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Articles Posted in Commercial Leasing

The Governor signed House Bill 469 on June 27, 2020, dealing with real estate conveyances.  The bill removes the requirement under Section 689.01, Florida Statutes requiring a landlord to have two witnesses when signing a lease for a term of more than one year.

The requirement for witnesses was limited to a landlord’s signature only and was designed to protect the grantor of the estate in the land. House bill 469 provides that no subscribing witnesses are required for a lease of real property or any instrument pertaining to a lease of real property, eliminating the requirement that two subscribing witnesses be present when the lessor signs a lease with a term of more than one year.

The bill becomes effective on July 1, 2020.

JCatalanoSRHL2An article authored by firm shareholder John Catalano is featured in the Business Monday section of today’s Miami Herald.  The article, which is titled “Owners of Retail Properties, As Well As Tenants, Will Feel Pandemic’s Bite,” focuses on the prospects for rent deferrals and insurance claims for the owners of closed stores and the spaces they occupy.  It reads:

. . . It has quickly become apparent that the outbreak of COVID-19 will take a massive toll not only on retail tenants, but also on the owners of retail properties. One of the first places that retailers will look for potential relief will be their lease agreements, which may include force majeure clauses and other provisions that are designed to cover business disruptions caused by catastrophes and acts of God.

These provisions will often list events such as floods, earthquakes, war, strikes, government regulations, civil disorder, etc., as triggers that would delay parties’ obligations under the contract. The applicability of the spread of COVID-19 as a force majeure triggering event may depend on the exact wording used in the lease. Some may generally stipulate “conditions beyond the parties’ control, including but not limited to Acts of God” as qualifying conditions, while others may specify circumstances such as “war, terrorist act, government regulation, disaster or strikes.” MHerald2015-300x72While leases widely differ in their form, modern leases for most major retail centers include a carve-out that the occurrence of a force majeure event does not permit late payment or nonpayment of rent by a tenant. Continue reading

JCatalanoSRHL2ORivera2014By Oscar R. Rivera and John Catalano

Real estate billionaire Tom Barrack, the chairman and chief executive officer of Colony Capital, warned recently that the U.S. commercial real estate mortgage market is on the brink of collapse due to a predicted chain reaction of margin calls, mass foreclosures, evictions and bank failures resulting from the coronavirus pandemic.

“Loan repayment demands are likely to escalate on a systemic level, triggering a domino effect of borrower defaults that will swiftly and severely impact the broad range of stakeholders in the entire real estate market, including property and home owners, landlords, developers, hotel operators and their respective tenants and employees,” he wrote.

The longtime friend of President Donald Trump surmises that the impact could dwarf that of the Great Depression.

Indeed, the commercial property market is under severe strain domestically and abroad due to forced shutdowns of retail and hospitality businesses during the COVID-19 outbreak.  The looming crisis in commercial real estate could eventually cause the Federal Reserve to relax some regulations, allow more forbearance on loans, and buy distressed assets directly by restarting the Troubled Asset Relief Program.

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With the growing popularity of Uber Eats, Grubhub, DoorDash and other food delivery services, many restaurants and other food service tenants (e.g., coffee shops) are now working diligently to increase their sales through delivery. Part of that process entails changes to their kitchen staffing and meal-preparation techniques, but another important element involves the use of dedicated parking spaces for takeout/delivery orders.

The online food-delivery apps are tapping into the public’s increasing aversion to cooking at home. For the first time ever in 2016, Americans spent more at eating and drinking establishments than on groceries, according to U.S. Census data. The delivery market grossed $30 billion in 2017, but Morgan Stanley estimates it could balloon to $220 billion within the next few years.

food-deliver-300x200The growth in food delivery has even led to the rise of virtual restaurants, which can only be accessed online. These establishments are discreetly nestled away in industrial parks, have no takeout window or signage, and their offerings can only be purchased via Grubhub and other delivery apps.

With the increased demand and competition in food takeout/delivery, savvy restaurateurs are now scrambling to make the necessary changes in order to take advantage of this fast-growing segment of the industry. The result of this changing dining landscape is creating the need for changes to the physical landscape of many malls and shopping centers, namely in the use of dedicated parking spaces for delivery/takeout visitors in order to enable them to make quick and easy stops.

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One of the retail sectors that is currently experiencing significant upheaval is the mattress industry.  Mattress Firm, the largest mattress retailer in the country, is closing hundreds of stores and scrambling to bolster its digital business as a result of significant sales declines.  Bed-in-a-box e-commerce mattress companies are sprouting up and beginning to expand to brick-and-mortar locations, but they are expected to continue to focus primarily on growing their online sales.

Analysts say overexpansion is at the heart of the industry’s troubles.  They point to the fact that there are now more mattress stores than McDonald’s restaurants in the U.S.  The end result is that the industry is in contraction, which comes at a difficult time for struggling malls and shopping centers while many other retailers are also flailing.

As landlords begin to receive rent reduction and concession requests from mattress store operators, they need to carefully consider and weigh their options.  This should begin with a thorough financial analysis of the value of the new lease rates that are being proposed, the long-term impact of the reduced lease payments on the property, the likelihood of leasing the space to a new tenant at comparable rates, and the costs and challenges that would stem from suing a tenant that may end up filing for bankruptcy. mat-store-300x200 This type of analysis can be very difficult to process, as it entails a clear-eyed look at the state of the market, the current vacancy and lease rates, and the marketing and commission costs that would be associated with securing a new tenant.

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Have you ever heard of this? If you are familiar with leases in the New York City area, you probably have.  But if you are not, you might be a bit surprised by it.  Like many legal issues that begin in either New York or California, the Good Guy Guaranty is now spreading beyond those borders, and if you are in the business of leasing space, you should become aware of it.

In essence, a Good Guy Guaranty is a pre-negotiated kick-out with the financial backing of a credit-worthy guarantor.  The guaranty is in place while the tenant is in possession, but if the tenant gives the landlord sufficient notice that it intends to vacate the premises and subsequently leaves the premises in good condition and as otherwise required by the lease, the tenant and the guarantor are both released.

shops-225x300The landlord benefits from it because it has a guarantor that backs the tenant and a tenant that surrenders possession when they vacate, thereby avoiding the need for the landlord to undertake eviction or abandonment litigation. The tenant benefits in that if it gives the landlord advance notice of its intent to vacate (usually anywhere from six to nine months) and is otherwise in compliance with the lease, it can close, be relieved of future liability and not be sued for damages.  And, the guarantor benefits in that if they make sure the tenant complies with the lease, the guarantor is never called upon to pay.

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Much has been written about the retail apocalypse, which began in 2010 and appears to have no end in sight with the recent bankruptcy filings by Sears and Toys R Us.  As the retail industry searches for ways to stem the tide of declining revenue, and online shopping continues to take its toll on traditional brick-and-mortar stores, one trend has emerged to bring mall owners a modicum of relief:  coworking in retail.

In shopping centers across the country, stores that have been left vacant by retailers are being converted into shared office space.  Coworking space inside of both enclosed and open-air malls is predicted to grow by an annual rate of 25 percent through 2023, according to a recent report from commercial real estate service provider Jones Lang LaSalle (JLL).  Shared office space is expected to reach approximately 3.4 million square feet of retail space by then, concluded JLL.

cowrk-in-mall-300x217Part of the attraction of these coworking spaces for mall owners is that such spaces often serve as incubators for new retail and even service companies that could eventually mature to operate their own stores in the future.  Mall and shopping center operators also like the fact that these coworking tenants bring added foot traffic to the property.  The business owners and employees who work in these spaces represent ideal target customers and prospects for all of the other stores, boutiques and restaurants at the property.

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The creation of a viable tenant mix is a critical component for practically every shopping center, so retail leases often have a defined “use” clause that limits a tenant’s use of the premises.  In certain cases, they also contain “exclusives” giving one tenant the exclusive right to their particular use or to sell certain items, and prohibiting all other tenants from that use or from selling those items in the center.

These “exclusive use clauses” many times have carve-outs to allow another tenant to sell some of the product lines covered by the competitor’s exclusive.  This is very common in restaurant exclusive use clauses where, for example, a steakhouse might have an exclusive on “steakhouses” in the center, but its lease contains a carve-out allowing other restaurants to have a steak plate on their menu.  The idea here is that most people who want to have steak are going to go to the steakhouse as opposed to the Italian restaurant at the same center that happens to have one steak item on its menu of pastas, pizzas and salads.

shopping-center-2-300x200The remedies for violations of exclusives are generally rather severe.  The tenant whose exclusive is being violated may sue or pay a reduced rent, and oftentimes they will resort to cancelling their lease and vacating the space.  As a result, these clauses are always heavily negotiated and must be carefully drafted.

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ORivera2014By:  Oscar R. Rivera

For commercial real estate landlords, guaranty agreements requiring the principal owners of small businesses to personally guaranty the obligations of the corporate tenant are standard operating procedure. In addition, commercial landlords oftentimes also require the corporate guaranty of a parent or other affiliated company, if the creditworthiness of a corporate tenant or franchisee is questionable.  One question that is often posed is whether waivers of defenses by guarantors in such guaranty agreements are enforceable?  Fortunately, for property owners in Florida, if the waivers are properly drafted, the answer is yes.

The waiver of defenses paragraph helps property owners avoid costly and disruptive litigation if legal action becomes necessary to enforce a guaranty.  Guaranty agreements containing language that clearly and unambiguously waives defenses to the enforcement of the guaranty have been strictly construed and enforced by Florida courts.

A typical waiver provision reads as follows:

“Guarantor hereby expressly waives (a) notice of acceptance of this Guaranty; (b) presentment and demand for payment of any of the Liabilities of Tenant; (c) protest and notice of nonpayment, nonperformance, nonobservance or default to Guarantor or to any other party with respect to any of the Liabilities of Tenant; (d) all other notices to which Guarantor might otherwise be entitled; (e) any demand for payment under this Guaranty; and (f) any and all defenses relating to Landlord’s failure to perfect a security interest in Tenant’s property and/or seize or attach any other collateral.”

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For many businesses, finding the right location at the best possible lease rates and with the best terms is among their most pressing and impactful challenges for the future of the enterprise.  The business location and the costs of leasing the space can often be among the foremost determining factors in a company’s long-term success.  As such, the negotiation of the terms of commercial leases is typically of the upmost importance.

For tenants, the best way to start is for the principals to gather information on the neighborhoods and locations that hold the most promise.  In addition to turning to highly experienced and qualified commercial real estate brokers for guidance, they should do their own research and become educated.  Prior to any meetings with prospective landlords and their representatives, they should take the time to conduct a thorough SWOT analysis to identify the strengths,cre2-300x237 weaknesses, opportunities and threats related to every prospective property.

This exercise, which is also beneficial for landlords to employ when assessing their lease offers, will help to enable businesses and organizations to develop a list of the priorities that they seek for each and every location.  Both landlords and tenants can use this form of analysis to create an agenda for their discussions.

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