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.”
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.
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.
A case that was decided last year by the New York Supreme Court, Kings County, illustrates the importance of protecting the confidentiality of proprietary supplier and manufacturing sources.
In this case, a wholesale distributor of off-price apparel engaged an employee to assist the distributor in sourcing merchandise from overseas manufacturers. The distributor and employee made a number of trips to a South American country where the distributor sourced merchandise through a business broker who provided introductions to local apparel factories.
After a few years, the employee left the distributor to work for a competitor that began to place orders for merchandise with these same factories through the same broker.
The distributor subsequently brought an action against the employee and the competitor for unfair competition claiming that the identity of the broker and associated factories constituted trade secrets, which the employee misappropriated for his own and the competitor’s benefit.
Under New York law, a former employee may generally solicit a business’s customers, so long as the employee is not bound by a non-compete agreement, does not solicit the customers while still employed by the business and does not rely on customer information that was wrongfully obtained or which constitutes a trade secret. The courts have applied a similar standard when evaluating whether the identity of a company’s suppliers may be treated as a trade secret, often also considering whether the company had exclusive arrangements with those suppliers.
In determining whether information is a trade secret, New York courts frequently apply a six factor analysis:
- the extent to which the information is known outside of the company;
- the extent to which it is known by employees and others involved in the business;
- the extent of measures taken by the company to guard the secrecy of the information;
- the value of the information to the company and its competitors;
- the amount of effort or money expended by the company in developing the information; and
- the ease or difficulty with which the information could be properly acquired or duplicated by others.
The court ultimately decided the action in favor of the employee and competitor, determining that the identity of the broker and the associated factories were not trade secrets. The distributor did not establish that the broker or the factories had promised to or did, in fact, sell exclusively to the distributor and did not show that the identities of the broker and the associated factories were confidential. The distributor also failed to provide evidence that it had undertaken great effort in discovering the factories, in establishing a business relationship with the broker or in keeping the identities of the parties secret.
The lesson here is that businesses that depend on key suppliers should not rely on trade secret protection alone to protect these relationships. Instead, they should take steps to identify as proprietary that information which they wish to protect and should enter into appropriately tailored non-compete and non-solicitation agreements with their employees that are designed to prevent them from disclosing or otherwise taking unfair advantage of such information of which they become aware during the course of their employment.
Credit: R. Brian Brodrick
Brian is a partner in Phillips Nizer’s Corporate Law and Securities & Private Placement Practices.