Restaurant Law Blog

Tuesday, June 24, 2014

Does Your Lease Contain a Demolition Clause - Why You Should Be Scared

If you have opened a new restaurant or bar in the last two years, you have likely noticed that New York City landlords are becoming steadfast in their demand that all new leases contain demolition clauses.  Old office and residential buildings are potential redevelopment opportunities which landlords are no longer willing to overlook.  Landlords, of course, want to maintain a steady income from the property while also maintaining their flexibility to terminate leases and/or relocate tenants if the need arises.  If a landlord has redevelopment in mind, then a right to terminate existing leases so that demolition or substantial renovation can occur may be necessary. However, from a tenant's viewpoint, such a right, without limitation, can be less than satisfactory. Sometimes arriving at an appropriate middle ground can be impossible. Just ask Wylie Dufresne whose restaurant wd~50, is closing because the building is being torn down for renovation.    Similarly, according to Eater NY, P.J. Clarke’s is in the middle of a $40 million dollar lawsuit with its landlord who is allegedly attempting to push them out so as to make room for Pastis.  In short, tenants cannot overlook a landlord’s desire to evict them should an opportunity arise.  For that reason, when negotiating a new lease, Tenants must consider things such as:

  • Is there a restriction as to when the right to terminate can be exercised – e.g. after the 5th year;
  • How is "substantial renovation" defined and what restrictions should be placed on it – e.g. 50% or more of the rentable area of the building in which the premises is situated, whether or not the premises are directly affected;
  • What proof is required to support the bona fide nature of landlord’s intention to demolish or substantially renovate the building – e.g., architect’s plans, DOB permits, etc.;
  • What advance notice should be required;
  • Is there a payout or other form of compensation for the remaining value of the tenant's leasehold;
  • Will the landlord pay for those costs associated with finding a new location for your restaurant or bar, including moving expenses and broker fees? 

Landlords are not stopping at demolition, however.  A related trend finding its way into lease agreements is the “sale provision” which essentially gives a landlord the right to terminate a lease if the landlord intends to sell the building. Such a provision will often require that there be an actual purchase agreement between the landlord and a potential buyer before the right to terminate kicks in. A tenant will want to ensure that any such agreement is "bona fide" and not merely an agreement between related parties entered into for ulterior motives. However, when the trigger for the exercise of the landlord's right of termination is an actual purchase agreement having been signed, the notice period is likely to be relatively short so that evictions, if necessary, can be accomplished on or before closing.

You might ask, “Why would a landlord want to terminate a lease agreement when selling their building since the income from the building is likely part of the attraction?”  Depending on the type of building, the desire to terminate and provide vacant possession of some or all of the building may be desirable. If the property contains a number of underperforming tenants, the landlord may want the ability to terminate those tenancies on the basis that the new development will be more attractive without them.. With this in mind, when the lease is being negotiated a savvy tenant with sufficient bargaining strength might insist that any such termination be conditional upon the landlord terminating all other tenants (or at least a portion of them based on a specified percentage of other premises or within a defined area of the mall), making it more difficult for a landlord to discriminate among its tenants in the exercise of the termination right.

In short, an owner's desire to get the most out of its property is a natural instinct in the world of commercial real estate but the impact of these provisions can be devastating to a tenant’s business.  Tenants need to be savvy in their lease negotiations to ensure the survival of their restaurant or bar for at-least, the duration of the lease. 

 


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