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

As the commercial real estate market begins to pick up steam, beware the urge to follow a “momentum” investment strategy rather that a “value” investment strategy.

Momentum investing relies on market increases to generate a return on investment. It is the “rising tide floats all boats” investment model. It is the investment model of which all “bubbles” are made.

As momentum investing accelerates, investment fundamentals tend to get lost. Instead of evaluating cash on cash returns using discounted cash flows that underlie “value” investing, a casino mentality takes hold – whereby investors can justify acquiring assets generating even a negative cash return, with the notion that rising prices will yield a profit. As the saying goes: “Any fool can make a profit in a rising market – and many fools do”. The challenge, of course, comes when a market hits a plateau or, worse yet, the market declines.

As a general proposition, value investing is significantly more prudent. If a project is cash flowing, and generating a positive return on investment, today and for the foreseeable future – which is a fundamental precept of a value investment strategy – the potential added return of any increase in value in the underlying asset caused by the “rising tide” effect is icing on the cake. Choose your cake with care.

There are, of course, exceptions to every rule. But, employing an “exception” is wisely done only after sober reflection of the particular circumstance to determine that in that particular case the exception is warranted. When an exception is regularly employed, it is no longer an exception – but, rather, becomes the rule itself.

As in all markets, there will be winners and there will be losers. It makes sense in the coming commercial real estate revival to position yourself and your company as a winner. You may not get another chance.

Exercise all appropriate due diligence. Use readily available and appropriate asset protection strategies. Invest with intentional regard to reliably building wealth though a well conceived value investing strategy – not a roulette table strategy that, over time, is virtually certain to fail.

If this recent economic debacle has taught us anything, it has taught that bad things can happen to good people who lose sight of the fundamentals. Good deals – even great deals – can be made if reliable commercial real estate investment fundamentals are employed.

As a wise mentor once told me: “You have a good brain – use it.”

Good luck.

R. Kymn Harp
Robbins, Salomon & Patt, Ltd.
Chicago, IL
www.rsplaw.com
JOIN MY THOUGHTBOARD: www.Harp-OnThis.com

REPORTING FROM THE FIELD. . .

“The best time to plant a tree was twenty years ago.

        The second best time is today.”

Chinese proverb

For over 35 years, I have represented commercial real estate investors, developers and business owners. Most of that time has been spent helping them acquire, finance, expand, develop, manage and grow their assets and businesses. For the past 5 to 6 years, as we have struggled through the Great Recession, a huge amount of my time has been spent helping clients keep their assets.

Growing up, I was steeped in the practical view that it is not so much what you acquire that counts, but, rather, what you keep. My parents and grandparents were not in the real estate business to make others wealthy. They were playing real life Monopoly®. They played to win. It was less about money for money’s sake than it was

The law is clear.  The so-called “Land Patent” defense does NOT work.

This is not earth shattering news, but it is a reminder that defenses to mortgage foreclosure actions must be well grounded in fact and warranted by existing law or a good faith argument for the extension, modification or reversal of existing law. In simple terms – defenses must at least be legally plausible.

One of the more bizarre defenses raised by a small group of defendants who refer to themselves as “sovereign citizens” is a so-called “land patent” defense. It does not work – at least not in Illinois.

In a long, unusual, and fairly cumbersome opinion filed by the Illinois Appellate Court on September 23, 2013, in the case of Parkway Bank and Trust Company v. Victor Korzen and Tomas Zanzola, 2013 IL App (1st) 130380, the First District Appellate Court addressed “a number of tactics a small number of debtors use to both delay the ultimate resolution of cases against them and to use the legal system for improper purposes. Some people might classify those who engage in these tactics as “sovereign citizens”, but regardless of nomenclature, their methods are not only counterproductive, but detrimental to the efficient and fair administration of justice. A recent New York Times article noted the FBI has labeled the strategy as “paper terrorism”.

I am a strong proponent of raising every viable defense to a mortgage foreclosure when representing a defendant. There are many defects in mortgage loan files, and many more defects arising from faulty loan administration, defective securitization of syndicated loans, and breaches of public policy and black letter law by lenders. Some lenders have fraudulently manufactured and forged missing assignment documents and other documents to fill material document gaps. There are legitimate defenses that can be raised and valid lender liability claims that can be pursued in many circumstances if the situation warrants and the resources are available to mount a strong defense and counter-attack.

That said, not every so-called “defense” is legitimate, and some are just plain goofy.

Among the illegitimate “defenses” is the claimed “land patent” defense. It simply does not work. It is not well grounded in law, and there is no good faith argument for the extension, modification or reversal of existing law that courts in Illinois – or probably anywhere in the United States – are likely to recognize as having been pursued in “good faith”. As a consequence, if you raise the “land patent” defense in defense of an Illinois mortgage foreclosure action, you are going to lose, be sanctioned, and perhaps be prosecuted for committing a Class 4 Felony.

In this short post, I do not intend to give an in-depth description of the (faulty) theory behind the land patent defense, but I will direct your attention to paragraph 72 et seq. of the Parkway Bank v. Korzen case, referred to above. Read this case if you are thinking about using the land patent contrivance as a “defense”, particularly in an Illinois mortgage foreclosure action. It does not work.

The Time to Decide – Commercial Real Estate Litigation

A sage once said, “The time to worry about where the ball will drop is before the wheel is spun”.  He was speaking about roulette, of course, but the wisdom of these words has much broader application.  The point is, worry about the outcome before you place the bet, when you can still do something about it.

Commercial litigation, especially commercial real estate litigation, is in some respects like roulette. Once your lawsuit is filed, the wheel is spinning.  Unlike roulette, you may still have a measure of control over the outcome — but you are in it until the ball drops. 

In CRE litigation there is seldom an insurance company prepared to write a check.  There is a substantial risk the case will proceed to trial.  There is no guaranty you will collect anything – especially if payment of money is not the relief you seek. Consequently, there is very little chance your attorney will accept your commercial dispute on a contingent fee basis. A third of nothing is still nothing. 

Lawyers handling commercial litigation are not your partners. Commercial litigators charge by the hour.  Except in rare cases where you can negotiate a hybrid fee arrangement, you will assume the entire financial risk – not your lawyer. Your lawyer is serving as your paid professional advocate; a hired gun, so to speak.

As long as you are willing and able to pay your lawyer to apply his or her skill and training to your cause, your lawyer is bound to represent you with zeal and vigor. If you do not pay, you should expect your lawyer to stop work.  The fact that the practice of law is a profession does not make it a charitable enterprise. It is both a profession and a business.  There is no moral or ethical imperative for a lawyer to work without pay while advocating a commercial dispute.  CRE litigation is business litigation – and the business being advanced is yours.

I am not a big fan of commercial litigation. It is expensive for my clients and distracts them from their core business.  It is in their core business where they make money.  It is because of their core business that I am their lawyer.  Still, if you are going to litigate, then commit to litigate. Do not file a lawsuit unless you intend to see it through and win.

If you know anything about law firm profitability, it may surprise you to hear me say I am not a huge fan of litigation. Lawsuits can be very profitable for lawyers. Lawsuits are labor intensive and can take on a life of their own.  Huge legal fees can be run up in a hurry.  If that is how you determine to spend your money then, by all means, call me.  My law firm has an outstanding group of litigators.  In commercial litigation, including CRE litigation, we combine our transactional knowledge with litigation prowess and are unsurpassed. I just think you ought to make an informed and seriously calculated decision before you decide to spend your money in this way.

It is virtually impossible to predict with accuracy how much a lawsuit will cost.  Typically, it will cost much more than you imagine. This is because, unlike a business or real estate transaction you can choose to walk away from if it ceases to make economic sense, lawsuits, once filed, are not so easy to escape.  It’s like choosing to dance with an 800 pound gorilla.  As the joke goes, “When do you stop?  When the gorilla decides to stop.”  Once you have filed a lawsuit, or have taken a position in a dispute that will lead to your adversary filing a lawsuit, you have reached the dance floor and may very well find yourself cheek to cheek with an 800 pound gorilla.

Don’t get me wrong.  There are times when litigation is necessary and appropriate.  There are times when an adversary is so brazenly interfering with your business or trampling on your rights and interests that the benefits of litigation will far exceed your costs.  There are times when litigation is your only reasonable choice. 

In making the decision to proceed, however, understand the tangible and intangible costs.  Attorneys’ fees may run into tens of thousands of dollars, and in a complicated case perhaps even into the hundreds of thousands of dollars. The litigation may also distract you from your core business and subject you to significant emotional strain and sleepless nights.  Do not underestimate these add-on intangible costs. 

If you are going to litigate, be sure to hire a  lawyer experienced in the type of litigation you intend to  pursue.  Litigation strategy is based on game theory.  Each move you make must anticipate your adversary’s next several moves. Your strategy and its implementation must be designed to win and be agile enough to adapt to changing circumstances if your adversary moves forward in an unanticipated way.  Knowledge is power.

Part of what makes litigation emotionally draining is a lack of understanding about how the process works.  It is not as mysterious as clients sometimes seem to believe.

The bones of litigation are this:  You and your adversary are in disagreement. You are convinced your position is superior.  Your adversary is convinced its position is superior. You are unable to reach a compromise that works for you both.  Filing a lawsuit is a decision to let someone else decide. 

The litigation process is a process of gathering useful information to support your position and to undermine your opponent’s position. Your adversary is engaged in the same process. Some of this information is applicable law. Much of the information is supporting facts. Ultimately, you will each present your compiled information to an independent decision maker.  A judge or jury will decide.

If you are going to litigate, the decision to do so should be based upon a sober determination of the benefits likely to be achieved, the costs of obtaining those benefits, and your likelihood of success.  You may have the greatest case in the world; your lawyer may tell you it will be a “slam dunk”; but if it is going to cost you more than you reasonably expect to gain – measuring both tangible and intangible costs – at least consider the choice of not proceeding. The decision to proceed or not to proceed is yours. It is very much a business decision.  

In making the decision to litigate, use the same skills of economic analysis you use to make real estate investment decisions. If you know it will cost you $2,000,000 to develop and market a project, but your likely return is only $1,500,000, would you proceed?  If your disputed claim is for $50,000 but it will cost you $60,000 to $100,000 to collect, should you proceed?  The answer may depend upon other factors as well but, all else being equal, the rational economic choice is obvious.

Too often lawsuits are filed as an emotional response to a perceived slight rather than being based upon an objective determination that the lawsuit is in your best economic interest. Do not let elevated testosterone levels get in the way of making a rational economic decision.  The  lawsuit is likely to continue long after your passions have faded.  By that time, you may be wrapped in the arms of that 800 pound gorilla.  If you have not made the decision to litigate based upon legitimate and dispassionate commercial considerations, you may find that your only way out is to settle on highly unfavorable terms.  This will not help you prosper.

A common mistake clients make is to assume that if a dispute is over only $10,000 to $50,000, the attorneys’ fees for pursuing or defending the case will be proportionately less than if the lawsuit involved $100,000 to $1,000,000.  This is not necessarily so.  The amount of time it takes to prove your case has very little to do with the amount in dispute.  The facts and issues, and the response of your adversary, determine the amount of time involved.  Since commercial litigation is typically billed by the hour, more time means higher attorneys’ fees regardless of the amount in dispute.  This reality should be taken into consideration when deciding to file suit, and likewise when considering an offer of settlement.

Some protection may be provided by the documents if they provide for the successful party to recover attorneys’ fees and costs from the unsuccessful party. But note: (i) you had better be sure you will be the successful party, or you may end up paying your adversary’s attorneys’ fees as well as your own; and (ii) you should consider whether a judgment against this particular defendant is likely to be collected.  If the defendant is on the verge of bankruptcy, or otherwise insolvent, obtaining a judgment that includes all of your attorneys’ fees will do you little good.  You will have just spent more money that will  not be collectible.  As the saying goes: “When you find yourself in a hole – stop digging.”

Remember.  The commercial dispute forming the basis of your lawsuit is yours, not your attorney’s.  Your attorney’s business is to represent you as your skilled professional advocate. Attorneys are bound to zealously advocate for your success, but they can not guaranty success and collection.

Deciding to file a lawsuit in a commercial dispute should be like deciding to get a kidney transplant.  It should be a decision that is not entered into lightly, and should be made only if the benefits to be obtained are greater than the burdens the procedure will entail. If you decide on a new kidney and go under the knife, be prepared to see it through. If, after the procedure has begun and your kidney has been removed, you change you mind and decide against a transplant, your decision is a bit too late.  The time to make that decision was before you got on the operating table.

I am not saying you should never file a lawsuit.  Each circumstance merits its own evaluation. What I am saying is that the time to decide is before the suit is filed.  Once filed, be prepared to do what must be done to win.  It is too late to un-spin the wheel.

                                                                                    Thanks for listening,

                                                                                                 Kymn

Employment Restrictive Covenants

The issue of enforceability of employment restrictive covenants comes up often in business, including the business of commercial real estate.

A common scenario is as follows:  A person goes to work for a company and is required to sign a Noncompetition and Nonsolicitation Agreement. Typically, it will say something like “during the term of employment, and for a period of one year after termination of employment, the employee will not compete with or solicit any customer or vendor of the employer.”  Sometimes the Noncompetition/Nonsolicitation Agreement is required to be signed as a condition of being hired. Other times the employer will tell an employee who is already employed that signing the Noncompetition/Nonsolicitation Agreement is a condition to continued employment.

Are Employment Noncompetition/Nonsolicitation Agreements enforceable in Illinois?

As a general proposition, Noncompetition/Nonsolicitation Agreements are enforceable in Illinois, as long as they satisfy a three-pronged test:  They: (1) must be no greater in scope and duration than is required for the protection of a legitimate business interest  of the employer-promisee; (2) must not impose undue hardship on the employee-promisor, and (3) must not be injurious to the public.

In a decision filed December 1, 2011, the Illinois Supreme Court shook up the Illinois employment bar by overruling an extensive line of cases that had narrowed the three-pronged test described above to a two-pronged test created by Appellate Court decision in 1973. In a case referred to as the Kolar decision, (Nationwide Advertising Service, Inc. v. Kolar, 14 Ill. Ap. 3d 522 (1973), the Kolar court held that an employment restrictive covenant was valid if there were (i) a near permanent customer relationship with the employer, and (ii) the employee had gained confidential information through its employment. The Illinois Supreme Court emphasized in its December 2011 opinion that the Kolar test is not valid. (Reliable Fire Equipment Company vs. Arredondo 2011 IL 111871). The Illinois Supreme Court, instead, reaffirmed the legitimate business interest test, and clarified that “whether a legitimate business interest exists is based on the totality of the facts and circumstances of the individual case. Factors to be considered in the analysis include, but are not limited to, the near-permanence of customer relationships, the employee’s acquisition of confidential information through his employment, and time and place restrictions. No factor carries any more weight than any other, but rather its importance will depend on the specific facts and circumstances of the individual case.”

For the most part, the Illinois employer’s bar hailed the Arrendondo decision as a victory, believing it gave employers a broader basis for enforcing employment restrictive covenants.  Ironically, many attorney’s representing primarily employees were encouraged by the Arrendondo decision as well, believing it gives employees more room to challenge enforceability by challenging, factually, whether a “legitimate business interest” is at stake.

“Little Known” Two-Year Rule for Employment Restrictive Covenants – Illinois

While the foregoing is all well and good, a fundamental concept of law is that employment

“How can you have any pudding, if you don’t eat your meat?”

Pink Floyd

Assignments of Rents.

Here’s a topic that doesn’t pop up in light conversation very often.

Assignments of Rents.

Virtually every commercial real estate financing includes an assignment of rents – either as a separate instrument, or in the mortgage, or both. We think we know what it means, and what protection in provides. But do we?

Assignments of Rents.

What could assignments of rents possibly have to do with Pink Floyd?

It has been suggested on occasion, only half-jokingly, that