows:
The rights of the lessor under the foregoing shall be cumulative and the failure on the part of the lessor to exercise properly any rights given hereunder shall not operate to forfeit any of said rights."

The case of Eskridge v. Macklevy, 468 So. 2d 337 (Fla. 1st DCA 1985) rev. denied, 478 So. 2d 54 (Fla. 1985), indicates that generally anti-waiver provisions in the lease agreement are enforced.

Accordingly, using our example in which a landlord has:

a. A specific written lease agreement;

 b. A provision in the lease agreement which indicates non-waiver provisions;

c. A properly issued demand notice for $2,100.00; and

d. Received a partial payment of $1,000.00,

the suggested approaches for the landlord, are as follows:

a. Notify the tenant that the tenant has failed to respond timely and in the full amount demanded of $2,100.00;

b. Indicate to the tenant that the landlord will accept the $1,000.00, but only as partial payment;

c. Reissue notification to the tenant that there is still the sum due and owing of $1,100.00;

d. Utilize the first notice as a basis to initiate an eviction action for non-payment of the notice under Florida Statute §83.20 or take a more conservative approach and reissue the Florida Statute §83.20 notice to the tenant, making demand for the $1,100.00 that is due and owing. The landlord can indicate that, notwithstanding the $1,000.00 payment, such partial payment and acceptance by the landlord was not conduct indicating a waiver of the demand and that acceptance of the $1,000.00 payment was not enough to cure the default nor preclude the landlord from initiating an eviction action and declaring the lease in default.

This above approach is an approach based upon the litigation strategy to avoid a tenant claiming that the landlord waived the §83.20 notice and that for some reason the landlord, by acceptance of a lesser sum, indicated that the lease was cured and not in default.

From a pragmatic and business standpoint, especially in light of today's marketplace, a commercial property manager may want to utilize the opportunity to communicate with the tenant and receive the $1,000.00 payment, indicate that it is not a waiver of the default, but use the opportunity as a platform to then negotiate to collect the balance of the $1,100.00, using our example above. It seems prudent that in these troubled economic times that a commercial landlord first protect their legal rights and the litigation strategy in regard to this matter, while at the same time, considering the realities of the situation recognizing that the goal is to bring the tenant current and have a continuous stream of rental income from the specific lease space in question.

The commercial landlord should avoid, at all costs, simply accepting the rent under some type of oral conversation ("oral handshake") or some type of purported understanding with the tenant that the acceptance of the rent defers any right of the landlord to pursue an action to evict or that for some reason a partial payment would cure the entire default.

Any default (partial payment of rent situation) should be clarified specifically and in writing. The best approach is the aforementioned letter confirming the partial payment, acceptance of the payment and the non-waiver of the default, as well as a ratification of the lease provision containing such non-waiver provisions.

Note: The underlying assumption in all of this is that the landlord has a viable and well prepared lease agreement, specifically outlining the rights and duties of the parties, in the event of a default, in clear and concise terms and which also contains appropriate remedial clauses consistent with Florida Law.

Kevin F. Jursinski, Esq.
Kevin F. Jursinski, P.A.
7800 University Pointe Drive, Suite 200
Fort Myers, Florida 33907
(239) 337-1147
(239) 337-5364
Kevin@kfjlaw.com

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TWO (2) WITNESSES REQUIRED ON LEASE (REVISITED)


BY KEVIN F. JURSINSKI, ATTORNEY AT LAW

There has been further litigation addressing the execution of long term commercial leases (more than a term of one year). Again: to avoid a legal issue it is imperative that there be two (2) subscribing witnesses on your commercial lease agreements regardless of the entity or format of the document. In my December, 2008, newsletter I identified issues as to the form of the lease agreement and the fact that lease agreements for a period of time in excess of one (1) year needed two (2) subscribing witnesses, but there are exceptions for corporations and LLCs.

In December, 2008, the case of Skylake Insurance Agency, Inc. v. NMB Plaza, LLC, 33 Fla. L. Weekly D 2215 (Fla. 3rd DCA 2008) was decided and initially indicated that the LLC statute (which allows for signature of documents by the authorized representative as managing member without witnesses) would control over the formalities of §689.01 (which requires two (2) subscribing witnesses for a conveyance of interest in real property, inclusive of a lease for a period of time in excess of one (1) year).

The rationale in regard to the first Skylake Insurance Agency, Inc. v. NMB Plaza, LLC case was that the statute empowering execution of lease agreements and other conveyances of interest in real estate by an LLC authorized member might supercede the requirements of §689.01.

Section 608.4235, Fla. Stat. (2003), addresses the authority of limited liability company members, managing members, and managers. Section 608.4235 (3) provides that, unless the articles of organization or operating agreement limit the authority of a member, any member of a member-managed company or manager of a manger- managed company may sign and deliver any instrument transferring or affecting the limited liability company's interest in real property. The instrument is conclusive in favor of a person who gives value without knowledge of the lack of the authority of the person signing and delivering the instrument.

Recently, the Third District Court of Appeals has revisited the Skylake Insurance Agency, Inc. case (Skylake Insurance Agency, Inc. v. NMB Plaza, LLC, 33 Fla. L. Weekly D 2215 (Fla. 3rd DCA 2008)) and clarified the issues as follows: Section 608.4235, Fla. Stat., spells out who may execute an instrument conveying real property on behalf of a limited liability company. This part of Ch. 608, Fla. Stat., explains which signatures third parties can rely on to convey a limited liability company's interest in real estate. Section 689.01, Fla. Stat. (2003), by contrast, governs the conveyance of real estate and imposes the two-witness requirement. The only express exceptions to §689.01 is for corporate conveyances made in accordance with §§ 692.01 and 692.02, Fla. Stat. There is no exception for limited liability companies per F.S. §608, et seq.

Again: As such the case addresses and answers the two (2) witness rule on leases signed by LLCs as follows:

"The question, then is whether the lease must also comply with the two-witness requirement of §689.01. In accordance with the view of the Real Property, Probate & Trust Law Section of the Florida Bar as amicus curiae, we hold that the answer is yes."

Property managers and commercial landlords should follow the advice originally given in our December, 2008, newsletter which is that the appropriate individual authorized to act on behalf of the legal entity should sign the lease and such signature on the lease should be witnessed by two (2) separate witnesses who should sign opposite the person's name.

Capacity of Signer/Intent

There have also been a number of cases over the years addressing the issue of intent of an individual whether the individual was signing on behalf of the company, or on behalf of themselves.

Further, so there is no misunderstanding: if a tenant is going to be executing a lease on behalf of an entity, for example a corporation or an LLC, that individual should sign in the signature block indicating that the person is signing "As president" or "As its managing member" rather than simply signing their name with no designation as to their capacity.

The additional language will clarify the issue of a capacity and clearly indicate on the face of the instrument that the individual is not executing this document on their own behalf.

Credit Worthiness of Commercial Tenant

At the same time, commercial landlords should also be concerned about having leases properly documented. If you are going to be executing the lease with an entity and you expect that entity to be responsible for the payments you may wish to engage in credit review and analysis of the individual and if necessary, request and require a personal guarantee from a financially responsible individual.

My last point addresses the local real estate economy. Recently, I heard a very well known property manager indicate the change in credit criteria for commercial tenants in today's troubled commercial real estate marketplace. His qualifications or criteria of a commercial tenant are as follows:

"If they have a pulse and the check clears, they are credit worthy and a qualified tenant".

Again, in an ideal world leases will be properly executed after a thorough review of the credit worthiness of the prospective tenant and the appropriate guarantees are acquired. However, as noted, in today's troubled marketplace with the scarcity of quality tenants, these rules may be somewhat relaxed.

Kevin F. Jursinski, Esq.
Kevin F. Jursinski, P.A.
7800 University Pointe Drive, Suite 200
Fort Myers, Florida 33907
(239) 337-1147
(239) 337-5364
Kevin@kfjlaw.com

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SHORT LEASING
Mitigation of Loss Rentals during increase in vacancies - Subleasing at a Discount


BY KEVIN F. JURSINSKI, ATTORNEY AT LAW

 

There are currently significant issues facing commercial property owners and managers as a result of dropping commercial property values and increasing vacancy rates. Due to our troubled economic times Commercial Tenants are faced with the choice of minimizing their business operations at one or multiple lease locations.

In minimizing the operational expenses of a specific location which may include closure, the Tenant still nonetheless needs to face the issue of ongoing obligations under its current commercial lease. When a Tenant vacates a lease space prior to the end of the lease term, the Landlord faces its own problem based upon the Tenant "going dark" and a possible failure of the vacating Tenant to make prospective lease payments for its base rent, CAM and any other additional charges that are due by the Tenant under the commercial lease.

One positive way to address the problems facing both the Landlord and the Tenant is to engage in "Short Leasing".

"Short Leasing":This is an approach to minimize and mitigate damages by a commercial Tenant. "Short Leasing" is a procedure of subleasing, assigning or subsidizing a sublease or assignment for a placement Tenant ("New Tenant") at the vacated premises. I have termed this approach "Short Leasing" since it is analogous to a short sale in which the defaulting borrower ends up selling their property for lower than the amount of the mortgage with the borrower negotiating a work out on the short fall with the lender. By utilizing "Short Leasing" the same concepts is applied, but in this case the Tenant takes proactive and positive steps to sublease or assign its Lease and subsidize or negotiate a workout with the lender for the balance of the lease terms similar to a format in a "short sale" arrangement.

Here is how a "Short Leasing" approach would work.

1. Remedies of Landlord in the event of default of the Commercial Lease: In a lease default situation, a Landlord can initiate suit against the Tenant to not only recapture the outstanding rentals, but the Landlord can pursue a claim for other damages accruing to the Landlord which may include accelerated rentals due under the lease, attorney fees, costs as well as the expenses of re-letting the premises. There is a way to address the problems facing both the commercial Landlord and the commercial Tenant and that is for both parties to initiate an assertive effort to be proactive and to mitigate and minimize damages.

2. Efforts of the Tenant to Minimize Lease Damages: The Tenant, notwithstanding the fact that the Tenant is vacating the premises, has a unique opportunity to aggressively advertise the premises for lease. The Tenant can undertake re-letting the premises by way of a lease assignment or subletting on its own. Unless a Tenant has commercial lease specialist on staff, a better approach may be to hire a commercial leasing agent who specializes in the area of commercial leasing. This broker can maximize the opportunity for a prospective Tenant ("New Tenant") at the vacated location by offering tenant subsidized incentives given by Tenant to new a New Tenant on the assignment or sublease.

3. Potential Lease Damages in Lease Default Situation: By way of example, in the event a Tenant is currently paying $15.00 per square foot for a 5,000 square foot location and also has the obligation to pay the total of $7.50 in CAM and marketing budget, the Tenant faces a monthly expenditure of $22.50 per square foot for a total of $9,375.00 per month to the Landlord. Assuming there is three (3) years remaining on the lease and the Tenant for economic reasons needs to close this location. In such a case the Tenant would face current monthly rentals of $9,375.00 together with prospective rentals. The Landlord could initiate suit against the Tenant for not only the current rentals, but accelerated rentals together with attorney fees, costs and any lease up fees that may occur. These damages would only be offset by any actual monies received by the Landlord with the accelerated rentals being reduced to present value but grossed up by any incentives that the Landlord has to offer to a prospective Tenant to take the premises.

Using our example and assuming there are three (3) years left on the lease and the current Federal Discount Rate is 1%, the Tenant would face accelerated rentals at $9,375.00 per month for thirty five (35) months ($328,125.00) reduced to present value in the amount of $324,843.75. (This is a simple calculation that assumes an immediate award by the Court accelerating at one (1) month after the default. In normal circumstances the judgment won't be entered for six (6) to twelve (12) months, at the earliest.) Nonetheless, based upon the above and foregoing, there is going to be an exposure to the commercial Tenant of a substantial, significant judgment in excess of $334,218.75. Plaintiff is entitled to recover past due rents and accelerate future rents accruing after Final Judgment together with recovering reasonable attorney fees and costs.

The Landlord also has (at least arguably) a duty to attempt to minimize damages, if it can, by re-letting the premises. The Landlord does not have to use extraordinary efforts to re-let the premises especially in the event the Landlord has other available units for lease in addition to the space that would be in default and Landlord employs its normal procedures to relet the vacated premises as used for other space in the overall property. Any prospective rentals subsequently received by the Landlord would need to be offset against the judgment obtained by the Landlord. The below are the identified steps which need to be addressed in a "Short Leasing" approach:

4. Summary of Options as to the Tenant's right to sublet or assign lease and opportunity to minimize and mitigate damages ("Short Leasing"): The Tenant has more options than simply to defend a lawsuit for lease damages. In fact, the Tenant can take a number of proactive steps to minimize and mitigate damages under a scenario when the Tenant has to vacate the premises and the Tenant nonetheless still has ongoing obligation for rent. In the above captioned scenario, there are a number of Tenant options, some far superior choices than others:

a. Exposure to Judgment: Face a prospective judgment in this example of in excess of $300,000.00 and hope that the Landlord might rent the Tenant's premises to reduce damages. A passive and poor plan of action;

b. Retain Commercial Leasing Agent: Alternatively the Tenant can take a proactive step as follows. The Tenant can immediately retain a commercial leasing agent to offer the premises for lease assignment or sublease;

c: Prospective Tenant Inducement under Short Leasing Scenario: The Tenant can authorize the commercial leasing agent to provide the prospective Tenants ("New Tenant") an inducement whereby the original Tenant offers to pay a percentage of the ongoing rent on a monthly basis to entice a New Tenant to promptly take over the existing lease. By way of example and assuming the above captioned scenario, existing Tenant could offer to pay 40% of the overall lease payments for the New Tenant or subsidize the monthly payments by paying the amount of $3,750.00 per month (this number of course is negotiable and is subject to discussions between Tenant, New Tenant, Commercial Leasing Agent and Landlord to arrive at a mutually acceptable figure). New Tenant could immediately take occupancy and pay the remaining 60% in the sum of $5,625.00 thereby reducing the Tenants exposure by not only 60% of the current rentals due at the premises, but also eliminating the Tenant's exposure to accelerated rentals, court costs, attorney fees, late charges as well as Tenant improvement lease up fees. Assuming the original Tenant was able to hire a commercial leasing agent for the payment of 5%, the original Tenant could save approximately 55% of the lease payments and the existing Tenant would have also avoided attorney fees, court costs as well as lease up fees. Using our example and assuming New Tenant would be promptly located, this could result in a saving of upwards of $180,000.00 of damage exposure, a substantial significant amount.

d. ("Short Payoff") Lease Buyout: Another alternative is for the Tenant to employ a "Short Payoff" approach. In this scenario the existing Tenant approaches the Landlord and agrees to pay the Landlord a buy out of the lease and a structured payment providing the Landlord with a cash payment, promissory note, or a promissory note with some sort of collateral (again these are negotiable items to be addressed by the Tenant). Any of these efforts are superior to taking no action and having the original Tenant exposed to substantial and significant damages resulting from vacating the premises and allowing for monthly lease payments and damages to accrue.

By taking a proactive approach, identifying the issues and taking a short leasing approach, a Tenant could minimize and mitigate its damages. In fact, utilizing the short leasing approach, it actually has a Win, Win, Win benefit since:

a. The Tenant reduces its potential lease exposure;

b. The Landlord avoids losses and a lawsuit costs and expenses in hopes of recapturing damages from the vacated premises;

c.The New Tenant acquired commercial lease premises at a significant subsidized lower lease payment and;

d. Our court system is relieved of further burden of commercial leasing litigation with results in a benefit to Landlord, Tenant, our judicial system as well as our economy.

Kevin F. Jursinski, Esq.
Kevin F. Jursinski, P.A.
7800 University Pointe Drive, Suite 200
Fort Myers, Florida 33907
(239) 337-1147
(239) 337-5364
Kevin@kfjlaw.com

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COMMERCIAL REAL ESTATE FORECLOSURES"”THE NEXT BIG CRISIS AND THE SUGGESTED SOLUTION


BY KEVIN F. JURSINSKI, ATTORNEY AT LAW

 

Like a punch drunk fighter with a big heart grappling to get up off the canvas after a one two punch of devastating residential foreclosures and skyrocketing unemployment rates, our real estate economy is staggering to its feet. Unfortunately we may be facing a knockout punch due to a potential crisis in commercial real estate. Proactive ways exist to avert the next blow, but it will take intelligence and bold planning.

Here are some causes for concern:

1. Commercial vacancy rates have risen sharply in the last several years, reflective of the downturn in the economy and overbuilding of commercial space.

2. As vacancies increase, values of commercial properties drop.

3. As vacancies increase, commercial property owners struggle to service mortgage debt creating default scenarios.

4. When defaults occur in commercial loans, foreclosures result and values drop further.

5. Because of the tight credit market a significant number of commercial loans that originated between 2004 and 2008 will be precluded from refinance opportunities.

6. Even solvent borrowers are being denied extensions of their loans due to current low appraisals on commercial property.

7. Between 2009 and 2011, over $814 Billion in commercial real estate loans will mature nationally.

8 .Deutsche Bank has issued a report indicating that 80% of the commercial loans made in 2007, financed by mortgage-backed securities, and due to mature but will not qualify for long term financing. If not extended they will go into default.

This is a crisis that will be upon us very soon. Our institutions and our government cannot react as inefficiently as they have in addressing residential foreclosures. Florida should also not pin its economic "Hope" on the federal government providing our state a bailout. One would have assumed that with Florida being the hardest hit economy of all fifty states due to the economic downturn, that the Federal Government would have designated Florida as one of the top states to receive Federal stimulus money and assistance. Shockingly, Florida is fiftieth (50th) in per capita receipt of Federal assistance. We need to address this problem without looking for "bailout money" or corporate welfare.

Here are my suggestions to address the problem:

1. Tax Subsidies For Private Investors vs. Bank Bailouts. Encourage the purchase of commercial mortgage paper and properties by offering tax subsidies. Private investors taking over troubled properties or nonperforming loans will request a discount for the risk assumed. This causes write-downs by lenders who may seek additional governmental bailouts or face FDIC takeover. A better solution is to provide tax subsidies for these investors to increase their return on investment, correspondingly enhancing the asset value of the loan or property to be acquired, which itself ultimately reduces loan loss due to a reduction in the write down on the troubled asset.

2. Smart Business Model Based Government Guarantees. Rather than bailout lenders from toxic commercial loans the government should conduct itself as a sound business manager for its shareholders"”the U.S. Taxpayers:

A. Identifying non-toxic commercial assets.

Provide a federal guarantee for only a portion of the loan based upon an economic analysis of anticipated revenues. This calculated government guarantee would encourage lending by banks to refinance or modify performing but struggling loans.

B. Identifying toxic debts held by lenders.

Let the market dictate the disposal of these toxic debts with tax subsidies for investors to encourage the purchase and enhance the value of the troubled asset to reduce the loan loss. If the asset is truly toxic, then let the bank suffer the loss and allow the marketplace to correct itself, which if necessary, means that institution suffers the loss for their poor lending practices.

C. Using government guarantees. This incentivizes banks to modify existing loans but provide for a recapture value so taxpayers share in profits when the loan performs.

D. Restricting the amount of government funds that guarantee the new "Public Private Investment Partnership".

The PPIP was formed to assist banks in disposing of their toxic debt (now euphemistically referred to as "legacy assets"). However, one of the key flaws in the government's PPIP program is that it requires the Treasury to back up the private investors with over 85% financing on a non-recourse basis with a poor return to the U.S. taxpayers. Even more compelling an argument against this program is that it is limited to an exclusive group of companies. In reality only the eight largest hedge funds on Wall Street can participate and make profits in the PPIP program.

3. 21st Century Mediation Model. More efficient ways exit to address commercial loan defaults than the antiquated foreclosure process currently in use. Lending institutions need to embrace proactive mediation, proven to effectively resolve issues in Florida litigation cases with a success rate of over 80%. Lenders need to staff their loss mitigation departments with solution-minded individuals tasked to structure creative loan workouts that include the use of government guarantees, tax subsidies and other innovative loan workout approaches developed by lenders. Use foreclosure suits only as a last resort to a loan that cannot be otherwise modified, restructured, sold or mitigated to reduce or eliminate the loss.

The next real estate crisis will soon be upon us. We need leaders who can assess the risk and implement a sound business approach to resolve the problem while exercising their fiduciary duties as stewards of the taxpayer's money.

 

Kevin F. Jursinski, Esq.
Kevin F. Jursinski, P.A.
7800 University Pointe Drive, Suite 200
Fort Myers, Florida 33907
(239) 337-1147
(239) 337-5364
Kevin@kfjlaw.com

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CURRENT ISSUES IN REGARD TO COMMERCIAL LEASES
IN TODAY'S TROUBLED REAL ESTATE MARKETPLACE


BY KEVIN F. JURSINSKI, ATTORNEY AT LAW

 

PART II

This is continuation of our series in regard to problems facing Commercial Property Managers, Landlords and Commercial Tenants in today's troubled economic times. This Newsletter addresses the issue regarding payment of rents and lease guarantees.

I review a wide variety of leases being provided to me in Southwest Florida affecting commercial lease premises. Many of the leases contain attempts by the Landlord to have a Tenant guaranty the lease performance so that the Landlord does not need to look solely to the Tenant's Company for payment of the lease obligations. If the Tenant's company is failing in business and needs to vacate the premises, then in such event, it is a sound business decision for the payment of rents to the Commercial Landlord to have the opportunity to pursue a claim against the principals of the company or the individuals that have a financial relationship with the company. The principals ideally would be able to pay the outstanding sums due and owing under the lease agreement.

Here are some issues to consider:

1. Pre-Lease Credit Check: The Landlord should do a background and credit check on the Tenants as well as the principals and guarantors. Generally, most Florida LLC's and Corporations should not be considered as having sufficient assets to protect the interest of the Commercial Landlord for lease payments, unless an entity has a substantial and significant track record that the Commercial Landlord can rely upon. However, in today's troubled economic times even major corporations may turn out to not be collectable in the future (See AIG, Chrysler, Lehmann Brothers, etc.). The Landlord should look to the principals of the company or other financials backers of the company for additional security in the form of a guaranty.

2. Financial Statements: The Landlord could determine the credit of the guarantors and principals by obtaining financial statements from them, which would be no different than if the Landlord was going to be issuing a loan to these individuals (which in effect the landlord is doing by conveying an interest in the Landlord's commercial property for a period of time (i.e. the Lease) in consideration for the repayment by the tenant or the principals for such obligation).

.3. Assets: Further, by obtaining a financials statement from the prospective principal or guarantor, the Landlord will arguably have a starting point as to assets to seek recovery in the event of a potential default or need to obtain judgment and collection thereof.

Guaranty: As indicated I see a wide variety of lease guaranties. The following are some basic concepts for the guaranty:

1.Separate Instrument: Many times I see leases which are "guaranteed" by simply having a signature block with the persons name identified as "guarantor." I question the practice and suggest it not be followed. There is always the issue of the intent of the guaranty and the enforceability of the guaranty, all of which should made clear by the landlord taking proactive steps in properly drafting the guaranty.

2.The Payment and Guaranty of Collection: The several difference types of Guarantees are:

a. Individual Guaranty of Lease: This guaranty is for payment and obligations of the Tenant on the lease. This is the guaranty to use.

b. Guaranty of Collection: The second guaranty is sometimes referred to as a Guaranty of Collection. This requires the Landlord to initiate suit against the Tenant and take all steps necessary to recover the debt obligation. Only after such efforts are undertaken and exhausted will be the Landlord be in a position to attempt to recover the deficiency against the guarantor on the guaranty of payment on it. I prefer the latter.

3. Lease Guaranty to Provide for Attorney Fees: A lease guaranty should also provide for the recovery of attorney fees. Failure to have that provision contained in the lease identifying the recovery of attorney fees can result in the landlord failing to obtain attorney fees and costs if the Landlord is successful in pursuing a judgment in the guaranty.

4. Signature: The signature of the guaranty needs to be very clear indicating that it is a personal obligation of the person signing and that no guaranty should allow the person signing it to indicate a capacity level other than individually.

In the June Newsletter we indicated that there would be some reference recent case law in Florida. One recent case is Fairway Mortgage Solutions, Inc. and Fernando Recalde v. Locust Gardens 988 So. 2d (4th DCA) 2008. In that particular case there was a concern over the lease guaranty. In that particular case the Landlord in the lease indicated as follows:

 

"The Tenant Signature above also indicates acceptance of Personally Guaranteeing this Lease and is being freely given as per section "G" of this lease."

In the Fairway case there was no separate written guaranty. The guaranty was simply a signature block on the lease with the aforementioned language. Further, the guaranty was then signed by the Grantor in the capacity as "president". Quite obviously this creates an issue as to the interpretation of the lease.

5. Intent of Guaranty/Question of Law: Lease guaranties and the interpretation thereof is a question of Florida Law. Further, this case indicated that addresses the concept of "Descriptio Personae" which is:

 

""¦a signature preceded by the word "by" and accompanied by descriptio personae, that is language identifying the person signing the document as a corporate officer or something similar, does not create personal liability for the person signing a contract to which he or she is not a specified party, unless the contract contains language indicating personal liability or the assumption of personal obligations.

Based upon the above and foregoing, the landlord is well advised to prepare a lease guaranty separate and apart from the actual lease and have the guaranty properly drafted to avoid enforcement problems as indicated above.

I would recommend that the Landlord obtain a lease guaranty prepared by an attorney who is well versed in such issued.

Next month, Part III, tenants actually holding over after the end of the lease and refusing to pay rentals.

Kevin F. Jursinski, Esq.
Kevin F. Jursinski, P.A.
7800 University Pointe Drive, Suite 200
Fort Myers, Florida 33907
(239) 337-1147
(239) 337-5364
Kevin@kfjlaw.com

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CURRENT ISSUES IN REGARD TO COMMERCIAL LEASES
IN TODAY'S TROUBLED REAL ESTATE MARKETPLACE


BY KEVIN F. JURSINSKI, ATTORNEY AT LAW

 

PART I

A consistent theme that runs through my discussions with property managers is the problem that they are having with their Commercial Tenants. The problem is a result of the Commercial Tenants being unable or unwilling to continue to pay full base rent, CAM rent, and other associated charges for their commercial lease.

Many proactive Commercial Property Managers are working diligently to resolve the problem by modifying lease payments and taking steps that can assist the Commercial Tenants through this particular troubled time. Even more compelling is the fact that not only are we going through one of the worst economic downturns in the history of Florida, but as importantly we are coming into the summer months which impact and effect any retail establishments during our "offseason".

Unfortunately, and notwithstanding the good faith efforts being undertaking by Commercial Property Managers and Commercial Landlords to modify the leases to accommodate Tenants during these troubled times, many of these modifications and efforts to alter the lease terms to assist the Tenants are actually being used by Tenants as affirmative defenses to the enforcement of the lease and future litigation.

Alternatively, these efforts are also being used by Tenants as affirmative claims against the Landlord for modification of the lease or actions undertaken which increase the Tenants rights. Below are a few examples and some positive and proactive suggestions to avoid the problem (which will be discussed in both the June and July 2009 Commercial News letters) along with some updated case law reflective of some of these various points:

Verification of Lease: On many occasions the Commercial Landlords and Tenants forget that even though the Landlord has consented to some lease concessions which actually benefit the Tenant rather than the Landlord, they must have these lease concessions set forth in writing. Again, the basic concepts are:

A. Any lease term in excess of one (1) year (and this includes any modification affecting more than one (1) year) has to be in writing signed by two (2) witnesses.

B. Any modification of the lease, in order to avoid potential issues between the Tenant as well as interpretation of the lease for any ambiguities by the trier of fact (Court or jury), needs to be set forth in writing clearly and unambiguously and signed by the parties.

EXAMPLE: The Tenant claims that it is unable to continue to make monthly payments of the base rent, CAM rent, and other items required to be paid under the lease.

1. The Tenant indicates that if they were given an abatement of at least six (6) months, they could be able to survive and be able to repay their debt once they are able to get back to their normal, regular "season". Further, they are hopeful during such time that the economy will begin to recover.

2. Tthe Landlord consents to a rent abatement but indicates to the Tenant orally that the Landlord would abate rent for six (6) months for the base rent. However, the Landlord would still expect the common area maintenance rent to be paid and other cost items that are passed through to the Tenant to be paid by the Tenant.

3. The following month, the Tenant pays an arbitrary sum and the Landlord accepts same. The Tenant follows up the next month and the Landlord accepts the same arbitrary rent payment. However, now the Landlord begins to question what the Tenants understanding was as far as the terms and conditions of the abatement and wants to reconcile the amounts due.

SOLUTION:

1. The concession to the rent should have been set forth in writing in the form of a simple amendment to the lease agreement signed by both the Landlord and the Tenant.

2. The Landlord should have specified that the base rentals themselves would be abated for a specific period of time such as six (6) specific months. During such time, the common area maintenance rent and other charges would nonetheless still be billed to the Tenant and this is confirmed in writing.

3. The Landlord should have indicated what takes place after the six (6) month abatement. They should indicate whether the six (6) months of rent would be totally forgiven, or alternatively if such six (6) months of rent will be recaptured in some structured repayment schedule and future lease payments.

4. A provision be set forth in the amendment that would indicate that in the event that the Tenant hereafter defaulted any other terms and conditions of the lease (inclusive of the payment of CAM rent) that the Landlord could nonetheless claim, in addition to all damages, accruing from such breach, any abatement of rents as additional damages. The amendment should also provide for the gratification by Landlord and Tenant of all other terms and conditions of the lease which, unless specifically modified by the amendment, remain in full force and effect.

OPTIONAL:

In the event that there is an outstanding rental due at the time of the abatement, this outstanding amount should be acknowledged by the Tenant. Again, it should be addressed so that such outstanding rental or past due rental would be identified specifically so there are no misunderstanding of the parties as to the obligation of the Tenant to make payment for same. Alternatively, this is also necessary so that there is no misunderstandings of the rights of the Landlord to collect such back rent and the method in which the Landlord will be collecting it prospectively.

Failure to do so in these troubled economic times will result in ambiguities occurring and misunderstandings between Landlord and Tenant. As importantly and especially from a real estate litigation attorney's standpoint, is the fact that such oral agreements and the conduct of the parties, will (if ambiguities exist) create parole (oral) evidence to be introduced which might allow the Tenant to introduce a number of conversations, discussions as well as allow the Tenant to give its "spin" in regard to what takes place.

All of the aforementioned may result in the Landlord and Landlord's counsel spending time, effort, and money to refute the Tenants allegations and assertions that there were some modification which the Landlord believes a search was not otherwise agreed to.

As such and based upon our economic times, it is more important than ever for Commercial Landlords and Tenants to be aware of the basic fundamental concepts of structuring of leases and modifications in this Landlord/Tenant relationship, especially due to the economic conditions of our real estate marketplace and the resultant impact and effect on Landlords and Commercial Tenants.

Next Month: Additional traps for the unwary Commercial Property Manager or Commercial Landlord and an update on case law relating to commercial leases.

Kevin F. Jursinski, Esq.
Kevin F. Jursinski, P.A.
7800 University Pointe Drive, Suite 200
Fort Myers, Florida 33907
(239) 337-1147
(239) 337-5364

As always, please feel free to e-mail me with any questions you may have, or any topics you would like to see addressed in future columns. My e-mail address is Kevin@kfjlaw.com. Kevin@kfjlaw.com

 

 

RENTAL RECAPTURE PROVISIONS ON SALE OF BUSINESS AND/OR ASSIGNMENT OF LEASES


BY KEVIN F. JURSINSKI, ATTORNEY AT LAW

This month's commercial lease newsletter addresses an area of commercial leases which can have some significance in the event of a sale of an ongoing business and/or an assignment of a lease or subletting of a lease.

Rental Recapture Provision:

Given today's economy, the market reality is that many businesses are being sold. Many tenants need to assign or sublease their premises based upon their inability to maintain a viable business.

From this standpoint, there are a number of factors to consider which include the Consent to Assignment of Lease, Assumption of Lease, as well as Recapture Provision.

We previously discussed the Consent to Assignment in the July 2007 Newsletter, these points are as follows:

1.Consent to Assignment:

In Florida a landlord cannot unreasonably withhold consent to assignment of lease. This dates back to a case called Fernandez v. Vasquez, 397 So. 2d 1171 (3 DCA 1981) which adopted the "Good Faith and Commercial Reasonable Rule" involving commercial leases in Florida. Some of the factors that the Court identifies in the Fernandez case (which is still good law today-see discussion below of recent case law) is that the trier of fact, (be it judge or jury), can apply the following standards of Good Faith and Commercial Reasonableness:

(A) The financial responsibility of the proposed subtenant or assignee.

(B) The identity or business character of the subtenant or assignee. (That is the suitability for the particular building or premises).

(C) The need for alterations of the premises.

(D) The legality of the proposed use.

(E) The nature of the occupancy. (That is office, factory, clinic, etc.)

2. Good Faith Standard of Assignment and Reletting: The Courts also have imposed an additional good faith standard for assignment and reletting utilizing the good faith standard as a gap filling mechanism in order to make sure that all parties conduct themselves in an appropriate good faith and businesslike manner.

A case involving this very factor and was just decided in the State of Florida (April 20, 2007) in the case of Speedway SuperAmerica, LLC. v. Tropic Enterprises, Inc., 2007 Florida Appellant Lexis 5799 (2DCA 2007). This decision was rendered by the Second District Court of Appeals.

In this case, a Sarasota County Court ruled that the landlord had the unfettered right under lease to withhold consent to the assignment of the lease made by the tenant to an assignee and its affiliate. In that case the Appellate Court overruled the Trial Court and indicated that the implied covenant of Good Faith exists in virtually all contractual relationships inclusive of commercial leases.

The Court indicated that, notwithstanding the language in the contract, there is a "gap filling default rule" which comes into play when a question is not resolved by the terms of the contract or when one party has the power to make a discretionary decision without defined standards. Publix Supermarkets v. Wilder Corporation of Delaware 876 So. 2d 652, 654 (Fla. 2d DCA 2004). The second DCA went on to say that the applied covenant of Good Faith and Fair Dealing is designed to protect the contracting party's reasonable expectations. Cox v. CSX Inter-model, Inc., 732 So. 2d 1092, 1097 (Fla. 1st DCA 1999). The Court further went on to indicate that "[W]here the terms of the contract afford a party substantial discretion to promote that party's self-interest, the duty to act in good faith nevertheless limits that party's ability to act capriciously to contravene the reasonable contractual expectations of the other party."

3. Recapture Provision:

Oftentimes in leases there is a provision contained in the lease which indicates that the landlord has the right to recapture either a percentage or all of the lease rentals by way of an assignment or subletting.

By way of example and not limitation, assume that a tenant has a below market lease for a retail space (for example, a lease which calls for the rentals to be $20.00 per square foot). Assume also that the tenant wants to assign this lease to a third party by way of an assignment or, alternatively, by subletting. Occasionally in commercial leases there is a provision contained in the lease which indicates that the landlord has the right to recapture all or a portion of the increase in rentals. Using our example, the tenant who assigns the below market lease to a third party by way of an assignment or subletting for a greater amount of rent per square foot so that the new tenant would be required to pay a one (1) time assignment fee to the existing tenant or, in the form of a sublease, the sub-tenant would pay a larger sublease payment to the existing tenant then the tenant would have to pay to the landlord.

By application of the recapture provision, the existing landlord could recapture all or a portion of that increase so that in the event of a below market lease the landlord could share in this below market lease and benefit from the assignment for a higher sum. Generally the recapture provision range from the landlord sharing fifty percent (50%) of the recapture amount or, alternatively, in certain situations, the landlord recapturing one hundred percent (100%) of this amount.

Caution should be taken to identify the specific terms and conditions of this recapture provision so that in the sale of the underlying business it is delineated in the Purchase Agreement whether any of the consideration given for the sale went to the assignment of the lease or simply whether there was any amount allocated towards the purchase price as an assignment fee or assumption fee of the existing lease.

This would prove to be significant in light of an existing recapture provision in the lease. A drafter of the purchase agreement involving a sale of a business and assignment of lease needs to thoroughly review the underlying lease to determine if any recapture provision exists and if so, address it accordingly in the Purchase Agreement.

Kevin F. Jursinski, Esq.
Kevin F. Jursinski, P.A.
7800 University Pointe Drive, Suite 200
Fort Myers, Florida 33907
(239) 337-1147
(239) 337-5364

As always, please feel free to e-mail me with any questions you may have, or any topics you would like to see addressed in future columns. My e-mail address is Kevin@kfjlaw.com. Kevin@kfjlaw.com

 

 

The Effect of Foreclosures on Commercial Property Tenants and Landlords (PART 2)


BY KEVIN F. JURSINSKI, ATTORNEY AT LAW
 
In last month's newsletter we discussed the potential negative impact to a commercial property in the event of a foreclosure. Part and parcel with the issue involving commercial leases is the relationship between the commercial mortgagee and the commercial tenant. Here are some concepts to consider in regard to commercial leases and the interrelationship between the commercial tenant and the mortgagee having a mortgage on the subject property. This is an important relationship especially in light of the potential issues that could arise in the event of mortgagees calling loans or enforcing certain rights due to our troubled economy.

Priority Issue of the Mortgagee: Whether a commercial mortgage is in place for a commercial property or alternatively, the landlord needs to refinance, restructure its debt or obtain alternate financing, the lender is going to require that it has a priority position in regard to its mortgage superior to all other claims of parties, inclusive of tenants and their leasehold interest. Whether a tenant executes a lease subsequent to a mortgage being in place or whether a commercial property owner is refinancing the property, the tenant is going to be required to acknowledge that it's lease interest is inferior to that of the fist mortgagee. The following concepts need to be understood by commercial property managers.

Attornment: Attornment is a legal term dating back to early English Law in which a tenant of property was not automatically required to consent to a new landlord if there was a change in ownership. As such, there had to be an acknowledgement of the new landlord. The concept of "attornment" that was developed is the acknowledgement by a tenant to agree to be subservient to the rights of a new owner or landlord of the leased property. This is whether the tenant is the current tenant under the lease and there is a new mortgage, a refinance is being sought, or whether a tenant is signing a lease on the premises with an existing mortgagee in place. In either case, the tenant should always be required by the commercial landlord to execute, as part of the lease, an attornment agreement in which the tenant effectively promises to recognize the mortgagee/lender (or a prospective mortgagee) as the tenant's landlord in the event of a default of the original landlord's mortgage obligation. An attornment protects a mortgagee who attempts to enforce his mortgage security from the risk of a tenant being released from their leases. As indicated, most commercial leases should be thoroughly drafted to include an attornment clause which would provide for the obligation by the commercial tenant to "attorn" to any successor in title which the lender might put in place through the exercise of the lender's remedy upon default and could include the lender or real estate owned entity of the lender.

Subordination: Subordination in commercial lease context means allowing for a third party to become superior to the real property interest being subordinated. In the case involving a commercial mortgagee on real property with a commercial tenant, in the event of a refinance, a mortgagee would require that the tenant subordinate its leasehold interest to the interest of the mortgage. This is required so that in the event of any foreclosure, there could be no claim that the tenant would remain in occupancy. Normally the subordination is in effect to protect the lender in a strong market where the lender would want flexibility to terminate the lease and lease the premises to a prospective third party tenant for a higher rent or enable the property to be sold without a tenant in the premises. In the event of a refinance situation, all mortgagees will require that the tenant enter into an agreement in addition to the attornment agreement, to subordinate its leasehold interest to that of any new mortgage.

In anticipation of these various and sundry provisions, again, a well drafted commercial lease should contain, among many other points, a subordination clause requiring the tenant to subordinate its interest to any new financing by a commercial lender.

Non-Disturbance Clauses: In situations involving attornment and subordination requirements the issue arises (especially with national tenants) that such tenant may not want to be dislodged in the event of a foreclosure, a refinance or any dispute existing between the landlord or its mortgagee or other parties.

For example, a national tenant having a long term lease with options to renew clearly does not want to have a successful location and operation with existing favorable lease rights, terminated as a result of a foreclosure action initiated by a mortgagee or the new lender exercising their rights to restructure the tenant mix or exercising their right to terminate certain of the leases. Sophisticated commercial tenants will want to have a corresponding right as to the subordination of their leasehold interest to avoid any risk of eviction.

The answer to such tenant's concerns is a non-disturbance agreement. A non- disturbance agreement creates a contractual relationship between the lender and the tenant in which the commercial landlord, as well as his mortgagee, indicates that neither the commercial landlord, its subsequent successor in interest nor the morgagee or subsequent mortgagee will disturb the tenant's possession so long as the tenant continues to pay rent and otherwise complies with the terms and conditions of the underlying commercial lease. This provides the adequate security and protection of a commercial tenant in its lease rights and is normally always insisted upon as a provision in a commercial lease by sophisticated commercial landlords.

The subordination, non-disturbance and attornment agreement (sometime referred to as "SNDA" in the industry) between the mortgagee and the tenant has the legal effect of creating privy of contract between both the tenant as well as the landlord through the mortgagee and the tenant. This relationship is also integral to the successful operation of not only the tenant's business, but projections required by the lender in performing the underlying the loan.

Most commercial mortgagees for commercial property will require a complete business analysis of the leases in effect and will look to protect those leases. Mortgagees want to make sure commercial leases, certainly at the very least those substantial tenants such as anchor tenants or national tenants which comprise core business of their property, have contained in the them appropriate SNDA's and supportive documentation.

Again, as the theme has been in all of commercial leasing, the right, duties and obligations of the Landlord and Tenant need to be well thought out prior to the lease being executed. The issues in regard to attornment, non-disturbance and subordination are all significant legal concepts which impact and affect the commercial landlord, commercial tenant and commercial morgagee. Commercial landlords and commercial tenants need to grasp the significance of these various concepts and focus on such concepts at the time the initial lease is being negotiated and executed.

Kevin F. Jursinski, Esq.
Kevin F. Jursinski, P.A.
7800 University Pointe Drive, Suite 200
Fort Myers, Florida 33907
(239) 337-1147
(239) 337-5364
Kevin@kfjlaw.com

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The Effect of Foreclosure on Commercial Property Tenants and Landlords (PART 1)


BY KEVIN F. JURSINSKI, ATTORNEY AT LAW

Given the economic crisis that is facing the residential market, many experts predict that the commercial market will soon begin to see an uptick in foreclosures. In fact, many property owners at this time with income producing properties are seeing attrition in their rentals given the fact that many tenants are abandoning or vacating the premises.

One only has to pick up a newspaper to see the number of retail establishments as well as offices that are closing. By way of example, there have been numerous closures of restaurants in the Estero-Bonita Springs area resulting in a high percentage of vacant space.

Secondly, many commercial and retail property managers and owners have experienced a loss of tenants for both real estate offices, title insurance offices, mortgage brokerage offices and constructions industry support offices including subcontractors offices and alike. This is the impact and negative effect to the commercial and retail market as a result of the collapse of the residential market. Look for things to get worse before they get better any time soon.

The following are some points to consider both for commercial property managers, commercial property owners, as well as commercial tenants:

Failure to Make Mortgage Payments: In the event a commercial property manager fails to make mortgage payments, the mortgagee/lender most likely would exercise after some legitimate bona fide good faith efforts to resolve the issue. Most commercial lenders will have in their mortgage instruments not only the right to declare the mortgage in default and seek foreclosure of the collateral, to wit: foreclose against the property, but also seek to have their rights under their assignment of rents document which indicates that if the tenant fails to pay the mortgage payment, then in such event the commercial landlord can require the court to compel the tenant to pay the rental payments. The tenant must pay the rents either into the court registry or collaterally assign those rental payments to the lender pursuant to either an assignment of leases, rents and profit. Most likely, the commercial property owner assigned is contemporaneous with the mortgage loan closing. Alternatively the commercial property manager or owner will be compelled to deposit these in the Court registry pursuant to Florida Statute 697.07 which indicates in pertinent part:

""¦(4) Upon application by the mortgagee or mortgagor, in a foreclosure action, and notwithstanding any asserted defenses or counterclaims of the mortgagor, a court of competent jurisdiction, pending final adjudication of any action, may require the mortgagor to deposit the collected rents into the registry of the court, or in such other depository as the court may designate. However, the court may authorize the use of the collected rents, before deposit into the registry of the court or other depository, to..."

Appointment of Receiver: In addition thereto, the commercial property manager must also anticipate that the mortgagee/lender would seek to have a receiver put in place to manage and operate either the center or commercial building. Many lenders take this position in the event that the tenant is unable or unwilling to properly manage the building or alternatively if the tenant is not making mortgage payments and further collecting rents but not applying it towards taxes, insurance, maintenance and other expenses, but rather simply usurping all of the rentals for the benefit of the tenant without regard to the condition or quality of the specific property.

Florida case law clearly indicate that a receiver is not favored since generally courts recognize that a Court is not as qualified to operate a business as the existing owner would be. The appointment of a receiver is not a matter of right, rather it is an extraordinary remedy which must be exercised with caution as it is in designation of the fundamental right of the legal owner to possession of the property. Twinjay Chambers Partnership v. Suarez, 556 So. 2d 781 (2DCA 1990); Alafaya Square Association v. Great Western Bank, 700 So. 2d 38 (5DCA 1997); Anj Future Investments, Inc. v. Ibrahim, 756 So. 2d 153 (3DCA 2000).

However, in certain circumstances, especially in which cases there is economic waste, potential attraction to the building, failure of payment of taxes, maintenance, utilities or alternatively allegations of fraud or misrepresentation in which the borrower clearly has no intent but to garner as much rents as possible without regard to the property, the Court may order a receiver to be put in place to preserve and protect the property as well as to collect the rentals for the benefit of the secured party to wit: the mortgagee.

Stipulated Operating Budget of Real Property: A good compromise situation between the lender and the owner and commercial property owner, or commercial property manager, is for a stipulation in a foreclosure action in which the commercial property manager or the commercial owner provide a monthly detailed budget to be filed with the Court and provide it to the mortgagee/lender indicating the outstanding bills and expenses on the property, as well as the rentals received. The commercial property or manager then identifies the application of rentals towards these outstanding payments so that the mortgagee/lender is assured that if rental payments are being received and accepted at least the underlying commercial property expenses are paid for and the property is being maintained, being protected against outstanding tax bills, having insurance in place to preserve and protect the collateral and having expenses for maintenance repairs and other costs aside to preserve and protect the collateral of the lender.

Next month: Impact and affect upon commercial tenants: including attornment, subordination and non-disturbance agreements in commercial leases.

 

Kevin F. Jursinski, Esq.
Kevin F. Jursinski, P.A.
7800 University Pointe Drive, Suite 200
Fort Myers, Florida 33907
(239) 337-1147
(239) 337-5364
Kevin@kfjlaw.com

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Tenants Hours of Operation and Unintended Consequences


BY KEVIN F. JURSINSKI, ATTORNEY AT LAW

 

In today's retail market, many Tenants are faltering in their operation of their businesses. There has been a higher vacancy rate in the amount of evictions based upon Tenants being unable to continue in retail operations as a result of the economic downturn.

When a Tenant closes for business permanently, and fails to pay rent, there are a number of remedies that a Landlord can undertake which have been identified in previous commercial newsletters. However, one issue that has arisen as a result of the economic downturn is the Tenant's determination to cut business hours, cut staffing, rethink inventories and/or intermittently cease operations for brief periods of times in order to address downturn in their respective business. These temporary closures or modifications in operations have a negative impact on the Landlord and unintended consequences for the retail center. Commercial Landlords and Property Managers should only consider the following:

1. Continuous Operation Clauses and Rules and Regulation of the Retail Center: These should be drafted explicitly and incorporated as part of the original lease agreement so that it is clear to both the Landlord and Tenant and if necessary the trier of fact, to identify the specific obligations of the Tenant in regard to the hours of operations.

In a retail setting, it is important that the overall nature and shopping experience for that particular center is identified and that all Tenants comply with the hours of operation. Certainly the retail center which has its retail shopping locations open for business would also want to have, as an adjunct, their other retail locations open for business at the same time including any restaurants or other service stores which would benefit the overall shopping experience.

If restaurants, coffee shops or retailers decide to curtail their business and close on certain days or close during hours when the center is actually open, it can have a negative impact and effect upon the overall shopping experience of a prospective retail shopper.

Further, and in the event that the shopping center has any of its retail stores "go dark" (either permanently or even temporarily) it may have the unintended consequences that this particular shopper may not return to that center or encourage that shopper to frequent other establishments.

2. Gross Percentage Rent: For many leases, the commercial Landlord will have included therein the gross percentage rent so that the Landlord, in addition to the base rent, common area maintenance rent, contribution to real estate taxes and other marketing fund will also have as part of its performa an opportunity to collect percentage rent based upon the Tenant meeting certain sales goals.

The lease should be crafted on this particular point to not only indicate specific rules and regulations of the center, but that the Tenant, under such gross percentage rent of the lease must also be open continuously during the required hours and be fully staffed and fully inventoried to maximize the prospective sales at the location. If a Tenant fails to be fully staffed and inventoried, ceases operations intermittently (even on a temporary basis) or does not operate in good faith in accordance with the terms of the lease, the Landlord will:

a. Suffer the possibility of having less percentage rent.
b. Have a situation in which the Tenant, due to failure to operate, may also have an impact upon other Tenants' sales, thereby creating a double negative effect in non payment of percentage rent and also;
c.Creating a negative atmosphere in the center by intermittently "going dark".

All of the above are the result of the Tenant failing to comply with the rules and regulations for hours of operation, failing to by fully staffed or inventoried has a direct correlation to collection of percentage rent and also has an impact upon the Landlord economically as well as an intangible impact and effect upon the overall retail "health" of the center.

3.Co-Tenancy Clauses: The commercial Landlord and commercial property and managers must also be cognizant of the fact that in certain specific leases with national retailers there could be a co-tenancy clause requiring a certain portion of the retail center to be leased and fully operational. Failure to do so, may result in the Tenant having the opportunity to either:

a.Reduce its rent or;
b. Terminate its lease based upon the failure of the Landlord to meet the co- tenancy clause.

Again, this is another specific potential negative impact upon the Landlord that can be exacerbated by a Tenant failing to maintain hours of operation, failing to be fully operational, staffed and inventoried.

4. Remedies Contained in Lease. The Landlord generally has a number of options in regard to its lease agreement to address the violations of a Tenant:

a. Breach of Lease and Remedies. The Landlord may declare that such consistent failure to operate in accordance with the rules and regulations be considered as a violation of the lease with the Landlord having the opportunity to take action accordingly. This is a dramatic remedy but one that should be included in the lease agreement in the event that the Tenant continues to violate the lease agreement. b. Corrective Action: The Landlord may also provide that the Landlord is afforded certain corrective action for the Tenant's failure to be operational which may include but is not limited to the ability of the Landlord to increase the base rent of the Tenant or alternatively to seek a liquidated damage clause in the form of a per day agreed upon liquidated damages clause.

c. A Liquidated Damage Clause: A liquidated damage clause is a provision contained in the lease which indicates that both the Landlord and Tenant acknowledge that a Tenant "going dark" and failing to comply with the rules and regulations by closing its premises and not being fully operational or taking other actions in violation of the lease may not result in a direct monetary damage to be identified by the Landlord but nonetheless both Landlord and Tenant can agree that because of the inability to identify a specific damage clause but nonetheless identifying the fact that such damage could exist. The Landlord and Tenant can identify a per day liquidated damage provision which the Landlord can seek as additional rent and as an agreed upon liquidated damage clause.

The drafting of such liquidated damage clause needs to be done specifically to avoid such clause being considered a penalty that must be remedy that is consistent to address the harm that is being suffered by the Landlord which may not be quantifiable at the time the lease is entered into, but nonetheless still is recognized as being a potential monetary damage to the Tenant based upon such non compliance.

All of this needs to be taken into account as the Landlord engages in negotiations for the essential lease terms which governs the retail center to anticipate such prospective violations by Tenants and the (direct and indirect) damages which may be suffered by the Landlord as well as the unintended consequences to be suffered by the Landlord from such activities. Such provisions contained in the lease should be clear, concise, and explicit so that there is no misunderstanding of the parties intentions, nor any ambiguity since the lease itself and the remedial provisions should be drafted so that a third party (Trier of Fact) can easily identify and enforce the reasonable rules and regulations, as well as remedial provisions contained in such lease agreement.

 

Kevin F. Jursinski, Esq.
Kevin F. Jursinski, P.A.
7800 University Pointe Drive, Suite 200
Fort Myers, Florida 33907
(239) 337-1147
(239) 337-5364
Kevin@kfjlaw.com

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"PITH of the Lease" and What it Means to Commercial Landlords and Property Managers


BY KEVIN F. JURSINSKI, ATTORNEY AT LAW

 

In today's troubled economic times, there is a rash of lawsuits being initiated by contractors against tenants for leasehold improvements and tenant build outs. If the landlord fails to properly protect its interest as to the premises, the landlord's real property interest may be subject to a construction lien claim under Florida Statute §713 et. seq. by the contractor who was not paid by the tenant.

A phrase that most commercial landlords and property managers are not familiar with but may unfortunately become part of their vocabulary in lease disputes is: "PITH of the lease". This will be the phrase that the commercial landlords and commercial property managers will be faced with and may scratch their heads wondering what this exactly means. Pith is defined in the dictionary as:

pith\â–ªpith\ n 2. The essential part: CORE.

The phrase "PITH of the lease" is a phrase that arose in that certain case Edward L. Nezelek, Inc. v. Food Fair Properties Agency, Inc. 309 So. 2d. 219 (3rd DCA 1975) as cited in A. N. Drew, Inc. v. Frenchy's World Famous Cajun Café, Inc., et al., 517 So. 2d 766, 1988 Fla. App. In the A. N. Drew, Inc. case the tenant engaged a contractor to do tenant improvements at the subject premises. The tenant then performed those obligations as part of the initial lease transaction but failed to pay the contractor which contractor in turn sues to foreclose against the Lessor's interest in the real property so improved. Generally, when a tenant takes occupancy of the premises there is specific provision in the lease indicating what aspect of the build out is allocated for the landlord and which aspect of the build out is allocated to the tenant.

If the tenant contracts for certain work to be performed by the general contractor, the general contractor may provide a Notice to Owner to the landlord claiming that the contractor is looking to the real property for the work contracted for by the tenant. If the tenant is authorized to perform such work, which generally arises under the lease agreement (and in fact may often be a leasehold obligation by the tenant per the lease, the "Pith of the Lease) then the contractor argues that this contractual obligation creates an authorized agency relationship between the tenant and the landlord to contract for such services and subjects the landlord's interest to a construction lien in the event that the contractor is not paid.

This has been further confirmed by Florida Statute §713.10:

"When an improvement is made by a lessee in accordance with an agreement between such lessee and her or his lessor, the lien shall extend also to the interest of such lessor."

As indicated, given these turbulent economic times, there are numerous defaults occurring, tenants failing to maintain operations and evictions. However at the same time, such tenants are leaving behind a number of unpaid bills inclusive of bills for improvements made to the subject premises. The A. N. Drew case indicates that in the event that the leasehold improvements are being contracted for by the tenant and are the "Pith of the lease" (roughly interpreted as being a central component of the lease) then in such event the landlord's real property interest may be subject to the tenant's claim. This issue, which has always faced landlords, is even more compelling in today's marketplace. The question that needs to be answered is:

"What can a landlord or real property manger do to prevent the landlord's real property from being subjected to a construction lien in the event of a tenant's default and non payment of its contractor?"

When a Tenant is doing build-out of the Lease premises, there may be a problem as to the payment to the contractor, subcontractor or material supplier. The problem arises when a contractor, laborer or material supplier attempts to assert a construction lien against the Landlord's interest in the premises as a result of work being performed by the Tenant in accordance with the contract. The Landlord should be advised to comply with Florida Statute 713.10, which requires the memorandum of the lease agreement to be recorded in the public records indicating a restriction on liens being implemented as against the interest of the Landlord to the subject premises. Florida Statute 713.10 states in pertinent part as follows:

"713.10 Extent of liens-Except as provided in s. 713.12, a lien under this part shall extend to, and only to, the right, title, and interest of the person who contracts for the improvement as such right, title, and interest exists at the commencement of the improvement or is thereafter acquired in the real property"¦When the lease expressly provides that the interest of the lessor shall not be subject to liens for improvements made by the lessee, the lessee shall notify the contractor making any such improvements of such provision or provisions in the lease, and the knowing or willful failure of the lessee to provide such notice to the contractor shall render the contract between the lessee and the contractor voidable at the option of the contractor. The interest of the lessor shall not be subject to liens for improvements made by the lessee when:

(1) The lease or a short form thereof is recorded in the clerk's office and the terms of the lease expressly prohibit such liability; or

(2) All of the leases entered into by a lessor for the rental of premises on a parcel of land prohibit such liability and a notice which sets forth the following is recorded by the lessor in the public records of the county in which the parcel of land is located."

In either event, however, the Landlord needs to protect itself on these particular situations by compliance with Florida Statute §713.10. The case of A. N. Drew, Inc. v. Frenchy's World Famous Cajun Café, Inc., et al., 517 So. 2d 766, 1988 Fla. App. and Heinberg v. Henrickson 877 So. 2d 34 (DCA 2004) are worthy of review as to a contractor's claim of lien for Tenant improvements when the improvements constituted the "PITH" of the Lease. Care should be given in this area to seek the advice of an attorney in the preparation of a commercial lease.

We previously touched on this point in a prior newsletter, but to reiterate the position, the landlords and commercial property managers should be put on notice to review their leases and make sure that their leases and documents are in compliance with Florida Statute §713.10 to protect their real property interest. The commercial landlord needs to position itself to avoid having to pay for work performed by the tenant. This is even more troubling because generally when a tenant fails to pay its contractor for leasehold improvements, it is also generally not paying the landlord.

Next month, an additional area of concern for landlords and property managers in today's troubled economic times.

Kevin F. Jursinski, Esq.
Kevin F. Jursinski, P.A.
7800 University Pointe Drive, Suite 200
Fort Myers, Florida 33907
(239) 337-1147
(239) 337-5364
Kevin@kfjlaw.com

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Procedures as to Separating Out the Eviction Claim vs. Damages Claim in the Lease


BY KEVIN F. JURSINSKI, ATTORNEY AT LAW

 

This month I would like to address an issue that is facing all businesses including Commercial Landlords and Commercial Property Managers, which is the procedure as to separating out the eviction claim vs. damages claim in the Lease.

As set forth in our very first Commercial Newsletter (January of 2007), this requires precise drafting of an appropriate Commercial Lease. I have reviewed numerous Commercial Leases in my twenty five plus (25+) years of practicing real estate law and there are a wide variety of Commercial Leases, some better than the others. In fact, I have not seen any that have proper and appropriate remedial provisions relating to alternate dispute resolution proceedings as to damage claims.

The alternate dispute resolution format would allow the Landlord and Tenant to engage in litigation relating to the eviction aspect of the case (possessory rights) on the expedited proceedings allowed for under Florida Statute §83, et. seq. (Non-Residential Tenancy Statute), but would require the parties to engage in the following procedures as it relates to the identification of the amount of damages, if any, as between the parties and award of attorney fees:

1. The parties would specifically waive and relinquish any claims to a Jury Trial;

2.The parties would submit all such non-eviction/possessory claims for damages or other non eviction claim to a three-step process, good faith negotiation, mediation and then binding arbitration.

The Mediation proceedings would be conducted in accordance with Florida Statute §44 and F.R.C.P. 1.720 and be conducted by a State of Florida Circuit Court Certified Mediator with an agreement that the designation for such Mediator which would be to require the Mediator to have a minimum of ten (10) years commercial and real estate litigation experience in order to act as the Mediator. Likewise, the Arbitration could be conducted and would be conducted by stipulating that the Arbitrator that will handle the Arbitration proceeding would have a minimum of ten (10) years commercial and real estate litigation experience to act as an Arbitrator. This allows the parties to select an experienced Mediator and experienced Arbitrator to resolve their issues.

Mediation in Florida has proven to be one of the most successful programs ever devised by the Florida Bar. The State of Florida and, in many experts' opinions, leads the entire nation in the quality of its Mediation and results, with the results ranging somewhere between an eighty percent (80%) to ninety percent (90%) success rate for Mediation. With these odds and given the fact that the parties are going to be required to submit to non-binding Mediation in any event, even if litigation is elected, would lead one to the distinct conclusion that the alternate dispute resolution proceedings might be incorporated into a Lease for the benefit of the parties. The fact that the case could be undertaken in Circuit Court as far as eviction would also allow for a vehicle and platform to enforce any Mediation or Arbitration settlement agreement or ruling, accordingly.

A Commercial Property Manger is cautioned that before undertaking a drastic modification of a Lease Agreement, that the Commercial Property Manager or Commercial Property Owner retain the services of a quality Real Estate Attorney who has the ability and knowledge to draft an instrument which can be enforceable under such terms and conditions.

Kevin F. Jursinski, Esq.
Kevin F. Jursinski, P.A.
7800 University Pointe Drive, Suite 200
Fort Myers, Florida 33907
(239) 337-1147
(239) 337-5364
Kevin@kfjlaw.com

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Remedial Provisions and Expediting Eviction and Judgment in Light of Today's Crowded Court Docket


BY KEVIN F. JURSINSKI, ATTORNEY AT LAW

 

This month I would like to address an issue that is facing all businesses including Commercial Landlords and Commercial Property Managers, which is the over crowding of our Court docket.

A. Court Docket Delays. In Lee County (as in many other Counties throughout Florida), the Court dockets have become increasingly over crowded as a result of foreclosure actions. For example, in Lee County, Florida, in April of 2008 there was a record 2,160 mortgage foreclosures filed which is a staggering number of foreclosures to put into the Court system.

Add that to the fact that the Courts in Florida are some of the most over crowded Courts (with our Judiciary handing more cases per Judge than many of the other States), as well as the fact that many of the Counties, such as Lee County, are even further over crowded and with a higher case load resulting in an extremely slow Court docket. This is not because the Judiciary isn't working hard, but simply due to the fact that the Judiciary is inundated with Court cases.

Further, and as compelling, are the potential State budgetary cuts being considered throughout Florida. If the current State budget cuts are initiated, there has been some suggestion that the Judicial staff in the Twentieth Judicial Circuit (five County area of Lee, Collier, Hendry, Glades and Charlotte Counties) might have their staffs cut by up to one-third (1/3).

B. Impact on Commercial Leases. What does this all mean to you as a Commercial Property Manager or Commercial Property Owner? It means that there is a possibility that your case for eviction and damages against the Commercial Tenant could be delayed substantially simply due to the market realties of what is taking place in our real estate market causing over crowding of the dockets and reducing the ability of the Courts to handle cases.

The question posed is what can be done by a Commercial Landlord and Commercial Property Manager to avoid these long delays in light of the recent market realties? One suggestion is to consider redrafting your Commercial Lease Agreements so that the Lease Agreements provide for additional remedial provisions and alternate dispute resolution procedures in regard to the damage claims.

C. Current Procedures Under Non-Residential Statutes. Current non-residential tenancy statute, in my opinion, is properly set up to allow for expediting Landlords' claims, especially the provisions provided for in Florida Statue §83.232, which is the "Pay to Play" provision requiring Commercial Tenants to deposit rents into the Court Registry if they wish to raise defenses to an eviction action. This also allows the Landlord to schedule and set evidentiary hearings to determine the amount of rents which need to be deposited in the Court Registry. Most of the time the Courts have been accommodating in regard to this matter and I would not suggest that anything be changed in regard to Commercial Leases which would impact and affect the rights to pursue the eviction action, especially given the fact that in addition to Florida Statue §83.232 the Summary Procedure Statute of §51.011 allows for maintenance of expedited proceedings and requires a five (5) day response time by the Defendant-Tenant relating to an eviction action, during which time the Defendant-Tenant must answer and raise all Affirmative Defenses as precluded from engaging in motion practice and, further, is required to either (a) deposit all disputed rents in the Court Registry; or (b) file for an immediate §83.232 Hearing to determine the amount of rents that need to be placed in the Court Registry.

However, the remaining provisions of the Non-Residential Tenancy Statute do not have such expedited procedures relating to damages, which damages must be litigated as any damage case which would require discovery and a Notice for Trial before the case is set for Trial. Further, in the Twentieth Judicial Circuit, most cases being set for Trial are referred to Mediation certainly at some stage of the proceeding.

D. Result: Case Delays. As such, in a situation involving the issue of damages, the Commercial Landlord does face and may be facing further extended delays simply as a result of the market realities of the over crowing of our Court System due to a number of factors, as well as the potential further delays which may be inherent as a result of budgetary cuts. Even without those budgetary cuts, our Court System and Judiciary is working harder with more cases than most of the other Court Systems in the United States.

E. Solution - Alternate Dispute Resolution Provision. One suggestion is to carve out from your Lease Agreement the obligations of the parties to litigate damages in Court and to commit to an alternate dispute resolution proceeding as it relates to damages.

This would require your current Leases to be reconstructed and divided up into two (2) separate remedial provisions: (a) the first is a remedial provision relating to the eviction process which would allow the parties full and complete access to the Court for the limited purpose of determining the amounts of rents to be placed in the Court Registry and the right of the Court to determine eviction and possession of the Tenant in accordance with the provisions set forth in the Non-Residential Tenancy Statute; (b) the second would be drafted to require the Landlord and Tenant to submit to alternate dispute resolution procedures as it relates to any potential damage claims.

 

 

Kevin F. Jursinski, Esq.
Kevin F. Jursinski, P.A.
Kevin F. Jursinski and Associates, P.A.
15701 S. Tamiami Trail
Fort Myers, Florida 33908
PH (239) 337-1147
FAX (239) 337-5364
Kevin@kfjlaw.com

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CO-TENANCY CLAUSES PART (Part 2)


BY KEVIN F. JURSINSKI, ATTORNEY AT LAW

 

In last month's Newsletter, we discussed "going dark" and continuous operations clauses in a Lease.

This month we will address an ancillary clause known as "co-tenancy."

I. Working Definition of Co-Tenancy Clause. Roughly defined, a co-tenancy clause is a clause put into a Lease Agreement which benefits the Commercial Tenant. Specifically, the co-tenancy clause is designed to identify the fact that the Lease obligation of the Tenants may be modified at the Tenant's option, in whole or part, as a result of the other Commercial Tenants at the Shopping Center ceasing operations.

II. Example of Co-Tenancy Clause in Operation. As an example, assume Tenant "A" is a retailer that wants to take occupancy at a specific Shopping Center in close proximity to Tenant "B" (Key Tenant). Tenant "A," based upon its due diligence and research, has determined that Key Tenant's occupancy (and, accordingly, the prospective projected profit margins and projected gross sales of Tenant "A") have been determined by Tenant "A" to be directly correlated to the location and operation of Key Tenants at the Shopping Center.

Further in this example, Tenant "A" has determined that in the event Key Tenant ceases operations, discontinues hours of operations, or in some way is not maintaining its normal course of business, that such actions could negatively impact Tenant "A's" own operation.

This results in Tenant "A" requesting a provision to be contained in its Lease which provisions would either (a) reduce the rent of the Tenant in such circumstances; or (b) allow the Tenant to abate its rental payments during such non-operation of Key Tenant or, alternatively, in fact simply cancel its Lease obligations entirely.

The Commercial Landlord or Commercial Property Manager is alerted to the fact that these co-tenancy clauses could have a serious and negative affect on the Commercial Landlord/Commercial Property Manager because of the "domino effect" of the Lease terminations.

III. Suggested Protections for Landlord if Landlord is Going to be Required to Grant Co-Tenancy Provision. In such case the Landlord should require that should the co-tenancy provision be exercised by Tenant "A" in the above example, the co-tenancy provision should only be exercised in the event that (a) Tenant is in full and complete compliance with the Lease Agreement; (b) Tenant itself is fully open for business, staffed, and conducting its business in accordance with the specific use provision of Tenant "A's" Lease; and (c) Tenant is otherwise in full compliance with the existing laws, together with any rules or regulations promulgated by the Landlord.

IV. Limitation of the Exercise of the Co-Tenancy Clause. Again, if a Commercial Landlord is faced with the obligation to accept a co-tenancy clause, the Landlord should consider some limitations which would include, but may not be limited to, the following:

a. Identify the fact that the Key Tenant's closure must be permanent rather than simply an abatement in its operations, such as an abatement for repairs, maintenance, renovations, etc. Such temporary abatement should not in any way be grounds for a trigger of the co-tenancy provision;

b. Require that the triggering of the co-tenancy clause on the closure of the Key Tenant's location is verified by an actual reduction in gross sales revenue of Tenant "A." If in fact the closure of Key Tenant has no negative impact upon the then existing gross revenue sales of the Key Tenant, an argument can be made that, notwithstanding the co-tenancy clause, the closure of the Key Tenant, either permanently or temporarily, has had no economic impact on Tenant "A's" business and should not be grounds for Tenant "A" getting a reduction in rental or allowing Tenant "A" itself to "go dark" or terminate the Lease; and

c. Set a specific period of time for the Key Tenant to be closed before the co-tenancy clause goes into effect to allow for a verification of a negative impact on the closure of Key Tenant. Example: requiring that a review of the books and records and gross sales of Tenant "A" be identified after a six (6) month period after closure of Key Tenant and only then and only if a there is a substantial decrease in Tenant's gross revenues that is attributable to the closure of Key Tenant, would the co-tenancy clause go into effect.

V. Mitigation of Damages by the Landlord. Another provision that the Landlord could insist be included in a co-tenancy clause is the ability of the Landlord to mitigate the damages as a result of the closure of Key Tenant. An example could be that if a Key Tenant announces a closure, that in such event the six (6) month period will be implemented and during such time the Landlord may have an opportunity to replace Key Tenant with a Substitute Tenant which might itself mitigate the closure of Key Tenant's facility thereby resulting in no detrimental effect to Tenant "A's" business and negating the ability of Tenant "A" to exercise his co-tenancy clause.

VI. Limitation of Remedies Against the Landlord. Again, if the Landlord is required to accept the co-tenancy clause, the Landlord may consider accepting such co-tenancy clause but indicate that if the Tenant exercises such co-tenancy clause this election would be the only remedy available to Tenant and there would be no consequential or other damages available to the Tenant as against the Landlord. Tenant "A" (in the example of Key Tenant "going dark") under such circumstances could not seek additional damages against Commercial Landlord as a result of Key Tenant "going dark."

VII. Reciprocal Rights of Landlord to Initiate its Own Exercise of a Co-Tenancy Clause. One other provision that can be added in the event a Landlord is required to accept a co-tenancy clause is to allow the Landlord itself to exercise the co-tenancy clause and terminate the Lease of Tenant "A" in the event of Key Tenant vacating the premises.

By way of example and assuming in our above example that Key Tenant is located adjacent to Tenant "A":

Rather than accept the exercise of a co-tenancy clause from Tenant "A" indicating that Tenant "A" could have a substantial reduction in its rent as a result of Key Tenant "going dark," the Landlord would have the opportunity itself to simply terminate Tenant "A's" entire Lease Agreement. This would allow the Landlord to potentially assemble the space in Key Tenant's location and Tenant "A's" location to make a larger "box" for another Tenant to enable the Commercial Landlord to mitigate its damages or lease the Tenant "A" space to another Tenant who would pay full rent. This reciprocal exercise of co-tenancy provision may give pause to the Commercial Tenant in exercising its own rights under the co-tenancy clause.

VIII. Summary. As an overview, it should be understood that the co-tenancy clause would only come into play when another Tenant (Key Tenant) ceases operation or "goes dark." Such action correspondingly and immediately impacts and affects the Commercial Landlord since the other Commercial Tenant (Tenant "A" in our example above) would then be able to exercise the various options under his co-tenancy clause.

Consider the scenario when Key Tenant either ceases operations or temporarily discontinues operations (whether or not they continue to pay rent or not resulting in the Center "going dark" for that space or spaces), which then immediately results in at least one other Tenant (in our example Tenant "A") having the option to reduce or discontinue rent or potentially terminate the Lease. This can have quite a devastating impact on the Landlord. As such, the Commercial Property Manger is alerted to these co-tenancy clauses and alerted to consider all of the various scenarios and legal ramifications of a Commercial Property Lease co-tenancy clause.

 

Kevin F. Jursinski, Esq.
Kevin F. Jursinski, P.A.
Kevin F. Jursinski and Associates, P.A.
15701 S. Tamiami Trail
Fort Myers, Florida 33908
PH (239) 337-1147
FAX (239) 337-5364
Kevin@kfjlaw.com

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Going Dark" and Co-Tenancy Clauses


BY KEVIN F. JURSINSKI, ATTORNEY AT LAW
(1st of 2 Parts)

In the February 2008 and March 2008 Newsletters I will be addressing two separate provisions which need to be read together and understood by Commercial Property Managers and Landlords: "Going Dark" and Co-Tenancy Clauses.

Part I. "Going Dark."

As used in the vernacular of commercial leases, "going dark" means that a Tenant ceases business operations at the leased premises. The reason why a Tenant would cease operations at the business premises are for a variety of reasons, but the result upon the Landlord is that the Landlord has, at the very least, a situation in which the leased premises appear to be abandoned which may or may not have an economic impact upon the Landlord depending upon the continuous payment of rentals (discussion below) but certainly from the standpoint of a retail and commercial center, a Tenant "going dark" has a negative impact and effect upon the Landlord especially when the anticipated time period for such succession of operations is for an extended period of time.

Further, if Tenant "goes dark" this may have a negative impact not only on the viability of the center from a perception standpoint from prospective customers, but also a negative impact on the center as to percentage rentals, customer foot traffic and other intangibles.

Clearly from the standpoint of an anchor Tenant, "going dark" could have a dramatic and extremely detrimental impact upon the retail center as to the local Tenants then remaining. For example, this could be a major supermarket chain "going dark" which supermarket was the anchor Tenant for that center and drove a substantial amount of the prospective traffic to the center. There is even a more severe impact upon the center since as indicated above there are several critical factors for the commercial Landlord/commercial Tenant to keep in mind in the operation of the center:

1. Collecting as much rent as the market will bear in a timely and full manner. Closure or "going dark" of some Tenants or possibly "going dark" of an anchor Tenant may have a negative impact upon the timely payment of rents and/or a "domino" effect upon other Tenants seeking to vacate.

2. Keeping the center healthy and keeping the center viable and the remaining commercial Tenants successful in their own operations. The obvious impact of an anchor Tenant "going dark" (or other critical Tenants) would have a drop in traffic and a subsequent fall off in the successful operation of other Tenants which again could negate in poor compromise of Goal Number One: Timely payment of rent.

3. Obtaining as much financing as possible and keeping its lenders satisfied. Depending upon the debt coverage ratio required by the loan agreements, Tenants "going dark" may impact the vacancy rate or alternatively may impact upon prospective rents to be received.

4. Tenant mix, customer draw, profitability, or ability to re-let the premises. The Tenant mix, customer draw, profitability, or ability to re-let the premises may also be negatively affected or impacted by the closure or the "going dark" of a Tenant.

Closure of a Tenant may also have an impact upon co-tenancy clauses existing in other Tenants' leases thereby again having a continuing "domino" effect of a drop in rents or issues with other leases (co-tenancy clauses briefly defined and more fully identified and discussed in March's newsletter) is the fact that certain leases contain provisions that allow such Tenant to either reduce its rent or in certain instances cease paying rent entirely in the event anchor Tenants or a certain percentage of occupancy of the entire retail center is not in operation.

5. Express continuous operations clause. To address the issue of "going dark" a Landlord should contain a provision in its lease for an express, continuous operations clause. A continuous operations clause should require the Tenant to remain in continuous operations and also be in compliance with the continuous hours of operations. The language must be precise and clear to identify specifically that the Tenant not only has to continuously operate their premises but cannot vary or alter the days of operations or cannot vary or alter the hours of operations since those variances can also have a negative impact upon the center with corresponding negative results.

Further in addition thereto, the Landlord should consider the express continuous operations clause as opposed to simply relying upon implied continuous operations provisions. The remedies for a Landlord would be to claim a breach of lease, claim specific enforcement or injunctive relief by the Court or seek performance/injunctive relief through enforcement by the Court.

The problem with these two remedies is that the remedy for breach of lease for non-payment doesn't really accomplish the goal which is a deterrence of the "going dark" provision. The Landlord actually suffers additional damages as a result of the "going dark" in addition to the loss of income.

There is also a situation in which a Tenant, such as a national anchor, may consider "going dark" but continues to pay rent. Unless there is a specific provision against this many Courts will indicate that the Landlord has not suffered any monetary damage from loss of rent and the Landlord would then have to specifically prove those tangible damages for the Tenant "going dark." Further, if the Landlord simply seeks to obtain injunctive relief the Court may indicate that it is really not in the position to force or compel a Tenant to remain open since that is a continuing administrative obligation of the Court and there are cases to indicate that injunctive relief under such circumstances may not be not appropriate or a recommended course of action for a Court to take since it would require specific performance/administration of the lease by the Court. See Mayor's Jewelers, Inc. d/b/a Mayor's Jewelers v. State of California Public Employees' Retirement System, 685 So. 2d 904 (4 DCA 1996).

Under these circumstances, it is quite obvious that the Landlord needs to take a proactive position in their express continuous operations clause and include therein a specifically and well drafted liquidated damage clause identifying the mutual, clear and concise language. This is defined given the fact that not only would the Tenant be in breach of the lease agreement based upon the failure to continuously operate its business but the Landlord could recover, in addition to the monetary damages as a result of the Tenant's non-payment of rent (if in fact such be the case), specific liquidated damages since the Tenant's "going dark" would have a negative impact on the Landlord but which might not be readily ascertainable at the time the lease was entered into. These damages would include: loss of prospective Tenants, negative impact upon other Tenants, loss of percentage rent from the existing Tenant that "went dark," and potential loss of percentage rent from other Tenants as a result of the defaulting Tenant "going dark."

The Landlord should be cautious and retain appropriate legal counsel to properly draft the liquidated damage clause since the enforceability of the liquidated damage clause needs to be determined by the Court. Many Courts continue to be very "Tenant friendly" and they may construe that a liquidated damage clause under certain circumstances could be considered a penalty. See Kevin F. Jursinski, Esq. Commercial Lease Newsletter dated January, 2008, "Exclusivity Clauses and Use Clauses."

As such, the Landlord is advised to take all appropriate cautions relating to the potentialities of a Tenant "going dark."

Kevin F. Jursinski, Esq.
Kevin F. Jursinski, P.A.
Kevin F. Jursinski and Associates, P.A.
15701 S. Tamiami Trail
Fort Myers, Florida 33908
PH (239) 337-1147
FAX (239) 337-5364
Kevin@kfjlaw.com

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Exclusivity Clauses and Use Clauses Part II:
BY KEVIN F. JURSINSKI, ATTORNEY AT LAW

 

In the December 2007 newsletter exclusivity provisions were addressed and the need to have such exclusivity provision written in clear, unambiguous and definite, identifying each and every right that was granted to the commercial tenant for the exclusive use of the subject premises.

The countervailing clause in reference to exclusivity provisions is the use provisions.

I. Definition of Use Provision

A use provision is a specific grant of the identifiable and allowable use of the Leased Premises set forth in the Lease Agreement. It seems fairly fundamental to commercial property owners and landlords that it is important for a commercial landlord to be able to control the type of use to be made at the commercial landlord's building, business premises or shopping center. However, in many instances the Trier of Fact, Judges or juries aren't sophisticated to the extent of understanding the specific requirements of a commercial landlord or property manager in making sure there is an appropriate tenant mix at the building, especially where tenant mix is significant such as a retail setting where a proper diversity of tenants is required for the success of the retail center.

II. Use of Premises is restrictive rather than permissive/all encompassing

Contrary to the exclusivity provision, (which indicates that the tenant has a sole and exclusive use of the premises for a specific and identifiable purpose), the use provision specifically limits the tenant as to the type of use stated and as identified by the landlord. There is the restrictive end of the use provision which indicates that the tenant can utilize solely and only for the use identified in that specific use clause.

Further the fact that the tenant is allowed to utilize the premise for such use does not imply, indicate or in any way require the landlord to preclude other tenants for making use of the premises for that very same purpose. The point of the use provision is to specifically and clearly identify for the tenant the use it can make of the subject premises so that the tenant can not stray from such use and the landlord can clearly control the tenant mix at the premises.

An example of this would be a shopping center which consisted of approximately ten stores anchored by a major supermarket chain and which might consist of an insurance office, a hair salon, a clothing store and several other retail establishments.

Quite obviously in such a shopping center for the tenants to be viable there can't be a duplication of the uses by one tenant as against the other. By way of example and in using our ten store model, it would be counterproductive for both the tenants as well as the landlord for the landlord to allow for two retail stores essentially having the same service or product to be located in close proximity in such a small shopping center.

While it might be acceptable for two ladies clothing stores to exist in a regional mall, a small shopping center would not be well served by having two ladies specialty stores located next to or in close proximity to each other with the small amount of traffic that would support such ladies specialty store.

Reasonable Restriction - Landlord can not withhold consent for Assignment of Lease

In many situations, a tenant is willing to sell its business to a third party purchaser who wants to assume the lease and take over the tenant obligations. In the case of Fernandez v. Vasquez, 392 So.2d 1172 (3DCA 1981) the Court indicated the following criteria indicating that the landlord must not unreasonably withhold consent to transfer:

"Where the lease merely contains a provisions - without more - granting a person, normally a landlord, the power to withhold consent, regardless of whether explicitly qualified to reasonable exercises of the power "¦ the courts have held the person's refusal to consent to a person acceptable by reasonable commercial standards to be an unreasonable exercise and thus violative of the lease"¦.."

""¦the following factors are among those which a jury may properly consider in applying the standards of good faith and commercial reasonableness: (a) financial responsibility of the proposed subtenant (b) the "identity" or "business character" of the subtenant, i.e., suitability for the particular building, (c) the need for alteration of the premises, (d) the legality of the proposes use, and (e) the nature of the occupancy, i.e., office factory, clinic, etc.,; See Popovic v. Florida Mechanical Contractors, supra, Whitman v. Pet Inc., supra, American Book Co. v. Yeshiva University, Development Foundation, Inc., 59 Misc.2d31, 297 N.Y.S.2d 156 (1969); Johnson v. Jaquith, supra. Denying consent solely on the basis of personal taste, convenience or sensibility or in order that the landlord may charge a higher rent than originally contracted for have been held arbitrary reasons failing the tests of good faith and reasonableness under commercial leases. Catalina Inc., v. Biscayne Northeast Corp., supra., **9 Chanslor-Western Oil & Development Co. v. Metropolitan Sanitary District, 131 Ill.App.2d 527, 266 N.E.2d 405 (1970, citing Broad and Branford Place Corp. v. J.J. Hockenjos Co., 132 N.J.L. 229, 29 A.2d 80, 82 (1944)."

However, as noted in Fernandez v. Vasquez the landlord can specifically refuse an assignment of the lease if the new prospective tenants would be making use of the premises inconsistent with the prior use. This is supportive of the fact that a granting clause or premises use clause can be specific and a tenant can only utilize the premise for the purpose intended as a matter of contract law and for no other purpose.

Landlords should draft with specificity the use provision. One example of a use provision which would limit the premises for a specific use would be as follows:

"USE - For the primary use of a full-service restaurant serving bear and wine only and a variety of entrees and appetizers including cheese plates, antipastos, salads, flatbread pizzas, sandwiches and deserts; and for no other purpose."

The use provision should be drafted by the commercial landlord with a clearly identifiable purpose for the landlord to insure a specific use only. Again the same concept applies in regards to the use provisions as it would apply to exclusivity provisions.

If the tenant strays from the use of the premises by contract the landlord needs to be in a position clearly and identifiably set forth to the Court why the tenant can not utilize the subject lease premises in the manner objectionable to the landlord and demonstrate to the Court that use of the premises violates the specific use privisions set forth in the use lease. Precise clear lease language which can be viewed objectively by a Trier of Fact must be incorporated into the document.

Problems that the landlord faces in regards to improperly drafting use clauses or exclusivity clauses as discussed in the December, 2007 newsletter is that (a) the landlord may not be able to enforce such a provision if it is not clear; (b) if the provision is not clearly drafted or the tenant believes it has some exclusive right to the type of business, the tenant may assert such claim can sue the landlord for constructive eviction by the landlord as a result of the Landlord entering into the lease with another tenant having a similar type use for a location at the shopping center. Hollywood Shopping Plaza, Inc. v. Schuyler, 179 So.2d 573 (4DCA 1965).

 

Kevin F. Jursinski, Esq.
Kevin F. Jursinski, P.A.
Kevin F. Jursinski and Associates, P.A.
15701 S. Tamiami Trail
Fort Myers, Florida 33908
PH (239) 337-1147
FAX (239) 337-5364
Kevin@kfjlaw.com

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EXCLUSIVITY CLAUSES AND USE CLAUSES PART I
BY KEVIN F. JURSINSKI, ATTORNEY AT LAW

 

I. Confusion among the Courts, Tenants and sometimes Commercial Property Managers

The next two monthly newsletters are going to be designed to address exclusivity clauses and use provisions in commercial leases, which generally impact and effect retail but could also be important in the issue of tenants as to other commercial premises.

II. Definition of Exclusivity Clause and Use Clause

A. In commercial leases it is important to start with the initial basic fundamental definition of these two particular concepts:

Exclusivity Clause - An exclusivity clause or exclusivity provision contained within a commercial lease is a provision which indicates that the tenant is granted, contemporaneous with the lease agreement, the right for certain identifiable uses at the subject premises generally and as within the complex, shopping center or development.

Use Provision - A use provision is a provision contained in the lease agreement which specifically identifies the use that is permitted by the landlord and can be inclusive or very restrictive depending upon the intent of both the commercial landlord and the commercial tenant.

Confusion as to the rights arising under both provisions.

Sometimes commercial tenants as well as commercial property managers/landlords confuse these two items. It is important to know that in an exclusivity clause, these are additional rights granted solely and exclusively to the tenant allowing a tenant the sole and exclusive right to be utilized those specific and identifiable uses for the tenant. In exclusivity clauses it is very important for the tenant as well as the landlord to have exact and precise language contained in the exclusivity clause.

Commercial landlords and tenants fail to recognize the fact that the enforceability of the exclusivity clauses, in the event of any dispute existing between the commercial landlord, the tenant with the exclusivity provision and a competing tenant (who may be the object of a claim for interference with a tenants' exclusivity provision) will fall directly to the Trier of Fact, which is generally the court and also most likely in a preliminary injunction setting. In this particular provision the person seeking to enforce the exclusivity provision needs to establish to the Court that the provision is clear, unambiguous and that the person is entitled to the equitable relief of a preliminary injunction. Preliminary injunctions generally are granted only when the movant (as in this particular the commercial tenant seeking to enforce his exclusivity provisions either against the landlord or the competing tenant) can demonstrate the following four factors:

1) Substantial relationships with specific prospective or existing customers or clients

2) Trade secrets or valuable confidential business or professional information that does not otherwise qualify as trade secrets

3) Customer good will associated with a specific market area

4) Trade secrets, as defined in s. 688.002(4).

As such it is very important that the language is clear, unambiguous and identifies with particularity the exclusivity provision that the tenant believes it can obtain.

III. When is a bagel not a donut?

Although this seems somewhat flippant, the question was answered in the Court in the case of LPI/KEY West Associates, Ltd. v. Sarah Luna, Inc., 749 So.2d 564., (FLA 2000). Specifically in the case of LIP/Key West Associates, the tenant had an exclusivity provision indicating that it would solely and exclusively have the right to utilize its premises for a "bagel bakery" located in a shopping center.

The exact terminology was in fact "bagel bakery" rather than terminology which the tenant believed to be all encompassing underneath "bagel bakery" which would include the sale of bagels, donuts and the like.

Dunkin Donuts was granted a lease at the premises and the tenant challenged the exclusivity provision claiming that the tenant solely had the right to operate a bakery at the premises and that Dunkin Donuts should be precluded from utilizing the premises to sell its goods which include, but are not limited to, bagels and donuts.

The Trial Court and the Appellate Court disagreed claiming that an exclusivity clause must be drafted to specificity and identified clearly what rights are exclusive to the tenant and what rights are not. In that particular case the tenant's interest was frustrated and the tenant was then faced with competition from a national retailer in the very same premises in which the tenant was operating its' "bagel bakery". Obviously in this particular case the lesson was well learned that: an exclusivity clause must be specific and definite to be enforceable.

IV. Those rights not precluded must be allowable.

The Courts are very supportive of the fact that exclusivity clauses should not be liberally construed since its intent is to limit prospective use of real property which flies in the face of basis tenet under Florida Law which is a restriction on alienation. As such and in the case of LIP/Key West Associates, the Court identified the fact that a specific identifiable exclusivity case as held by LIP/Key West Associates would eliminate the ability of a competitor Southernmost Donut Co., Inc., from selling its wares in competition with the retailer LIP/Key West Associates, who had the exclusive provisions.

In short, please refer to the case since it has a comprehensive identification of the exclusivity provisions which were ruled upon by the Court which exclusivity provisions were clear, definite and all encompassing.

V. Summary

The key point in identifying the exclusivity provisions is that in the event that commercial landlord or commercial tenants want to carve out the sole and exclusive use of its premises for an identifiable use which would ultimately preclude any and all other third parties from utilizing premises located in the same building/shopping center/complex in competition with that tenant, that exclusivity clause must be clear unambiguous and specific as to each and every detail otherwise the tenants "exclusive rights" will be construed only to what is exactly identifiable in such clear and uncertain terms as set forth in the lease agreement.

 

Kevin F. Jursinski, Esq.
Kevin F. Jursinski, P.A.
Kevin F. Jursinski and Associates, P.A.
15701 S. Tamiami Trail
Fort Myers, Florida 33908
PH (239) 337-1147
FAX (239) 337-5364
Fort Myers, Florida 33907
Kevin@kfjlaw.com

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CONTINUING ONGOING MAINTENANCE, REPAIRS AND EXPENSES
BY KEVIN F. JURSINSKI, ATTORNEY AT LAW

 

This is an area that is often a negotiated aspect of lease obligations and which should be specifically identified by the Landlord.

The commercial Landlord of a shopping center needs to identify what areas of repair outside the premises or as part of the structure are to be considered Common Area Maintenance, (CAM), which of course would allow for a pass through from the Landlord to the Tenant.

Thereafter, all of the remaining areas of maintenance, repairs and replacements should be specifically identified, allocating to whether the Landlord or the Tenant is responsible for maintenance repairs or replacements to the structure. The following are sample lease provisions for informational purposes:

a. Landlord's Maintenance and Repair Obligations.

Landlord shall be responsible only for the following areas and repairs:

Maintenance, Repair and Replacement of roofing system Maintenance, Repair and Replacement of HVAC roof top systems

b.Tenant's Leasehold Improvements or Tenant's Obligations.

Tenant shall, at his expense, throughout the term of this Lease, take good care of the Premises, the fixtures and appurtenances therein and Tenant's Property. Tenant shall be responsible for all repairs, interior and exterior, structural and non structural, ordinary and extraordinary, in and to the Premises and the facilities and systems thereof, inclusive of the need for which arises out of: (1) Tenant's Leasehold Improvement or alterations;

(2) the installation, use or operation of Tenant's Property in the Premises;

(3) the moving of Tenant's Property in or out of the Building; or

(4) the act, omissions, misuse or negligence of Tenant or any sub Tenant or any of its or their employees' agents, contractors, or invitees. If damage is caused by the negligence of Tenant, its employees, agents, contractors or invites, Tenant at its expense, shall promptly replace all scratched, damaged or broken doors and glass in and about the Premises and shall be responsible for all repairs, maintenance and replacement of wall and floor coverings in the Premises and for the repair and maintenance of all sanitary and electrical fixtures therein. Tenant shall promptly make, at Tenant's expense, all repairs in or to the Premises for which Tenant is responsible pursuant to this Section, and any repairs required to be made by Tenant to the mechanical, electrical, sanitary, heating, ventilation, air conditioning, or other systems in the Premises shall be performed only by contractor(s) reasonably designated by Landlord, save and except for Landlord's specific obligations set forth in 12(a) hereinabove. All such repairs shall be performed at such times and in such manner as shall cause the least interference with the operation of the central systems of the Premises or the Building in which the premises is located and the use of the Premises by other occupants. All such repairs shall be subject to the supervision and control by Landlord for which Landlord may charge Tenant a reasonable fee. If Tenant fails to make such repairs promptly, or within 10 days after occurrence, and to the satisfaction of Landlord, Landlord may at its option, make such repairs, and Tenant shall repay the cost thereof to Landlord on demand. Tenant waives all rights to make repairs at the expense of or on the behalf of Landlord, or to deduct the costs thereof from Rent. Any other repairs in or to the Building and the facilities and systems thereof for which Tenant is responsible shall be performed by Landlord at Tenant's expense.

The sole responsibility and cost to the Tenant shall be the repair and maintenance to any grease traps or required modification to the plumbing system needed by Tenant for use of the Premises as a restaurant facility.

c.Tenant's Obligations for Common Area Outside of Premises and Signage.

As a cost to Tenant and as part of the exterior Common Area Maintenance, Tenant shall keep and maintain both the interior and exterior of the Premises and its systems serving the Premises (other than the specific items identified in Section 12(a) hereinabove) in good working order, condition and repair, and shall make all repairs, structural and otherwise, interior and exterior, as and when needed in or about the Common Area, except for those repairs or maintenance obligations for which Tenant is responsible pursuant to the provisions of this Lease (Section 3(b), 9(a) and 12(a) above).

Tenant also acknowledges and agrees that it is fully responsible for all exterior maintenance as identified hereinabove, inclusive of maintenance, repair and replacement of exterior signage, parking lot, driveways, curbing and all other aspects of the exterior of the Premises.

Landlord shall have no liability to Tenant, nor shall Tenant's covenants and obligations hereunder be reduced or abated in any manner whatsoever, by reason of any inconvenience, annoyance, interruption or injury to business arising from any work needed to be performed by tenant or Landlord's making any repairs or changes which Landlord is required or permitted by this Lease, or required by law, to make in or to any portion of the Building or the Premises, or in or to the fixtures, equipment or appurtenances of the Building or the Premises, such repairs to be completed within a reasonable time. Landlord shall not be liable for any damage to Tenant's property caused by water from bursting or leaking pipes, waste water about the rented property, or otherwise: or from an intentional or negligent act of any co tenant or occupant of the property surrounding the rented property, or other occupant of the property surrounding the rented property, or other person, or by fire, hurricane or other acts of God: or by riots or vandals: or from any other cause: all such risks shall be assumed by the Tenant. Landlord shall not be required to furnish any services or facilities to, or to make any repairs to or replacements or alterations of, the Premises where necessitated due to the fault of the Tenant, its agents and employees, or other Tenant's, their agents or employees. Additionally, Tenant waives any and all claims of any kind, nature or description against Landlord arising out of the failure of the Landlord from time to time to furnish any of the services requested to be furnished hereunder including, without limitations, air conditioning, heat, electricity, elevator service, and toilet facilities."

Next Month: Little observed, but important provisions regarding insurance, maintenance and repairs to premises to be contained in commercial leases.

 

Kevin F. Jursinski, Esq.
Kevin F. Jursinski, P.A.
Kevin F. Jursinski and Associates, P.A.
15701 S. Tamiami Trail
Fort Myers, Florida 33908
PH (239) 337-1147
FAX (239) 337-5364
Kevin@kfjlaw.com

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LANDLORD AND TENANT OBLIGATION FOR PREMISES BUILD-OUT, MAINTENANCE AND REPAIR
BY KEVIN F. JURSINSKI, ATTORNEY AT LAW

 

I. Landlord and Tenant obligation for premises build-out, maintenance and repair.

Unlike a residential setting in which there are statutory provisions identifying specific obligations of the Landlord and Tenant as to maintenance and repair, (see Florida Statute 83.51 and 83.52) in a commercial lease setting, the obligations as between Landlord and Tenant for premises build-out, maintenance and repair are a matter of contractual obligations to be entered into between the parties.

Care needs to be given for each and every one of these specific areas of obligations, both as to the Landlord and Tenant.

II. Premises Build-Out.

In most situations, at the commencement of a commercial lease, there is a provision for a Tenant to perform maintenance, repair or build-out in one of the following categories:

1. Landlord provides a certain square footage dollars for reimbursement to the Tenant to allow the Tenant to effectuate repairs.

2. The Landlord contracts to do a certain specific amount of work at the premises with the Tenant doing the completion of the build-out.

3. The Landlord negotiates a lease in which the premises are surrendered to the Tenant in "as-is condition" or if new premises, a "vanilla box".

III. Landlord performs percentage of Tenant build-out

It is important under these situations for both the protection of the Landlord as well as the Tenant that specific areas of build-out that fall within the category of the Landlord's obligation be specifically identified. It also should be identified in the lease that the "Landlord's Work" should only encompass a set amount of work and such "Landlord's Work" should not carry over into the critical path management (construction schedule) of the Tenant's obligation to build-out its premises.

The Landlord should be cautious in identifying specific work to be performed, the nature and scope of such work as well as the time period that such work should be done. As often is the case in situations when there is premises build-out, the Tenant is provided with a commencement date of the lease as well as an occupancy date.

The Tenant has certain particular requirements for building out the premises to suit its individual needs. The Landlord needs to be cautious that the scope of the "Landlord's Work" should not overlap into any areas which would allow the Tenant to claim that the Landlord has delayed its performance, thereby allowing the Tenant to claim a default in the lease. Alternatively, in situations where the Landlord is to do a certain aspect of the build-out, a Tenant may claim that for some reason the Landlord has improperly or untimely performed its obligations, resulting in Tenant being unable to perform its obligations, and accordingly, the Tenant would then have a defense for abatement of rent based upon the Landlord's failure to perform.

The best advice to a Landlord is to:
a.) Be specific in identifying "Landlord's Work";
b.) Strictly monitor Landlord's performance and percentage of Tenant build-out and document same.

IV. Per Square Footage Contribution.

The simplest way for a Landlord to contribute to Tenant build-out is for the Landlord to provide the Tenant with a square footage allocation contribution, giving the Tenant reimbursement for a certain amount of money per square foot as a credit towards the build-out.

This amount of money should be paid to the Tenant once the work is completed or, at the very earliest, as each stage of the work is completed. The Landlord does not want to be in a position where it reimburses the Tenant in advance for construction work at the premises which has not yet been completed or when payments are still outstanding to contractors, subcontractors or material suppliers see discussion in section VI below

V. "As-Is" Condition.

The Landlord can surrender the premises to the Tenant in a "as-is" condition, but it should be noted that the Landlord should take all necessary steps to ensure that the premises are fully inspected and, at the very least, no existing code violations occur at the premises.

The reason for this is the recent Supreme Court case of P&R Inc. v. Beacon Property Management, 842 So. 2d 773 (Fla. 2003), in which the Tenant was able to establish an independent tort action against the Landlord (as well as the property manager) for failure to notify the Tenant of an existing code violation in the interior wall structure.

VI. Florida Statute 713.10 - Disclaimer Protection as to Construction Lien

When a Tenant is doing build-out of the Lease premises, there may be a problem as to the payment to the contractor, subcontractor or material supplier. The problem arises when a contractor, laborer or material supplier attempts to assert a construction lien against the Landlord's interest in the premises as a result of work being performed by the Tenant in accordance with the contract. The Landlord should be advised to comply with Florida Statute 713.10, which requires the memorandum of the lease agreement to be recorded in the public records indicating a restriction on liens being implemented as against the interest of the Landlord to the subject premises. Florida Statute 713.10 states in pertinent part as follows:

"(1) The lease or a short form thereof is recorded in the clerk's office and the terms of the lease expressly prohibit such liability; or

"When an improvement is made by a lessee in accordance with an agreement between such lessee and her or his lessor, the lien shall extend also to the interest of such lessor."

(2) All of the lease entered into by a lessor for the rental of premises on a parcel of land prohibit such liability and a notice which sets forth the following is recorded by the lessor in the public records of the county in which the parcel of land is located"¦"

In either event, however, the Landlord needs to protect itself on these particular situations. The case of A. N. Drew, Inc. v. Frenchy's World Famous Cajun Café, Inc., et al., 517 So. 2d 766, 1988 Fla. App., worthy of review as to a contractor's claim of lien for Tenant improvements when the improvements constituted the "PITH" of the Lease. Care should be given in this area to seek the advice of an attorney.

Next Month: Landlord and Tenant's repair obligation - Who is responsible in a commercial lease?

 

Kevin F. Jursinski, Esq.
Kevin F. Jursinski, P.A.
Kevin F. Jursinski and Associates, P.A.
15701 S. Tamiami Trail
Fort Myers, Florida 33908
PH (239) 337-1147
FAX (239) 337-5364

Kevin@kfjlaw.com

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OPTIONS TO PURCHASE AND FIRST RIGHT OF REFUSALS IN A LEASE
BY KEVIN F. JURSINSKI, ATTORNEY AT LAW

 

This is the second part of a discussion on options contained in commercial leases. This second part addresses First Right of Refusal and Option to Purchase.

I. Options to Purchase or First Right of Refusal.

Occasionally, the Landlord and Tenant, as part of the lease negotiations, agree to an Option to Purchase or First Right of Refusal as to the lease premises. There is a distinction between these two commercial rights.

An Option to Purchase sets an Option Price at a specific sum certain which would allow the Tenant to buy the subject real property on an agreed upon price with specific terms and conditions or alternatively, on an Option Price with a verifiable method to establish a value. (An appraised value by a MAI Appraiser or a blended value of two appraisers, one selected by the Landlord or the Tenant or a verifiable procedure or formula which could be enforced by a Trier of Fact). The preference however, would be to have a specific sum certain purchase price for an Option to Purchase together with all material terms and conditions of the purchase price, inclusive of the manner and method of exercising the option, the date of closing and the specific procedure to be utilized in allocation of closing expenses and alike, between the Landlord as seller and Tenant as buyer.

II. Options to Purchase-Method to Exercise.

The Option to Purchase should be drafted in clear, unambiguous terms providing for all essential terms of the purchase. The Option to Purchase should also contain a specific method for the Tenant to exercise the Option in writing with such Option Notice identifying these essential terms of the Purchase.

III. First Right of Refusal.

Although similar to an Option to Purchase the First Right of Refusal essentially allows the Tenant the Contractual Right to purchase the property under the same terms and conditions under which the Landlord would be selling the property to a third party purchaser based upon a bona fide written proposal from the Landlord.

The distinction between an Option to Purchase and a First Right of Refusal is that in the latter, the Tenant can not force or elect the purchase of the property, as could the Tenant with a specific identifiable Option to Purchase. In a First Right of Refusal a Tenant gets the opportunity to purchase the property in the event that the Landlord receives a legitimate prospective contract from a bona fide purchaser.

IV. Pros and Cons of a First Right of Refusal-Landlord

The First Right of Refusal is a two edged sword for both the Landlord and Tenant. As far as the Landlord is concerned it does encourage the prospective Tenant to purchase the property, but may also negatively impact the Landlord's ability to negotiate a lease. Generally, in a commercial lease deals, certain prospective purchasers might shy away from negotiating if they know that their very best deal that they negotiated, could be subject to a review and acceptance by the Tenant who could negate the prospective purchaser's efforts in negotiations and purchase the property to the Tenant's benefit. This affectively allows the Tenant to step into the shoes of the prospective buyer, who may have negotiated an outstanding purchase price for the subject property only to see the Tenant reap the benefits.

In addition, a First Right of Refusal often ends up chilling prospective purchasers interested in buying the property which may correspondingly make it harder for the Landlord to have a specific and set format to dispose of the property based upon the fact that any prospective contract is contingent upon the Tenant's waiver and relinquishment of its rights.

V. First Right of Refusal Pros and Cons for Tenant.

The First Right of Refusal, as above indicated, has positive and negative implications for the Landlord. The First Right of Refusal has some positive and negative implications for the Tenant. The Tenant must be wary of the time periods and the manner and method to exercise the First Right of Refusal.

Often times the Tenant is induced into entering into a lease agreement with the understanding that the Tenant would have the right to purchase the subject property since the Tenant may be making substantial and significant improvements to the property based upon the Tenants belief that they would have the First Right of Refusal to buy the property.

If the First Right of Refusal is written so that the Tenant is required to exercise the First Right of Refusal with minimal notification, or on terms and conditions which might not be able to be met by the Tenant, the Tenant can end up relying upon a First Right of Refusal and making leasehold expenditures with no real bona fide right to purchase the property.

An example of this is in the event that the First Right of Refusal requires the Tenant to waive their rights to purchase the property without an adequate amount of notice. By way of example of a less than desirable First Right of Refusal for a Tenant, which could prejudice a Tenant, is the following:

 

"Landlord and Tenant acknowledge and agree that in the event that Landlord receives a bona fide written contract for sale and purchase for the real property that Landlord will provide Tenant with written notice of such written offer to purchase. Upon receipt of such notice, Tenant shall have seven (7) days from the receipt of such notice (exclusive of the date of notice) to advise Landlord that Tenant will exercise Tenant's First Right of Refusal to acquire the subject property under the same terms and conditions of the proposed offer for sale and purchase."

In such circumstances a Tenant might be faced with having to close on an all cash purchase on short notice which under certain circumstances might prevent the Tenant from exercising the Right, even though with adequate time to close, the Tenant might have chosen to accept the offer.

By way of example; if the purchase price was $1,000,000.00 with a cash closing the Tenant nonetheless, might be able to obtain financing and still pay "cash" at closing if the Tenant had enough time to arrange for the closing. However, without adequate time to exercise its rights it might be unable to do so under such circumstances as above set forth and be forced to waive and relinquish any First Right of Refusal and possibly walk away from substantial and significant lease hold improvements.

An appropriately drafted First Right of Refusal for the Tenant should allow adequate time for exercising the Option on First Right of Refusal. In addition, a properly drafted First Right of Refusal should also provide that the Landlord is required to provide the Tenant with a renewed opportunity to exercise the First Right of Refusal if there was a material change in the third party offer after the Tenant failed on election to waive its exercise of the First Right of Refusal on the original contract terms.

In summary, the fundamental concept of accurate contractual language needs to be applied to Options to Renew, Options to Purchase and First Right of Refusals contained in Commercial Leases.

Kevin F. Jursinski, Esq.
Kevin F. Jursinski, P.A.
Kevin F. Jursinski and Associates, P.A.
15701 S. Tamiami Trail
Fort Myers, Florida 33908
PH (239) 337-1147
FAX (239) 337-5364

Kevin@kfjlaw.com

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COMMERCIAL LEASE RENEWALS/OPTIONS TO RENEW
BY KEVIN F. JURSINSKI, ATTORNEY AT LAW

 

Often times our Commercial Property Management/Commercial Landlords are confronted with issues relating to lease renewals, Options to Renew and occasionally Options to Purchase contained in the lease instrument (the latter to be covered in the September Newsletter). The question always arises, "Is this an affective lease renewal?"

In order to answer this question you must first look at some of the fundamental concepts underlined in the document.

In the first Commercial Lease Newsletter that I prepared (January 2007), I identified the fact that the lease instrument should be properly drafted and be clear and unambiguous as to its terms and conditions. Even more compelling is when the lease instrument addresses issues such as Options to Renew, Options to Purchase and other issues which can have a significant impact upon the Landlord's bottom line.

In addition to being clear and unambiguous as far as its language, the lease option should also avoid being an "Agreement to Agree." It is quite common to see lease options or annual renewals provisions drafted as follows:

"At the end of the initial lease term, the Tenant shall have the right to extend this lease, and at such time Landlord and Tenant shall agree upon an applicable fair market rent for the subject premises."

Depending upon whether you represent a Landlord or a Tenant, the argument could be made that there is no enforceable Option to Renew based upon the fact that this is simply an "Agreement to Agree." Agreements to Agree are not enforceable contracts in the State of Florida.

One person's interpretation of "fair market rent" can clearly be different than another's and, accordingly, the argument can be made (depending if you are advocating a Landlord's or a Tenant's position) that no effective option exists or obligation thereof as a result of the fact that there are no definite terms and conditions other than the nebulous "fair market for rent."

II. Time for Exercise of Renewal Option.

Often times, there is also a problem when the language is not clear as to when the Tenant can exercise his Option to Renew and again this leaves a great deal of uncertainty to both the Landlord and Tenant and (depending upon the circumstance and the marketplace) potential litigation in the event either party wants to avoid the Renewal Option. The language should clearly identify the date and time prior to the expiration of the lease term that the Tenant can exercise the Option to Renew. There should also be a specific provision contained in the lease that indicates just how such Option to Renew is going to be made and delivered. Generally, the most effective way for the option to be renewed is to be in writing and delivered either via hand delivery or Federal Express/courier to the Landlord by the Tenant in order for there to be an effective lease renewal. Again, the time period should be an adequate time prior to the expiration of the lease term to enable the Landlord to plan for a substitute Tenant, but not such a time period that requires the Tenant to make an election far in advance of the termination date of the lease.

Generally on a five year lease for retail space, a hundred and twenty to a hundred and eighty (120-180) days out for renewal is considered reasonable, since it takes a significant period of time to obtain a substitute retail Tenant, together with the fact that space planning and permitting may also increase the time period for a replacement Tenant to occupy the premises.

III. Automatic Renewals or Leases in Perpetuity.

There are certain leases which identify the fact that the lease will automatically renew either on the same terms and conditions or on the same terms and conditions less and except for an annual increase in the rental based upon CPI or some other indicator.

Florida Courts, like other states, are consistent in that the absence of clear intent by the parties to create a lease in perpetuity a covenant to renew is satisfied by only one (1) lease renewal.

Accordingly, unless a series of options are identified with specificity and unambiguous terminology, the courts will, at the very most, allow for one renewal notwithstanding the language of continuing renewals of the lease unless an objection is made. Chessmasters, Inc. v. Chamoun, 948 So. 2d 985 (4DCA 2007); PL Lake Worth Corp. v. 99Cent Stuff-Palm Springs, LLC., 949 So. 2d 1199 (4DCA 2007).

IV. Actions of the Landlord Inconsistent with Exercise of the Option.

The Courts have construed that these options and renewal terms can not be blocked nor can one party take advantage of another party which results in the other party claiming a non-renewal.

In the case of Chessmasters the Court was clear that each party must cooperate in good faith in regard to the action. In this particular case, the Landlord failed to timely respond to a request to provide documentation relating to certain lease expenses and did not timely comply and or refused to supply the information. Based upon the inability to have the information, there was a problem with the exercise of the option and in this particular case the Landlord negated the Tenant's option to obtain the lease renewal because it had not timely made such election.

The Tenant, as identified by the Court, properly had the right to exercise the option because it was denied access to the information which would form the basis of the Tenant's decision to exercise such option. The Court felt that the Landlord had not exercised his duty of good faith in regard to the lease agreement and by failing and refusing to supply the information precluded the Tenant from making an intelligent decision on the renewal and therefore allowed the Tenant additional time within which to make the renewal.

Kevin F. Jursinski, Esq.
Kevin F. Jursinski, P.A.
Kevin F. Jursinski and Associates, P.A.
15701 S. Tamiami Trail
Fort Myers, Florida 33908
PH (239) 337-1147
FAX (239) 337-5364

Kevin@kfjlaw.com

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THE RIGHTS OF THE TENANT TO ASSIGN A COMMERCIAL LEASE
BY KEVIN F. JURSINSKI, ATTORNEY AT LAW

 

One question that is often asked by the landlord is whether the landlord has to consent to the assignment of lease by a tenant.

This often comes up when a tenant is interested in selling its business or alternatively, the tenant simply wants to be relieved of the obligation of the lease and a third party is interested in taking over the space. There have been many instances in which a landlord simply refuses to allow for the assignment not wanting to allow the tenant to transfer the interest in the lease to a third party. Oftentimes the landlord is totally wrong on this particular point, which results in the Landlord being exposed to a damage claim and attorney fees by the tenant.

I. Assignment of Lease v. Subletting

There is a distinction between a sublease and an assignment of lease. By definition a sublease is a situation in which the tenant enters into a lease with a sub-tenant for all or part of the premises being occupied. Generally, the initial tenant remains liable on the lease and controls the nature and extent of the use of the premises. By contrast, an assignment of lease is where that same tenant would assign all right, title and interest under the lease agreement to the new tenant who would then have 100% of the contractual rights under the original lease. The latter situation is generally utilized in sales transaction since the purchaser of the business wants to have all rights of entitlement that the original business owner/tenant had. Oftentimes the lease agreement indicates that either (a) the tenant can not sublease or assign the lease without the expressed written consent of the landlord or contains a more appropriate clause or (b) that the tenant cannot assign or sublease the tenant without the written consent of the landlord which consent will not by unreasonably withheld. The language "unreasonably withheld" is the key point in this discussion.

II. Assignment Rights of the Tenant

Amazingly up until 1980 apparently there wasn't a definitive published case in Florida whether a landlord could preclude the tenant from assigning or subleasing the subject premises or whether the landlord could arbitrarily refuse to consent to such assignment. This issue was clarified by the case of Fernandez v. Vasquez, 397 So. 2d 1171 (3 DCA 1981) which adopted the "Good Faith and Commercial Reasonable Rule" involving commercial leases in Florida. In such case the Court felt that in situations where a tenant is attempting to assign the lease, the landlord may withhold consent, but can only do so in a reasonable manner. The Court indicated that the landlord may not arbitrarily refuse consent to an assignment of a commercial lease, but must use Good Faith and Commercial Reasonableness.

Some of the factors that the Court identifies in the Fernandez case (which is still good law today-see discussion below of recent case law) is that the trier of fact, (be it judge or jury), can apply the following standards of Good Faith and Commercial Reasonableness:

(A) The financial responsibility of the proposed subtenant or assignee.

(B) The identity or business character of the subtenant or assignee. (That is the suitability for the particular building or premises).

(C) The need for alterations of the premises.

(D)The legality of the proposed use.

(E) The nature of the occupancy. (That is office, factory, clinic, etc.)

The Court in Fernandez held that a landlord is not going to be required to allow one tenant to be relieved of their obligations by assigning it to a third party tenant who is materially altering and changing the use of the facility or is financially not as sound as the original tenant.

An example of this would be, Tenant A, who is occupying premises for a hardware store and is a solvent and operating an ongoing business. In such a situation a landlord could reasonably withhold consent if that hardware store owner decides to assign the lease to a third party who is financially inferior to the original tenant and intends to modify the use of the premises. (For example: operating an X-Rated book store which would modify the existing use, as well as potentially raising some questions of legality) as well as the fact that the premises would be physically modified to accommodate such use.

In this situation a landlord could reasonably refuse consent although an argument could be made by the tenant that the original tenant would nonetheless still remain liable under the lease (unless the tenant was released of further obligations) and therefore the only question is the intended use and if a certificate of occupancy was granted for such use.

These questions need to be based upon factual analysis. It is critical in situations in which a landlord intends to block the assignment that the landlord is well aware of the Commercial Reasonable Rule and if any questions arise, consult with a qualified Real Estate Attorney.

A recent case involving this very factor and was just decided in the State of Florida (April 20, 2007) in the case of Speedway SuperAmerica, LLC. v. Tropic Enterprises, Inc., 2007 Florida Appellant Lexis 5799 (2DCA 2007). This decision was rendered by the Second District Court of Appeals.

In this case, a Sarasota County Court ruled that the landlord had the unfettered right under lease to withhold consent to the assignment of the lease made by the tenant to an assignee and its affiliate. In that case the Appellate Court overruled the Trial Court and indicated that the implied covenant of Good Faith exists in virtually all contractual relationships inclusive of commercial leases.

The Court indicated that, notwithstanding the language in the contract, there is a "gap filling default rule" which comes into play when a question is not resolved by the terms of the contract or when one party has the power to make a discretionary decision without defined standards. Publix Supermarkets v. Wilder Corporation of Delaware 876 So. 2d 652, 654 (Fla. 2d DCA 2004). The second DCA went on to say that the applied covenant of Good Faith and Fair Dealing is designed to protect the contracting party's reasonable expectations. Cox v. CSX Inter-model, Inc., 732 So. 2d 1092, 1097 (Fla. 1st DCA 1999). The Court further went on to indicate that "Where the terms of the contract afford a party substantial discretion to promote that party's self-interest, the duty to act in good faith nevertheless limits that party's ability to act capriciously to contravene the reasonable contractual expectations of the other party."

III. Commercial Landlord or Property Manager Decision Making Process

In situations in which a commercial landlord or property manager is faced with an assignment of lease, the commercial landlord or property manager should determine exactly what is being attempted by the assignment.

The commercial property manager or landlord can legitimately request that the new tenant provide the landlord with information in regard to (a) financial credit worthiness of the tenant (b) the intended use of the premises by the new tenant (c) what alterations the new tenant wishes to make to the subject premises and (d) whether the new tenant's business will be in compliance with all existing zoning, ordinances, city and county licensing, as well as the fact as to whether the proposed use of the premises would in any way violate any exclusive covenants existing at the subject premises and whether the intended use would fit the mix of the particular property. This is the question that should be addressed.

Simply because an office tenant decides to assign a lease to a third party tenant who might be in a position to operate a retail business from such premises and could obtain a license to validly do so, does not mean that the landlord would automatically have to consent to such use, given the fact that such use might not be reasonable under the circumstances and further would not result in a good "tenant mix" at this particular property.

The key for the commercial property manager and landlord when faced with a situation involving an assignment is to follow the Commercial Reasonableness Rule and be aware of the factors enabling the commercial landlord or property manager to exercise its rights to refuse consent to assignment of lease only under specific factual and good faith reasons to do so, utilizing the "Commercial Reasonableness Rule" and complying with covenant of Good Faith." Generally, the party who prevails in such action would recover attorney fees and other damages may also be available in this situation.

The ultimate question of the reasonableness to consent to or withhold consent to assignment is going to be a fact question for the trier of fact (judge or jury) and if a commercial landlord or property manager has any questions on this particular point it would wise for such commercial property landlord to consult with a qualified Real Estate Attorney.

 

Kevin F. Jursinski, Esq.
Kevin F. Jursinski, P.A.
Kevin F. Jursinski and Associates, P.A.
15701 S. Tamiami Trail
Fort Myers, Florida 33908
PH (239) 337-1147
FAX (239) 337-5364

Kevin@kfjlaw.com

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Lease Agreement: Concise and Clear Language

by Kevin F. Jursinski, Attorney at Law

In a commercial lease setting, the initial and fundamental concern of the property manager, Landlord as well as Tenant should be to have a concise and clear lease agreement identifying the rights of the parties to the commercial lease space being rented.

Given the fact that most commercial lease agreements are prepared by the Landlord it is important for the lease to contain clear and unambiguous language since there is a distinct possibility that, in the event of any ambiguity Florida Law may require that such lease agreement would be construed more strongly against the Landlord as maker of the lease rather than the Tenant.

Minimal Lease Provisions

A clear and concise lease agreement needs to address, at a minimum, the following elements:

1. A proper description of the name of the parties.
2. A specific description of the property to be leased.
3. The specific term of the lease.
4. The provision for rent payments.
5. Signatures of the parties (with two (2) witnesses if it exceeds more than one (1) year.)
6. Words of mutual agreement indicating that the intent of both parties is to create a lease contract.

Two Witnesses Needed

It is also important to note that any lease agreement for term in excess of one (1) year needs to be not only signed by the parties to be bound, but also witnessed by two (2) witnesses who need to sign opposite the parties name. A lease in excess of one (1) year may be declared to be unenforceable in the event that the lease does not contain two (2) witnesses.

Is a Bagel a Donut?

An example of lease drafting which contained an ambiguity which created a substantial problem for the Tenant is a case of LPI / Key West Associates, Ltd. and Southernmost Donut Co., Inc. v. Sarah Luna, Inc.749 So. 2d 564 (3 DCA 2000). In the commercial lease litigation seminars I provide to property mangers in Florida, I often refer to this case by using the question, "Is a bagel a donut?"

The reason for the problem in this particular case, is the Tenant participated in drafting an exclusivity clause so that the Tenant (who ran a small bakery and donut shop) would be the only "bagel bakery" in that particular shopping center. The intent asserted by the by the Tenant, was that this provision was to provide the Tenant with the exclusivity to be the only bakery in the shopping center. Subsequent to the Tenant entering into the lease and commencing its business, the Landlord rented space at the shopping center to Dunkin Donuts. The Tenant objected and sought the Court to enforce the restrictive covenant in the Tenants lease agreement to prevent the Landlord from allowing Dunkin Donuts to open. The Court determined that use of the words "bagel bakery" was not clear and unambiguous and did not preclude the Landlord for leasing premises to Dunkin Donuts, notwithstanding the fact that Dunkin Donuts did in fact sell bagels. This Court determined that the term "bagel bakery" did not define the actual business being run by Dunkin Donuts and therefore Dunkin Donuts was able to open and remain in occupancy at the premises.

Accordingly, make sure the lease is clear and concise and conveys the meaning intended and more importantly that a third party reviewing the lease will understand the intent of the Landlord and Tenant in entering into the lease.

Patent and Lateral Ambiguity

There are two types of ambiguities that occur in a contract. The first type of ambiguity is called patent. Patent means that the ambiguity appears on the face of the Lease and is addressed by the lease. In such case that the Court will not attempt to rewrite the contract on matters the parties have already attempted to cover or address in the document.

The Court however can construe the intent and terms of the lease if there is a "latent" defect. A latent ambiguity is a hidden defect that concerns a matter not addressed by the parties or expressed in the contract. In a situation where there is a latent ambiguity, Florida Courts have the authority to attempt to determine what the parties would have included in a contract had they anticipated the occurrence or condition that created the latent ambiguity and in such a situation the function of the Court is to ascertain the intent of the parties and if necessary to use extrinsic or parole evidence (oral evidence), if necessary to interrupt the contract.

A Written Lease can be Modified by Oral Argument

Parole evidence or oral evidence generally is not allowed by the court to alter or modify a written agreement and would only be utilized in the event of a latent ambiguity to determine the intent of the parties. Generally, the parole evidence rule would bar varying the terms of written contract based upon other verbal promises or assurances. Notwithstanding this general promise however, (and even in the event of an "entire agreement clause" a clause generally found in most commercial leases which indicates that no other representations can be relied upon) there are circumstances in which a written lease may be changed by an oral agreement. Case law in Florida is clear that an oral modification can occur and a written lease may therefore be altered or modified if one of the parties has accepted and acts upon the other parties representations and if failure to enforce the lease in such in manner would work of fraud on either party to refuse to enforce such oral modification.

Conversation Log for Property Managers

The above is the general guideline for having an effective and viable lease agreement to be entered into between the parties. A proper review of the existing Lease instrument being used will be important so that in the event of any dispute there is no question but that the true and express intent of the Landlord and Tenant is conveyed in the written instrument. Allowing oral testimony to modify the terms of the Lease results in the Landlord and/or the Property Manager losing a great deal of control over the premises.

One of the areas that I cover in my Commercial Property Management Seminars is to suggest that all our Landlords and Property Managers keep, a "conversation log" which is simply a chronological record of all conversations that occurred between the Landlord and the Tenant as to lease terms and conditions. In the event of any future dispute relating to what was said or done in regard to any issues relating to the lease premises or terms of the lease, there can be a specific conversation log in regard to the matter with a contemporaneous date, time and description of the conversation. On numerous occasions it has been my experience that the conversation log can raise a defense for what was said or done by the Landlord and relied upon by the Tenant and can counter assert the lease that may have been modified.

Another suggestion is to have the Landlord or Property Manager confirm in writing what was said or done. If there is in fact an agreement which modifies the lease in any way, then that modification should be reduced to writing and signed by Landlord and Tenant (Again - two witnesses here!) with such amendments being part of the lease.

As I do in my seminars, I also ask the readers to please submit to me (at Kevin@kfjlaw.com) any questions you may have because I have found it educational for myself to hear different fact scenarios and questions that arise by the Commercial Property Managers that I represent and would like to address these questions in future columns.

Thanks and I look forward to our next column.

Kevin F. Jursinski, Esq.
Kevin F. Jursinski, P.A.
Kevin F. Jursinski and Associates, P.A.
15701 S. Tamiami Trail
Fort Myers, Florida 33908
PH (239) 337-1147
FAX (239) 337-5364

Kevin@kfjlaw.com
www.kfjlaw.com

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FLORIDA'S UNFAIR AND DECEPTIVE TRADE PRACTICE ACT ("FDUTPA") (FLORIDA STATUTE §501.201 ET SEQ. ;PROTECTIVE MEASURES TO BE TAKEN BY A COMMERCIAL PROPERTY MANAGER

by Kevin F. Jursinski, Attorney at Law

 

The Florida Supreme Court has issued a ruling in one of the very few commercial property management cases that has been announced in the last twenty-five (25) years establishing tort liability for commercial property managers. The ruling affords the commercial tenant the ability to recover damages under Florida's Unfair and Deceptive Trade Practice Act (501.201 et. seq.) against a property manager (as well as a Landlord) in a commercial lease setting. In the case of PNR, Inc. v Beacon Property Management 842 So 2d.773 et. 777 (Florida 2003) the Florida Supreme Court awarded damages to a commercial tenant as against the property manager arising out of the lease of commercial space.

This involved the restaurateur purchasing a business that had a lease in place. During the occupancy there were issues that arose in regard to the maintenance and repair of the premises. Notwithstanding the fact that the property manager (in this case Beacon Property Management) had a commercial property management agreement with the owner that actually had expired (prior to the tenant's occupancy) there were nonetheless some discussions between the tenant and the commercial property manager in regard to maintenance and repairs. The Court found in that particular case the tenant could sue the property manager as well as the landlord under FDUTPA and that such act "applies to any private cause of action arising from single, unfair or deceptive act in the conduct of any trade or commerce even if it involves only a single party, single transaction, or single practice (PNR, Inc. v Beacon Property Management 842 So 2d.773 et. 777 Florida 2003).

That holding was upheld on remand from the Florida District Court of Appeals and Beacon Property Management v. PNR 890 So. 2d. 294 4 DCA 2004. The case outlaws any ""¦ unfair method of competition and unfair and deceptive trade practice in the conduct of any trade or commerce."

In Beacon, the property manager asserted that the property manager did not have liability, that the Tenant was not a "consumer" protected by the statute, that the property manager did not engage in any unfair and deceptive trade practices defined by the statute, and further that there was no pattern of conduct as well as the fact that this was an isolated occurrence.

Unfortunately for the property manager, this case ended up being decided against the property manager and establishing that liability in Florida under FDUTPA for property managers.

SIGNIFICANCE OF BEACON CASE AS TO COMMERCIAL PROPERTY MANAGERS

What this means to the property manager is that the property manager now is liable and can be sued under Florida's Unfair and Deceptive Trade Practices Act arising out of actions taken by the property manager in leasing commercial space owned by property manager's client. This is a significant case that imposes statutory tort liability on the commercial property manager (which includes recovery by the prospective Tenant of damages and statutory attorney fees as well as costs.)

The property manager should be acutely aware of this new case and at the very least provide in its commercial property management leasing agreement that there is sufficient and adequate indemnification by the Landlord to save, protect and hold the commercial property manager harmless. This indemnification should be from any and all claims arising under the commercial lease, inclusive of any tort claims, Florida's Unfair and Deceptive Trade Practices Act which could arise as a result of conditions at the premises which may cause damage to the prospective Tenant.

In addition thereto, the property manager should have such indemnification clearly outlined in its property management agreement and should also provide that the commercial property manager's attorney fees are likewise paid for by the Landlord under such circumstances.

Kevin F. Jursinski, Esq.
Kevin F. Jursinski, P.A.
Kevin F. Jursinski and Associates, P.A.
15701 S. Tamiami Trail
Fort Myers, Florida 33908
PH (239) 337-1147
FAX (239) 337-5364

Kevin@kfjlaw.com
www.kfjlaw.com

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Additional areas of protection for the property manager: FLORIDA'S REAL ESTATE COMMISSION LEASING ACT
BY KEVIN F. JURSINSKI, ATTORNEY AT LAW

The Florida Legislature has recently provided the property manager a new statute to protect its interest. The new Florida statute is Florida's Real Estate Commission Leasing Act. Florida Statute 475.801 et. seq.

This statute provides the commercial leasing broker with a lien for its leasing commission. It indicates in part that a broker has a lien upon the owner's interest (or Tenant's interest depending upon who the commercial property manager is contracted with), for any real estate commission earned by the broker pursuant to a brokerage agreement with respect to a lease of commercial real estate.

There are some specific provisions contained in Florida Statute 475.801 that provides for the protection of the commercial property manager in the form of a lien, either against the landlord's interest or the tenants respective interest, depending upon the situation and whether the commercial property manager represents the tenant or the Landlord. In order to perfect the lien as Florida Statute 475.805 provides for specific language to be included in a lien notice to be issued by the broker either to the Landlord's or Tenant.

The property manager is encouraged to review this statute and incorporate those provisions in its commercial property leasing commission/listing agreement to further secure and protect the commercial property manager as to outstanding leasing commissions due and owing.

This is equally important for the commercial property manager or real estate broker, acting in a capacity as leasing agent for the owner or leasing agent for the Tenant since the statute does provide for notification and lien rights arising as against the Landlord's interest as well as against the Tenant's interest. A thorough review of the statute and incorporation of these provisions, and a reservation for notification of the rights should be included in any listing or real estate agreement that are entered into by property manager, either that are in capacity as leasing agents for the Landlord, or in a capacity as the agent for the Tenant in securing commercial space.

The commercial leasing lien rights statute is a companion statute to the new commercial real estate commission lien statute as to the sale of commercial properties (see Florida Statute 475.700 et. seq. Lien Act)

The above and foregoing are areas of concern which should be addressed and identified by all commercial property managers engaging in Landlord or Tenant representation in the State of Florida. Failure to do so is a trap for the unwary inasmuch as a commercial property manager's can have exposure for damages as well as attorney fees and costs for conditions of the property outside its control.

Further, unless protections are incorporated into the property manager's contracts or protective measures are incorporated to secure and perfect the payment rights of the property manager, the property manager can be without recourse to recover listing commissions from a Landlord or the Tenant.

Upcoming in next months article is a discussion in regard to actions to be taken by the commercial property manager or owner when a tenant defaults and the protections as afforded to the commercial property manager or landlord in such situations, including distress for rent writs and levy upon tenant's personal property.

Kevin F. Jursinski, Esq.
Kevin F. Jursinski, P.A.
Kevin F. Jursinski and Associates, P.A.
15701 S. Tamiami Trail
Fort Myers, Florida 33908
PH (239) 337-1147
FAX (239) 337-5364

As always, please feel free to e-mail me with any questions you may have, or any topics you would like to see addressed in future columns. My e-mail address is Kevin@kfjlaw.com. Kevin@kfjlaw.com
www.kfjlaw.com

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EVICTIONS AND THE COMMERCIAL LANDLORD PART I: WHAT IS A LANDLORD OR PROPERTY MANAGER TO DO WHEN A TENANT FAILS TO PAY RENT OR DEFAULTS ON ITS LEASE?
BY KEVIN F. JURSINSKI, ATTORNEY AT LAW

Part I: Non-Payment Scenario

At some point in time, the commercial landlord, or the commercial property manager, will face the following scenarios:

A) The tenant has stopped paying its monthly rental and is deficient in its rent; and/or,

B) The tenant has engaged in activities which constitute a breach of the lease, and has not cured this breach, even though the tenant has been warned appropriately; and/or,

C) The tenant appears to be depleting its inventory (especially in a retail setting), and the owner, landlord or property manager suspects that the tenant is preparing to make a "midnight run"; and/or,

D) The lease has terminated and the tenant has held over without a written lease extension; and/or,

E) The tenant has actually vacated the premises owing rent and removing all of its personal property.

In any of these scenarios, the commercial landlord or commercial property manager is faced with the decision as to how to proceed. The answer is that before the situation occurs the commercial property manager should have already put in place a procedure for dealing with each and every instance as set forth above.

Part II: Underlying Basis For Eviction - A Comprehensive Lease Agreement

As in previous articles, the fundamental concept of any successful commercial lease endeavor is that a lease be put in place that contains the essential and necessary terms to protect the interest of the commercial landlord as well as the tenant. Specifically, as it relates to the eviction, this lease agreement should expressly identify the events of default which would enable the landlord to undertake various remedies under Florida law. The fundamental concepts of Florida law are that the landlord, in the event of non-payment of rent, can take the following actions:

A) The landlord can sit back and do nothing and sue the tenant each month as the rents become due;

B) The landlord can initiate suit for eviction to take possession of the subject premises for the benefit of the tenant;

C) The landlord can initiate suit to take possession of the premises for the benefit of the landlord; Wagner v. Rice 97 So. 2d 267, 270 (Fla. 1957)

Part III: Actions to Be Taken to Regain Possession In the Event of a Tenant Default

Florida Statute 83.05 provides how the landlord may recover possession of non-residential property. The essential decision a landlord, or property manager, must make with a commercial tenant is whether he/she wants to obtain the rentals and get back on track or if the landlord/property manager, wants to evict the tenant. If the former, the landlord or the commercial property manager, should issue notification to the tenant, and make demand upon the tenant for the rent in an appropriate letter requesting a payment. .

If the latter, Florida Statute 83.20 provides several scenarios the landlord, or commercial property manager, can regain possession provided that certain notices are given. These scenarios are:

A) Where the person holds over after expiration of the lease;

B) Where the person fails to pay rent and thereafter received a three-day notice in writing demanding the rent or possession; or,

C)Where the tenant materially breaches the lease and is afforded a fifteen-day written notice requiring a cure of its breach and the cure does not take place.

The question then facing the landlord, or commercial property manager, is whether the tenant should be evicted or whether the rentals need to be paid. Generally, landlords, and commercial property manager, simply want the lease to be cured and rather than send a formal statutory demand notice for the possession of the premises, the landlord, or commercial property manager, will simply issue a notification of non-payment of rent to encourage the tenant to make such payment. This would be considered a "soft touch" letter.

Alternatively, the landlord, or commercial property manager, may consider a sterner letter, which would be a demand under Florida Statute 83.20, which not only sets forth a specific demand for the rent but also provides the tenant with a statutorily required three-day notice under Florida Statute 83.20 to pay such rent or surrender the premises.

Part IV: Right to Waive Notice Under F.S. 83.20

Notice under Florida Statute 83.20 may be waived or may be extended by the commercial lease language. Most landlords, and commercial property managers, would be surprised to know that the residential tenancy statute, which generally deals with rental of an apartment or house, is much more detailed and specific and covers a greater area of the law than the non-residential tenancy statute, which involves the lease of commercial space. This is because the law generally indicates that commercial leases should be construed based upon the negotiations of the parties, whereas the residential tenancy situation generally requires more statutory interpretation to protect the rights of residential tenants who are given more statutory protection than the non-residential tenant.

There is nothing provided in Florida Statute 83, Chapter I which indicates that the lease agreement cannot afford the tenant additional notification time for payment of the rental or curing of the breach of the lease. Further, there is a specific case arising out of the Second District Court of Appeals, 2004, A.Z.3, Inc. d/b/a BCBG Max Azria v. Tampa Westshore Associates Limited Partnership, which provides the landlord the right to immediately undertake a lawsuit to evict the tenant for non-payment of rent, even though the landlord didn't comply with Florida Statute 83.20 and gave no notice, three day or otherwise.

However, there are several impediments to a landlord in exercising such rights based on a waiver provision in the lease. First of all, if the landlord intends to waive the statutory notice under Florida Statute 83.20, the landlord and tenant should know that such waiver of a statutory notice must be expressly stated in the lease agreement. In the AZ3 case, the language found by the court was in fact express as to the waiver. However, the court found that other provisions in that same paragraph had been stricken, thereby negating the expression of the waiver. All in all, it appears that Florida courts are reluctant to waive the three-day notice.

From a practical standpoint, why would a landlord not want to have a three-day notice in the lease? It seems that the general approach has always been, in a non-payment situation, that the landlord first sends a "soft touch" letter to gain the attention of the tenant before issuing and serving upon the tenant a three-day notice demanding possession or payment. The landlord, if diligent, can utilize a F.S. 83.20 notice to request payment and cure of the lease. Normally, all of this should take place in the very first month when a tenant defaults. The only advantage of the waiver of the 83.20 notice is the fact that the landlord can save three (3) business days (not including the day of service) from whence he can initiate suit. The time period of the three day notice excludes Saturdays, Sundays and legal holidays.

Part V: Service of Three-Day Notice

It would seem appropriate then, for a diligent landlord simply to use either the "soft touch" or the 83.20 notice and track the time period. It is up to the landlord, or commercial property manager, to decide whether to initiate suit in the event that the tenant fails to respond to the 83.20 notice.

Kevin F. Jursinski, Esq.
Kevin F. Jursinski, P.A.
Kevin F. Jursinski and Associates, P.A.
15701 S. Tamiami Trail
Fort Myers, Florida 33908
PH (239) 337-1147
FAX (239) 337-5364
Kevin@kfjlaw.com
www.kfjlaw.com

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EVICTIONS AND THE COMMERCIAL LANDLORD PART II: SELF-HELP OR LOCKOUT, IS IT LEGAL?
BY KEVIN F. JURSINSKI, ATTORNEY AT LAW

I: Self-Help or Lockout, is it legal?

The most often-asked question at a commercial or a residential leasing seminar is as follows:

"In the event that the tenant fails to make payment of rent, can I simply change the locks or retake possession if I am certain that this tenant is not going to make payment"? The most dreaded word that a commercial lease attorney representing a commercial property landlord can hear is that his client has taken self-help measures, or performed a lock-out of the tenant.

From experience in handling hundreds of commercial landlord litigation cases, it seems to me that the courts have their hot buttons pushed whenever they hear the words "self-help" or "lock-out." Florida law does not allow a landlord to retake possession of commercial premises by self-help or lock-out. Further, not only would this create an ineffective retaking of possession of the premises, the effects of a self-help or lock-out could be as follows:

A) The tenant could regain possession as a matter of law by court order;

B)The tenant could claim wrongful eviction and business damages based upon such lock-out;

C)The tenant could claim that the landlord converted the tenant's property for the landlord's own benefit;

D)The tenant could claim that the landlord engaged in civil theft by obtaining possession of the property and sue the landlord under Florida Statute 8.12.014, and F.S. 772.11 seeking to recover from the landlord treble damages of any property which was converted, either "temporarily or permanently" by the landlord together with the tenant's attorney's fees.

E)The tenant may recover attorney's fees and costs as a result of such activity.

If the landlord engages in a lock-out or self-help, the landlord may have to jump through a number of hoops to restart the eviction process or have one great explanation to provide the trial Court. This entire process may be tainted with these self-help and lock-out efforts, all of which negate the ability of a commercial lease attorney to effectively pursue the landlord's rights and remedies. As such, in answer to the above question of landlord using self-help or lock-out is as follows: Don't do it and, if you do so, you do so at your own peril.

II: Steps To Be Taken As A Condition Precedent to Eviction- "Avoiding the Tenant Midnight Run"

The above and foregoing identified what a landlord could do in the event of a non-payment or breach of lease and the formal requirements for providing notification. What is the reality, however, of a landlord trying to protect itself in the event the tenant doesn't pay the rent?

We will talk further about what takes place in obtaining the judgment and pursuing the eviction in next month's Newsletter. What the landlord needs to have in place, even before providing notice, is some procedures in the event that the tenant vacates or, in the vernacular of commercial property management, makes the "midnight run" by backing up a moving van and removing all of the tenant's inventory, assets and other items from the premises. In such a case, the landlord is stripped of one of the best weapons a landlord has to encourage payment of the rent or, at least, one of the best weapons the landlord has to secure some type of payment from the tenant, which is the landlord's lien.

Florida Statute 83.08, and case law construing the same, provides the landlord a specific statutorily-created lien upon all of the tenants personal property kept at the leased premises with such landlord's lien commencing at the time the tenant commences a lease at premises. This statutory landlord's lien is superior to all other liens against the tenant's personal property other than a properly recorded security agreement which security agreement has been recorded in the form of a UCC-1 with the Secretary of State and which security interest has been put in place prior to commencement of the lease and the placement of personal property in the leased property.

III: What Is The Benefit of A Landlord's Lien?

This is probably one of the few weapons a landlord really has and counter-balances the fact that the landlord is generally frustrated by not receiving rent, and not being able to take any affirmative action as against the tenant in the form of self-help and lock-out (as cautioned above).

With the landlord's lien, the landlord has the right to claim against the tenant's property for all rentals then due and owing. The landlord's lien is, in effect, as against the tenant's property wherever it is situated, even if the tenant would happen to vacate. By way of an example, if the landlord is owed $10,000.00 in rent, the tenant vacated without paying the rent and the tenant moved all of the personal property to a storage unit, then as such the landlord would, nonetheless, have its lien as against such tenant's personal property located at the storage unit (or wherever it will be found). The big problem, however, is the pragmatic issue: How can you identify the property and how do you enforce the lien when (a) the lien is not recorded; (b) the personal property is, generally, not titled; and/or, (c) the landlord might not be aware of where the personal property has been taken? The answer to the enforcement rights under the landlord's lien is to discuss the distress for rent writ.

IV: Distress for Rent Writ: The Ability of the Landlord to Take a Proactive and Immediate Enforcement Action Against the Tenant in Lieu of the Self-Help or Lock-Out

The distress for rent writ is the landlord's answer to the inability to utilize the self-help or lock-out. Essentially, Florida Statute 83.11 provides the landlord with the ability to immediately petition the court (without notification to the tenant or the tenant's attorney) and to obtain a distress for rent writ against the tenant's property. This is a constitutionally accepted procedure and is not a violation of the tenant's due process rights because the landlord is required to post a bond for double the amount of the rentals claimed or double the amount of the tenant's personal property and post such monies in the court registry either in the form of a cash bond or a surety bond for the benefit of the tenant in the event that the distress writ isn't properly issued out. The distress writ is then served upon the tenant along with a distress for rent count, which needs to be filed as a condition precedent to obtaining the distress rent. The distress writ (F.S. 83.12) and places the tenant on notice that he cannot remove any of the tenant's property from the premises without further order of the court.

The tenant is afforded the opportunity to recover its property by petitioning the court to determine the value of the property described and by placing a similar type of bond in double the amount of the value of the property or, alternatively, petitioning the court to dissolve the writ if the tenant can show that the writ was improperly obtained. The distress for rent writ is the landlord or commercial property manager's answer to legal "self-help" and gives the landlord or commercial property manager the right to effectively claim all personal property of the tenant as security for the payment of the rent.

In a retail setting, the distress for writ is even more compelling, since the tenant is effectively precluded from engaging in further business since he can't sell or dispose of any of its inventory or assets.

V: Procedures to Have Such Distress Remedies in Place

Obviously, the landlord or commercial property manager needs to be aware of his rights under the landlord's lien and also have the ability to "pull the trigger" on the issuance of the distress for rent writ by having a readily available commercial bond or a bonding agency available to assist the landlord or, alternatively, having the cash available to post with the court registry to secure the enforcement of this landlord's lien.

One of the issues that always arises, and calls attention to the landlord in these matters, is when a tenant is preparing to vacate the premises and remove the personal property. Generally, in such a situation, the landlord will not have very much time to take appropriate action, which generally requires action to be taken within days, if not hours. In such event, a great deal of pre-planning needs to be in place, the bond needs to be available or the cash availability, and the relationship with the commercial attorney needs to be such that the commercial attorney can react quickly, have the law suit prepared and filed with the lawsuit walk through the courthouse and to the judge's chamber for the issuance of the distress writ upon approval of the bond by the clerk and then service by the sheriff of the appropriate county.

All of this takes time and the landlord or commercial property manager should have everything in place to effectively obtain such writ. If the trigger is pulled, there should be at least several days notice which the landlord can give to the commercial attorney to start such activities, since it generally takes the first day for the filing of the law suit and then assignment to the sheriff's department to obtain service no earlier than the following day. This is conditioned upon everything being handled in an appropriate manner. However, in such event, the landlord or commercial property owner will know that if it's successful in obtaining judgment, it arguably would have a valid claim against the tenant's personal property as a means to collect the outstanding rentals.

Kevin F. Jursinski, Esq.
Kevin F. Jursinski, P.A.
Kevin F. Jursinski and Associates, P.A.
15701 S. Tamiami Trail
Fort Myers, Florida 33908
PH (239) 337-1147
FAX (239) 337-5364
(239) 337-5364
Kevin@kfjlaw.com
www.kfjlaw.com

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EVICTIONS: PART III - THE PROCEDURES
BY KEVIN F. JURSINSKI, ATTORNEY AT LAW

I. What is the Procedure and how long does it take to get an eviction through the court system?

In the previous two monthly newsletters, I have provided information regarding how to commence and perfect your right to initiate suit and also some ways to secure your interest and the enforcement of your Landlord's lien to collect a prospective judgment. The next step is to identify the time periods and procedures to work the eviction count through the court system. Next month we will discuss suing for damages and suing out the Distress Writ.

A) Three Day Notice perfected.

At this stage you should have served an appropriate Florida Statute 83.20 Landlord's Notice upon the Defendant/Tenant. You should have provided the necessary time periods with the minimum time period being three (3) business days exclusive of the day of service in accordance with Florida Statute 83.20. You should have also checked and made sure that you were in compliance with your own provisions contained in the lease, which might require additional notification in excess of the three day notice.

B) Evidence of Service.

You will also need to identify and establish the fact that you have served the Defendant. Many Landlords make the mistake of mailing the notice to the Tenant with no certified return receipt. Some Landlords mail the certified return receipt to the Tenant, but the certified return receipt never gets delivered.

The approach that I recommend is to have a process server, who serves Complaints, personally serve the Three Day Notice or (Five Day Notice if applicable) upon the Tenant, then provide an Affidavit of Service to the Court. This creates a presumption of service and eliminates delays and the ability to prove actual service.

C) Initiation of suit.

Once the service has properly been perfected and the time period has run, a suit can be initiated with a multi-count Complaint. Count One of the Complaint will be the Eviction Count, with Count Two and Three being the Count for Damages and Distress for Rent Writ. This newsletter will focus on Count One, the eviction.

II. Reduction of Time.

Normally a Defendant in every lawsuit has twenty (20) days within which to respond to the Complaint from the date of service. In an eviction action, you can request and impose Summary Procedure pursuant to Florida Statute 51.011. Once invoked, Summary Procedure requires the Defendant to provide a response within five (5) days of the date of service. In order to do this, the attorney should provide that the Summons indicates the five (5) day response time. Also, the attorney should make such request in such count as well as in the prayer for relief under Count One.

A) Service of the Complaint.

Once the Complaint is served the Defendant has, pursuant to Florida Statute 51.011 and 83.232, responsibility of filing his Answer and Affirmative Defenses within five (5) days of service as to the eviction count. No motion practice is allowed in regard to commercial evictions during the five (5) day response time.

III. If the Defendant fails to file his Answer within five days or the Defendant fails to pay its rent in the Court Registry, the Plaintiff's Counts can do several things.

A. Default.

In the event of a failure to Answer, the Plaintiff's counsel should promptly file a Motion for Default with the clerk seeking a default as to Count One and then following up with an application to the Court for Possession as to Count One with notification served upon the Defendant at the same location as Defendant was served.

B. Requirement to post money in the Court Registry.

Pursuant to Florida Statute 83.232 the Defendant/Tenant is required to post in the Court Registry the amount alleged in the Complaint as unpaid rent or suffer an immediate judgment for eviction. Premici v.United Growth Properties, 648 So. 2d 1241 (5DCA 1995). Camena Investments and Property Management Corp. v. Cross, 791 So. 2d 595 (3DCA 2001).

IV. Tender of Rents into Court Registry. "If you want to play, you have to pay".

There are two options in regard to Florida Statute 83.232. The Landlord can be proactive by initiating his own request (filed with the Complaint) for the Court to determine rents. What this enables the Landlord to do is to immediately request the Court to set a hearing on the court docket so that once the five (5) day time period runs and if the Tenant fails to make the payment the Landlord, Plaintiff, can request the Court for a prompt hearing solely to determine the amount of rentals outstanding.

Likewise, the Tenant, can itself further make a request under Florida Statue 83.232 for a hearing. However, the Landlord, in being proactive, can avoid the delays most likely inherent with Tenant's request since the Tenant will be in no great hurry to deposit monies in the Court Registry.

The 83.232 hearing is solely for the purpose of determining whether (a) outstanding rentals exist and (b) the amount of the rentals that need to be deposited in the Court Registry. The statute is very clear and indicates as follows:

Florida Statute 83.232 Rent paid into registry of court. "In an action by the Landlord which includes a claim for possession of real property, the Tenant shall pay into the court registry the amount alleged in the complaint as unpaid, or if such amount is contested, such amount as is determined by the court, and any rent accruing during the pendency of the action, when due, unless the Tenant has interposed the defense of payment or satisfaction of the rent in the amount the complaint alleges as unpaid. Unless the Tenant disputes the amount of accrued rent, the Tenant must pay the amount alleged in the complaint into the court registry on or before the date on which his or her answer to the claim for possession is due."

The Hearing encompasses the following:

"Florida Statute 83.232 (2) If the Tenant contests the amount of money to be placed into the court registry, any hearing regarding such dispute shall be limited to only the factual or legal issues concerning:
(a) Whether the Tenant has been properly credited by the Landlord with any and all rental payments made; and
(b) What properly constitutes rent under the provisions of the lease."

Accordingly, and at the very least, the Plaintiff/Landlord can take steps to expedite the Tenant either (a) paying rental into the Court Registry or (b) obtaining possession. The worse case scenario for the Plaintiff/Landlord in seeking possession is that the Defendant Answers and shortly thereafter is required to put the money into the Court Registry that is due and outstanding as determined by the Court. This does not satisfy the Landlord's request for possession of the premises, but at the very least, the amounts of rentals are secured in a Court Registry to protect the interest of the Landlord during the pendancy of the lawsuit.

V. Defenses of the Tenant

The Tenant may raise certain defenses as to the Three Day Notice and the Depositing of the Rents into the Court Registry. If the Landlord follows the appropriate procedure to properly identify the outstanding rentals paid and then properly serves the Three Day Notice as well as file the Summary Procedure Request pursuant to the statute, the Landlord can be satisfied knowing that procedurally his case is properly before the Court with the only determination being how much the Tenant would owe and if the Tenant fails to make such payment the Landlord would be entitled to possession.

VI. Common Defenses Raised Against Landlord.

Certain defenses may be raised against the Landlord, starting with claims by the Defendant/Tenant of non-compliance with Florida Statute 83.20, Notice by the Tenant. The most compelling Tenant defense is the claim that the Landlord has made demand in the Florida Statute 83.20 Notice for more than the outstanding rentals and therefore the Tenant would claim that procedurally the Florida Statute 83.20 Notice is improper, because it has made demand for more than what was outstanding.

Some defendants would point to certain cases that are based upon the residential tenancy statute to indicate that a Florida Statute 83.20 Notice would void-out the ability procedurally to even plead the cause of action, the landlord needs to verify.

The Landlord should be diligent in addressing these particular points and be alerted to make sure that the lease is reviewed, the Three (3) Day Notice demands "˜rent' as defined in the lease, and no other charges are included and service is properly perfected. Once this is done, the Landlord or commercial property manager can then look to their counsel to complete the eviction process and make the appropriate legal adjustments.

In summary, if the Landlord proceeds expeditiously, the Landlord may retake possession of the subject premises and have same done within less than thirty (30) days or alternatively, and again, within such thirty (30) day time period, require the Tenant to deposit the outstanding monies due and owing to the Plaintiff/Landlord in the Registry of the Court.

Kevin F. Jursinski, Esq.
Kevin F. Jursinski, P.A.
Kevin F. Jursinski and Associates, P.A.
15701 S. Tamiami Trail
Fort Myers, Florida 33908
PH (239) 337-1147
FAX (239) 337-5364
Kevin@kfjlaw.com
www.kfjlaw.com

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Law Offices of Heist, Weisse & Wolk, P.A.
Phone: 1-800-253-8428 Fax: 1-800-367-9038

Serving Florida's Property Managers with main office in Fort Myers Beach. Available by appointment in Orlando and Clearwater


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