Checkpoint On the World’s Most Expensive Retail Street

Trump Tower

When Presidential Security Interferes with Revenue
and the Customer Service Experience

In the words of a troupe of Britons, first heard long ago, “And now for something completely different.” This post is a transatlantic collaboration, co-authored by members of the fashion and real estate law practices of Phillips Nizer LLP, of New York City, and Fox Williams LLP, of London. The firms address the same legal question from the perspective of New York law, in the segment authored by the Phillips Nizer, and English law, in the segment authored by Fox Williams.

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The secondary residence of U.S. President Donald Trump is located in the eponymous skyscraper that bears his name located in an area of Upper Fifth Avenue in New York City, at the apex of the most important and most expensive shopping district in the Western Hemisphere. Prized retail space can be found in the building and in surrounding properties. This is not the typical environment for establishing a security cordon for the protection of the President of the United States.

If President Trump continues to maintain Trump Tower as a secondary residence and working office (as he had done while President-elect), we can surmise that protective and preventative measures that have been in effect for weeks, will continue. Anyone brave enough to attempt to enter the still-cocooned retail spaces will receive a quick course in world-class security. You have to talk your way past federal and local law enforcement officers to get into Gucci, which is in Trump Tower but accessible by the street, to say nothing of what you need to do to get into the building’s atrium for the chance to score a latte at Starbucks. In short, the conversion of Trump Tower into “White House North” has not been good for business for any tenant who is not named Trump.

New York City and State Law

The retail tenants may seek ways to mitigate their losses. The law and most leases, however, are not particularly sympathetic to this type of economic collateral damage, which typically falls under the category of “consequential damages.”

As a general rule, a tenant’s choice of remedies when things go wrong in a lease is to seek an abatement of rent, or to seek to cancel the lease. Lost profits are considered speculative by the courts and are almost never awarded in cases involving commercial leases. Most commercial leases have specific prohibitions against the award of lost profits.

One possible alternate claim would be for what is known as “constructive eviction.” That happens whenever something within a landlord’s control substantially interferes with the use and enjoyment of the leased premises. The catch here is that it has to be something the landlord does or fails to do; in the case of the President, however, the security is not his own but that of the United States government, working closely with the New York City Police Department.

Many leases provide that, if access to the premises is thwarted or impeded by fire or other damage, rent will be abated. For those leases, there could be support for the claim that the extraordinary event of government restraint on access forms the basis for an abatement of rent.

New York courts have held that a party may be relieved from its duty to perform whenever an unforeseen event has occurred that destroys the underlying reasons for performing the contract. The argument that the United States Secret Service and the local police have turned your block into the Maginot Line is not a familiar one, but it could, at least in theory, gain traction if damage is shown to be acute enough.

Finally, there is always a claim against the government—but that is probably pushing it a bit. Whenever property is taken from a private individual by the government under “eminent domain,” there must be payment of just compensation. There is an exception to the rule that provides that there is no compensation when a taking is due to the exercise of “police power.” An example of police power is the right to damage or destroy private property (without compensation to the owner) when such an act is necessary to protect the public interest. If you want to know what that means, watch the next time someone parks an expensive car in front of a fire hydrant when a blaze has started and fire fighters arrive with their axes.

In short, there is no clear way, through the use of litigation, for retailers caught within the security cordon or even just outside it to seek redress. However, the President is nothing if not a deal maker, and as a sage old lawyer once suggested, “If you don’t ask, you don’t get.” It cannot hurt to contact the landlord and practice your take on “the art of the deal.”

English Law

The position under English law has differing aspects (and certainly uses a different legal language) but is similar. It is true that this could be an issue that is unique to the circumstances in which these retail tenants find themselves, but it raises issues pertinent to landlords and tenants in both jurisdictions. One can easily envisage similar circumstances in London, for example, affecting footfall to tenants’ retail stores and outlets, be that at the instigation of the state, or from other sources. What if a prominent politician or other VIP took offices in Regent Street or Bond Street? What if state security demanded establishing a similar cordon for some other reason, one that interfered with the tenants of prime retail space in the capital?

In English law, the concept of a tenant (as opposed to a landlord) seeking to “cancel” or “determine” a lease is almost unheard of without the agreement of the landlord (for example, a surrender or a break clause). Whilst English contract law has well-established principles of breach of a contract leading to its termination, this does not translate well to the realm of landlord and tenant law, where a tenant is seeking to terminate the lease (this is not the case with the landlord, who can usually seek to forfeit the lease in the event of a tenant’s breach).

So, with this avenue all but closed to tenants, they would usually need to focus on the terms of the lease itself to seek damages or a court order that the interference must stop.

Like our U.S. colleagues, English lawyers would express doubt as to whether the concept of rent abatement can apply to these facts. For the reasons given above, where an English lease contains a rent abatement – or “rent cesser” – clause, that clause normally relates to circumstances in which the property in question is damaged or destroyed (usually due to circumstances for which the landlord is insured) only to the extent that it is uninhabitable. If that is the case, the rent will not be payable whilst the property cannot be occupied. It might be stretching matters too far (without specific wording in the lease) to extend this well-established concept to fit these facts. Trump Tower (or the hypothetical English equivalent) is not a property that is damaged; it is the access to it that has been compromised.

If this offers little comfort to tenants, there are two further (and largely overlapping) English law concepts that might assist. English law has long recognized that landlords must not “derogate from their grant” and the obligation to allow the tenant “quiet enjoyment” of the property. If proved, they entitle a tenant to sue the landlord for damages.

The former principle states that, in granting the lease, the landlord has agreed to confer certain benefits on a tenant, and should not do anything that substantially deprives the tenant of those benefits. The latter requires the landlord to ensure that there is no interference with the tenant’s possession and enjoyment of the property itself.

English cases on the above where tenants have succeeded, have included erecting advertising billboards obscuring the tenant’s premises, alterations by a landlord that discourage passers-by, and causing noise and disruption by way of building works adjacent to the tenant’s property.

So, it would appear that English tenants might be better placed in these circumstances than their U.S. counterparts. However, as in America, tenants are likely to run into the same problem they would encounter had they set up shop on Fifth Avenue instead of Regent Street: is the presence of such high security something instigated (or even sanctioned) by the landlord, or is it a matter of national security, out of the hands of whatever corporate vehicle happens to own the freehold of a given retail unit? The unfortunate truth is likely to be that the security presence is not the ‘fault’ of the landlord, and thus, the landlord cannot be said to have violated either legal principle.

Tenants may therefore find themselves, as in America, caught between a rock and a hard place: a landlord who is ‘not at fault’ and a rent abatement clause that does not do enough to protect their interests. Perhaps one for English tenants’ lawyers to think about too when drafting leases of high-end retail and fashion outlets in the busiest and most desirable of the U.K.’s shopping districts.

Credits: Steven J. Rabinowitz

Steve is counsel in Phillips Nizer’s Real Estate Law practice.

Elizabeth “Liz” Ruff, partner, and Tom Morton, associate at Fox Williams LLP, Solicitors (U.K.)

At Fox Williams, Liz advises on a broad range of commercial property transactions, both freehold and leasehold, including property management, investment acquisitions and disposals, secured lending, property finance, general landlord and tenant issues. Tom is a property litigator, and heads up the firm’s Real Estate dispute resolution practice.

Visit the Fox Williams Fashion Law Group website at www.fashionlaw.co.uk.

Phillips Nizer would like to thank Liz and Tom for providing a non-U.S. perspective on this very interesting, and in this instance, extremely unique and unusual circumstance in real estate law affecting the landlord-tenant relationship.


Avoiding Large Problems in Small Stores

Schaufenster

Some retailers have embraced the strategy of opening a large number of small stores rather than focusing on a few flagships. Advantages include minimizing the chance of significant economic loss in any given location and increased exposure on a national level.

One drawback to this strategy is that, with the greater number of leases to be negotiated, there is an attendant possibility of large legal fees. The retailer could, with justification, believe that, since the rent is small for each location, the legal fees should be similarly modest.

However, the retail tenant’s counsel cannot be any less vigilant in negotiating these store leases. That is because certain types of liabilities can be very costly, no matter the size of the store or the amount of the rent. Those liabilities generally arise from problems with the physical condition of the store.

Landlords come in all sizes and shapes, and often different negotiation strategies are called for depending on who is on the other side of the table. But there is one thing all landlords have in common: they want the tenant to accept the premises “as is” and be responsible for all physical problems within the demised premises. “You have inspected it,” they will say, “or if you haven’t done so, you should do so at once.” But by the very nature of the small store strategy, the tenant is opening in locations where it is unfamiliar with local laws and may not wish to undertake the expense of hiring local architects and expediters to inspect and report on real or potential problems at each location.

Typically, the tenant retailer knows it will have to do work to prepare the store for its occupancy, but the tenant will likely also be unwilling to accept responsibility for any major construction needed to prepare the space for its occupancy. One would imagine that landlords would feel the same way, but often that is not the case. Even if we leave aside landlords who wrongly seek to conceal defective or environmentally unsafe conditions and look at honest landlords, we find that it is not uncommon for them to worry about their buildings being consistently up to code. Even if the building was in full legal compliance at the time of original construction, laws change, and repairs and replacements over time may not be in compliance with the updated code. The big fear is that, when a retail tenant applies to have its plans approved for its leased space, the building department will return with a laundry list of upgrades that are essential to bring the entire building up to code.

Retail tenants must anticipate and respect that fear, and savvy tenant counsel should be able to handle the concerns of the landlords with sensitivity (and often creativity) to help the landlords overcome their fears. The solutions that arise in these situations, when parties cooperate and reasonable compromises are made, can be mutually beneficial. But one thing is certain: the goal of counsel for the retail tenant is to do what is reasonably necessary to help keep costs both predictable and under control.

Credit: Steven J. Rabinowitz

Steve is counsel in Phillips Nizer’s Real Estate Law practice.


Preventing Trouble From “Popping Up”

For lease sign

Pop-up stores have become fashionable among small businesses and large companies alike because they offer a company the opportunity to sell merchandise and to test retailing concepts with minimal investment.  They are also advantageous for landlords who hope to rent space that is temporarily being carried without rental income.

From the perspective of tenant counsel, however, there can be difficulties.  Because the whole point of the exercise is to offer customers a temporary retail experience at minimal financial exposure, the client is seeking to avoid expending large sums on legal fees.  If the client concludes that there is very little financial risk due to the short-term commitment, there can be a tendency to ask for minimal or even no involvement by counsel.

Complicating matters, the landlord is also looking to minimize legal fees, with similar pressures on its counsel to hold down fees.  The attorney for the landlord will therefore often send its standard lease form with only minimal modifications to tailor the lease to the pop-up concept.  Because standard form commercial leases typically impose maximum liabilities on the tenant (which is contrary to the pop-up concept, at least from the tenant’s point of view), the tenant’s lawyer may well find it difficult to deliver a fair lease at the right price.

As an example, the lease form from landlord might provide that, in the event of fire damage, the landlord has a substantial time to rebuild.  That makes no sense for a pop-up store.  The draft lease may also provide for tenant to make all sorts of repairs to the premises, often including building systems.  That is hardly an expectation of the tenant when signing a lease for temporary space.  Compliance with law can prove tricky under the best of circumstances.  Even a long-term tenant must protect itself from expenditures in case the premises need to be brought up to code.  Although the pop-up tenant must of course comply with applicable law, it likely will not want to be responsible for any expense to the pop-up due to deficiencies in the building or the leased premises.  The date of delivery of the leased premises is also an issue.  A landlord typically wants a grace period if it is late in delivery.  For a pop-up tenant, for whom every day of a short-term rental will likely count, any delay in delivery could spoil everything.

Fighting out the applicable clauses concept-by-concept and line-by-line with the landlord’s attorney cannot lead to satisfaction for anyone due to time constraints and the desire to keep down legal fees.  In my experience, the best way to handle the problem is to put in an “omnibus” clause such as:

Notwithstanding anything in this Lease to the contrary, the parties agree that Landlord shall be responsible for all repairs, ventilation, utility lines, maintenance and compliance with laws regarding building repairs that commercially reasonable parties would expect a landlord to perform, taking into consideration the length of this lease and the demised premises’ use as a “pop-up” store, and all other provisions of the lease (including, without limitation, casualty, condemnation, access to premises for improvements, failure to timely deliver possession, and use of existing facilities such as electrical wiring and meters) shall be deemed so modified in the light of the same reasonable expectations.  No “To Let” or “For Sale” signs shall be permitted at the Premises.

Credit:  Steven J. Rabinowitz

Steve is counsel in Phillips Nizer’s Real Estate Law practice.