Adaptive Reuse Of Underutilized Real Estate

Cool Projects – A Love Affair Revisited

We are entering a new frontier for adaptive re-use. The worldwide COVID-19 pandemic has left the urban commercial landscape in tatters. Shuttered vacant commercial space is commonplace throughout cities and towns. Doors and windows are boarded-up in shopping districts and entertainment districts that were thriving as recently as February 2020. Some have become barely recognizable.

Looking to the Future

What is to become of this vast inventory of vacant retail space, shuttered restaurants, empty hotels and office buildings, abandoned shopping malls, cavernous and empty theaters, stranded travel destinations, and more? Who will have the vision and courage to adapt and redevelop these properties into newly viable economic jewels? And when?

Make no mistake; it will happen. And it’s likely to happen much more quickly than you think.

While many are just beginning to peak their cautious heads out from under their COVID blankets, value-add developers are assembling to scoop-up valuable assets to be reimagined and repositioned for economic glory. If you believe the residential real estate market is hot, hold onto your collective hats. There are enormous profits to be made in commercial real estate and new business. These COVID-depressed sectors have struggled during the COVID shutdown, but unless the government blows it with short-sighted regulation and foolish tax policy, substantial economic revitalization is about to commence. Jobs, business opportunities, community-desired services and amenities, and great economic rewards are on the horizon. The ingenuity and creativity of value-add developers and the entrepreneurs they enable, coupled with vast amounts of available capital, are about to be unleashed in a torrent.

Pent-up demand is a powerful force. We are about to witness the creative power of visionary value-add developers as they reimagine and reinvent vacant and underutilized commercial space and turn it into some remarkably Cool Projects. I can’t wait!

COOL PROJECTS – Real Estate Projects I Love to Work On.

I love cool real estate projects. Cool projects are why I became a lawyer. Cool projects are why I come to the office each day. Cool real estate projects are why I did not become an astrophysicist (well, one reason – although, that might have been cool too). Cool projects are the reason I live, smile, dance, breath, scour the earth for new deals, jump for joy.

And by “cool”, I don’t mean in a thermal sense – but rather in a “this project is so cool” sense. I am referring to real estate projects that are awesome. Real estate projects that are fun. Real estate projects that make you say “Wow – what a cool project!”

Cool projects don’t need to be costly projects in major urban centers – although those can be cool too. I’m talking about projects that are creative. Projects that require vision and imagination. Projects that take something mundane and turn it into something special.

Some people think I only like huge projects. To be honest, I do like huge projects, but largely because the huge projects I have worked on also happened to be cool projects.

Redevelopment of the commercial portions of Marina City in downtown Chicago was a cool project. Ground-up development of Sears Centre Arena in Hoffman Estates, Illinois was a cool project. Work on various mixed-use projects around the Midwest and upstate New York have been cool projects. But so has been the much smaller development of an 8,000 square foot microbrewery in the historic Motor Row District of Chicago using TIF financing; development of countless restaurant and entertainment venues throughout the Midwest; conversion of a multi-story industrial building into a high-tech office center; conversion of an outdated office building into a stylish, luxury hotel; adaptive reuse of outdated retail strip centers, bank buildings, city and suburban office buildings, bowling alleys, warehouses, industrial buildings, gas stations, and various small to medium sized special purpose buildings into modern, fully functional jewels – reinvented to provide much needed retail and service amenities for local neighborhoods and communities. It is not the size of the project that makes it cool – or the cost – it is the concept, imagination and creative challenge involved that makes the difference. At least for me.

Cool Projects Test

Here’s a test [call it the “Cool Projects Test”, if you will]:

Which of the following projects is more likely to end up on Kymn Harp’s list of cool projects?

If experience teaches us anything, it teaches that the COVID-19 pandemic will end.  Things we enjoyed before, will be enjoyed again. People still want to shop, travel, dine-out, go to theater, attend live concerts and sporting events, marvel at fireworks displays, celebrate family gatherings, and do all the things that enrich our lives.  Demand did not simply evaporate; it remains strong. Pressure is building. Pent-up demand is rising. It is waiting to be unleashed. Are you ready?

Pundits speak of a “new normal” – but what does that even mean?

Not long ago, during the Great Recession, we heard talk of a new normal as well. How long did it take for that new normal to become a faded memory once the economy rebounded and began to expand? (Not long.)

Clearly, this pandemic has been devastating, with tragic loss of life, severe illness, and widespread economic devastation. New words and phrases have entered our lexicon, like asymptomatic, social distancing, bending-the-curve, intubation, N95, no-mask/no entry, quarantine, self-isolation, COVID-Lease amendments, COVID-abatements, PPP loans, sneeze-barriers, and the like. Although we learned in pre-school to “wash our hands”, we’ve gained new appreciation for this simple task since March 2020.

Discussions now focus on a need to reconfigure health facilities, office space, restaurants, hotels, conference centers, congregate living facilities, schools, places of worship, public transportation, shopping centers, and more, to prevent the spread of infectious disease.  Some claim this pandemic will cause a seismic shift away from urban living and centralized business districts, in favor of far-flung regions linked together by Zoom or other remote video-conferencing technologies.

But will it?  

A growing number of medical experts believe that multiple effective vaccines and treatments will be available shortly, which could bring the COVID pandemic to an end by the third or fourth quarter of 2021. What then?

When COVID cases are no longer in the news, will we remain preoccupied with social distancing, isolation, remote offices, and remote meetings? Or will be get back to business as usual?  Will we stay hunkered down in our suburban home-offices while our competition is out actively meeting with prospects and clients, looking for development opportunities, and doing business in person?

Is the central business district dead? Is urban living to be no more? Will theaters, bars, and restaurants remain closed? Navy Pier? Magnificent Mile? The restaurant and shopping scene in Chicago’s West Loop, Fulton Market, Pilsen, Greektown, Streeterville, Chinatown, Little Italy, Bronzeville, River North, and neighborhoods and suburbs beyond?  Are they gone for good? 

How long will it take before the “new normal” gives way to the “old normal” – with restaurants and banquet halls reopening, people dining out, going to live concerts, returning to the office, taking vacations, meeting in-person with customers, clients and friends, going to sporting events and live theater or the movies, spending money on leisure activities, buying urban condos, staying at downtown hotels, and doing all the things they recently enjoyed? 

What are the implications for adaptive reuse of commercial space left vacant by this pandemic, and for commercial real estate investment and development, and for business in general? What will be in demand this next summer and fall? 

What will be the turning point? Many of my clients are already looking past the pandemic to the next wave of opportunity. Are you?  

How are you positioning yourself for the opportunities that are coming? Is your professional team still intact? Did they retire? Move away? Go out of business?

What opportunity awaits?

            Are you ready for what comes next? Should we talk?

Thanks for listening,

Kymn

Lawyers are like most other business professionals. We want your business and we want your referrals – we just don’t always know the best way to ask for either.

Take me for example. I’ve been handling commercial real estate transactions and business deals for nearly 40 years. I’ve loved (almost) every day of it, and I look forward to many more (knock on wood). My clients appreciate my insights and value the guidance I provide. Other attorneys respect what I do, and brokers and CPAs like working with me because I strive for practical solutions to efficiently and effectively get the job done. I pay close attention to learn my clients’ business objectives, then work diligently and negotiate hard to get my clients what they expect – when they expect it. That’s what lawyers do. Or at least what all lawyers should do. For any client hiring a lawyer, what else is there?  Achieving client objectives and getting the deal closed on time is why lawyers exist. Deals fail, for sure, but we can never be the reason they fail. Deals that fail are a waste of everyone’s time and money. Getting the deal done, if it can be done, is our value proposition.

Deals are my lifeblood – my passion. They’re why I wake up every morning and get out of bed. I love this stuff. I can’t explain exactly why that is – it just is.  Why do musicians practice their instruments and play? Why do scratch golfers golf? Why do competitive skiers ski?  It’s our passion. We don’t know exactly why – it comes from within. And we always need more.

Commercial real estate deals always come first for me, but in every commercial real estate project is a business. They go hand in hand. My preference for a good real estate deal over a good business deal is a matter of only slight degree. There’s not really a number one and a number two. It’s more like #1 and #1A.

So what’s the problem?

The problem is, a lot of people don’t know I’m available to represent them. I write books and articles on commercial real estate. I give seminars on how to structure and close business and real estate transactions. I publish a commercial real estate and business blog.  People think I’m busy, or that I only handle huge deals. The truth is, I am busy – but never too busy to handle another deal, large or small. In the words of the late, great Lucille Ball: “If you want something done, ask a busy person to do it.” We all loved Lucy!

The most shocking question I get from prospective clients is: “Would you (I) be willing to handle my (their) next business or commercial real estate deal?”  Are they kidding? My answer is always an emphatic “yes”! It’s my passion. It’s my love.  It’s what I live for.

To be sure, I’m a business professional, and I charge for what I do, but if you have a commercial real estate deal or business deal, and need representation, I’m in. Never be shy about calling me. We’ll work out the economics. The range of deals I handle is extraordinarily diverse. For a taste, look at my blog Harp-OnThis.com, or check out my latest book, Illinois Commercial Real Estate on Amazon.com or in your local public library. I love this stuff. I need this stuff. Of course I want to represent you. When can we get started?

So back to my initial point:  I do want your business and your business referrals. Like many other business professionals, I just don’t know the best way to go about asking for it. What do you suggest?

It is not uncommon for commercial real estate investors to pool their funds for real estate investments. To obtain project financing, equity requirements remain relatively high. Loan to value ratios are in the 60% to 70% range in many circumstances. Even a modestly priced commercial project with a $5,000,000 price tag may require equity in the range of $1,500,000 to $2,000,000. The greater the price tag, the higher the equity requirement. A Real Estate PPM is an important tool when raising funds from outside investors for a real estate project.

TYPICAL INVESTMENT STRUCTURE

Private real estate investments are typically structured through a manager-managed limited liability company (LLC), with the project promoter or its affiliate named as the manager. Oftentimes, the business terms of the transaction will include a cumulative preferred return to equity investors, an attractive internal rate of return to equity investors until all capital is returned, and a waterfall that provides for a disproportionate percentage of distributable cash to be used toward repayment of the equity investment until it is repaid in full, followed by a permanent allocation of profits and losses based on percentage of ownership.

OUTSIDE INVESTORS – PROS AND CONS

The advantage to the promoter in raising capital from outside investors is that it places the promoter in a position to acquire and control more and larger real estate projects. A disadvantage to promoters is that they must give up a meaningful piece of project ownership and anticipated profits in return for using other people’s money.

 An advantage to outside investors is that they may realize high investment returns and certain tax advantages by participating in a real estate investment. A disadvantage is that they typically have little direct control over the project and must rely upon the knowledge, skill and efforts of the promoter to make money. Of course, if the outside investors don’t possess the knowledge and skill themselves, relying on an experienced real estate promoter may be their best bet for taking advantage of the opportunities real estate investment has to offer.

DUE DILIGENCE AND THE REAL ESTATE PPM

Whether investing in a stabilized real estate project, a project to be newly constructed, or a value-add project requiring redevelopment, renovation, or adaptive reuse, careful evaluation of the benefits and risks always require knowledgeable investigation using due diligence.

A good place for an outside investor to begin is by closely reading the investment PPM (private placement memorandum) which an outside investor should expect to receive from the promoter before making an investment. A well drafted Real Estate PPM will describe the project, the relevant history and experience of the promoter, sources of funds, uses of funds, material terms of the investment, including transfer restrictions, the exit strategy, and the identifiable risks of the investment and the project.

The Real Estate PPM, however, is only the beginning. A conscientious investor needs to go beyond the statements in the PPM to gain an understanding of the underlying real estate project itself, not unlike a conscientious lender would – but even more so, since the interest of an equity investor is subordinate to the interest of any secured lenders. If the prospective investor does not have the direct knowledge and expertise to evaluate and understand the underlying real estate project, it is highly advisable for the prospective investor to hire an advisor, attorney or consultant who has the skill-set to conduct the evaluation.

PPM – A DEFENSE DOCUMENT

Promoters sometimes resist preparing a fully developed PPM because they believe (naively) that it is an unnecessary burden and needless expense. Realistically, however, it is essential and its cost is a cost of raising money from outside investors.

Some promoters discount the value of a carefully prepared PPM because they think of it as a marketing brochure. With that belief, they conclude that their investors don’t need an expensive marketing brochure prepared by a lawyer. In truth, a PPM is not a marketing brochure. It is a critical defense document. Like insurance, it is only a waste of money if you never need it. Even the most well thought-out real estate project may not turn out as planned, or may not result in the impressive profits anticipated at the outset. In that case, believe it or not, there is a meaningful risk that the investors will sue – especially if they end up losing money.

Anytime a person is making a passive investment with the expectation that profits will be derived solely through the efforts of another, the investment is, by definition, an investment contract and, by extension, a security.  The party offering the security is required by law to make a whole host of disclosures to make sure the investor is fully informed of all material facts and risks. Failure to adequately describe the investment and disclose known and foreseeable risks exposes the promoter to serious potential liability under applicable securities laws and regulations.

When the investors sue, it will be for on a variety of theories, including breach of contract, fraud in the inducement, common law fraud, negligent misrepresentation, and violation of applicable securities laws. The investors will allege that the promoter made all kinds of promises and told the investor all kinds of things regarding the project and the investment, which the promoter knew, or should have known, were false.  The investor will also claim the promoter concealed or failed to disclose facts and risks known to the promoter which, if disclosed, would have caused the investors to decline making the investment. Since securities laws provide investment rescission rights and impose near strict liability on a broad range of promoters and persons controlling the investment, the promoter and its principal advocates can be exposed to significant personal liability absent an effective and reliable defense.

A well-crafted PPM can be highly effective in providing a strong defense by spelling out, in writing, all the material details and assumptions of the project and the investment, and all known and foreseeable risks inherent in the project and the investment. It will also limit the right of the investors to rely upon only the matters expressed in the PPM, and will clarify the distinction between statements of fact, and forward looking projections which constitute matters of opinion or belief which cannot reasonably be relied upon. As such, the Real Estate PPM is a powerful defense tool that no real estate promoter seeking investment from outsiders should go without. If things go poorly, it will be the firewall between the investors’ loss and the personal liability of the promoter.

INVESTOR RELIANCE ON PPM

From the investors’ perspective, the PPM is a valuable tool as well. If meticulously crafted, it will disclose the material details of the project and the investment, and will point out risks the investor should consider, even if they are risks the investor is willing to accept.   The investor will have the right to rely upon the facts and details set forth in the PPM unless expressly qualified or limited. If the PPM misstates the facts or omits to disclose known or knowable risks, the PPM can serve as a powerful piece of evidence in a claim against the promoter. It is precisely this evidentiary risk that impels promoters to dot the i’s and cross the t’s to make sure the PPM is complete and accurate – which makes it a valuable source of information for the prospective investor.

PROJECT DUE DILIGENCE BY INVESTOR

Even with the inclusion of necessary facts and disclosures in the Real Estate PPM, a detailed analysis and discussion of certain real estate fundamentals underlying the project may not fall within the purview of the PPM. If the disclosed risks are carefully crafted with broad language, in may be up to the prospective investor, in the exercise of due diligence, to evaluate the underlying project to confirm the suitability of the property for its envisioned use.

Due diligence by the investor is always appropriate. If the prospective investor does not have the knowledge on its own to understand real estate fundamentals, it is incumbent upon the investor to engage a real estate professional who possesses the necessary knowledge.  Regardless of whether a failure to adequately disclose and address gaps in the underlying project fundamentals is sufficient to expose the promoter to liability, imposing liability on the promoter is not the object of the investment. The object of the investment is to put the investor’s money to work in a profitable venture that will yield a favorable return – not a lawsuit.

*                      *                      *

Whether raising money from outside investors, or considering an investment in a real estate project as a passive outside investor, a well-crafted Real Estate PPM is a vital component and critical step. Ignore it at your own peril.

Thanks for listening,

Kymn

I’m happy to announce that the website for my new book, Illinois Commercial Real Estate is now live.  Visit www.Illinois-CRE.com for a book excerpt.

Illinois Commercial Real Estate, Due Diligence to Closing, with Checklists, is intended as a practical handbook for investors, developers, brokers, lenders, attorneys and others interested in commercial real estate projects in Illinois. This book zeros-in on commercial real estate due diligence, and walks the reader through the due diligence process, from conception to closing, with a focus on making sure the commercial real estate project functions as intended after closing.  Checklists are provided as an aid to commercial real estate professionals to assist on evaluation of the property and the transaction on the path toward successful closing. As people in the real estate industry understand, if the deal doesn’t close, it doesn’t count.

I’d like to extend Special Thanks to:

My clients, whose passion for creative commercial development I share;

My partners and staff at Robbins, Salomon and Patt, Ltd., who work with me tirelessly to earn our client’s business every day.

Catherine A. Cooke and Emily C. Kaminski, attorneys at Robbins, Salomon & Patt, Ltd. who provided legal research, advice, counseling, and technical editing;

James M. Mainzer, tax partner at Robbins, Salomon & Patt, Ltd., for his insights and assistance on tax matters;

The editing staff at the Illinois Institute for Continuing Legal Education, for editing early versions of chapters 11, 12, 25, 27 and 28, which were first published in IICLE Practice Handbooks;

Dale V. Weaver, Illinois licensed surveyor, who was kind enough to convert my rough draft drawings into the diagrams included at chapter 25;

. . . and, of course, my friend and valuable resource, Linda Day Harrison, founder of theBrokerList, for her ongoing encouragement and support.

If you are buying, developing, financing, selling, leasing or otherwise dealing with commercial real estate in Illinois, I hope you will find Illinois Commercial Real Estate, Due Diligence to Closing, with Checklists to be a useful resource.

ENJOY!!!

R. Kymn Harp

WHY DEVELOP AIR RIGHTS?

Prime commercial land is limited. Prices per square foot can be astronomical. Demand for efficiency to maximize return on investment is growing. No wonder developers and property owners are looking to the sky, with varying degrees of success, to capture all the value they can from each urban parcel. Air rights development may be the solution you are looking for.

Owners and developers, and people in general, are conditioned to think of potential development sites as flat surfaces with essentially two dimensions: north/south and east/west. They see only the surface of the land, and envision the building they will construct for the particular purpose they have in mind; a bank, a drugstore, a restaurant, a strip mall, a parking garage, an office building. If the parcel is larger than they need, they may envision subdividing the parcel to make two or more lots. In most cases, however, they think primarily in terms of land coverage for the type of building they need. They visualize only the two dimensional space depicted on their Site Plan or Plat of Survey.

In 30 out of 50 states, including Illinois and all other Mid-Western states, the “Rectangular Survey System” is in effect. The Rectangular Survey System was adopted in 1785 to meet the needs of the Federal Government as it faced the challenge of dividing vast areas of undeveloped land lying west of the original 13 colonies. The system, developed under the direction of Thomas Jefferson, essentially divides the United States into rectangles, measured in relation to lines known as Meridians and Base Lines.

Development lots are instinctively viewed as the two-dimensional surface of land visually representing a potential development parcel. Descriptions of a parcel typically refer to “a parcel of land X feet by Y feet” located in relation to an intersection or other identifiable landmark.

Once a parcel is “developed”, or designated for development, by construction of improvements on the land, it is natural to think of the parcel as being unavailable for further development (unless the existing improvements are to be demolished).

Classic examples of this are single story commercial buildings at prime commercial locations, a multi-deck parking garage or mid-rise building in a downtown development area, railroad tracks or spurs cutting across valuable urban land and, in some cases, roadways and alleys.

Each of these situations represent, potentially, under-utilization of valuable real estate. Finding a way to develop the “air” above these existing or planned improvements maximizes the economic utility of these parcels and can be like creating “money from thin air.”

The practice of finding ways to utilize the “space above” is often referred to as “air rights development”. Air rights development requires thinking in three dimensions, and requires serious design consideration and legal planning but, when land values are at a premium and zoning permits, the economic return may be dramatic.

Though often overlooked, virtually all of Chicago’s downtown business district is a “city in the air“. People tend to think of streets and street level entrances to buildings in the downtown Chicago “loop” as being at “ground level”. This is simply not the case. Most of what is thought of in the Chicago Loop as being at “ground level” is located 12 to 22 feet above the earth’s surface. This explains the vast network of “lower” streets and passageways in downtown Chicago, such as “Lower Wacker Drive”, “Lower Dearborn Street”, “Lower State Street”, etc. which most people seldom traverse. It also explains why, in 1992, the Chicago Loop business district was virtually shut down by “the Great Loop Flood of ’92”, but few people got wet or even saw any water as office and retail buildings were closed and workers were sent home because of “flooding”.

The point of these observations is to reveal that “development of air rights” is not new. It is also not “. . . some exotic legal manipulation of doubtful efficacy dreamed up by big city lawyers for use only in big cities”. Development of so-called “air rights” is little more than efficient use of a limited resource when use becomes economically feasible and beneficial.

WHAT ARE “AIR RIGHTS”?

“Air rights” are part of the “bundle of rights” constituting fee simple title to real estate. The term “air rights” generally refers to the right of the owner of fee simple title of a parcel of land to use the space above the land. If this right did not exist, it would not be possible to

 2016 Updat

Are you planning to purchase, finance, develop or redevelop any of the following types of commercial real estate in the USA?

• Shopping Center
• Office building
• Large Multifamily/Apartments/Condominium Project
• Sports and/or Entertainment Venue
• Mixed-Use Commercial-Residential-Office
• Parking Lot/Parking Garage
• Retail Store
• Lifestyle or Enclosed Mall
• Restaurant/Banquet Facility
• Intermodal logistics/distribution facility
• Medical Building
• Gas Station
• Manufacturing facility
• Pharmacy
• Special Use facility
• Air Rights parcel
• Subterranean parcel
• Infrastructure improvements
• Other commercial (non-single family, non-farm) property

A KEY element of successfully investing in commercial real estate is performing an adequate Due Diligence Investigation prior to becoming legally bound to acquire or finance the property.  Conducting a Due Diligence Investigation is important not just to enable you to walk away from the transaction, if necessary, but even more importantly to enable you to discover obstacles and opportunities presented by the property that can be addressed prior to closing, to enable the transaction to proceed in a manner most beneficial to your overall objective. An adequate Due Diligence Investigation will assure awareness of all material facts relevant to the intended use or disposition of the property after closing. This is a critical point. The ultimate objective is not just to get to Closing – but rather to confirm that the property can be used or developed as intended after Closing.

The following checklists – while not all-inclusive – will help you conduct a focused and meaningful Due Diligence Investigation.

This is Part 2 of a multi-part series of articles discussing the duties, rights and remedies of commercial real estate tenants in Illinois. Part 1, entitled “Getting It Right” discussed the importance of clarity in lease drafting, and the potential for unintended leasehold easements for parking, and other uses.

In March 2015, the Illinois Institute for Continuing Legal Education (“IICLE”) published its 2015 Edition practice handbook entitled: Commercial Landlord-Tenant Practice. To provide best-practice guidance to all Illinois attorneys, IICLE recruits experienced attorneys with relevant knowledge to write each handbook chapter. For the 2015 Edition, IICLE asked R. Kymn Harp and Catherine A. Cooke to write the chapter entitled Tenant’s Duties, Rights and Remedies. We were, of course, pleased to oblige. Although each of us represent commercial landlords at least as often as we represent commercial tenants, a clear understanding of the duties, rights and remedies of commercial real estate tenants is critical when representing either side of the commercial lease transaction.

The following is an excerpt (slightly edited) from our chapter in the 2015 Edition. We hope you find this excerpt, and the excerpts that will follow, informative and useful. Feel free to contact IICLE  directly to purchase the entire volume.

The COVENANT OF QUIET ENJOYMENT
What Is It? — General Principles

It has long been the law in Illinois that a covenant of quite enjoyment is implied in all lease agreements. Blue Cross Ass’n v. 666 N. Lake Shore Drive Associates, 100 Ill.App.3d 647, 427 N.E.2d 270, 273, 56 Ill.Dec. 290 (1st Dist. 1981); 64 East Walton, Inc. v. Chicago Title & Trust Co., 69 Ill.App.3d 635, 387 N.E.2d 751, 755, 25 Ill.Dec. 875 (1st Dist. 1979); Berrington v. Casey, 78 Ill. 317, 319 (1875); Wade v. Halligan, 16 Ill. 507, 511 (1855).

A covenant of quiet enjoyment “promises that the tenant shall enjoy the possession of the premises in peace and without disturbance.” [Emphasis in original.] Checkers, Simon & Rosner v. Lurie Co., No. 87 C 5405, 1987 WL 18930 at *3 (N.D.Ill. Oct. 20, 1987). This does not mean, however, that no breach of the covenant of quiet enjoyment may be found in a leasehold without a finding that the lessor intended to deprive the lessee of possession. Blue Cross Ass’n, supra, 427 N.E.2d at 27. It simply means that a tenant must actually be in possession of the premises to claim a breach of the covenant of quiet enjoyment. If the tenant has already vacated the premises before the disturbance has commenced, no breach of the covenant of quiet enjoyment occurs. Checkers, Simon & Rosner, supra, 1987 WL 18930 at *3.

An implied covenant of quiet enjoyment includes, “absent a lease clause to the contrary, the right to be free of the lessors’ intentional interference with full enjoyment and use of the leased premises.” Infinity Broadcasting Corporation of Illinois v. Prudential Insurance Company of America, No. 86 C 4207, 1987 WL 6624 at *5 (N.D.Ill. Feb. 9, 1987), aff’d, 869 F.2d 1073 (7th Cir. 1989), quoting American Dairy Queen Corp. v. Brown-Port Co., 621 F.2d 255, 258 (7th Cir. 1980).

If the landlord breaches the covenant of quiet enjoyment, the lessee may remain in possession and claim damages for breach of lease. In such case, the measure of damages is the difference between the rental value of the premises in light of the breached covenant of quiet enjoyment and the rent that the tenant agreed to pay under the lease, together with such special damages as may have been directly and necessarily incurred by the tenant in consequence of the landlord’s wrongful act. 64 East Walton, supra, 387 N.E.2d at 755.

Although Illinois cases defining the precise scope of a covenant of quiet enjoyment are rare, BLACK’S LAW DICTIONARY, pp. 1248 – 1249 (6th ed. 1993) defines “quiet enjoyment” in connection with the landlord-tenant relationship as “the tenant’s right to freedom from serious interferences with his or her tenancy. Manzaro v. McCann, 401 Mass. 880, 519 N.E.2d 1337, 1341. (Ringing for more than one day of smoke alarms in an apartment building could be sufficient interference with the tenants’ quite enjoyment of leased premises to justify relief against the landlord.).”

HOW THE COVENANT OF QUIET ENJOYMENT MAY APPLY— CASE LAW

In Blue Cross Ass’n v. 666 N. Lake Shore Drive Associates, 100 Ill.App.3d 647, 427 N.E.2d 270, 273, 56 Ill.Dec. 290 (1st Dist. 1981), the First District Appellate Court discussed the covenant of quiet enjoyment in the lease as granting the tenant a right of quiet and peaceful possession and enjoyment of the whole premises and equated a breach of quiet enjoyment under a lease to a private nuisance. “A private nuisance in a leasehold situation is ‘an individual wrong arising from an unreasonable, unwarranted or unlawful use of one’s property producing such material annoyance, inconvenience, discomfort, or hurt that the law will presume a consequent damage.’ ” Id., quoting Great Atlantic & Pacific Tea Co. v. LaSalle National Bank, 77 Ill.App.3d 478, 395 N.E.2d 1193, 1198, 32 Ill.Dec. 812 (1st Dist. 1979).

The tenant had entered into a five-year lease on August 22, 1978, with a five-year renewal option, for approximately 53,000 square feet of the