The road to litigation is paved with creative clauses.
the basic ingredients for commercial leases are the same, they can vary widely
in length and number of issues covered. While many aspects of landlord-tenant
agreements are tried and true, what happens when an aggressive and creative
landlord — or more likely the landlord’s attorney — inserts a provision into
the lease that is unusual and then tries to enforce that provision through
litigation? Often the result is expensive court battles over the enforceability
and impact of the unusual lease provision.
examples of such provisions that have been recently litigated, the so-called
“most favored nation” and “early out” clauses, provide guidance for commercial
landlords that seek to insert similar provisions into their leases.
Most Favored Nation
commercial lease context, the term most favored nation,
which is borrowed from the international trade arena, refers to an arrangement
where a lessee in a shared building, such as a strip mall, receives the benefit
of any other tenant’s negotiations regarding matters such as costs per square
foot for common area maintenance, taxes, insurance, or even rent.
clauses are more often found in leases with national tenants that are in a
strong bargaining position. That being said, landlords can also take advantage
of these clauses under the right circumstances.
the last few years, national tenant Payless Shoesource has engaged a
third-party consulting firm to review its leases and determine whether its
landlords are complying with most favored nation clauses. This review has led
to litigation over the meaning and enforceability of such clauses. Recently,
Payless brought a lawsuit over this type of provision against Belmont Shopping
Center LLC, located in Detroit, in Wayne County Circuit Court, Case No.
the landlord was put under immense pressure to resolve the matter, because a
violation of the most favored nation provision triggered the tenant’s right to
reimbursement of legal fees under the lease terms. As the case wore on, the
settlement value of the case continued to rise until the landlord eventually
had no choice but to settle.
lesson that other landlords can take from this case is to be mindful that even
a minor violation of this type of lease provision could have costly
ramifications if pursued by an aggressive tenant, and landlords should be
cognizant of the risks when agreeing to such provisions.
Early Out Clauses
most favored nation clauses, which are generally inserted in tenant-friendly
leases, early out clauses favor the landlord and are more typically found in
out clauses have rarely been litigated and are usually
only present in leases where the landlord is in a strong bargaining position.
An early out clause essentially allows a landlord to terminate a lease before
the expiration of its term as long as the landlord provides advanced notice and
consideration in the form of a termination fee in exchange for the right to
early termination. Thus, these provisions allow landlords to take advantage of
rapidly changing market conditions by exercising the early out to create
vacancies in hot markets, but give them the flexibility to keep existing
tenants in down markets.
there is very little case law on such clauses, at least two courts have
accepted and approved so-called early out clauses. For example,in re Ardolino,
298 B.R. 541, 544-45 (Bankr. W.D. PA. 2003), the court rejected the tenant’s
argument to invalidate early out clause as the clause is consistent with other
terms of lease and not otherwise ambiguous. Landlords may be able to rely upon
this case to enforce not only early out clauses, but also to limit a tenant’s
attack to any portion of a lease, especially if the tenant relies upon evidence
of verbal promises or statements.
recently, a Orion, Mich., landlord defended an attack to the validity of an
early out clause in a summary proceedings case in the 52-3 (Rochester) District
Court, in Baldwin Plaza, LLC v. Xuan Thi-My Duong, Case
No. 13-C01635, aff’d on appeal, where the tenant argued that the clause was
unconscionable, or simply unfair. The landlord ultimately prevailed, because
the courts found that the tenant had ample opportunity to negotiate and/or
reject the lease if it did not want to be bound by the early out provision.
However, under Michigan law, a district court’s ruling is not binding on other
courts, so this landlord-favoring ruling from the 52-3 District Court, even
though upheld on appeal, does not have precedential effect. Binding or not,
this decision should give some confidence to landlords that utilize and rely on
early out clauses in the future.
favored nation and early out clauses are just a couple of examples of the wide
variety of unusual commercial lease provisions. As the foregoing cases
illustrate, the question of whether a court would uphold an unusual lease
provision is only one consideration for creative landlords. There is also the
matter of how costly it would be to enforce. Landlords should also consider how
to be in the best position to enforce such clauses and whether the potential
for costly litigation makes the clause more burdensome than its potential
intended benefit. These benefits and risks should be weighed by the landlord
with the advice of legal counsel. Be wary of simply regurgitating old leases
that might have been successful under different circumstances.
S. Bolton is an attorney at Maddin, Hauser,
Wartell, Roth & Heller PC in Southfield, Mich. Contact him at firstname.lastname@example.org.