Publications

Avoiding Problems Before They Arise

Alan S. Petlak
California Centers Magazine
December 16, 2007

Litigation often arises when potential pitfalls are not thought about in advance and not properly addressed in the documents. This article will examine some of the pitfalls that a shopping center owner should keep in mind when entering into agreements and how some of those pitfalls may be avoided by addressing them before a dispute arises.

Letters of Intent

A letter of intent is a document describing the preliminary understanding of parties who intend in the future to enter into a contract. However, courts do not always look at letters of intent as an agreement to later agree. Therefore, to avoid being tied to the often incomplete and imprecise terms of a letter of intent, it is important that proper cautionary language is used to make clear that the letter of intent is not a binding agreement. It is also important to be cognizant of the fact that even when a letter of intent contains the proper cautionary language that it is not an enforceable agreement, a party may still be held liable if it is later found not to have negotiated in good faith.

Security Deposits

Section 1950.7 of the California Civil Code requires the return of a security deposit in a commercial lease within a specified period of time which vary a bit depending upon the type and amount of deposit. Section 1950.7 may be waived by express provision in the lease agreement. It is advisable, therefore, for a shopping center owner holding a large security deposit to include a provision in the lease agreement which makes clear that the security deposit may be held and applied against future damages and to explicitly waive the provisions of California Civil Code Section 1950.7 with respect to the time periods by which a security deposit must be returned. Absent such specific waiver, a landlord who elects to terminate a lease will be prohibited from using the security deposit as an offset against future damages by reason of a recent case [(250 L.L.C. v. Photopoint Corp., 131 Cal. App. 4th 703 (2005)].

Mechanic’s Liens

A shopping center owner who permits a tenant to perform its own tenant improvement work should think about the risk of a mechanic’s lien being recorded against the property in the event the tenant fails to pay the contractor, subcontractor or material supplier. The owner should consider requiring the tenant to provide a payment bond equal to the construction contract price before the work begins. Alternatively, the owner may require an increase in the security deposit until the improvements are completed and appropriate releases are received by the owner and that the tenant defend, indemnify and hold the shopping center owner harmless with respect to any tenant improvement work performed on the property.

Relocation Provisions

When entering into a lease with a tenant, a shopping center owner should think about including a relocation provision in the lease that will allow the landlord to move the tenant to a new location if such a need later arises. While there are no reported cases in California which discuss the enforceability of relocation provisions, the few available non-California decisions on the subject make clear that the more details provided with respect to the relocation in the lease, the more likely a court will find that such a provision is enforceable. The provision should require comparable and reasonable alternative premises and take into consideration such things as the amount of notice that should be provided to tenant, a mechanism to determine the location and layout of the new premises, who should pay for the costs associated with the relocation, remedies if the tenant fails to relocate and how often the landlord can relocate the tenant during the life of the lease.

Use Provisions

A use provision may be used by a shopping center owner to restrict a tenant from expanding into another tenant’s business. In turn, a tenant may use an exclusive use provision to prevent competitors from opening up in the same center. To avoid litigation later, it is important to clearly define and specify in the lease agreement what constitutes a permitted or exclusive use and, to the extent practical, what does not. For example, a use provision in a supermarket lease which gives the supermarket the exclusive right to sell “unprepared foods” may be later used by the supermarket to prevent a pharmacy which sells unprepared foods from opening up at the center. Similarly, giving a gym the exclusive right to operate a “health club” may be later used by the gym to prevent a yoga studio from opening up at the center. Litigation may arise when the parties are unclear as to the precise nature of the permitted or exclusive use granted to the tenant. For this reason, it is advisable that the parties to the lease agreement be as specific and precise as possible.

Litigation often arises when the documents are unclear and the parties do not properly anticipate the problems that may arise later. Therefore, to avoid litigation later, parties should strive to make sure the documents are clear and precise and that disputes that may later arise between the parties are considered and dealt with in advance.

About the Authors: Alan S. Petlak, Esq. is Of Counsel at Pircher, Nichols & Meeks, a law firm that represents real estate clients nationwide through its offices in Los Angeles and Chicago. Mr. Petlak specializes in real estate litigation and is based in the Los Angeles office. Additional information is available at www.pircher.com