These are troubled times. The COVID pandemic is crushing some segments of the commercial real estate industry, including particularly retail and restaurants.
R. Kymn Harp
In COVID-19 lease negotiations, I usually represent commercial landlords. When representing commercial tenants, knowing the challenges landlords face is useful. Commercial tenants should recognize that when seeking rental abatements, or other rent relief, they are proposing to shift the financial burden of COVID from tenant to the landlord. Landlords may want to help; but they may be unable to do so and preserve ownership of their property.
The good news is, there appears to be light at the end of the COVID tunnel. Vaccines are here. The bad news is, we have a long recovery ahead for small businesses and commercial landlords.
The idea that most commercial landlords are “rich people”, large corporations, or REITS who can better weather the financial storm brought by COVID is not true. Most landlords rely on timely payment of rent to pay their mortgages and other expenses of ownership. And, unlike commercial tenants, landlords did not receive direct relief under the federal CARES Act. The forgivable PPP loans to small businesses allow commercial tenants to use up to 40% of the loan proceeds to pay rent. This was designed to help small businesses survive, and to indirectly help commercial landlords by giving commercial tenants funds to help pay rent. Frequently, commercial tenants have ignored this aspect of the PPP loan program.
Strategically, tenants make a mistake when they approach their landlord with a sense of entitlement, and demand rent relief. COVID-19 is not the fault of the landlord any more than it is the fault of the tenant. At a minimum, when asking the landlord for rent relief, a commercial tenant should be prepared to certify to landlord that tenant has suspended distributions to tenant’s owners and investors. The landlord is not the tenant’s business partner. Why should a landlord take a financial hit to enable a tenant to continue to pay tenant’s owners and investors? Landlords have their own financial challenges.
Except in rare occasions where the lease terms provide otherwise, commercial tenants are not automatically “entitled” to rent relief because of COVID-19. It is not a right. If a commercial tenant needs COVID rent relief, it must be willing to be financially transparent and able to make a compelling case to landlord as to how the landlord will benefit by granting the requested relief. Even a compelling case may not be enough if landlord’s mortgage payments, real estate taxes, insurance, utilities, and necessary third-party vendor obligations cannot be paid or abated. Tenants need to provide information to landlord to enable the landlord to likewise make a compelling case to its lender and critical third-party vendors.
Plausible workout strategies may include:
(a) temporary deferral of monthly base rent to be repaid later, with or without interest; or
(b) temporary abatement of monthly base rent in exchange for an extension of the current lease term.
Abatement is a forgiveness of rent. Deferral merely postpones the due date. A landlord will typically need corresponding relief from its lender to help fund the abatement or deferral, and to suspend applicable loan covenants.
Often the best solution is a partial rent abatement (say, for example, a 25% to 50% base rent abatement for a short period) in exchange for extending the term of the lease at full rent. This helps give commercial tenants the rent relief they need in these difficult times, while preserving the value of the property for the landlord – and collateral value for its lender.
Finding a solution that preserves the tenant as a viable occupant and preserves the value of the property for the landlord and its lender is the surest route to avoiding costly and catastrophic litigation.
COMMERCIAL LEASES AND THE LAW OF ELECTRONIC TRANSACTIONS
By Guest Authors: David P. Resnick and Seth Corthell
David P. Resnick, RSP Shareholder
Most commercial leases are forged by a deliberate, organic process that includes face-to-face meetings, telephone calls and written correspondence between the landlord, the tenant and their respective agents, culminating in a written contract that historically was required to be signed by hand by both parties. Over the past 20 years, the rise of email as a generally-accepted medium of business communication has prompted the law to allow certain contracts, including leases, to be entered into electronically, without a handwritten signature. Progress has been made in this respect, both by statute and the common law; however, tweaking a centuries-old legal axiom takes time. This article addresses recent developments and the present state of the law with respect to commercial leasing and electronic media.
The Historical Basics
Under the law, all leases are contracts. As such, leases require certain basic legal components to be enforceable. Every contract must state definite terms and include a grant of consideration and mutuality of agreement and obligation between competent parties. In order to be valid, contracts require offer and acceptance by the parties.
In addition, almost all leases are subject to the statute of frauds. Patterned after an English statute enacted in 1677, the statute of frauds is the legal doctrine that certain contracts – including leases and other contracts affecting any interest in land – be contained in a written, signed instrument. Certain exceptions commonly apply, notably to short term (i.e. less than one year) leases. But prior to recent developments, the law was relatively straightforward: Real estate contracts must be in writing to be enforceable.
The Culture Evolves
In light of this precedential legal backdrop, many questions arise from our increasing reliance on email in commercial leasing. For instance, can an email or series of emails constitute a written lease? Can an electronic signature on a lease bind a party in the same way as a handwritten signature? Short of an ink-signed paper document, what might constitute a binding lease?
In 1999, in response to questions like these and calls for clarity on the use of electronic media for business transactions, the Uniform Law Commissioners promulgated the Uniform Electronic Transactions Act (UETA). The UETA was the first effort to create a uniform set of laws with respect to electronic commerce, and 47 states have adopted it since its release.
Section 7 of the UETA contains the fundamental rules of the act:
A record or signature may not be denied legal effect or enforceability solely because it is in electronic form.
A contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation.
If a law requires a record to be in writing, an electronic record satisfies the law.
If a law requires a signature, an electronic signature satisfies the law.
In short, the objective of the UETA is to establish that in the context of applicable transactions, electronic signatures are the equivalent of manual signatures and electronic records are the equivalent of hard copies. A stated “paradigm” of the UETA is that it applies only to parties to transactions who have each acquiesced by some means to be bound electronically. Moreover, under the UETA a party may always refuse to be bound by electronic correspondence.
Application
While case law is plentiful with respect to electronic communications and application of the UETA, the common law is still evolving as to the application of these topics in the context of commercial leases and other real estate contracts. A few notable cases highlight the complexities and pitfalls inherent in adjudging the enforceability of contracts without historically reliable handwritten signatures.
Though not ultimately related to a lease, St. Johns Holdings, LLC v. Two Electronics, No. 16 MISC 000090, 2016 WL 1460477 at *3 (Mass. L.C. April 14, 2016) is an example of a court’s willingness to expand its interpretation of the statute of frauds in the context of electronic communications. In that case, the plaintiff, St. John’s Holdings (SJH) contacted the broker of defendant Two Electronics (T-E), first seeking to lease T-E’s property and later seeking to purchase the property instead.
Following a period in which the parties exchanged and negotiated draft purchase agreements through their respective agents, T-E’s broker sent a text message to SJH’s real estate agent stating that T-E wanted SJH to sign the purchase agreement first and provide the deposit check before T-E would finalize it. At the end of the message, T-E’s broker (bearing authority for T-E) wrote his name. The same day, SJH’s agent went to the office of T-E’s broker and delivered the check and the signed agreement. Unbeknownst to SJH or its agent, T-E had a competing offer from a third party, and had accepted the other offer the same day it received the signed agreement from SJH. T-E then refused to execute the agreement with SJH.
SJH subsequently brought an action for a declaratory judgment that the contract was executed, and for specific performance of the contract. T-E moved to dismiss, arguing that SJH could not allege that T-E ever provided a signed writing compliant with the statute of frauds grounds. SJH argued that the broker’s name at the bottom of the text message from T-E’s agent was sufficient to satisfy the statute of frauds.
The court ultimately agreed with SJH, finding that the text message in question, read in conjunction with the previous negotiation communications between the parties satisfied the requirements of the statute of frauds. In coming to this conclusion, the court noted the evolution of business practices and the prevalence of electronic communications in business transactions. The court analogized the broker’s name at the bottom of the text message to an electronic signature at the bottom of an email and deemed it sufficient to satisfy the statute of frauds’ signature requirement.
Similarly, Crestwood Shops, LLC v. Hikene, 197 S.W.3d 641, 644 (Mo. Ct. App. 2006), demonstrates the significance courts will apply to email correspondence under the UETA in adjudicating the validity of contractual offer and acceptance. In that case, tenant Hikene sought to lease larger retail space in a shopping center from the landlord, Crestwood Shops, LLC. The parties entered into a five-year lease, but following commencement of the term, Hikene identified several problems with the new space, including mold on the premises, a defective HVAC system, and foundation issues. As Hikene made preparations to renovate the new space, she brought the issues with the property to Crestwood’s attention.
Communications between Hikene and Crestwood became increasingly contentious, and both parties thereafter agreed to correspond in writing only. Following her continued dissatisfaction with Crestwood’s response to the space issues, she stated in an email her desire to terminate the lease if the problems were not corrected by a date certain. The next day, Crestwood responded that they accepted Hikene’s request to be released from the lease as of the stated date.
Hikene sought a declaratory judgment that the lease was not terminated, arguing that she did not agree to conduct her business transactions electronically and that she did not intend her email to be an offer to terminate the lease. The court disagreed, ruling that the parties consented to the conduct of business through email, and that Hikene’s email constituted an offer to terminate that satisfied the statute of frauds. In coming to its decision, the Court noted that the UETA instructs fact-finders to consider the “context and surrounding circumstances, including the parties’ conduct.” Following this directive, the court determined that Hikene’s March 17 email insisting that the parties communicate through email demonstrated her willingness to transact business through email.
Clarity Is Key
As the legal regimes associated with electronic communications evolve, a variety of measures are available to parties to a lease in order to avoid being bound without intent. For instance, landlords and tenants transacting electronically may ensure that a lease proposal or draft lease document is not exploited as an offer by including the following common language in each cover transmittal: “Nothing herein shall be deemed or construed to be an offer by [sender], and [sender] shall not be bound unless and until such time as all parties have delivered fully-executed documents.” And persons transmitting via email should always be aware that their electronic signature may be deemed to have the same legal effect as their handwritten signature.
As a general proposition, if a party wishes to confirm that it will not be bound by electronic correspondence, it is always wise to do so in writing. The requirement in the UETA that a party must agree to conduct business electronically need not be established by an explicit statement; rather, it may be satisfied by an interpretation of context and conduct. To be clear, parties to a lease are advised to reduce to writing their consent, or withdrawal of consent, to be bound in this manner.
Not long ago, commercial leases would take weeks to negotiate, draft and finalize. Like virtually every other area of commerce, technology has streamlined the leasing process such that today, leasing transactions are completed with lightning speed. Leasing professionals should be mindful of the hazards of doing business electronically and should consider the legal consequences of every email.
David P. Resnick is a member of the Board of Editors of the Commercial Leasing Law & Strategy newsletter. He is a Shareholder at Robbins, Salomon & Patt, Ltd. in Chicago, concentrating his practice in commercial real estate development and finance. Seth Corthell is an attorney based in Chicago, Illinois.
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
