Usually, it is a good thing when an anchor tenant decides that it is time for a massive renovation that requires Landlord to totally renovate and redesign the shopping center. It should mean a good face lift and upgrades for the local tenants. However, there will be some challenges and pain suffered along the way, particularly if the tenant does not have protections built into its lease up front, but also if the tenant doesn’t seek and obtain protections prior to the commencement of construction.

This scenario is playing out for a local restaurant client of mine. The restaurant, a popular deli located in a Publix anchored shopping center is suffering through Landlord’s renovations of the Publix and the shopping center. To call the work “renovations” is an understatement as Publix, like it so often does with its older, smaller stores, is in the process of a total rebuild. Only the exterior walls remain. The interior has been totally gutted and the roof above the store is gone. Like so many old Publix centers, Publix sits in the middle of the shopping center, with small, local retail, including my restaurant, on either side. From the street, it looks as if Publix is not just closed, but demolished. Therefore, it looks as if the entire shopping center will also be demolished.

During the demolition work, the contractors have cut water, gas and electric lines multiple times causing my client to close down for several days. The client has suffered lost revenue and expenses including paid wages for closed days to employees, not to mention spoiled food and other lost expenses. Vibrations from construction activities, unclean work site (such as nails in the parking lot), unsafe sidewalks and no signage, have also adversely affected business. The client has contacted the Landlord through the property manager and so far, the property manager has deferred to the general contractor, arguing that all cuts in utility services are general contractor’s liability.

Client contacted me for help. The first thing to look to is the lease. The lease should have protections for disruption of utilities and services caused by Landlord, in this case through its contractors. It should have provisions regarding construction and renovation of the shopping center, maintenance of the common areas, access to the shopping center and Tenant’s premises, quiet enjoyment. signage and multiple other like provisions. Needless to say, I have seen better leases than this one.

The next question is whether Landlord approached Tenant prior to construction started. Landlord should have discussed its plans with all of the tenants and the accommodations Landlord would make to minimize disruption to each of the tenants’ businesses. Tenants could then outline their concerns so that Landlord could adjust. Expectations could be set and met. In this case, despite the fact that everyone knew Publix’ plans, work just started without any converations.

Now, here we are with loss of business damages to the client. This is a good reminder as to why it is important to consult with an attorney prior to signing any document. A properly drafted lease probably would not have stopped this Landlord from doing thing that disrupted Tenant’s business. But it sure would have given Tenant leverage and remedies when things got bad.

Paul Newman uttered that famous line as Cool Hand Luke at the end of the 1967 classic, mocking the prison warden just before he is killed after his escape from jail. I often think about this quote when I am working out disagreements between parties. How often are these disagreements between contracting parties caused by a simple lack of communication? More often than the clients would like to admit, for sure.

We have been working on a problem for a tenant client with his commercial lease. He has been experiencing roof leaks for almost the entire time he has been in the building. Many of the air conditioning units have failed and the property manager has been non-responsive. There have been other smaller issues that have become bigger issues because of the lack of attention to the on-going roof and HVAC issues.

After numerous complaints following major afternoon thunderstorms, a roof contractor was finally dispatched. Some patch work was done, but the problem has never been totally resolved. Some of the HVAC units have been replaced while others have continued to deteriorate and ultimately failed. And, it appears, that the way the units are mounted on the roof have caused many of the leaks. The AC contractor and the roof contractor agree on this, yet the property manager has not authorized either to fix the problem.

Getting no satisfaction from the property manager, we made demand on the Landlord. Landlord made its own demands due to the smaller lease issues. It became apparent through this exchange of demands and subsequent conversations with Landlord’s attorney that Landlord was missing key information and, perhaps, so was Tenant. Landlord was not aware of the number of times Tenant had complained about the leaky roof or that the AC and roof contractors had agreed that the installation of the HVAC units were causing some of the leaks. Nor was Landlord aware that Tenant was fulfilling its own obligations under the lease to keep the HVAC units in good repair up to a maximum dollar limit. Tenant was unaware of the efforts Landlord was taking to resolve other issues Tenant had raised. Neither party was communicating with the other directly. Nor was either party giving the other complete information of the various issues and resolutions. Part of the problem was that the property manager, the go between, was withholding information. We aren’t exactly sure why. Perhaps property manager was protecting itself and its contract. Or maybe the property manager is just not competent. Regardless, the lack of communication has caused Tenant and Landlord to posture to the point of dueling demand letters with threats of litigation seeking damages and potential injunctive relief.

This is not the result either party wants. But, when it’s raining in your offices and you don’t feel as if you are getting the attention you require, I suppose it is hard to keep a level head. We are hopeful that the lines of communication are being restored and repairs will begin promptly. After all, it didn’t end well for Cool Hand Luke.

A Right of First Refusal (ROFR) is the right to match an offer to purchase a seller’s property. ROFRs can be found in different types of documents relating to both real and personal property. Often, they are contained in leases, giving the tenant a ROFR to purchase the leasehold property. They are also used in shareholder, partnership and operating agreements giving “partners” the ROFR to purchase each other’s interest in the entity.

ROFRs often have a chilling effect on a seller’s ability to sell property, particularly real estate. Potential buyers won’t put forth much time, effort or due diligence in looking at a property knowing that an offer could be matched and the property sold to the holder of the ROFR. If a property is very desirable, a potential buyer might have to overpay in order to discourage the ROFR holder from exercising.

Generally, ROFRs require that the holders close on the same terms as set forth in the offer. Therefore, if a seller receives an all cash, no-contingency deal, the holder would have to close without financing and with no contingencies. Sometimes this will also work to the potential buyer’s advantage. While the price might be attractive to the ROFR holder, the terms of the offer might make it difficult, if not impossible for the ROFR holder to close.

Usually, the event that triggers the ROFR is a “bona fide, 3rd party offer” duly accepted by the seller. What constitutes a bona fide 3rd party offer? The easy, legal answer is an offer made by an unrelated 3rd party purchaser who purchases the property for valuable consideration that is inducement for the entering into a contract without fraud or deception.

I recently had a tenant ask me to analyze a situation relating to a ROFR. The tenant had completed its 10 year initial lease term and the 1st year of its 5 year renewal term. There were 4 years remaining on the lease. The landlord had received an unsolicited offer to sell the building from an unrelated 3rd party. Though the landlord had not intended to sell, landlord was inclined to accept and forwarded the offer on to tenant with a note saying that landlord would pass on the offer if tenant would agree to purchase the property at the end of the lease term for a price that was $200,000 less than the current offer.

Needless to say, the tenant was confused. To make it more confusing, the offer was full of contingencies. The first major contingency was that the buyer had to get 3 adjacent properties under contract and then simultaneously close with this property. So, the contract was intended to be a property assemblage and this was the 1st of 4 parcels that the buyer had made an offer on. The other major contingency was re-zoning and site plan of the assembled property. However, the contract did not describe the intended use or the required approvals. My primary question was whether we even had a bona fide contract that triggered the ROFR.

The biggest problem was that tenant’s ROFR required that tenant respond in 15 days and close within 45 days thereafter. Given that the buyer’s contingencies had not yet been satisfied and that there was no possible way that they could be satisfied before tenant would be obligated to exercise the ROFR and then close, the contract was not yet ripe and therefore, not a bona fide contract for which tenant’s ROFR had been triggered. Until the buyer satisfied or waived the contingencies, the buyer had not obligation to close and therefore, the buyer was not a bona fide purchaser.

Further, landlord’s action in advising the tenant that it would reject the offer and enter into a different purchase agreement with tenant indicated that landlord had not accepted the contract and was using it as a method to force tenant to purchase the property using the ROFR. Landlord wanted the best of both worlds – 4 more years of cash flow via rent, and a guaranteed buy out at the end of the term. Landlord could not get either of these through the contingent offer but had to accept the offer when tenant rejected the offer and put landlord on notice that the offer was not bona fide. This could come down to a shoving match if and when the proposed buyer satisfies its contingencies and attempts to close.

Lesson learned? Make sure you understand the triggering event of the ROFR before signing a lease whether you are the landlord or the tenant. Any ambiguity in an offer can be exploited and delay the exit strategy for one side or the other.

Usually, at the end of every year or at the beginning of the new year, landlords send out their “CAM Notices” or “Rent Notices” in which they inform commercial  tenants of their monthly rent for the upcoming year. Depending upon what type of commercial lease a tenant might have, one or more factors  may cause the rent to increase in the new year. Tenants should spend time examining these notices to ensure that the information contained in them is correct and consistent with the lease they entered into and perhaps modified afterward.

Some leases do not directly pass on any of the operating costs of the property. This type of lease is called a “gross lease”.  Notices received under gross leases may only detail an increase in the rent because of a stated increase or fixed percentage increase in the rent provided for in the lease at the outset when it was signed, or alternatively refer to an index, such as the Consumer Price Index as a basis for any rent adjustments in the coming year.

Under a “modified gross lease”, the landlord passes on some but not all of the operating costs of the property to the tenant, such as real estate taxes and insurance. In addition to containing the information noted above, when there is a modified gross lease, the landlord’s notice will probably state the anticipated cost of the passed through expense for  the coming year, and  the tenant’s monthly (i.e., 1/12th)  share of the these passed through expenses based upon the tenant’s pro-rata percentage occupancy of the building.

When all of the operating expenses for the property are passed on to the tenant by the landlord under a lease, the lease is typically referred to as a “net lease” or “triple net” lease. In this instance the rent increase or CAM notice is more elaborate. As before, a portion of the notice details the basis for any increase in the monthly rent due to a  preset rent increase in the lease or an external  formula  for adjusting the rent,  but now the portion of the notice dealing with the operating expenses of the property passed through to the tenant might expectedly contain more information than if the notice related to a modified gross lease.

No matter what the lease type, the tenant should carefully compare the information contained in the landlord’s notice to the lease (e.g., pro-rata percentage of building, basis for base rent increases in the lease independent of any pass through, specifics of the passed through expense, if any). If the rent increase was based upon a CPI increase, the back up for the CPI based increase should be provided.  In the case of both a modified gross lease and a net lease the tenant may want to ask the landlord for copies of the 2017 real estate tax bill and the 2017 insurance premium bill so that the tenant can compare those actual costs to the projected 2018 cost. If the landlord’s notice pertains to a net lease, the tenant may also want to ask for a copy of the property’s operating expense statement for 2017 to compare it to the projected operating expenses for 2018.

This coming year, tenants should also carefully review the monthly sales tax amount that they are being charged. Beginning on January 1, 2018 the state level sales tax will be reduced from 6% to 5.8 % for rental payments attributable to a tenant’s occupancy of a premises during January, 2018 and after.

Certain counties, such as Miami-Dade County, Florida impose a local option surtax on commercial or short term rents. . The recent change in the state level sales tax has no effect on local surtaxes. Thus, in Miami-Dade County, FL. the sales tax rate on monthly commercial rents will be 6.8% instead of the 7% that was previously charged.

The year is young and there is still time to save money by critically reviewing the landlord’s recent rent or CAM notice

Sometimes, when you think you’ve won, you’ve really lost. In my most recent case, I was very successful in working out a bad lease for a client.  Prior to coming to me, the client had been through several rent deferments.  The deferments had come due and the landlord was unwilling to give any further accommodations.  After months of negotiation, the tenant thought she had the parameters of a lease extension.  But, there were numerous open issues and financial terms to address.

After discussing the client’s financial position, I was able to negotiate a write-off of the deferred rent, over $300,000, and a tenant improvement allowance to modernize the space in exchange for only a 3 year extension of the lease and a slower increase in the rent. Only the TI would be guaranteed.  These negotiations took over 2 months.  We determined that the tenant did have an A/R balance of under $20,000 which would have to be paid as a condition of the new lease.  The client assured that the could make this payment and could fund any tenant improvements in excess of the TI allowance.  The tenant signed the new lease in early September.  We all felt like this was a win – the landlord, tenant and I.

After Hurricane Irma, I called to check on the client to make sure everything was ok as I had not received the fully executed lease back from the landlord. She complained that the landlord was stalling on signing the lease and therefore, she couldn’t start the TI.  Before I volunteered to check on this, I probed.  She complained that business loss was significant due to the hurricane and its aftermath and she was not able to make the promised payment and that landlord was being unreasonable, refusing to work with her.  Alarms started going off all around me.  This money should have been available before the hurricane at the time the lease was signed.  She started pointing fingers at everyone again – the landlord, the property manager, her partner, FPL, me.  Clearly, the issue was, is and always has been the tenant’s inability to pay the rent and other obligations prior to and since the execution of the modification.

What appeared to be a big, hard fought win looks to be turning into a loss. Could this have been avoided?  I don’t think so because the tenant, the client, has not been honest.  Mostly, she has not been honest with herself about what she could and could not afford.  But she also wasn’t honest with me and therefore, I could not properly advise her or handle the negotiations.  Expectations were set based on false premises and when we thought we had a win, we really lost.  Any bargaining position we might have had was lost as soon as she signed the lease.  If the tenant did not have the financial wherewithal to meet its obligations, either under the prior lease terms or under the renegotiated lease terms, she should have never signed the new lease.  As a result, we have lost the thrill of victory and now feel the agony of defeat.

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