Lease Language

The road to litigation is paved with creative clauses.

Although 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.
Two 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

In the 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.
These 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.
Over 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. 12-012419-CK.
Eventually, 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.
The 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

Unlike most favored nation clauses, which are generally inserted in tenant-friendly leases, early out clauses favor the landlord and are more typically found in landlord-friendly leases.
Early 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.
Although 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.
More 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.
Most 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.