Articles Posted in Commercial Leasing

As the COVID-19 pandemic fades, some legal cases that were temporarily postponed by the Courts, such as commercial evictions , are resuming and going forward in litigation.  A recent case in the news involved the popular family restaurant Applebee’s, and its location in the heart of New York City,   in Times Square.

The case involved the non-payment of rent totaling over seven million dollars by Applebee’s during the pandemic.  The company argued that it had cash flow problems worsened by the pandemic, had to completely close its Times Square location in March, 2020, and could not reopen until June, 2021.

The attorneys for the landlord argued that there were no clauses in the commercial lease allowing Applebee’s to avoid making payments owed during the pandemic.  The Court ruled that Applebee’s had to pay the full amount of the back rent, and also ordered that it be evicted from the Times Square location.

Our readers may be pleased to hear that mask mandates are falling like dominoes throughout the area served by our attorneys.  This newfound attitude heralds a time of optimism.  However, the scars created by the COVID era remain, particularly with respect to commercial leases.  This post will examine some typical provisions in commercial leases that should be reconsidered and negotiated in light of changing times.

In many commercial leases, landlords will prefer strict definitions as to use of the premises and signage permitted on the premises.  For instance, if the tenant is a fitness facility, the landlord may draft the use clause very narrowly and identify the permitted use as a boxing fitness studio.  Should the tenant have difficulty in operating the location, he will not necessarily be able to sublet to another tenant unless the use is the same.  If this particular tenant could not operate a boxing fitness studio during a pandemic, how will he find another tenant who wants to use the space for the same narrow purpose?  As such, an experienced attorney  will ask the landlord to broaden the permitted use in the lease to fitness studio or any lawful use.

Flexibility  is also required with respect to alcohol sales, which may be restricted in a lease.  As our readers may recall, during the pandemic struggling restaurants were permitted to sell alcoholic beverages for takeout.  This was a lifeline for such businesses and should not be prohibited by a lease, which should permit alcohol sales in accordance with current law and not be further restricted by a landlord.  The open restaurants program  in New York City permitted restaurants to operate supplemental space on the sidewalk or in the street appurtenant to the restaurant.  Lease provisions requiring a tenant to keep the sidewalk clear should be modified to permit use as may be permitted by an open restaurant program.

A recent news story in the New York Post raises important issues regarding the effects of the coronavirus pandemic on evictions in New York State.  According to the report, an “Intragram influencer” named Marisa Hochberg owes at least $14,000.00 in past due rent on her summer rental in Montauk, and has refused to vacate the premises, even though her lease expired several months ago.

In ordinary times, an eviction action would be brought by the attorneys for the homeowners in the local landlord-tenant Court, seeking to evict the tenant.  In the Hochberg case, the tenant could be the subject of either a holdover action, or a non-payment action.  First, as her lease expired by its terms, this makes her a month-to-month tenant subject to termination on proper notice (holdover action).  Second, as she has failed to pay rent due, this also allows the possibility of a non-payment proceeding being brought against her.

However, as our readers are aware, these are not ordinary times.  Not all landlord-tenant courts, which are local in nature, are scheduling and hearing cases on a regular basis, due to COVID concerns.  Before attempting to file a case in a local landlord-tenant Court, experienced counsel should contact the Court directly to ensure that they are accepting and scheduling new cases.

As we are all aware, the effects of the COVID-19 virus on commercial leases will be quite substantial.  Many businesses have been forced to limit their hours, or have been forbidden to open at all during this time.  Of course, a business whose income has been limited in this manner will have problems meeting its rent obligations under its lease.

When this occurs, there may be potential liability for the guarantors of such leases.  Under many commercial leases, the principals of the business may be required to personally guarantee payment of the business’ rent obligations.  This means that if the corporate leaseholder fails to pay the rent, the guarantors may be sued personally to remit the sums due under the lease.

There are different types of guarantees under commercial leases, as has been explained in a prior blog post.  Experienced counsel should carefully review the lease to determine its exact terms and the potential obligations of the guarantors.

Rockland County, New York  is an area served by our firm.  Surprisingly, this area has become a hotbed of competition for the hot dog consuming customer.  Perhaps the contestants in the annual 4^th of July hot dog eating contest sponsored by Nathan’s  could even practice for the big event in Rockland.

All kidding aside, there is a classic commercial leasing issue that has arisen in this area.  A fast food restaurant known as Dawg House  developed and was enjoying financial success selling its popular hot dogs.  Recent news outlets have reported  that the large national chain Shake Shack  is planning to lease space in the same center where Dawg House is located.  Dawg House engaged skilled counsel  when it negotiated  its lease.  This issue was foreseen and an exclusivity clause was included in the final lease.

In this case, the exclusivity clause provided that the landlord was forbidden from leasing another space in the same center to a tenant whose primary business is the sale of hot dogs and wieners.  Certainly, Shake Shack sells hot dogs.  However, it also sells burgers, chicken sandwiches, french fries, frozen desserts and particular alcoholic beverages, which menu items Dawg House also sells.  These overlapping menu items are not necessarily forbidden by the exclusivity clause, but common sense dictates that the businesses of Dawg House and Shake Shack overlap.  It may be a matter of litigation as to whether the overlapping menu items as opposed to the primary business in selling hot dogs and wieners triggers the exclusivity clause and its ramifications.

Commercial leases in New York are not immune to the effects of COVID.  Enforced shutdowns of “non-essential” businesses by governmental authority has led to mass closure of many retail stores and restaurants and record-high unemployment rates.  Even restaurants limited to the restriction of takeout and delivery service are suffering severely reduced revenue.  The current business climate has inherently altered the lease obligations that a tenant can maintain.  This post will address how the parties to a lease should be addressing the changes to New York’s commercial lease landscape.

It is not unusual for commercial leases to contain a requirement by the tenant to maintain business interruption insurance.  Tenants with such coverage should file a claim with their insurer.  Many insurers may initially deny the claim on the basis that pandemics are not included in their coverage.  This tactic is likely to be subject to future litigation.  Ultimately, the insurers may be required to cover such losses.

A tenant should have an experienced attorney review the particular lease that has been signed to determine whether a force majeure clause may excuse the tenant from its rent obligations.  This clause excuses a tenant from obligations for circumstances beyond its control such as terrorist attack, war, famine, strikes, catastrophic weather conditions and acts of God.  A particular lease needs to be evaluated to determine whether a pandemic is considered to be a force majeure.  Force majeure may also provide the tenant with a defense if conditions prevented it from obtaining a building permit, completing a build-out according to an established schedule, opening for business by a particular date and the like.

News outlets have recently reported that Lady Gaga’s father is refusing to pay the rent due on the commercial restaurant space occupied by him in Grand Central Terminal.    Essentially, he has claimed that physical conditions interfere with the successful operation of his business.  These conditions allegedly include a growing homeless population that monopolizes seating intended for customers consuming food, rodents and aging facilities such as bathrooms and seating.  This post will discuss whether the tenant in this instance has a valid defense for refusing to pay his rent and other options that may be available to him.

In this case, the particular restaurant is in the center of the food court and does not require a patron to enter an area exclusively used by those being served.  It inherently allows for non-customers to occupy the restaurant space along with paying customers and may legitimately adversely affect business conditions.  The landlord in this case, the MTA, owns and manages the rest of Grand Central Terminal, making it potentially able to control adverse business conditions.

Generally, commercial leases negotiated by this author anticipate a tenant’s potential request for a rent reduction when property conditions deteriorate and forbids such action.  Most commercial leases provide that the landlord does not warrant property conditions and that a tenant therefore cannot withhold rent for diminished property conditions and the like.  Also, since this restaurant space was readily viewable and accessible prior to its being rented, the tenant could have anticipated the issues that he has recently raised and was aware of property conditions.