Articles Archives - Page 2 of 5

Real Estate Contracts: The Complex and Often Overlooked Indemnity Clause

Published: April 21, 2022

“Let’s leave that to the lawyers.” It’s a familiar refrain that I hear often as contract negotiations drag on between parties. After the primary deal points in a contract have been agreed upon, many clients believe that the remaining terms can be easily resolved without their involvement. Unfortunately, this is rarely the case, as what some clients perceive to be boilerplate or “standard” could become critically important if a dispute arises relating to the transaction.

Jacqueline Simonovich in Law360: Transforming Law Firms’ Diversity Intent Into Real Progress

Published: April 7, 2022

by Jacqueline M. Simonovich

In the summer of 2020, we saw a flurry of diversity and inclusion activity at law firms in response to the murder of George Floyd and the general social unrest in this country at that time. Many firms ostensibly renewed their diversity and inclusion initiatives.

While these renewed commitments were well-intentioned, it was hard not to wonder — would all this talk actually translate into action? Or would these actions surpass the performative and translate into real, measurable progress?

COVID-19 Commercial Tenant Eviction Update

Published: February 4, 2022

by Mark E. Ellinghouse

As March approaches, we are poised to hit the two-year anniversary of California’s March 4, 2020, State of Emergency Proclamation relating to the COVID-19 health crisis. In the months that followed, we watched federal, state, and local governments adopt myriad laws, rules, emergency orders, proclamations, declarations, ordinances, and mandates, creating a patchwork of rules and regulations for commercial real estate that defied generalization or statewide compliance practices. The market may never look exactly like it did before COVID-19 (note our last article: to-go alcoholic drinks are here to stay!). As concern over the virus appears to be waning, we are seeing jurisdictions generally, but not uniformly, remove their COVID-19 commercial tenant eviction protections*. We therefore thought it would be appropriate to highlight a few of the notable policies which are in effect in some of California’s markets. Of course, most of the rules listed below have exceptions, and exceptions to the exceptions, so please consult your local laws (or counsel) before proceeding.

New California Laws Affecting Real Estate in 2022

Published: January 27, 2022

by Mark E. Ellinghouse

After surviving holiday family dinners, a few-too-many champagne toasts, and a record-breaking snowstorm, this team is ready to turn its sights to a new year and the exciting projects that are in store. To kick off our 2022 newsletter season (and hopefully in better fashion than the Sacramento Kings), we thought it would be helpful to summarize a few of California’s noteworthy new-for-2022 laws.[1] There aren’t any earth-shattering changes that will require substantial deviation to standard operating procedures, but some represent new requirements that will need to be considered in upcoming projects.

The Importance and Dangers of Letters of Intent

Published: November 23, 2021

by Mark E. Ellinghouse

Despite a global pandemic and a bingo-card full of natural disasters and calamities, the commercial real estate market has been extremely active over the past two years. While there are some signs that activity will be less frenetic in the upcoming year, most commentators project continued growth, development and overall volume. Many of our clients are already eyeing next year’s targets, beginning the negotiation process with the hopes of getting these deals under contract in the first quarter of 2021. Given these efforts, we thought it might be helpful to offer a friendly reminder regarding the importance and dangers of letters of intent.

Recent Fires Serve as Reminder That Casualty Will Always be a Hot Issue

Published: October 11, 2021

by Mark E. Ellinghouse

Fires have played a major role in the history of California. Not only have these disasters repeatedly left a trail of devastation through the State’s forests and other natural areas, but recent fires have been noteworthy in their damage to developed areas such as Paradise and South Lake Tahoe. The impacts will be felt for years, as families struggle to rebuild their homes and charred trees litter freeways and hiking trails. These effects are a good reminder to make disaster plans, including identifying key heirlooms and records and reviewing insurance policies for adequacy and comprehensiveness.

Shauna Correia in the Sacramento Business Journal: If Asked For a Religious Exemption From A Vaccine Mandate, Be An Optimist

Published: October 11, 2021

In a contributed article for the Sacramento Business Journal, Shauna Correia discusses an extremely challenging issue that many businesses and HR professionals are facing – how to evaluate religious exemption requests from vaccine mandates. The October 8, 2021 article explores two important questions that arise:

What sort of religious belief or religious practice qualifies for a religious exemption?
How do employers know whether a proposed accommodation is reasonable or an undue hardship?

Read the full article in the Sacramento Business Journal, here. (paywall may apply)

How New Legislative Policy May Affect COVID-Related Lease Disputes

Published: September 13, 2021

by Mark E. Ellinghouse

Over the last eighteen months, we have been forced to devote significant resources to interpreting how largely-forgotten legal doctrines apply to real estate contracts in a post-COVID world. These principles, including force majeure, frustration of purpose, and impossibility/impracticability, were generally overlooked in real estate transactions until life-altering global events required their use. Indeed, many of the cases interpreting these doctrines date back to the world wars that dominated the first half of the twentieth century. Modern practitioners often did not even address these concepts in their agreements.

Now, these policies have come front and center, driving the discourse between parties trying to adjust their expectations to an entirely different business environment. As I have previously discussed, the judicial process is slow to provide guidance on these issues, failing to provide many opportunities for expedited resolutions and the judicial policy which flows from them. Legislators have, perhaps unsurprisingly, been happy to step into this role, and we have seen a tremendous amount of new policy designed to address the impact of COVID on existing and future contractual relationships. One such new policy is particularly noteworthy.

As a quick background, the frustration of purpose doctrine generally provides that where the fundamental reason of a party entering into a contract has been frustrated by an unanticipated, supervening circumstance which substantially destroys the value of that contract and purpose, that party can be discharged from its duty to perform its contract and the contract can be extinguished. Historically, the defense is available only when the frustration is substantial. It is not enough that the transaction will be less profitable than originally anticipated, or even that one party will sustain a loss; rather, the frustration must be so severe that it is not fairly regarded as within the risks assumed by that party under the contract.

On August 4, 2021, the San Francisco Board of Supervisors passed Ordinance 122-21, which provides that for certain commercial tenants, COVID-19 is presumed to have frustrated the purpose of the lease, excusing these tenants’ obligation to pay rent. This ordinance has essentially rewritten how the frustration of purpose doctrine applies, allowing temporary interruptions of normal operations, such as during the COVID-19 pandemic, to be deemed sufficient to allow for relief. While the ordinance does not override an agreement to the contrary and sunsets after 2025, it should assist small retailers who might otherwise be left without relief.

I find this ordinance disconcerting for several reasons. First, by altering the application of a fundamental legal doctrine, the Board of Supervisors undermines at least a century of existing case law, potentially creating even more uncertainty regarding how these doctrines apply now and going forward. Second, the ordinance ignores the interests of landlords, who risk losing their income stream due to COVID and may not be any more capable of sustaining their business than the tenants protected by the ordinance. Finally, the approach manipulates a legal doctrine to achieve its purpose rather than attacking the issue head-on by, for example, offering cash, tax, or other incentives to parties affected by COVID.

Of course, San Francisco is one of perhaps the most progressive political communities in the country. We have not seen similar enactments in other jurisdictions and I do not predict they will follow. The ordinance highlights the importance of understanding the political climate in which properties are located, as these sorts of policies may be more or less prevalent depending on such factors. While the overall impact of the Board of Supervisors’ ordinance is unlikely to have mass application or significantly change the market, it is a notable development in the global reaction to the unique circumstances presented by a global pandemic.

NY Court of Appeals Decision Highlights Growing Trend of Higher Courts Ruling Against COVID-Related Lease Defenses

Published: August 4, 2021

by Mark E. Ellinghouse

Since the start of the COVID-19 health crisis, we have been approached by both landlord and tenant clients asking how COVID affects their leasehold obligations. While we have generally encouraged our clients to approach these matters in an honest and amicable manner with a focus on resolution, disputes have arisen between owners and occupiers. Legal resolution does not come quickly, as the legal process tends to delay final adjudication for several years. Some decisions have been rendered in interim proceedings (such as bankruptcies), but on the whole, there simply has not been enough time for COVID-related disputes to proceed through both the trial and appellate levels and provide guidance on how these lawsuits will be resolved.

A recent decision by a New York appeals court is perhaps one of the first to provide some clarity regarding how an appellate court will interpret how common COVID-related defenses will apply in a lease enforcement action. In The Gap, Inc., v. 170 Broadway Retail Owner, LLC, the tenant (The Gap) sued its landlord under theories of casualty, frustration of purpose, and impossibility, seeking to avoid its obligation to pay rent and terminate its lease in response to the COVID-19 pandemic. When the landlord filed a motion to dismiss the tenant’s complaint, the trial court denied the motion, finding that the tenant had stated a valid claim and providing implied approval that these arguments could be used by tenants to avoid their leasehold obligations.

On appeal, the appellate court unanimously overturned the trial court’s decision. The judges first concluded that the casualty provision of the lease was not triggered by COVID-19 because no physical loss or damage had occurred. The court then addressed the tenant’s equitable arguments, finding that frustration of purpose did not apply because the tenant was not completely deprived of the benefits of its premises, and it was not impossible for tenant to perform its obligations under the lease such that the lease could be rescinded. The tenant was ordered to pay all back rent and continue paying rent in accordance with the lease going forward.

Although not binding in California, this decision is emblematic of the trend among courts reviewing the impact of COVID-19 on commercial leases. On the whole, most courts have concluded similarly to the New York appeals court, deciding that tenants must bear the risk of a pandemic absent some unique circumstances or lease terms that would vary this conclusion. This is true even in the business interruption insurance context, leaving tenants without many legal options for relief. Hopefully, the various governmental stimulus packages have supported these tenants’ business operations sufficiently to weather the worst of the pandemic and take advantage of what appears to be a booming economic recovery. For landlords, these decisions are welcome support for opposing any tenants who attempt to opportunistically rely on COVID to justify temporary or permanent relief from their leases.

The Importance of Lease Drafting: Lease Language Takes Center Stage in “Cinemex”

Published: April 6, 2021

by Mark E. Ellinghouse

When in the throes of protracted lease negotiations, frustrated clients often ask me whether a proposed term is truly necessary to the contemplated transaction. Most clients start these discussions with the goal of achieving a fair form of lease, but as consideration of the minutiae of lease provisions continues, clients typically hit a point where they no longer wish to spend any more money on legal fees and simply want to “get the deal done.” This sentiment is both understandable and reasonable, especially where the risks associated with a provision may not outweigh the cost in legal fees required to resolve it in a favorable manner. This sentiment can also cause mistakes, however, if either side is so committed to consummating a transaction quickly that it is willing to sacrifice clarity or accuracy in its lease.

A recent decision out of a Florida bankruptcy court highlights the importance of the language of a lease, as something as simple as a misplaced phrase can have disastrous results. The case, In re Cinemex[1], involved a movie theater operator who filed for Chapter 11 bankruptcy protection and sought to avoid its obligation to pay rent under one of its leases pursuant to a force majeure provision. That provision excused either party’s obligation to perform its obligations under the lease for certain enumerated conditions as follows:

If either party to this Lease, as the result of any … (iv) acts of God, governmental action, condemnation, civil commotion, fire or other casualty, or (v) other conditions similar to those enumerated in this Section beyond the reasonable control of the party obligated to perform (other than failure to timely pay monies required to be paid under this Lease), fails punctually to perform any obligation on its part to be performed under this Lease, then such failure shall be excused and not be a breach of this Lease by the party in question, but only to the extent occasioned by such event.

Cinemex, the tenant, relied on the fourth subsection to circumvent its rental obligations, claiming that the Florida Governor’s orders closing movie theaters fell squarely within the “governmental action” exemption. The Landlord argued that the subsequent parenthetical (emphasized in bold above) carved out Tenant’s obligation to timely pay rent from this exception. The carve-out on which the Landlord relied is very common in commercial leases, where landlords insist on the continued payment of rent regardless of the circumstances.

The court found that, because of its placement immediately following the fifth subsection (for matters beyond the reasonable control of a party) rather than before or after the entire five-subsection list, the Landlord’s carve-out only applied to the fifth subsection and did not apply to the fourth subsection. As a result, the Tenant was permitted to claim application of the force majeure provision and was excused from its obligation to pay rent during the period in which the governmental action prevented its operations at the premises. This was undoubtedly not the Landlord’s intent, and resulted in lost rent to the Landlord.

This case is a good reminder that the specific language of a lease, and its placement within the document, can be critical to determining its application. When lease negotiations bog down, it can be difficult for clients to appreciate how a provision can be applied or why it is so important, especially when the negotiations have been ongoing for weeks or months. But part of the reason clients hire attorneys is to ensure that this language is drafted precisely to have its desired effect. As the Cinemex decision illustrates, inartful drafting can lead to disastrous results for parties to a lease (the court in Cinemex conclude the lease was not a “well drafted document”). While they can be stressful and expensive, protracted lease negotiations are sometimes necessary to ensure that the lease matches the parties’ intent and will be interpreted exactly as the parties desire.

[1] In re Cinemex U.S. Real Estate Holdings , CASE NO. 20-14695-BKC-LMI (Bankr. S.D. Fla. Jan. 26, 2021).