CREJ - Property Management Quarterly - April 2017
There are many ways a commercial tenant may find itself in a nonmonetary default. Violations of the “use” clause; failure to maintain the premises; violation of rules and regulations and prohibitions contained in the lease; violation of any prohibition on subletting or assignment; providing false or misleading financial statements; failure to take occupancy, vacation or abandonment of the premises; failure to continuously operate; making alterations without consent; and failing to obtain the requisite insurance are but a few. With so many potential defaults, varying grace periods and cure rights, I called Amanda Halstead to help clarify the complicated legalese. •Sessions: Why do most leases contain so many different default clauses with various triggers, grace periods, deadlines, notice requirements, cures and remedies? •Halstead: Defaults come in all shapes and sizes, some material, others less material, some that can be promptly cured, others that require additional time. From a landlord perspective, a list of enumerated defaults with various grace periods provides the landlord with some flexibility. For example, a landlord might prefer not to put a tenant in formal “default” for something immaterial if he is marketing the property for sale or attempting to refinance. From a tenant perspective, enumerating specific types of defaults and providing for different cure periods offers protection by providing a tenant with the opportunity to avoid termination of a lease in the event of a minor breach. The timeframes for cures are specific to the nature of a default. By way of example, the time period for curing a default that might cause damage to the leased premises, result in harm to a person or cause the landlord’s insurance to be cancelled typically would be very short. Generally there is no contractual cure period for an unauthorized assignment because landlords want to know who is occupying their spaces. A generic default provision (for example, any failure to perform hereunder constitutes a default) could be detrimental to a landlord and tenant, both of which may have a vested interest in preserving a lease. •Sessions: What is the difference between a monetary default and a nonmonetary default in a lease? •Halstead: A monetary default is the failure to pay any monies required under a lease. A nonmonetary default is the failure to perform any other obligations under a lease. Examples of nonmonetary defaults are provided above. •Sessions: Why are any owners reticent about pulling the nonmonetary default trigger? •Halstead: A landlord might be hesitant to make demands on a tenant that could cause a breach to ripen into a “default” for a number of reasons. By way of example, in a slow market, a landlord might prefer to keep a tenant who is in default in an immaterial way as opposed to terminating that tenant’s right to possession and having to locate a new tenant. With any new tenancy comes additional expenses including brokerage commissions and improvement allowances. Although these items typically are recoverable from a defaulting tenant, it may be difficult, if not impossible, to collect. A landlord also might have concerns that a technical default under a lease could interfere with a potential sale or refinance. Moreover, as a plaintiff, a landlord would have the duty of establishing the default by the tenant. Certain nonmonetary defaults, particularly violations of rules and regulations, are difficult to prove and might involve testimony of a reluctant witness (i.e., the neighboring tenant). •Sessions: Do grace periods favor the tenant or the landlord? •Halstead: Grace periods undoubtedly benefit a tenant, giving her additional time to meet the obligations, but also grace periods can be beneficial to a landlord who may prefer that a tenant not be immediately in default. •Sessions: Who needs to receive notice of default? •Halstead: Before sending any notice of default, a landlord should review the notice provisions of a lease. In order to be effective, a notice may need to be sent to one or more addresses in a specific manner, such as overnight, certified mail, return-receipt requested or hand delivery. •Sessions: What does it mean to “diligently pursue” the cure? •Halstead: This term is a bit ambiguous and, in the legal world, ambiguity leads to litigation. For this reason, it is important that the lease require that the tenant commence the cure on or before a certain date, complete it within a certain timeframe (providing an outside date for the cure) and diligently pursue the cure in the intervening period. The concept of diligent pursuit suggests that a tenant should not sit idly on his hands but instead should undertake diligent efforts to cure the default. This can be tough to prove. •Sessions: Can a tenant invoke a force majeure provision in a lease? •Halstead: Depending on how the force majeure provision is written, a tenant may be able to invoke it. Most force majeure provisions expressly exclude rental obligations and instead apply only to performance obligations. Assuming a tenant has the right to invoke a force majeure provision, it only will serve to provide a tenant with relief if the default is outside of the tenant’s control. Otherwise, it offers no protection. •Sessions: Which default provisions do the parties heavily negotiate? •Halstead: It is not uncommon for tenants to request longer grace periods for the payment of rent or that they be provided with written notice and an opportunity to cure before a failure to pay can ripen into a default. Many tenants will request that vacation of the premises not be construed as a default. •Sessions: What is the main cause for a landlord default? • Halstead: Not surprisingly, the most frequently asserted landlord defaults relate to a landlord’s maintenance and repair obligations. • Sessions: Should there even be a landlord default provision in a lease? • Halstead: A well-drafted lease will provide a landlord with the right to written notice of a breach and an opportunity to cure before such breach can ripen into a default. This can be critical particularly in an eviction action where a tenant, who has failed to pay rent, argues that the tenant should be excused from performance due to a landlord default. It’s very easy to establish that the tenant failed to provide the requisite notice and therefore the landlord cannot technically be in default. • Sessions: Should lenders be given an opportunity to cure? • Halstead: Lenders usually have the right to cure a landlord’s default pursuant to the deed of trust, which most leases are subordinate to. A landlord should, however, be weary of granting cure rights to the tenant’s lenders. It’s not uncommon for a lender providing a loan to a tenant to request that a landlord waive its lien rights and agree to provide the lender with, among other things, cure rights, access to the premises and the right to remove collateral. Counsel should review these types of agreements, typically drafted by the lenders, in advance. Such agreements typically provide tenants’ lenders with rights that far exceed those which would be afforded a tenant and which can greatly lengthen the period of time required for a landlord to obtain legal possession of its property following a default.