The Battle Over Self-Help

Source: CCN Retail Perspectives

10/23/2013

A common battle between landlords and tenants during lease negotiations is whether or not, and in what circumstances, a tenant will have the right to exercise self-help following a landlord’s failure to perform lease obligations. The outcome of these negotiations will typically depend on the creditworthiness and bargaining strength of the particular tenant.

The issue of self-help usually arises in connection with the negotiation of the landlord’s maintenance obligations (although the issue also commonly arises in connection with the negotiation of the general landlord default provision). Under the typical space lease, landlords usually assume certain obligations in connection with the maintenance, repair and replacement of structural and other components of the premises. To the extent a landlord fails to satisfy such obligations, the tenant will want to be in a position where it can remedy the problem and receive reimbursement from the landlord for same. Sophisticated tenants will take a strong position on this issue, especially to the extent the landlord’s failure to properly maintain its elements of the premises will interfere with the operation of the tenant’s business. The tenant must be in a position where it can rectify the problem sufficiently to continue its operations.

On the other hand, most landlords are compelled to oppose such concessions. Most landlord maintenance and repair obligations relate to structural components of a building or the shopping center, and work relating to such components could potentially affect other premises or components of the shopping center. Accordingly, landlords will commonly try to limit a tenant’s ability to make such changes, out of fear that a tenant’s work may inadvertently affect other aspects of the shopping center. Furthermore, landlords oppose providing tenants with self-help rights in an effort to avoid potential disputes in the future over whether or not a tenant was justified in performing work at the landlord’s expense.

Except in connection with negotiations with sophisticated or well leveraged tenants, most tenants are left with no ability to exercise self-help from a contractual standpoint. In such circumstances, if a landlord fails to satisfy its maintenance and/or repair obligations, the landlord may be subject to claims of a landlord default and the remedies that flow from such default. On the other hand, tenants with significant bargaining strength are often able to negotiate self-help rights under certain circumstances.

When representing the landlord, it is important to limit a tenant’s self-help rights to situations where the landlord’s failure to properly maintain the premises will have a material, adverse affect on the ability of the tenant to operate its permitted business from the premises. Furthermore, it is important to limit a tenant’s self-help remedy to a situation in which the landlord has failed to satisfy its obligation following written notice and an opportunity to cure. In addition, many landlords require a second notice and opportunity to cure (albeit usually for a shorter period of time) before the tenant will be entitled to exercise self-help. It is also important, when representing landlords, to ensure that any self-help right exercised by a tenant is limited to rights relating to maintenance obligations within the premises. Tenants should not have the right to effectuate changes or perform other work in the common areas or in a way that will potentially detrimentally affect other occupants of the shopping center.

In the event a tenant exercises self-help, it will want to be in a position where it immediately receives reimbursement from the landlord for such work. On the other hand, the landlord will need the ability to properly review expenses before reimbursing the tenant. Accordingly, many self-help provisions will provide for the landlord to reimburse the tenant within 30 days following the landlord’s receipt of invoices and other documentation reasonably requested by landlord to justify the expenses. Landlords usually will also want to make sure that they are only responsible for the costs reasonably incurred by the tenant. Sometimes the tenant will negotiate for an offset right to the extent the landlord fails to reimburse its costs within a negotiated period of time. Whether or not an offset right is granted is often dependent upon the relative bargaining strengths of the parties. If the landlord must agree to an offset, it should attempt to limit the amount of the offset in any given month to a particular percentage of rent or otherwise attempt to toll the tenant’s ability to offset during any period during which the landlord is disputing the subject claim.

The ability to exercise self-help in a situation where a landlord is not complying with its maintenance obligations under the lease is an issue of paramount concern to the tenant. However, without negotiating the proper protections, the landlord can expose itself to numerous risks at the hands of the tenant.

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