A common mistake that many commercial tenants make is assuming that protections provided by courts for residential tenants are also available to commercial tenants. There are many statues and ordinances in existence designed to protect individual consumers and residential tenants. The reasoning behind these laws is the assumption there is unequal bargaining power between an individual and a larger, more well funded, commercial enterprise.
One of the protections that courts typically afford residential tenants is the warranty of habitability. This same protection does not necessarily apply to a commercial tenant unless it is expressly negotiated into the lease. When it comes to 'business to business' contracts of any kind, including commercial leases, with certain exceptions, a court will look no further than the terms of the contract. Many tenants only look at the key business terms and pay scant attention to the remainder of the lease agreement.
One of the first Superstore Sandy-related cases to addressed by the New York courts brings this point home. In Maiden Lane Properties v. Just Salad Partners, 056312/13, N.Y.L.J. 1202598292879 (Civ., NY, Decided April 29, 2013), the building was without its power for 2 months. The landlord provided a generator to ensure residential tenants had access to electricity but the commercial tenants were on their own. Just Salad obtained its own generator but experienced significant downtime and costs for obtaining and running its own generator. It decided to not pay its rent for those two months and the landlord sued.
The tenant claimed that it was entitled to a rent abatement under the casualty provisions of the lease. However, the tenant failed to follow the terms of the casualty provisions by providing the required notice of casualty to the landlord. As a result, the court sided with the landlord .
While this case was decided in New York, the lessons we can learn from it still resonate in Ohio. When you are a commercial tenant you need to follow the terms you negotiated in the lease regardless of who unfair they seem when a crisis occurs. If a notice is required to obtain protections under the lease, then you must provide that notice. Also, it's important to consider what events qualify as a casualty under your lease. Under the New York case above, that landlord raised that issue as well. After a significant event has occurred is the wrong time to be reviewing your lease to determine if you are protected.
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Are Mortgage Servicers “Suppliers” of “Consumer Transactions” pursuant to the Ohio Consumer Sales Practices Act (Part II)?
On May 14, 2013, the Ohio Supreme
Court in Anderson v. Barclay’s Real
Estate, Inc., Slip Opinion No. 2013-Ohio-1933 answered the above question
posed to it by the Federal District Court for the Northern District of Ohio by
holding that “the servicing of a borrower’s residential mortgage loan is not a ‘consumer transaction’
as defined in O.R.C. 1345.01(a); and “an entity that services a residential
mortgage loan is not a ‘supplier’ as defined in O.R.C. 1345.01(C).
A complete background and fact
summary of the case can be found in this author’s earlier blog posting of March
4, 2013 appropriately titled: “Is a Mortgage Service Company a Supplier of Consumer
Transactions pursuant to the Ohio Consumer Sales Practices Act (“CSPA”)? Basically, the Anderson case originated in the Federal District Court for the
Northern District of Ohio, who concluded (with regard to the CSPA claims) that
there was no controlling precedent in Ohio on whether the CSPA applied to
mortgage services, so the Federal Court asked the Ohio Supreme Court to answer
the following two questions:
1) Does the servicing of a borrower’s residential mortgage loan
constitute a “consumer transaction” as defined in the Ohio Consumer
Sales Practices Act, O.R.C. 1345.01(a)?
The Plaintiff, Mrs. Anderson argued that the answer to this first question
should be “yes” because mortgage servicers provide a number of services to
borrowers, including accepting their payments and working with borrowers to
obtain loan modifications. The servicer,
Barclay’s Real Estate, Inc. dba HomEq
Servicing (“HomEq”) argued that mortgage servicers perform their services for financial
institutions, not for borrowers/consumers, and that therefore the
transactions were commercial and not covered by the CSPA.
The Supreme Court of Ohio agreed
with HomEq, holding that the servicing of a borrower’s residential mortgage
loan is not a “consumer transaction.” To
justify its holding, the court first recognized that one essential element of
O.R.C. Section 1345.01(a) was not met:
that there was no “sale, lease,
assignment, award by chance, or other transfer of a service [by the servicer]to
a consumer”. Rather, the
court reasoned that mortgage servicing is a contractual agreement between the
mortgage servicer and financial institution, with no direct contract between
the borrower and the mortgage servicer.
While the court acknowledged that the servicer’s duties might involve
interaction with borrowers, it reasoned that those interactions are always on
behalf of the financial institution.
The court further reasoned that
service provider transactions are not consumer transactions because there is no
“transfer of an item of goods, a service, a franchise or an intangible”
as required by the statute. The court explained that while a financial
institution may contract with a mortgage servicer to service a loan, the
mortgage servicer does not transfer a service to the borrower. The court’s decision was also influenced
by: (1) the CSPA 2007 amendment which
added dealings between consumers and loan officers, non-bank mortgage lenders
and mortgage brokers as being covered by the CSPA but did not include dealings
between consumers and mortgage servicers; (2) Uniform Consumer Sales Practices
Act commentary which noted that land transactions should be specifically
excluded from Consumer Sales Practices Acts; (3) Ohio court decisions holding
that the CSPA does not apply to “collateral services” that are solely
associated with the sale of real estate; and (4) other states that wanted real
estate transactions and loan servicing covered by their consumer protection
statutes specifically defined consumer transactions to include them.
2) Is a mortgage servicer a “supplier”?
Mrs. Anderson argued that servicers are “suppliers” within the CSPA
because they essentially function as collection agencies. The court disagreed, concluding that in order
to be a supplier, the servicer would have to be engaged in the business of
“effecting” or “soliciting” consumer transactions as provided in O.R.C.
1345.01(c). The terms “effecting” and “soliciting”
are not defined in the CSPA, so the court went to Black’s Law Dictionary and
found “effect” to mean “to bring about or to make happen”; and “solicit” to
mean “requesting or seeking to obtain something”. Since servicing a
mortgage does not cause a consumer transaction to happen, and mortgage
servicers do not seek or request borrowers, the court handily dismissed
the plaintiff’s argument and held that servicers are not “suppliers” under the CSPA.
General Provisions in Contracts: "Miscellaneous" does not mean "Unimportant"
Towards the end of every contractual agreement, including real
estate purchase agreements and leases, are certain provisions that often come
under the heading of “Miscellaneous” or “General Provisions” and are often
referred to as the “boilerplate” provisions.
While these provisions may be “boilerplate” in the sense
lawyers insert them into nearly every agreement, they remain important and
should not be ignored. Below is a summary of some of these
provisions and their purpose:
Entire Agreement – Most agreements have a section
captioned “Entire Agreement” or “Integration.” The purpose of this section is
to clarify that the entire agreement of the parties is embodied in that written
agreement, and prior agreements (verbal or written) are integrated into this
current signed contract and no longer have separate force and effect. If a party
to the agreement later asserts that there were other agreements
between the parties and these other agreements
pre-date of the signed
agreement containing an integration clause, then the earlier agreements will be considered merged into the newer agreement and enforceable. If there are
other agreements that the parties want to remain in effect concurrently with the new contract, then they must revise this ‘boilerplate’ provision to reflect this.
Binding Effect; Assignment – Most contracts include a provision that
states the agreement will be binding upon the parties’ successors and
assigns. If a company is bought out, you
may want to ensure the acquirer is still bound to honor the obligations in the
contract. A separate issue to address is
what limitations should be placed on a party’s ability to assign the agreement
without the other party’s consent. If a buyer on a real estate purchase
agreement intends to create a new entity prior to closing to own the real
estate, then it will be important to include language allowing the buyer to assign
the agreement to an affiliate.
Severability – This provision is included to ensure
the entire contract isn’t voided if a court finds that one or more the
provisions are unenforceable. It allows
the unacceptable provisions to be severed by the court and the remaining terms
of the contract are still enforceable. However, there may be instances where
certain provisions are so important to the purpose of the contract, that if a
court strikes out any of those provisions, the parties will not want the contract to continue. In that case,
a severability clause should not be included in the agreement.
No Waiver – The purpose of a waiver provision is to
make it clear that a party can waive one or more breaches and still be free to
act on a similar breach later. Without such a clause,
the breaching party could argue before a court that prior waivers of a breach by the other party created a ‘course of dealing’ that amends the contract and
the court might agree.
Governing Law; Venue – Governing law matters in an
agreement. The laws in one state may be, and often are, vastly different from
the laws in other states.
Which state’s law governs can effect the outcome of a lawsuit. Some contracts also include venue
provisions. Be aware that an agreement to litigate in courts of a specific state,
or even a specific county within a state, will typically be upheld.
Notice – The notice section of a contract dictates how notices under the
agreement should be delivered and to what addresses. It is important to follow the requirements in
this section precisely if a formal notice under the agreement is given. For
example, don’t email or fax a notice to the other party unless the agreement
expressly allows for it.
_____________________________
Types of Commercial Leases-What’s in a Name?
There are as many types of commercial leases as there are creative lawyers to draft them. Most types of leases are defined either by the kind of property involved (industrial, retail, office), or by how the rent is calculated and who pays what.
Industrial/Office/Retail Leases. While industrial, retail and office lease forms will contain many similar provisions, “one size does not fit all”. In a retail lease for example (especially in large shopping centers), the following provisions can be found that are not often utilized in office and industrial leases: a) Continuous Operation (the tenant is required to open and operate their business on the premises, continually, throughout the lease term); b) Exclusive Use (the tenant is granted the exclusive use to operate a particular business in the shopping center); c) Radius Restriction (the tenant is required to covenant that it will not lease space within a radius of so many miles of its leased premises for the same use [e.g., a second pizza hut location too close to the one which is the subject of the lease]; d) Percentage Rent (the tenant is responsible for paying base rent on the property, as well as a monthly percentage of income earned from the business occupying the leased space); and e) Co-Tenancy (the tenant reserves the right to terminate the lease, or pay lower rent if an anchor tenant leaves the shopping center).
In an office lease, there are typically more services provided (e.g. elevator, janitorial, guard/concierge) by the landlord (which expenses are typically passed on to the Tenant). In addition, the concept of “usable” vs.” rentable” square footage and “load factors” must be understood and evaluated. A Load Factor is a method of calculating total rent of a tenant that combines usable square feet of the premises and a percentage of square feet of common areas. Basically, usable square feet + percentage of common area square feet (for common restrooms, lobby, elevators, stairwells, and hallways) = rentable square feet. This calculation of the addition of a percentage of the common area expenses to monthly base rent is known is the "load factor." In order to simplify and standardize the measurement of office space, the Building Owners and Managers Association International ("BOMA") has adopted uniform standards for the measurement and leasing of office space. The "BOMA Standard" is utilized in many office leases.
In industrial leases, particular attention should be given to the availability of “industrial amenities” (e.g. high pressure gas lines; cranes; truck docks and “drive-ins” and electrical capacity) and environmental provisions in the lease. Representations, warranties, covenants and indemnities are the norm for the tenant and its operations, as well as regarding landlord’s common area operations and past environmental status of the premises. An environmental audit is often recommended so that a “snapshot of environmental status” can be taken at the lease’s inception.
Lease Types based on Rent-Gross vs. Net Leases. Typically, when dealing with commercial real estate leases, a gross or net lease is utilized, with net leases coming in more than one “flavor”. The following summarizes the basic types and their variations on a theme.
In a gross lease – aka a “full service lease”, the landlord pays all of the expenses associated with maintaining and operating its property (such as insurance, taxes, repairs, trash collection…). These costs will be blended with the base rent to determine the overall rent due by the tenants. Gross lease provisions are usually used for industrial/warehouse space, but can be found in office and retail leases as well. The term “Modified Gross Lease” (sometimes referred to as an “Industrial Gross Lease”) describes a lease in which some, but not all operating expenses are absorbed by the Landlord.
A “net lease” requires the tenant to pay, in addition to rent, some or all of the property expenses that normally would be paid by landlord (or "lessor"). These include expenses such as real estate taxes, insurance, maintenance, repairs, utilities, and other items. For “multi-tenant” properties, such as a shopping center, the expenses that are "passed through" to the tenants are usually pro-rated among the tenants based on the square footage of the area leased by each tenant. The tenant’s share of expenses is often referred to as “Tenant’s Proportionate Share”. There are different kinds of “net leases”, with different names to describe same based on what market one is in, and who is describing the lease (e.g., tenant, landlord, broker or attorney) Many in the commercial real estate industry describe the variations of net leases as follows:
Single Net Lease - the tenant pays for real estate taxes as well as the base rent.
Double Net Lease - the tenant pays for real estate taxes and commercial property insurance.
Triple Net Lease (or Net-Net-Net or NNN) – the tenant pays all real estate taxes, building insurance, and costs associated with the repair and maintenance of any common areas. This form of lease is most frequently used for single tenant buildings and retail space.
Absolute Triple Net lease (or "True Triple Net Lease”)- in the so-called “true” triple net or “bondable” lease, tenants will pay (or reimburse landlord for), in addition to real estate taxes, insurance and common area maintenance, their proportionate share of roof replacement and structural costs to the building. Typically, these leases are not terminable by the tenant, nor are rent abatements allowed. Basically, the tenant pays for and assumes every imaginable real estate risk related to the property.
But what’s in a name? As you might expect, there is much disagreement among landlords, tenants, brokers and attorneys re: the type of lease they have. Focusing on the “label,” however is misguided and problematic. Closely analyzing the lease to determine who is responsible to pay for what is much more important, especially regarding the scope of a tenant’s and landlord’s respective liabilities under commercial leases for repairs and replacements.
When allocating responsibility for maintenance and repairs, most commercial landlords intend for their tenant to make most of the repairs, or be responsible to reimburse the Landlord for same. Does repair mean replacement? Some landlords may think so, however, most courts have decided that if a landlord wants a tenant to replace the roof, for example, vs. patch it periodically, the lease must provide, to the effect, that “it shall be the tenant’s obligation to repair and replace the roof.” See ASP Properties Group v. Fard, 35 Cal Rptr 3d 343 (Court of Appeals, 2005). See also Robert A. Schoshinski, America Law of Landlord and Tenant, §5:18 at 271 (1980). In the ASP case, a lease amendment was prepared after the lease was signed, to add the roof to the list of items that the tenant was to repair and maintain in good and safe condition. However, the Court determined the list to be a list of repair obligations, not replacement obligations for the tenant. Simply stated, “the courts have held that an express covenant to repair will not be enlarged by [language] construction…a covenant to repair does not include a covenant to replace”. Ohio Real Property Law and Practice, Sec. 20.08 [1]-[3] (2007).
The moral of today’s lesson? Don’t worry so much about what you call the lease; make sure you know what it says, and that your intent, especially regards who pays for what and who makes repairs and./or replacements is clearly spelled out. In other words, "watch your language" and “Say what you mean, precisely, or a judge will decide what you meant.”
Industrial/Office/Retail Leases. While industrial, retail and office lease forms will contain many similar provisions, “one size does not fit all”. In a retail lease for example (especially in large shopping centers), the following provisions can be found that are not often utilized in office and industrial leases: a) Continuous Operation (the tenant is required to open and operate their business on the premises, continually, throughout the lease term); b) Exclusive Use (the tenant is granted the exclusive use to operate a particular business in the shopping center); c) Radius Restriction (the tenant is required to covenant that it will not lease space within a radius of so many miles of its leased premises for the same use [e.g., a second pizza hut location too close to the one which is the subject of the lease]; d) Percentage Rent (the tenant is responsible for paying base rent on the property, as well as a monthly percentage of income earned from the business occupying the leased space); and e) Co-Tenancy (the tenant reserves the right to terminate the lease, or pay lower rent if an anchor tenant leaves the shopping center).
In an office lease, there are typically more services provided (e.g. elevator, janitorial, guard/concierge) by the landlord (which expenses are typically passed on to the Tenant). In addition, the concept of “usable” vs.” rentable” square footage and “load factors” must be understood and evaluated. A Load Factor is a method of calculating total rent of a tenant that combines usable square feet of the premises and a percentage of square feet of common areas. Basically, usable square feet + percentage of common area square feet (for common restrooms, lobby, elevators, stairwells, and hallways) = rentable square feet. This calculation of the addition of a percentage of the common area expenses to monthly base rent is known is the "load factor." In order to simplify and standardize the measurement of office space, the Building Owners and Managers Association International ("BOMA") has adopted uniform standards for the measurement and leasing of office space. The "BOMA Standard" is utilized in many office leases.
In industrial leases, particular attention should be given to the availability of “industrial amenities” (e.g. high pressure gas lines; cranes; truck docks and “drive-ins” and electrical capacity) and environmental provisions in the lease. Representations, warranties, covenants and indemnities are the norm for the tenant and its operations, as well as regarding landlord’s common area operations and past environmental status of the premises. An environmental audit is often recommended so that a “snapshot of environmental status” can be taken at the lease’s inception.
Lease Types based on Rent-Gross vs. Net Leases. Typically, when dealing with commercial real estate leases, a gross or net lease is utilized, with net leases coming in more than one “flavor”. The following summarizes the basic types and their variations on a theme.
In a gross lease – aka a “full service lease”, the landlord pays all of the expenses associated with maintaining and operating its property (such as insurance, taxes, repairs, trash collection…). These costs will be blended with the base rent to determine the overall rent due by the tenants. Gross lease provisions are usually used for industrial/warehouse space, but can be found in office and retail leases as well. The term “Modified Gross Lease” (sometimes referred to as an “Industrial Gross Lease”) describes a lease in which some, but not all operating expenses are absorbed by the Landlord.
A “net lease” requires the tenant to pay, in addition to rent, some or all of the property expenses that normally would be paid by landlord (or "lessor"). These include expenses such as real estate taxes, insurance, maintenance, repairs, utilities, and other items. For “multi-tenant” properties, such as a shopping center, the expenses that are "passed through" to the tenants are usually pro-rated among the tenants based on the square footage of the area leased by each tenant. The tenant’s share of expenses is often referred to as “Tenant’s Proportionate Share”. There are different kinds of “net leases”, with different names to describe same based on what market one is in, and who is describing the lease (e.g., tenant, landlord, broker or attorney) Many in the commercial real estate industry describe the variations of net leases as follows:
Single Net Lease - the tenant pays for real estate taxes as well as the base rent.
Double Net Lease - the tenant pays for real estate taxes and commercial property insurance.
Triple Net Lease (or Net-Net-Net or NNN) – the tenant pays all real estate taxes, building insurance, and costs associated with the repair and maintenance of any common areas. This form of lease is most frequently used for single tenant buildings and retail space.
Absolute Triple Net lease (or "True Triple Net Lease”)- in the so-called “true” triple net or “bondable” lease, tenants will pay (or reimburse landlord for), in addition to real estate taxes, insurance and common area maintenance, their proportionate share of roof replacement and structural costs to the building. Typically, these leases are not terminable by the tenant, nor are rent abatements allowed. Basically, the tenant pays for and assumes every imaginable real estate risk related to the property.
But what’s in a name? As you might expect, there is much disagreement among landlords, tenants, brokers and attorneys re: the type of lease they have. Focusing on the “label,” however is misguided and problematic. Closely analyzing the lease to determine who is responsible to pay for what is much more important, especially regarding the scope of a tenant’s and landlord’s respective liabilities under commercial leases for repairs and replacements.
When allocating responsibility for maintenance and repairs, most commercial landlords intend for their tenant to make most of the repairs, or be responsible to reimburse the Landlord for same. Does repair mean replacement? Some landlords may think so, however, most courts have decided that if a landlord wants a tenant to replace the roof, for example, vs. patch it periodically, the lease must provide, to the effect, that “it shall be the tenant’s obligation to repair and replace the roof.” See ASP Properties Group v. Fard, 35 Cal Rptr 3d 343 (Court of Appeals, 2005). See also Robert A. Schoshinski, America Law of Landlord and Tenant, §5:18 at 271 (1980). In the ASP case, a lease amendment was prepared after the lease was signed, to add the roof to the list of items that the tenant was to repair and maintain in good and safe condition. However, the Court determined the list to be a list of repair obligations, not replacement obligations for the tenant. Simply stated, “the courts have held that an express covenant to repair will not be enlarged by [language] construction…a covenant to repair does not include a covenant to replace”. Ohio Real Property Law and Practice, Sec. 20.08 [1]-[3] (2007).
The moral of today’s lesson? Don’t worry so much about what you call the lease; make sure you know what it says, and that your intent, especially regards who pays for what and who makes repairs and./or replacements is clearly spelled out. In other words, "watch your language" and “Say what you mean, precisely, or a judge will decide what you meant.”
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