Landlord Tenant Commercial Contracts

Podcast episode by Art Macomber

Art discusses commercial contracts and the process for review and issues that can impact an agreement. Example: Art discusses how the corona virus is impacting contract lease agreements.

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I would like to talk a little bit today about contracts. We have a lot of contracts that we interpret. Some of the big ones just drive me crazy, because contracts are usually between two non-lawyers. So, you have to ask yourself, why are these contracts written for lawyers? Now, look, I understand that there are some complicated things going on.

And today I’d like to talk about commercial contracts, in particular landlord tenant commercial contracts. But American lawyers have this disease. We call it, we’re even trained on this in law school, it’s what we call a cathedral contract. And this is a contract that has every bell and whistle, every gargoyle, every gutter, every finial, everything you could possibly attach to a cathedral is in that contract. That is to say the darn thing is 50 to 60 to 70 pages long. And here’s the problem: one has to be able to read the contract, what we call the four corners of the contract, to determine the intent of the parties. And if the contract is 60 to 70 pages, then you almost always have to hire a lawyer to understand it. And this is just not functional. In my view at Macomber Law, what we believe is that ordinary people, that is to say non-lawyers, just regular folks who have vast expertise in other areas besides the law, have to be able to read these things and understand them.

And so contracts are transactional in nature. You want to be able to read them, and then act get something done. And then for commercial contracts, you want to go out and build your business, make your profit, produce whatever you produce. So the functionality of a contract that can be read, the shorter the contract is, the better it can be.

And when we talk about a commercial leasing contract between a landlord and a tenant, what we have to recognize is that the only thing that’s really going on is that a landlord is conveying in the lease possession to a tenant. It’s the same as renting an apartment or renting a house. It’s very straightforward. And we know that there are other things that come in. Many tenants have to make improvements. Many tenants need parking lots. There has to be arrangements for utilities. There may have to be, not only physical changes inside, but also accommodation to other people. For example, what if the property’s inside a strip mall and there are ten businesses? What if the property is in a giant shopping center? There are many things that are going on. Sometimes there’s a master lease, sometimes called a ground lease in a major shopping center, and then there’s a tenant lease for that specific tenant. Sometimes there are drive-thru considerations. What if it’s a bank? Is there a vault? I get it. There’s a lot of complexity in commercial landlord tenant contracts. But there’s also no reason to make it, well let’s put it this way, there are more reasons to try to simplify what is inherently a complex contract than there are reasons to make it more complex.

So the long sentences, the twenty-word sentences, the the reference to other clauses where you’re jumping around like a grasshopper through the thing, I mean, these are just not functional. Now, we recently had an experience where the governors of several states have closed businesses, closed churches, closed schools. For example, in Washington State, this has been done. I believe it’s been done in New York City and California. So now, a lot of tenants are going to the landlord and saying, I want to invoke a contract provision that will get me out of paying rent. And the first provision that you always look for here is called a force majeure. This term comes from the French and means superior force. Now in contracts, examples of this maybe fires or earthquakes or meteors that may rain down on your on your store and punch holes in the roof. I mean, it could be almost anything.

And so in this case, people are saying, well, this superior force is stopping me from doing business. And so here’s where force majeure really has its definition. In a contract, the two parties are interacting. One person’s paying rent, one person has possession, there are things being done. Sometimes there are percentages of sales, there’s all kinds of calculations that go on on a monthly basis, on a seasonal basis. And then suddenly, in comes this force majeure. In in the world of contracts, lawyers call this the supervening force. This is the force that is superior to the other forces that normally operate within the contract. That is the forces of the parties themselves. So it’s almost as if a third party comes in. Now, if an act of God happens, then obviously God would be a third party, but these days, we have governors of states that come in and say, you must close your retail business unless you’re an essential business. Well, if you’re maybe you’re a beauty salon, or a barber shop, or, or something that’s not essential, like a rug store, maybe, you know, there’s different lists of what counts as being essential.

And so, so now there’s a supervening force that interrupts the transactional relationship of the landlord tenant. And there are several things that I that I want to bring to the fore. Actually, four things I’d like to talk about today beyond the force majeure, or the supervening force, and one is called abatement. Another is called tolling. Another is is the notice provisions in the contract. And then the fourth is a catch-all of what else do you talk about during these times?

So let’s talk about abatement. What is abatement? You know, usually we think of the word abatement in terms of a nuisance. That is to say, you stop it, you stop the nuisance. And so in this case, the tenant says I’d like to abate the rent for the period of the supervening force. And many contracts already have this provision. For example, if there is a car accident and it runs through the wall of the Taco Bell, and you can’t sell burritos. And so during the period of construction, the tenant might say, well, this is a supervening force. The car came right into the restaurant. So I’d like to abate the rent during the time of the reconstruction. This also happens in eminent domain proceedings may happen with construction that’s done by the tenant. And the term abatement means, from this point of the incident of the supervening force, then until the supervening force is removed. So in this case, for example, say in Idaho, Governor Little earlier this week said that non-essential businesses had to close Well, you really don’t have a choice. As a commercial tenant, you obey the law, and you close. So now you’re closed. And the question is, do you get to abate the rent? In other words, not pay it during the time before Governor Little says, okay, now it’s safe now you can reopen? So say that’s three weeks. Do you get to not pay rent for three weeks? There needs to be something in the contract about abatement of the rent during the three-week period, and remember abatement is to just get rid of it. That is to say, it doesn’t come back. In other words, it’s not like, well, during the period of abatement, say it’s two weeks, you don’t have to pay but you’ll have to come back later and pay. No, it means you just abate it. In other words, you never have to pay that rent. Unless there’s something else in the contract. These commercial contracts, we read them for their plain language trying to determine the intent of the parties. And so, if it says you get abatement for construction, but you don’t get abatement for force majeure, then you don’t get to write it off. And the fact is, let’s be realistic. You know, the tenant still has possession of the landlord space. And because the supervening force has come in, you don’t pay rent and you have possession of that space under abatement.

Tolling is a situation where we’re going to extend the time. In other words, if I have an obligation to pay you rent on the first, we will total the time of your obligation to pay for the time that the supervening event is in force. So if your rent’s due on the first of the month, and it’s a two-week, supervening force, then you wouldn’t have to pay your rent for two weeks. That’s a tolling provision, but the rent is still due, it’s just due later. The notice provisions are very important. Notice has to be accomplished to the right address, using the right method, it might be email, it might be certified mail, it could be carrier pigeon, it doesn’t really matter. Whatever’s in the contract. And you know, there are remedies in the contract. So that if one party defaults, or breaches is the better word, if I have a performance, say my rent is due to the landlord on the first of the month and I don’t pay by the first, then I’m in breach of contract, unless I can take advantage of an abatement provision a tolling provision or a force majeure provision that says I don’t have to pay during those periods. But the fact is that I probably have to give notice to the landlord that I’m going to take advantage of that provision. Because the landlord is going to be expecting a check from me. And what they’re actually going to get is a nice little letter that says, by the way, as you may be aware, there’s a supervening force going on here. There’s a force majeure, there was a fire, there was something there was an earthquake. So you still need to comply with the notice provisions. Even though you could say, well, everybody knows about this, it’s on the radio, it’s on the newspaper. This is not a secret, everybody knows that. That you know, Governor Inslee closed all the businesses in Washington that were non-essential, everybody knows. But that everybody knows isn’t good enough. You have to meet the notice provision. So you need to communicate with the other party about what’s going on. Some of the notice provisions are very onerous.

Sometimes these tenants actually write the contract and the landlord accepts it. And it’s so full of words that you really don’t see it until something happens. For example, if, if the tenant gives notice to the landlord of a supervening force event, then the two parties have to negotiate. And if they can’t negotiate, the landlord must wait for the tenants obligation to be fulfilled until after a judge rules. Well, guess what? That could be six months, it could be a year could be a year-and-a-half. So you need to watch out for these provisions. And it means in in that case, you might want as a landlord, you might not want to give notice that the rent is late. You might want to wait. But you still want to communicate with the tenant. You still want to. So figure out something else to talk about. For example, if business is interrupted, and and the commercial landlord is an additional insured in the tenant, commercial general liability insurance, then maybe the landlord writes to the tenant and says, because you don’t want to give them a notice of default, you just want to say, do you have business interruption insurance? I wanted to check about this provision. I wanted to check about the progress of that. I wanted to check on anything. And just see what comes back. Because if you meet the explicit notice provision, you might be putting yourself in a mud hole you can’t climb out of. But we always advocate that parties to a commercial business contract always discuss and maintain communications.

That’s really the purpose of a contract, is to memorialize the communications and the promises and the performances that we’ve made to the other. So you do need to keep up communications, whether you’re a landlord or a tenant, you always need to communicate with the other. And so when these types of events occur, unfortunately, you probably should get a lawyer involved just to read the darn thing and see what it says. You know, they say you should write to your audience, while lawyers write commercial contracts to the audience they believe they’re going to have which, frankly, is other lawyers. And it’s, frankly, many times very dysfunctional because you shouldn’t have to afford a lawyer every time you just want to interpret a contract with a tenant that you have. But that’s a discussion for another day. And we’ll let you go now. And we hope this is giving you some enlightenment about contracts.

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