Generally speaking, courts will typically uphold language in a commercial lease (and guaranty), unless it is contrary to statutory law or public policy. Consequently, commercial landlords, tenants and guarantors have a lot of leeway in allocating the risk and responsibility of issues inherent in commercial leases/guaranties. Because of this deference to the language in a commercial lease/guaranty, landlords, tenants and guarantors are strongly advised to “say what they mean, precisely, or a judge will decide what they meant”.
Failure of a lease to clearly define if repairs include replacements, for example, or what improvements stay with the landlord and what goes with the tenant upon expiration of the lease (i.e., the “fixture” vs. “trade fixture” issue) often results in disputes that could easily have been avoided with clear, specific lease language (See “Getting a Fix on Fixtures”, Ohio Real Estate Blog, by Stephen Richman, June 30, 2008). Additionally, if one intends for a party in a commercial lease to pay for general real estate taxes and assessments, as well as special assessments and “PILOT’s, it must be specifically spelled out in the lease. The landlord in Chu Bros. Tulsa Partnership, P.L.L. v. Sherwin-Williams Co., 187 Ohio App. 3d 261, 2010-Ohio-85, was unpleasantly surprised to learn that the phrase “Tenant shall pay all general real estate taxes and assessments” did not include responsibility for “PILOTs”. (See “PILOTs = Special Assessments according to the 12th District Court of Appeals”, Ohio Real Estate Blog, by Stephen Richman, October 22, 2010).
In light of the recent Stark County Court of Appeals case known as Strip Delaware LLC v. Landry’s Restaurants, Inc., 2011-Ohio-4075, identifying what a guarantor is guaranteeing in a lease guaranty can now be added to the growing list of lease and guaranty provisions that must be drafted carefully, and precisely to avoid unintended and often, costly results.
The facts of the “Strip Delaware” case are simple enough. Strip Delaware, LLC (the “Landlord”) owned a parcel of real estate known as “the Strip” in Stark County that was leased to Landry’s Seafood House - Ohio, Inc. (the “Tenant”) to operate a “Joe’s Crab Shack” restaurant. Landry’s Seafood Restaurants Inc. (the “Guarantor”), an affiliate of the Tenant signed a guarantee of the lease. After nine (9) years of operations, Joe’s Crab Shack closed (in 2006), stopped paying rent and as a result of these defaults, the Landlord sued the Tenant and the Guarantor.
The lower court awarded the Landlord damages against the Tenant and the Guarantor for base rent, common area maintenance charges, taxes, brokerage fees, costs to restore the premises for a new tenant; and costs and attorneys fees totaling approximately $47,000. Both the Tenant and Guarantor appealed the decision, raising a number of “assignments of error” (claimed mistakes in the original decision). The Guarantor’s basic position was that the guarantee only guaranteed the Tenant’s periodic payments of basic rent, common area maintenance and taxes. The Guarantor further argued that nowhere in the guarantee agreement was there a provision calling for the Guarantor to pay for attorneys fees.
Unfortunately for the Guarantor, the specific language in the guarantee agreement did not state what the Guarantor had intended; rather, it stated the complete opposite. The guarantee provided that the Guarantor “shall be liable for rent payable under the Lease”, however, “rent” was defined in the guarantee as “the maximum (base) rent, additional rent, and all other sums and charges payable by Tenant to Landlord under the Lease”. Finding a specific directive in the guarantee to look to the lease for the guarantee’s complete definition of “rent”, the justices found clear language in the lease calling for Tenant to pay “any deficiency that arises by reason of re-letting the premises”, attorneys fees, and “costs and expenses relating to Tenant’s default and the re-letting of the premises, including without limitation brokerage fees… and the costs of repairing, to put the leased premises into good condition”. The difference between the guarantor’s unwritten intent (of guaranteeing only periodic rent/additional rent payments) vs. the comprehensive definition of guaranteed “rent” clearly stated in the guarantee/lease cost the guarantor approximately $92,000.00.
The moral of this story? Say what you mean, precisely, in a commercial lease and guarantee, or a judge will decide what you meant. If you intend a guarantor to only guarantee periodic payments of rent, common area maintenance charges and taxes, that is precisely how the guarantee should read. On the other hand, if the guarantor is to be liable for anything and everything stemming from a tenant’s default, a provision comparable to the language used in the Strip Delaware guarantee would be in order. Of course, the best way to avoid unintended and costly consequences, “later” is to engage a legal professional to review the lease and guarantee prior to signing. Paying one attorney “now” is always less expensive than paying two attorneys “later”.
Failure of a lease to clearly define if repairs include replacements, for example, or what improvements stay with the landlord and what goes with the tenant upon expiration of the lease (i.e., the “fixture” vs. “trade fixture” issue) often results in disputes that could easily have been avoided with clear, specific lease language (See “Getting a Fix on Fixtures”, Ohio Real Estate Blog, by Stephen Richman, June 30, 2008). Additionally, if one intends for a party in a commercial lease to pay for general real estate taxes and assessments, as well as special assessments and “PILOT’s, it must be specifically spelled out in the lease. The landlord in Chu Bros. Tulsa Partnership, P.L.L. v. Sherwin-Williams Co., 187 Ohio App. 3d 261, 2010-Ohio-85, was unpleasantly surprised to learn that the phrase “Tenant shall pay all general real estate taxes and assessments” did not include responsibility for “PILOTs”. (See “PILOTs = Special Assessments according to the 12th District Court of Appeals”, Ohio Real Estate Blog, by Stephen Richman, October 22, 2010).
In light of the recent Stark County Court of Appeals case known as Strip Delaware LLC v. Landry’s Restaurants, Inc., 2011-Ohio-4075, identifying what a guarantor is guaranteeing in a lease guaranty can now be added to the growing list of lease and guaranty provisions that must be drafted carefully, and precisely to avoid unintended and often, costly results.
The facts of the “Strip Delaware” case are simple enough. Strip Delaware, LLC (the “Landlord”) owned a parcel of real estate known as “the Strip” in Stark County that was leased to Landry’s Seafood House - Ohio, Inc. (the “Tenant”) to operate a “Joe’s Crab Shack” restaurant. Landry’s Seafood Restaurants Inc. (the “Guarantor”), an affiliate of the Tenant signed a guarantee of the lease. After nine (9) years of operations, Joe’s Crab Shack closed (in 2006), stopped paying rent and as a result of these defaults, the Landlord sued the Tenant and the Guarantor.
The lower court awarded the Landlord damages against the Tenant and the Guarantor for base rent, common area maintenance charges, taxes, brokerage fees, costs to restore the premises for a new tenant; and costs and attorneys fees totaling approximately $47,000. Both the Tenant and Guarantor appealed the decision, raising a number of “assignments of error” (claimed mistakes in the original decision). The Guarantor’s basic position was that the guarantee only guaranteed the Tenant’s periodic payments of basic rent, common area maintenance and taxes. The Guarantor further argued that nowhere in the guarantee agreement was there a provision calling for the Guarantor to pay for attorneys fees.
Unfortunately for the Guarantor, the specific language in the guarantee agreement did not state what the Guarantor had intended; rather, it stated the complete opposite. The guarantee provided that the Guarantor “shall be liable for rent payable under the Lease”, however, “rent” was defined in the guarantee as “the maximum (base) rent, additional rent, and all other sums and charges payable by Tenant to Landlord under the Lease”. Finding a specific directive in the guarantee to look to the lease for the guarantee’s complete definition of “rent”, the justices found clear language in the lease calling for Tenant to pay “any deficiency that arises by reason of re-letting the premises”, attorneys fees, and “costs and expenses relating to Tenant’s default and the re-letting of the premises, including without limitation brokerage fees… and the costs of repairing, to put the leased premises into good condition”. The difference between the guarantor’s unwritten intent (of guaranteeing only periodic rent/additional rent payments) vs. the comprehensive definition of guaranteed “rent” clearly stated in the guarantee/lease cost the guarantor approximately $92,000.00.
The moral of this story? Say what you mean, precisely, in a commercial lease and guarantee, or a judge will decide what you meant. If you intend a guarantor to only guarantee periodic payments of rent, common area maintenance charges and taxes, that is precisely how the guarantee should read. On the other hand, if the guarantor is to be liable for anything and everything stemming from a tenant’s default, a provision comparable to the language used in the Strip Delaware guarantee would be in order. Of course, the best way to avoid unintended and costly consequences, “later” is to engage a legal professional to review the lease and guarantee prior to signing. Paying one attorney “now” is always less expensive than paying two attorneys “later”.
2 comments :
Very good advice. Many people underestimate how the court's interpretation will differ from what they think is so clear in the lease. So clear to them.
this is really a good advisable post..anybody having doubts will surely be benefited by this...
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