Inventory Location Not Basis for Lease Termination

Facts: After signing a lease and moving into its new space, a tenant was notified via inspection that its sprinkler system violated several fire code provisions and that it was storing merchandise too close to the sprinkler riser. The tenant asked the owner to correct the sprinkler system deficiencies. The owner responded by giving the tenant a notice stating that it would terminate the lease if the tenant did not move the items away from the sprinkler.

After a second inspection revealed the same problems, the owner served a written notice to the tenant that it had to vacate based on its failure to maintain a safe storeroom. The owner then sued to have the tenant removed. The trial court ruled in favor of the tenant, and the owner appealed.

Decision: The appeals court upheld the trial court's decision.

Reasoning: The appeals court found that the lease required the owner to comply with the fire codes and provided a right to terminate the tenant's lease for only nonpayment of rent. Accordingly, the location of inventory did not constitute a basis for termination of the lease.

Mila Investments, Ltd. v. Family Dollar Stores of Ohio, January 2009

Expert Commentary: Prohibit Safety Violations with Lease Clause

Marie A. Moore, a Louisiana real estate attorney, says that, frequently, courts are unwilling to permit an owner to terminate a lease based on a default that the court views as “technical,” such as in this case. She notes that it appears that this lease made it easy for the court to avoid termination because first, the owner assumed the obligation of complying with fire codes, and second, the lease permitted termination only for nonpayment of rent. Instead, Moore says, the lease should have contained a clear provision stating that if the tenant is not operating in accordance with the law or is causing a violation of fire codes or insurance requirements, the tenant will be in default, and the owner has the right to terminate.

To avoid the unfavorable outcome for the owner in this case, New Jersey real estate attorney Mark Morfopoulos advises owners to make sure that their leases provide that the tenant will not do anything that will cause the premises to violate any “law, statute, ordinance or governmental rule, regulation, or requirement now in force or which may hereafter be enacted, including any building code requirements or the requirements of any board of fire underwriters or other similar body now or hereafter constituted (collectively, Governmental Requirements).” The clause should also state that the tenant will, at its sole cost and expense, promptly comply with all Governmental Requirements “as and when enacted, relating to or affecting the condition, use, or occupancy of the premises,” he adds.

Morfopoulos also says that to be fair, an owner should exclude costs to change the structure of its building unless such changes are required as a result of the tenant's improvements to or particular use of the premises. “If an owner desires additional rights to terminate, it should expressly include them in the lease,” he concludes.

Expert Commentators

Marie A. Moore, Esq.: Member, Sher Garner Cahill Richter Klein & Hilbert, LLC, 909 Poydras St., 28th Fl., New Orleans, LA 70112; (504) 299-2108; mmoore@shergarner.com.

Mark Morfopoulos, Esq.: Meislik & Meislik, 66 Park St., Montclair, NJ 07042; (973) 783-3000; mmorfopoulos@meislik.com.

reprinted from CommercialLeaselawinsider.com

Terminating a Commercial real estate can substantially increase your bottom line. This is a very complicated transaction that demands expertise in commercial real estate, corporate finance and legal issues. One firm that has a successful track record in saving large companies millions of dollars by terminating or buying out their lease obligations is Cambridge Consulting Group. For more information please visit their website- www.ccgiweb.com