Subscribe by Email

Articles Posted in Commercial Leasing

A ruling last week by the Fourth District Court of Appeal serves as a telling reminder for commercial real estate tenants of the standards that must be met in order to justify their early termination of commercial leases based on the theory of constructive eviction.

In the case of Griffin Industries, LLC v. Dixie Southland Corporation, tenant Griffin leased a warehouse space in Davie, Florida, from landlord Dixie Southland for a five-year term, and it was one and a half years into its lease when a dispute ensued. Griffin decided to purchase a property that would suit its needs in Pompano Beach, and three weeks after this acquisition the Town of Davie posted a “Courtesy Correction Notice” directing that it “discontinue pumping water into the street, remove exterior pipe & cap-off” within six days or face potential fines.

Griffin e-mailed the notice to Dixie, and in response the landlord removed and capped off the offending pipe in compliance with the municipal notice. It implemented a plan to pump excess water through PVC pipes onto different portions of the property, and the local building department re-inspected the property and closed its file.

Griffin continued to inquire with Dixie about its remedy for the drainage, and Dixie enlisted a contractor to design and implement a permanent onsite drainage system. However, this did not seem to satisfy Griffin, and its attorney wrote to Dixie to indicate that he had visited the property and witnessed illegal discharges which were still occurring. As a result, the attorney’s letter indicated that Griffin would be terminating its lease in June 2009, which is when it vacated the property and ceased its monthly payments.

Dixie, which subsequently leased the property to another tenant for a three-year term for $4,000 less per month than it had been receiving from Griffin, sued Griffin, which counterclaimed for breach of the lease and also raised several affirmative defenses. The trial court entered judgment in favor of Dixie and awarded damages for unpaid rent and sales tax through June 2010.

4dca.jpgGriffin filed an appeal seeking a reversal of the trial court’s ruling because it contended that it was legally entitled to terminate the lease because Dixie “created and refused to correct unpermitted storm water and drainage systems, that Dixie breached the Lease by failing to ‘keep and maintain in good condition’ the storm water and drainage systems, that Dixie constructively evicted Griffin by failing to correct illegal storm water and drainage systems, and fraudulently induced Griffin to enter into the Lease by falsely representing that ‘the property had all the permits.'” The tenant also contended that, alternatively, the amount of damages awarded should be reduced to reflect rent through an earlier date than that ordered by the trial court pursuant to a clause in the addendum to the lease.

In its unanimous opinion, the appellate panel found:

“A tenant is not entitled to terminate a lease based on a theory of constructive eviction unless the premises are unsafe, unfit, or unsuitable for occupancy for the purposes for which they were leased [citation omitted]. Other than the events that transpired during the thirty-four days between the issuance of the Courtesy Notice and Griffin’s Termination Letter, the record is devoid of evidence of complaints on the part of Griffin with the storm water drainage system on the Property. There is no evidence of any interference with Griffin’s operations or of any safety, fitness, or suitability issues prior to the issuance of the Courtesy Notice.

“To the extent there may have been an illegal condition on the Property when Griffin sent the Termination Letter, the Town of Davie already had inspected the Property and closed its file; no fines had been imposed; there was no pending Courtesy Notice or other form of governmental citation wherein the possibility of fines being imposed existed; and Dixie had engaged and entered into a written contract with an engineering firm to design an onsite drainage system for the Property. None of these facts were in dispute. Thus, any issues Griffin may have had relating to the storm water drainage system either had been, or were, in the process of being addressed by Dixie prior to the Termination Letter.”

The appellate court also found that Griffin is liable for the rent plus sales and property taxes and insurance not paid by the new tenant for the remaining term of the lease.

The Fourth DCA’s ruling in this case should serve to remind commercial real estate tenants of the strict standards that must be met to justify a lease termination based on a theory of constructive eviction. Our firm’s other real estate attorneys and I write regularly in this blog about important business and legal issues for commercial real estate tenants and landlords, and we encourage Florida real estate industry followers to submit their email address in the subscription box at the top right of the blog in order to automatically receive all of our future articles.

For the last several years, the state legislature has considered the possibility of rolling back Florida’s tax on commercial real estate lease payments, and the issue is back on the legislative agenda for 2015 with the introduction of a bill last week in the Florida Senate. I was very pleased to have had the opportunity to participate in last week’s International Council of Shopping Centers Florida Legislative Conference in Tallahassee, and our meetings with the lawmakers and their representatives proved to be very productive in persuading them to keep this measure in mind.

Because Florida is the only state that imposes a sales tax on the sums that businesses pay to rent commercial space, this tax has a negative effect on the efforts of economic development councils and government to attract major employers and promote the growth of industries in the state. For the retail industry in Florida, this tax has been particularly onerous. The industry is struggling to compete with online retailers, and the tax makes it especially difficult because most of the online sellers have their facilities in states that do not impose such a tax.

As Gov. Scott has noted in previous years, the sales tax on commercial rent costs Florida businesses $1.4 billion per year. Its reduction “will make it more affordable for businesses to lease space, so they can keep more of the money they earn and create more jobs,” said Gov. Scott. “Florida is the only state that imposes this tax, and we must keep working to make Florida the best place in the world to start and grow a business.”

Flalegislature.jpgOur firm’s other real estate attorneys and I are pleased that this issue is once again being considered by the Florida legislature, and we will monitor its progress during this year’s session and post a final update on its outcome in the coming months. We write regularly in this blog about important legal and business issues for the commercial and residential real estate industries in Florida, and we encourage industry followers to enter their email address in the subscription box at the top right of the blog in order to automatically receive all of our future articles.

In a deal that was more than two years in the making, I recently represented the owner and developer of 220 Alhambra Circle in the sale of the office tower to Mercantil Commercebank for $75 million. Mercantil has been the largest tenant in the building for more than 15 years.

The bank has acquired one of the premier class A office towers in the Coral Gables market (pictured below), which has been one of the largest bright spots in the South Florida office market. Recent reports in Globe Street (www.globest.com) and The Real Deal (www.therealdeal.com) chronicle how the Coral Gables office market continued its momentum during the fourth quarter of 2014. The reports note that two new tenants recently inked leases at The Alhambra, which is the 14-story office tower that is interconnected with the Hyatt Hotel.

220Alhambra.jpgFiduciary Trust International of the South, a division of Franklin Templeton Investments, signed a lease for 12,500 square feet at the property, where it is relocating from its current space in downtown Miami. Pipeline Workspaces, a shared office space provider, signed a lease for 14,000 square feet at 95 Merrick Way, which is also part of the same complex.

According to statistics gathered by CBRE, the Coral Gables office submarket continues to lead the way in terms of office market absorption. Tenants leased about 195,000 square feet of office space in Coral Gables during the first three quarters of 2014, which is substantially more than any other submarket in Miami-Dade County.

For the second consecutive year the Florida Legislature has failed to pass a bill to cut the state’s taxes on commercial real estate leases. Gov. Rick Scott included a reduction in the tax rate on commercial rent as part of his proposed budget to the lawmakers, but the bill to cut the tax from six to five percent failed to gain enough support in the Florida Senate.

As I wrote in this blog on March 17, this tax has a negative effect on the efforts of economic development councils and government to attract major employers and promote the growth of industries in the state. For the retail industry in Florida, this tax has been particularly onerous. The industry is struggling to compete with online retailers, and the tax makes it especially difficult because most of the online sellers have their facilities in states that do not impose such a tax.

The businesses that lease space in Florida and the real estate professionals who work with them at least won a small victory after seeing this measure fail twice. House Speaker Will Weatherford proposed a comprehensive study before the start of the next session aimed at determining the effect of reduced commercial lease taxes on state revenue.

Florida legislature.jpgOur other South Florida real estate attorneys and I encourage the state legislature to enact this measure next year and rollback this tax that creates an unfair burden exclusively on the businesses that lease space in Florida. We will continue to monitor and write about important business and legal issues for the Florida real estate industry in this blog, and we encourage industry followers to submit their email address in the subscription box at the top right of the blog in order to receive all of our future articles.

Parties negotiating a retail lease will often discuss a kick out clause, which allows for termination of the lease before the expiration of the term if a specific sales threshold has not been met by the tenant. Typically the tenant requests the clause, since if it’s not reaching that threshold it may not be generating enough revenue to justify continuing operation of its business at that location. Because the lease may be structured to pay the landlord percentage rent, the landlord may want a termination right as well if it believes that a stronger tenant would lead to greater sales. As such, a kick out clause can be structured to give either side, or both, a right to terminate the lease.

If the landlord agrees to a tenant’s right to terminate, the parties should discuss what conditions would apply. For example, if the landlord has invested in improvements to the tenant’s space and those improvements have not yet been fully amortized, the parties should consider whether the tenant will reimburse landlord for the unamortized portion. Likewise, if the landlord paid a broker’s commission, then the unamortized portion of those funds could be paid by the tenant as well.

Assuming the parties agree on the financial terms, timing is another important issue. Typically whichever party is agreeing to the other having a termination right – whether it be landlord or tenant — will want to have some significant period of time elapse before the termination right becomes effective. In this way the landlord is protected from the risk of the tenant giving up too soon, and the tenant is protected from the landlord trying to replace it with another tenant. For the same reason, the party agreeing to grant the other a termination right may want that right to be a one-time election which must be made in a short period of time. Without that window, a tenant with a termination right could fail to meet the threshold, decide its business is sufficient to stay open for awhile, and thereafter have no commitment to stay open any longer than it pleases. At that point, it has a continuing right to cancel the lease. The same could be said for the landlord. If the tenant misses the threshold but the landlord is satisfied with fixed rent, it could keep the lease in place until it finds a better opportunity and then terminate at that time.

A kick out clause can be critical to a party to a retail lease. For a tenant, it may mean the difference between merely closing a failing venture with minimal personal loss or risking the loss of all of its assets. For a landlord, it allows an owner to increase revenue by finding a tenant that is better suited to its location.

For both parties, it is important to remember that the kick out clause is not just a tool, but one that may inadvertently become a double-edged sword. To avoid that risk, both the landlord and the tenant need to consider the positive and negative implications of each side having a termination right under a kick out clause and determine whether it is a good solution for them.

The recent proposal by Gov. Rick Scott and several state legislators for the 2014 legislative session to reduce Florida’s sales tax on commercial leases is a positive indicator that this tax is going to diminish for the businesses that rent space in the state. Similar bills for the 2013 session were not passed by the legislature, but they appear to have effectively laid the groundwork for the support and passage of these measures for the 2014 session.

The Governor’s proposed budget includes a reduction of one half of one percent, which would bring the tax rate down from the current six percent to 5.5 percent and would save the businesses paying the tax a total of approximately $104 million per year. The House and Senate each have their own bills pending, and the bills may actually result in a full one percent drop in the rate with additional reductions in the years to come.

Because Florida is the only state that imposes a sales tax on the sums that businesses pay to rent commercial space, this tax has a negative effect on the efforts of economic development councils and government to attract major employers and promote the growth of industries in the state. Commercial Lease sign.jpg For the retail industry in Florida, this tax has been particularly onerous. The industry is struggling to compete with online retailers, and the tax makes it especially difficult because most of the online sellers have their facilities in states that do not impose such a tax.

As the Governor noted in his announcement of the proposal, the sales tax on commercial rent costs Florida businesses $1.4 billion per year. He said: “This reduction will make it more affordable for businesses to lease space, so they can keep more of the money they earn and create more jobs. Florida is the only state that imposes this tax, and we must keep working to make Florida the best place in the world to start and grow a business.”

Our other South Florida real estate attorneys and I applaud these efforts by the Governor and the legislature to begin to rollback this tax that creates an unfair burden exclusively on businesses that lease space in Florida. We will continue to monitor and write about important business and legal issues for the Florida real estate industry in this blog, and we encourage industry followers to submit their email address in the subscription box at the top right of the blog in order to receive all of our future articles.

In the past, the Florida Department of Revenue has, at times, demanded the payment of sales tax on property improvements made by commercial real estate tenants if the improvements became the property of the landlord at the end of the lease term, which is practically always the case. Regardless of whether the property improvements were not required by the landlord under the terms of the lease or were not made to the landlord in lieu of rent payments, the state sometimes considered such improvements to be rent and therefore subject to sales tax. However, the state’s position was rejected in a decision in 2011 by the First District Court of Appeal, and now, after much lobbying by the commercial real estate industry, with the International Council of Shopping Centers being one of the loudest voices, the Department of Revenue has issued a Technical Assistance Advisement to clarify its new stance on the matter.

In its “Technical Assistance Advisement 13A-023,” the Department indicates that it will follow the appellate ruling and not hold payments made by tenants for leasehold improvements to be subject to sales tax under the following conditions:

  • The improvements are made to put the premises in a condition suitable for the operation of the tenant’s business.
  • There is no requirement from the landlord to spend a specific or minimum amount of money on the improvements.
  • There is no credit given against rental payments to the tenant for the completion of the improvements.
  • The improvements are not explicitly classified as rent, additional rent, rent-in-kind, or in lieu of rent.
  • There is no evidence that there was an attempt to reclassify rental payments to avoid the tax.

While this decision was issued by the Department of Revenue under a private letter ruling and is therefore only binding on the Department for the party who requested it, the guidance appears to reflect the Department’s current position on the issue.

Restaurant remodel.jpgBecause this has been a contentious issue and the Department of Revenue’s stance was rejected by the appellate court, it stands to reason that the Department will closely scrutinize leasehold improvements by tenants to determine if the conditions for the sales tax exemption were met or if the improvements were in any way in consideration for the lease. Fluctuations in lease payments that may appear to be tied to the completion of property improvements by tenants will likely be viewed as red flags calling for detailed reviews to determine if the improvements were actually in consideration for the tenant’s lease. In addition, if the landlord receives any kind of exclusive benefit to utilize the tenant’s improved facilities upon the completion of the renovations, the department may deem the improvements to have been made in consideration for the lease.

This ruling represents a very positive departure by the Department of Revenue from its previous stance. All commercial property owners, tenants and listing agents involved in leases in which the tenant will pay for leasehold improvements should take careful note to adhere to these guidelines if they wish to avoid sales tax liability for the improvements. Our firm’s real estate attorneys are able to assist clients in the drafting of lease language to accommodate the Department’s new guidelines.

Our other real estate attorneys and I write about important legal and business issues for the Florida real estate industry in this blog, and we encourage industry followers to submit their email address in the subscription box at the top right of the blog in order to receive all of our future articles.

Founded in 1957, the International Council of Shopping Centers (ICSC) is the global trade association of the shopping center industry with more than 60,000 members in the U.S., Canada and over 90 other countries. I have had the honor of leading numerous courses and seminars at the organization’s events in recent years, and in the next few months I look forward to continuing these presentations at two of ICSC’s professional development events.

On Monday, March 10, I will lead the three-hour course titled “The Economics of a Lease: Rent, Escalations and Pass-Throughs” at the ICSC University of Shopping Centers, which is an advanced level educational program aimed at elevating each attendee’s level of knowledge of the industry by learning directly from experienced professionals. The course will cover the strategies and tactics of negotiating monetary provisions, including minimum and percentage rent clauses, security deposits, operating costs, real estate taxes and merchants/marketing fund payments. Attendees will be led through an analysis of the key elements of each of the lease provisions: base rent, percentage rent, operating costs, real estate taxes, marketing funds, security deposits, utilities and services, and tenant improvement allowances and their monetary impact interrelationship with the net return to the landlord as well as to the tenant. Sample clauses, included in the materials, will be distributed and dissected in an effort to analyze their strengths and weaknesses.

ICSC.jpgThe next University of Shopping Centers will take place March 10-12, 2014, on the campus of the Wharton School of the University of Pennsylvania in Philadelphia. For additional information and online registration, visit www.icsc.org/2014UV.

I will also be presenting a course titled “Construction Law, Insurance and Ethics” at the ICSC John T. Riordan School for Retail Real Estate Professionals on Wednesday, April 2. The course will take a fresh look at various construction law and insurance protocols. Topics will include basic real estate and construction contracts, insurance and how it relates to real property coverage, insurance documents, and practicing good ethics in the workplace. The course will cover the purpose and content of contracts and other legal documentation, and the general tenets of construction, development, and real estate law. It will review insurance principles and practices, and the various types of policies that are common to development, design, and construction activities and practices.

The event will take place at the Doubletree Paradise Valley Resort in Scottsdale, Arizona, March 30 to April 3, and information and registrations are available at www.icsc.org/2014SAZ.

A retail tenant leasing space in a shopping center generally knows what to expect with regard to the physical space and the basic lease terms that will apply, since shopping centers and shopping center leases are designed for retail uses. When a retail tenant leases space in an office building, different issues arise that should be addressed before the landlord and tenant commit to the deal.

If, for example, the retail tenant is a restaurant, the tenant should confirm that the building provides appropriate access for trash removal and deliveries. In a shopping center or enclosed mall, most tenants have rear doors or back corridors that allow for trash removal. The tenant should confirm that similar provision has been made in the office building.

Restaurant 2.jpgVentilation can also become an issue for a restaurant tenant. Retail centers are often single story, so contractors have roof access to avoid complicated ventilation issues. If the office building is multi-level and a restaurant use was not contemplated during the design phase, the landlord and tenant will need to work together to ensure that the restaurant can operate within the building’s physical parameters.

All retail tenants, not just restaurant operators, need to be sure that other potential issues are addressed. These include, among others, building hours, parking, operating expenses and even HVAC service. Retail tenants may have longer business hours and need adequate adjacent parking available for customers. They also may have different needs regarding building services. Often an office building will provide HVAC service during specific building hours, with tenants responsible for paying additional costs for service outside of those standard hours. The retail tenant will need to investigate whether they will be using their own HVAC system so as to avoid that extra cost. If the retail tenant is installing its own system, it also wants to confirm that the landlord is not charging for HVAC service.

These and other relevant issues should be addressed in the lease to avoid future misunderstandings, which in and of itself presents another potential challenge. When a tenant signs a lease for space in a shopping center, the lease form is generally drafted with all retail users in mind. In an office building, the landlord may be using an office lease form for all tenants. The office form can be revised to accommodate a retail tenant’s specific concerns, but the tenant will need to negotiate the lease carefully so that all of its particular issues are addressed.

Our other real estate attorneys and I write about important real estate business and legal matters in this blog on a regular basis, and we encourage industry followers to submit their email address in the subscription box at the top right of the blog in order to automatically receive all of our future articles.

A request for an estoppel certificate can illustrate the tension that exists between a landlord and tenant. An estoppel certificate contains a certification as to specific facts. So, for example, when a landlord refinances an office building or shopping center, the landlord’s lender may require that the landlord obtain estoppel certificates from all tenants. A tenant’s estoppel certificate typically will confirm that the lease is in full force and whether the landlord is in default, and it will include various other facts, such as duration of the term, rent, rights of renewal and similar points that are important to a lender.

If a tenant is diligent in its communications regarding the property and the lease, then the landlord should not be surprised if the estoppel certificate indicates a landlord default. If, however, the tenant has not notified the landlord previously of some failure to perform and the tenant lists various defaults in the estoppel certificate, the news will be both alarming to the landlord and a threat to closing.

Some tenants innocently deliver this information for the first time in an estoppel certificate. They are busy running their businesses and may not have taken the time previously to confirm that the landlord has been meeting its obligations. For these tenants, the request for an estoppel certificate triggers a more detailed review, as they cannot risk delivering a clean estoppel certificate – one which does not mention a landlord default – if there is a default outstanding because they may not be able to make a claim in the future for such a default. The tenant may still have protection if the receiving party knows that the information included is untrue due to the omission of certain facts, as such party may not rely on false information to prevent a later claim, but it is a risk for the tenant to rely on such knowledge.

Other tenants may see the request for an estoppel certificate as an opportunity. They know that the landlord is under a tight time frame to close its loan, and rather than argue over a sudden complaint or repair request the landlord may merely complete the task to obtain the clean estoppel certificate. This leads these tenants to make requests that are not obligations of their landlords under their leases.

In our experience, such actions by a tenant are a mistake. If the tenant issuing the demand is a major tenant, then it has sufficient leverage to request repairs at any time without threatening to hold up a closing. However, if the tenant is using its leverage either to gain something unreasonable or merely because it failed to perform its diligence on a regular basis, the landlord will understand what is happening and may react accordingly. It is also notable that in certain jurisdictions, the tenant may be liable for damages for the interest savings lost by the landlord if it is unable to close its loan.

Even if the landlord agrees to an unreasonable demand, the delivery of the clean estoppel certificate by the tenant may not resolve the issue from the landlord’s perspective. When the tenant has its own request in the future, whether for an estoppel certificate or anything else needed from the landlord, it may find that the landlord has become less amicable. For that reason any landlord or tenant that sees the delivery of an estoppel certificate as a tool rather than an obligation should be prepared for all possible responses.

Contact Information