Florida Real Estate Lawyer Blog

In my latest video I discuss how commercial landlords are now reaching out to end users that were not only shunned in prior times, but actually even those that were prohibited. Prohibited-use provisions had been considered part of the boilerplate provisions and were not subject to much negotiation, but today some uses that have long been prohibited are being reconsidered as part of traditional shopping centers. Click below to watch my brief video that discusses several specific types of tenants that are no longer being prohibited by many shopping centers, and scroll down to read my article on the topic posted on November 21, 2011.

My latest video focuses on several factors that create additional intricacies for a landlord in leasing to a franchisee. Most franchisors will require that the landlord enter into a franchisor generated addendum, with typical provisions addressing default notices, cure rights, right of entry after default or termination, use and restrictive covenant issues, assignment and recapture provisions, and the ability to mortgage property equipment, among others. In addition, the landlord should ask to see a copy of the fully executed franchise agreement in order to verify that the term of the agreement is longer than the term of the lease. Another critical element is determining what defaults and termination rights may exist under the franchise agreement. All of these may influence what the landlord is willing to do in its lease, and what it is willing to negotiate.

Click below to watch my brief video to learn more about these and other unique aspects of leasing to franchisees, and scroll down to read my article on the topic posted on Nov. 14, 2011.

Last September my colleague Fern Musselwhite wrote an article for this blog on the importance of using clear and unambiguous co-tenancy clauses in shopping center leases. Her article discusses a recent New York case that illustrates how a lack of clarity in a co-tenancy clause can be devastating to a landlord. The case hinged on a clause requiring the leasing of a space in the shopping center to a "national retailer." Because the term "national" was not defined in the lease, the court deferred to the definition in Black's Law Dictionary, which it quoted as "nationwide in scope." It ruled in favor of the tenant that BJ's Wholesale Club did not meet this requirement in the lease, as the retailer does not maintain any stores in the western half of the country.

To learn more about this issue and why it has become imperative to use clear and unambiguous co-tenancy clauses in shopping center leases, click below to watch my brief video on the subject and scroll down to read Fern's article from September 19, 2011.

Last spring, the case of Ruehl No. 925, LLC v. State of Florida, Dept. of Revenue received a great deal of attention in commercial real estate circles in Florida. It raised the issue of whether a tenant's improvement costs should be taxed as if they were rental payments. Ultimately, the court in this case was not willing to equate the cost of improvements with taxable rent, and the decision was recently upheld on appeal.

The trial court found that the tenant in this case was not required to spend a specific amount of money on the improvements or complete them over a particular period of time. The court also found no evidence that the rental structure in the lease was affected by the tenant's improvements. Rather than comparing the improvement costs to rent, the court found them to be "simply an expense which the tenant had to incur to get the premises in a condition that would be suitable for its intended purposes."

Following a recent appeal, the First District Court of Appeal affirmed the trial court's decision that the costs of the tenant's leasehold improvements were not part of the rent due under the lease and therefore were not subject to sales tax.

If this is the final resolution of this issue, it is certainly a positive decision for landlords and tenants in Florida who are negotiating commercial leases and the costs of building out their spaces. The recession and slow pace of recovery have taken a heavy toll on the commercial real estate market in the state, and the additional taxes on the cost of tenants' improvements and renovations would exacerbate the financial challenges facing the industry.

Our Florida real estate lawyers will continue to monitor this appellate ruling, and if there are any further developments in the case we will cover it in this blog. To ensure that you receive all of our future articles, submit your e-mail address in the subscription box at the top of the blog.

The International Council of Shopping Centers' University of Shopping Centers is an advanced level educational program serving the retail real estate and shopping centers industry worldwide. Its mission is to elevate each attendee's level of knowledge of the industry by learning directly from experienced professionals.

I have been granted the honor of serving as the Dean of the College of Law for Non-Lawyers at the next ICSC University of Shopping Centers, which will take place March 5-7, 2012, on the campus of the Wharton School of the University of Pennsylvania in Philadelphia. My course will be titled "Anatomy of a Lease," and it will cover how to read and craft lease clauses, interpreting provisions for enforcing lease requirements for both tenants and landlords, identifying tenant and landlord costs impacted by lease clauses, the key provisions and business points affecting the lease, and new sustainable provisions for construction and operations that address energy use and minimize greenhouse gases.

The International Council of Shopping Centers is the global trade association of the shopping center industry with more than 60,000 members in the U.S., Canada and over 80 other countries. I have been very active with the organization for many years, and I regularly serve as one of its featured speakers at its educational conferences and seminars throughout the country.

Click here to learn more about this event, get the brochure and register online.

Florida's lien law was revised this year to clarify the right of a contractor to lien the interest of a landlord when the landlord's tenant contracts for improvements. Under the previous version of Section 713.10, Florida Statutes, a landlord was able to avoid having its real property interest liened if it followed certain recording requirements. If there was a concern with a particular lease, a landlord could record a short form of the respective lease. If the lease prohibited a lien attaching to the landlord's interest, the landlord then would be protected. If the landlord was preparing to lease several spaces in one building, the landlord could record one notice covering the entire building. The landlord again would be protected so long as the specific lease language prohibiting liability was included in the notice and the landlord represented in the recorded notice that all leases at the property contained this prohibition.

Under the 2011 changes to the statute, the recording of the notice or short form of the lease must occur before a notice of commencement is recorded. If a contractor has any concerns that its lien would not be permitted, under the revised statute, the contractor may serve written demand on the landlord for a copy of the lease provision which prohibits the liening of the landlord's interest. If the landlord does not provide the requested provision within thirty days, or if the landlord provides a false or fraudulent copy of the lease provision, it loses the statutory protection so long as the contractor has complied with the statute and has no actual notice that the landlord's interest was not subject to lien.

A recent Florida case before the Fourth District Court of Appeal highlights the protection afforded to a landlord who followed the recording requirements prior to the 2011 statutory revisions. In MHB Construction Services, L.L.C. v. RM-NA HB Waterway Shoppes, L.L.C., the landlord had properly recorded a notice prohibiting a lien against its interest. Two years later, the landlord entered into a lease with a tenant, who thereafter contracted for improvements to be made to the leased space. Before the contractor began work, the landlord recorded a notice of commencement.

The contractor argued that the recording of the notice of commencement nullified the landlord's protection under the notice of lien prohibition. The court disagreed, finding that the purpose of the notice of commencement was to provide proper information of record so that the lienor could complete a notice to owner. The court also refuted the contractor's arguments that a lien could attach to the landlord's interest because the tenant improvements were required and funded by the landlord. The court noted that not only did the lease not require the improvements, but it required the tenant to obtain the landlord's consent before any improvements were made. In addition, although the landlord contributed a tenant improvement allowance toward the cost of construction, the allowance was less than ten percent of the entire construction budget and was contingent on the tenant obtaining a final release of lien from the contractor. Given these facts and the recorded notice of lien prohibition, the court determined that the contractor could not lien the landlord's interest. For the general contractor's perspective on this decision, click here to read Nicholas Siegfried's article on the significance of the ruling in our construction law blog.

If you own a property against which you recorded a notice of lien prohibition prior to the 2011 statutory revisions, at least one jurisdiction has recognized that you remain protected under the statute. Our real estate and construction lawyers work closely with our clients to enable them to protect their properties against improper liens and claims, and we encourage commercial real estate owners and managers to contact us with any questions regarding the safeguarding of their properties.

The recent economic downturn has caused a seismic shift in the retail use landscape. To fill vacant space, landlords are reaching out to end users that were not only shunned in prior times, but actually even those that were prohibited. Prohibited-use provisions were considered part of the boilerplate provisions and were not subject to much negotiation. Today, some uses that have long been prohibited are being reconsidered as part of traditional shopping centers.

Existing tenants are being asked to waive use restrictions to allow some of these long prohibited uses. Two of these are schools and churches. With the large number of big box closings, landlords began to see these large spaces, which are often nearly next to impossible to subdivide into smaller retail spaces, as viable for school/church use. The fear was that the parking spaces would be taken up for long periods of time by people not visiting stores. Recent history has proven otherwise.

Another typical prohibition was for bowling alleys and billiards clubs. The same parking rationale applied, as well as a fear that it would attract the wrong clientele to the retail center. But new bowling alleys and billiard parlors have gone "upscale." High-quality music systems, televisions, lights and upscale food and liquor service have given these retailers an almost night club-like ambiance and mystique, which has made them attractive to landlords and the other tenants.

Traditional parking issues remain, and the solution is generally the creation of "exclusive" parking fields for the retailer or the construction of structured parking to increase the parking space count for the center.

The next prohibited use to fall by the wayside is the "massage parlor." No need to go into detail as to why this was a typical prohibited use. But this prohibited use was brought to the forefront by the rollout of legitimate day spa type operators, such as Massage Envy. The chain has been successful because it offers very reasonable prices for traditional Swedish, deep tissue and other massage treatments which are typically offered by larger resort spa providers.

So, the bottom line is, review the prohibited use clause and craft a reasonable proposal for existing tenants with the information that they need to evaluate when seeking to waive an existing prohibited use. In addition, consider amending your current lease form to provide more flexibility in the future for similar situations.

Our real estate attorneys have extensive experience with all aspects of commercial lease agreements, and we write about these and other important issues affecting the Florida commercial and residential markets on a regular basis in this blog. We encourage industry followers to submit their e-mail address in the subscription box on the right in order to automatically receive all of our future articles.

Franchise companies are one of the largest and most successful areas in present day retail. There are several unique considerations which create additional intricacies for a landlord in leasing to a franchisee.

An immediate benefit that adds value and recognition to the retail center is the value of an established trade name and brand that is associated with the new user. Additionally, franchisors require that franchisees pass a rigorous vetting process, which usually means that if the franchisor has approved the franchisee, there should be some meat on that bone, especially if this franchisee already has other stores under operation.

That being said, the landlord must understand that a franchisee business is its own independent operation that simply has licensing rights to the brand and only has a contractual relationship with the franchisor company. The two are totally separate entities, and unless the premises are being leased by the franchisor entity itself, the landlord should not expect to receive any corporate guaranty for the lease obligations from the franchisor, nor believe that it has any relationship with the franchisor. In fact, most franchisors will require that the landlord enter into a franchisor generated addendum that in some cases is beneficial and in other cases is prejudicial to the landlord.

Typical provisions in the addendum should address default notices, cure rights, right of entry after default or termination, use and restrictive covenant issues, assignment and recapture provisions, and the ability to mortgage property equipment, among others. There is no exact magic to the addendums, and they vary from franchisor to franchisor.

They are also subject to negotiation.

The landlord should ask to see a copy of the fully executed franchise agreement. There are number of reasons for this, the most important being the verification of the fact that the term of the agreement is longer than the term of the lease. Another critical element is determining what defaults and termination rights may exist under the franchise agreement. All of these may influence what the landlord is willing to do in its lease, and what it is willing to negotiate.

Our real estate attorneys have extensive experience in negotiating lease agreements on behalf of both landlords and tenants in franchise situations, and we maintain offices in Miami-Dade, Broward and Palm Beach counties. We write about important real estate law issues in our blog on a regular basis, and we encourage industry followers to add their e-mail address in the subscription box on the right in order to automatically receive all of our future articles.

The International Council of Shopping Centers is the global trade association of the shopping center industry with more than 60,000 members in the U.S., Canada and over 80 other countries. I have been very active with the organization for many years, and I regularly serve as one of its featured speakers at its educational conferences and seminars throughout the country.

In three weeks on Friday, Nov. 4, I will have the privilege of co-leading the next ICSC Executive Learning Series program at the organization's Lifelong Learning Center in New York City. It will focus on "The Changing Economics of a Lease," and I will be discussing the strategies and tactics that landlords and tenants should use in negotiating monetary provisions, including minimum and percentage rent clauses, security deposits, operating costs, real estate taxes and merchants/marketing fund payments. I plan to lead the participants through an analysis of the key elements of each of the lease provisions and their monetary impact interrelationship with the net return to the landlord, as well as to the tenant. In addition, I will distribute and dissect sample clauses in order to analyze their strengths and weaknesses.

Click here to learn more about this event, get the brochure and register online.

As I covered in Part 1 of this article in my blog post from Sept. 9, pop-up stores have become a permanent component of the retail landscape. These retail stores of a strictly temporary nature, most typically Halloween or Christmas decoration stores, have evolved into what is now a sophisticated and carefully planned marketing and branding concept.

For shopping center owners, pop-up stores seem like the perfect solution to retail vacancies. At the same time, retailers also use them for testing new markets or concepts as well as for promoting brand loyalty. Toys"R"Us, for example, used them extensively during last year's holiday season.

Most temporary store transactions are structured as a license agreement and not as a lease. This is because it simplifies the negotiation process for the landlord and provides them with more flexibility to remove a tenant if it breaches the agreement.

For a retailer that is planning on opening a pop-up store during the holiday season, careful steps should be taken to verify that the signage for the store will not be an issue. Branding is one of the major reasons cited by retailers in their use of pop-up stores. They want customers to return to one of their permanent locations, or they may even want to actually retain the space after the holidays and enter into a long-term lease for the location. Therefore, appropriate review of the signage clause is necessary.

The next major issue is the use clause. The tenant needs to make sure that there are no exclusives in any existing lease that would prohibit or limit the intended use of the premises. A retailer could find, after a substantial investment in merchandise and employee costs, that it cannot use the premises as intended. Tenants should not blindly rely on the landlord to make sure that the use is permissible. Appropriate research should also be conducted to verify that the tenant may obtain all required licenses and permits to operate in the premises. Most pop-up store license agreements state that the property is being taken "as-is." If there have been building code changes or other changes to laws that make the premises not in compliance, the tenant may not be able to obtain an occupational license from local authorities to open and operate the premises. Remember that pop-up stores are filling vacant space, so it is important that the tenant find out how long the space has been vacant and whether it is code compliant.

Last but not least is to plan ahead. If there is a possibility that the tenant will want to keep the space for a longer term, make arrangements to stay in the space while a new lease is negotiated. We do not encourage tenants to keep long-term possession of stores under a license agreement. While it might seem like a possible alternative, negotiate a formal lease agreement if the tenant intends to stay beyond the short-term life of a pop-up store agreement.

Our real estate attorneys in South Florida have extensive experience in the structuring of license agreements and leases for retail space on behalf of both landlords and tenants, and we regularly write about these types of issues in this blog. We encourage industry followers to enter their e-mail address in the subscription box on the right in order to automatically receive all of our future articles.

Last month I wrote an article for the blog on the reasons why commercial landlords should prefer letters of credit over cash for the security deposits from their tenants. This has become especially true in today's economy, with so many businesses that are having trouble staying afloat.

The problem with a cash security deposit posted by a tenant under a lease is that it is considered to be property of the tenant's estate in bankruptcy proceedings, so the funds are subject to the automatic stay provisions of the Bankruptcy Code. That means that if the tenant files for bankruptcy, the deposit will not be able to be accessed by the landlord without court approval, and often times the court will not allow access at all.

To learn more about how landlords are using letters of credit in order to avoid this risk, click below to watch my new video on the topic and scroll down to read my article posted on August 15.

As real estate lawyers, our goals are to negotiate deals in which our clients are reasonably content with the outcomes -- no deal is ever completed where one side is ecstatic and the other completely unhappy -- and to prepare clear and concise documents that help our clients to avoid litigation. Achieving the first goal is the result of good communication with our clients, which enables us to understand what is of primary importance in their mind with respect to the specific transaction at hand. Achieving the second goal often requires avoiding the pitfall that we have discussed is previous articles: ambiguity in the documents.

A recent New York case illustrates how a lack of clarity in a co-tenancy clause can be devastating to a landlord. In Staples the Off. Superstore E., Inc. v. Flushing Town Ctr. III, L.P., 30 Misc.3d 1239(A), 926 N.Y.S.2d 347 (N.Y.Sup. 2011), the landlord entered into a lease with Staples that provided Staples with certain rights and remedies in the event the co-tenancy requirement was not met. That requirement was based on the landlord leasing a space in the center to "Home Depot (or a national retailer having not less than 100 stores. . ." Instead of Home Depot, the landlord leased the space to BJ's Wholesale Club. BJ's operates in 15 states, predominantly in the Northeast but also through the Mid-Atlantic, the Southeast and as far into the Midwest as Ohio. BJ's operates no stores in the western half of the country.

The landlord argued that BJ's met the co-tenancy requirement because it is nationally known and maintains a presence in multiple regions of the country. Staples argued that to be considered a national tenant, the tenant must have locations across the country. Because the term "national" was not defined in the lease, the court deferred to the definition of "national" in Black's Law Dictionary, which it quoted as "nationwide in scope." The court refused to equate "national" with that of a tenant who was known throughout the country.

For both landlords and tenants, a co-tenancy requirement can be a major source of concern during the negotiation of a lease. Without the anticipated type of co-tenant also operating in the center, the tenant may believe that it will not be able to generate the level of business necessary to operate at a profit. In that case, satisfying the co-tenancy requirement is not just a perk for the tenant, it is fundamental to its business plan.

As the landlord in the Staples case found, a narrow co-tenancy clause may create a tremendous burden on the landlord to fill a space with a particular type of tenant. Some co-tenancy clauses deal only with the opening of a co-tenant's business, and other clauses also address a continuing obligation to have a co-tenant operate in the center. The latter places an even greater burden on the landlord, as the landlord may be comfortable when it negotiates the co-tenancy clause that it has a third party under lease to satisfy the opening co-tenancy requirement, but it cannot control whether that tenant stays in business. If a landlord agrees to co-tenancy clauses with multiple tenants and each clause relies on the same third party, the failure of that condition could create a domino effect that may bring down the entire center.

For this reason, the lesson to be learned is two-fold. If a business term carries a great risk because it relies on the actions of a third party, both landlord and tenant must weigh that risk against the consequences of the failed condition, including the associated costs. If both sides believe that the risk is one worth taking, then, in the case of co-tenancy, the clause should be drafted with clear definitions so that each side is able to anticipate what substitute tenants may be placed in the space if the originally anticipated party drops out.

If there is a failure of a meeting of the minds as to a replacement tenant, neither party will be ecstatic with the eventual outcome. In fact, if there is one thing of which we can be certain, it is that a lease that ends up in litigation is one with two unhappy parties.

We are often approached by small local commercial real estate tenants that would like to engage us to review and negotiate the lease form sent to them by the landlord. The reality is that small tenant leases can be difficult to negotiate because the small tenant does not have the clout that is necessary to negotiate major revisions to the landlord's lease form.

The term "small tenant lease" refers not only to the mom-and-pop tenant which has only one or two stores, but also to any tenants that are not national "credit" tenants that add value to the center. It also refers to any tenant that occupies very small square footage. For these tenants, the most critical aspect of the lease is that they understand the implications of what they are signing and how the lease document will actually impact their day to day operations. They also need to understand the effects that the lease will have on their company or their personal lives, should the store fail and be forced to close. Therefore, our review focuses on their day-to-day business, the key issues that might be negotiable, and the prospects for what could happen if the business fails.

A main topic for review in these leases is the Use Clause. It is important that everything that the tenant intends to do in the space is covered by the allowable use, or that there is enough wiggle room in the language as drafted to allow the tenant the ability to expand or modify its uses to accommodate market needs.

Another area which is always of concern is the construction section, which addresses the tenant's construction obligations in the premises to make it operable for the intended use. This section also details how the construction will interrelate with the opening date requirement and the operating covenants which are usually included in the lease form. One of the major trouble areas for a tenant is the construction of the premises. With their lack of construction experience, they might miscalculate their timing needs and payment obligations to the contractor. If the work is not completed on schedule, the tenant will be required to begin paying rent to the landlord, whether they are open for business or not. This could cause a severe cash crunch for the inexperienced tenant, and it could also trigger payment problems with the contractor that result in liens being filed which would create further defaults under the lease. Careful consideration must be made in reviewing and agreeing to realistic time frames and payment schedules.

Insurance is also an important area of concern. The tenant's insurance agent should always review the insurance paragraphs of the lease to confirm that the tenant's policies comply with the lease requirements. Many times the small tenant may not be able to afford the amount of liability insurance coverage required by the lease, therefore the negotiation of appropriate amounts is required.

Sublease and assignment restrictions are typical in most lease forms, and they will require careful review and oftentimes be in need of modification. Many small shops are family-owned businesses that would pass on to family members in the event of the death of one of the shareholders. Also, the family patriarch may need to plan for a smooth transition and create trust and estate plans that cover such eventualities. The assignment provision should be reviewed keeping this in mind to allow for transfers without the landlord's consent for estate planning purposes, as well as intra-family transfers for the tenant entity to give the small shop owner such flexibility.

Last but not least is the issue of which entity or individual is guaranteeing the lease. Most small shop landlords will require a guaranty of the lease from the principals of the tenant. This is because they want the owner to have some proverbial "skin in the game." While these forms are rarely negotiable for the small shop tenant, a careful explanation of what it all means and what financial consequences a claim against the guaranty can have on the principals' credit standing and future abilities to do business is essential.

The attorneys at our firm who focus on real estate matters have been negotiating small shop leases and license agreements for retail properties for more than 30 years, and we encourage the owners of these businesses and the landlords that cater to them to contact us with any questions about these agreements or other important legal and business matters.

Pop-up stores have become a permanent component of the retail landscape. The name "pop-up store" was coined to describe a retail store of a strictly temporary nature. Typically they were the Halloween store, or the Christmas decoration store, or some other strictly seasonal sales concept.

Over the years, these stores have evolved into what is now a sophisticated and carefully planned marketing and branding concept. For shopping center owners, pop-up stores seem like the perfect solution to retail vacancies. At the same time, retailers also use them for testing new markets or concepts as well as for promoting brand loyalty. Toys"R"Us upped the ante during last year's holiday season by opening a significant number of temporary stores to successfully increase their holiday season sales figures.

With the 2011 holiday season fast approaching, now is the perfect time for us to point out a few issues that landlords should review when considering leasing to a pop-up store:

First and foremost is the decision between executing a lease or a license agreement with the retailer. For a store that will be open for a short time period, we advise our clients that a license is a much better option. It provides for much less negotiation and much faster execution. Also, it does not constitute an interest in the property and therefore gives the landlord greater flexibility in a holdover situation.

Another issue is the need for appropriate insurance coverage by the store along with an appropriate indemnity provision protecting the landlord and its interest.

Also important is the drafting of the use clause in the agreement. The language needs to be drafted narrowly, so that the operator is held to a strict standard of what it can and cannot sell. Critical for the landlord is that the use clause not violate any "exclusives" language in existing leases. With the holiday season generating nearly half of a retailer's profits, allowing a violation of another retailer's exclusive could result in severe liability for a landlord.

Another consideration is signage. Existing retailers are generally held to a strict signage criteria, and they would have cause for concern if the landlord relaxed its signage standards and allowed a low quality banner being hung above a store entrance. The landlord should require professional grade signage, even if it is of a temporary nature.

A final issue that could also be significant is the ability for the landlord to enter and show the premises to potential future tenants. Usually pop-up stores use vacant space that is available for long-term lease. The landlord needs to maintain the ability to continue to show the space while not interfering with the pop-up store's use.

There are several other issues to consider, but it is best to let experienced real estate attorneys such as those at our firm counsel landlords or retailers directly about those matters. We have been crafting lease and license agreements for retail properties for more than 30 years, and we have worked with shopping center landlords and retailers throughout Florida and the entire country.

It is well established that a cash security deposit posted by a tenant under a lease is considered to be property of the tenant's estate in bankruptcy, and it is subject to the automatic stay provisions of the Bankruptcy Code. Therefore, it may not be accessed by a landlord without court approval. Many times, the court will not allow access at all.

To alleviate this risk, landlords often ask that the tenant post a letter of credit ("LOC") instead of cash. The argument made is that the LOC is deemed to be an obligation to pay from a third party (the bank issuing the LOC) and therefore is not part of the bankrupt tenant's bankruptcy estate.

Once the landlord has drawn on the LOC, however, the question arises as to whether the proceeds of the LOC are subject to the statutory cap on the landlord's damages under a rejected commercial lease pursuant to §502 of the Bankruptcy Code. Generally, §502 does not alter the entitlement of the landlord to the full proceeds of the LOC in cases where the landlord has not also filed a claim against the tenant for recovery of unpaid sums due under the lease. Therefore, a landlord holding a LOC as security for a lease should consider not filing a proof of claim in a tenant's bankruptcy case. Of course, there are a number of other considerations that play into this critical decision, and careful analysis with bankruptcy counsel is essential to any decision.

Careful drafting of the letter of credit provisions play a pivotal role in whether and when you may access the proceeds. Appropriate bankruptcy filings are equally pivotal in protecting the landlord's rights in any tenant bankruptcy.

Our firm's real estate and bankruptcy attorneys have been drafting such clauses and implementing recovery strategies for our clients for more than thirty years.