Chef Geoff's Downtown Fights To Extend Lease

[lizzie]

http://www.bizjournals.com/washington/breaking_ground/2013/10/chef-geoff-pleads-for-right-to-stay-at.html?page=all

[DaveO]

I find that an interesting case and argument.  I've negotiated lease renewals and despite what the language of the lease says landlords take all sorts of attitudes and reactions that often are at complete odds with the language of the renewal.  Its usually all about money and in this case it seems to be the same.  The developer has a huge expensive project on the drawing board, they've already made a cash buyout offer to the operator and he turned it down.

I say hold em up.  Get more cash!!!!   Fight the fight!!!  and good luck to Chef Geoff's.  

[jayandstacey]

I'm with ya on the "get more cash" part.   But if the extensions require mutual agreement - well, there isn't mutual agreement.  And isn't the owner within their rights to not extend if they don't want to?

Put another way, let's say Chef Geoff's failed tomorrow.  Would the owner have rights to go after the restaurant for losses on the lease extensions that never happened?

As for the stalling tactics - I don't negotiate or otherwise waste my time on things I know I won't accept.  Just because the restaurant forwarded various offers doesn't mean the owner has any obligation to act upon, let alone accept, any of them.

[DonRocks]

Does anyone think there's something fundamentally wrong with the "get more cash" mentality?

How about "right vs. wrong" for a change?

I hate people.

[jayandstacey]

I actually don't hate such people per se - simply because it has the tendancy, in the long run, to backfire.  And it always highlights those who live like that.

My wife once said that she hated to see confederate flags - I responded that while I disagree with the symbolism of the flag, it actually serves as a nice "scarlet letter" to let me know who to avoid in business or personal matters.  (note that this goes back to my "foist" rule - which is to say that I don't care about someones beliefs and would never ask but if they insist on foisting those beliefs upon me, then I will consider and possibly act on them.  If one drives their plumbing truck around with a big confederate flag on it, well... I appreciate that plumber's right to their opinion but I won't ever give them my business.)

I only know the details as presented in the article.  Based on those alone, I'd say their suit has little chance of winning anything - that while they might have gotten something, they'll end up with nothing.   More importantly, the next landlord will probably be at least careful, if not downright strict, with their next lease.

Or they buy their own building.

[DaveO]

I find the case interesting.  I don't know how a court will decide nor on what basis it will make a decision.  I also think it has little to do with right or wrong.  A lease extension right is a serious part of a written agreement:  the written agreements are part of the fundamental aspects of American law.

As I recall the people that head Quadrangle are nice people but extremely tough (as are most landlords) in business.  There isn't a lot of right or wrong there.  Its business.

More power to Chef Geoff Tracy if he has made that location a success.  Not all restaurants in that terrific location have made it over the years.

Can the right to extend a lease overcome the desire of a landlord to bulldoze a building a build a larger building?  I don't know.  The landlord agreed with the tenant years earlier to provide for a lease extension.  Almost assuredly that agreement spelled out a way to determine a market rent if the two sides couldn't agree in negotiations.

Ultimately I think it will be negotiated about cash.  In my opinion more power to Chef Geoff Tracy.  Fight the fight.  I'm not the one to say the original offer for a buyout was reasonable or "right" or not...but I suspect the original offer was on the low side.

[jayandstacey]

Can the right to extend a lease overcome the desire of a landlord to bulldoze a building a build a larger building?  I don't know.  The landlord agreed with the tenant years earlier to provide for a lease extension.  Almost assuredly that agreement spelled out a way to determine a market rent if the two sides couldn't agree in negotiations.

I have no background in commercial leasing - but do in other contracts.  Are such extensions typically written as the sole right of the lessee to extend, and the only question is if the rent can be raised?  If so - yeah, more power to Mr. Tracy.  An inflection point in a lease isn't the time when the lessor can exit, if they have no termination rights in the agreement at that point.

In my world (which has nothing to do with commercial real estate) optional extensions are almost always either mutually agreed - or automatic unless one party steps in and terminates. 

I can see where upon establishing a business who's very floor is reliant on the lease - the lessee would want the sole discretion to extend, and would probably get it.  The owner shouldn't have allowed 20+ years in the first place.

So yeah, more power to Chef Tracy if that's so.  Either way, it seems the contract should be pretty plainly interpreted.

[DaveO]

@ Jayandstacey:  From rereading the article there was a 10 year lease with 2 five year renewals.  If the tenant's attorney was savvy the renewals would not have had rental rates but would have a specific way to get an agreed upon rent using a 3 appraiser method in the event the landlord and tenant couldn't agree on the amount.  (that is all from memory...if there are additional elements to specifying terms during a renewal I'm not familiar with them)

on the other hand a supermarket anchor in a shopping center might have  a 30,40, 50 year lease with extensions...and the extensions might have specific rental rates.  In the first case usually the landlord has more negotiating leverage.  In the 2nd case the tenant has more negotiating leverage.

I never ran into this kind of case, where a retail tenant used his renewal rights to try and stop a tear/down redevelopment of a building. From the article it appears quadrangle (the landlord) is going to quadruple or quintuple the size of the development.  That has enormous value.

I just found the situation and article interesting.  Whether one likes or doesn't like the restaurant, more power to the operator for running a successful restaurant there.  Its a great location IMHO able to pick up business traffic and tourist traffic.  If its especially good it can draw local traffic at night.  I've seen other restaurants fail in that location and nearby with similar location advantages.

I also think that its in the last 10+ years that retail rents in downtown DC just skyrocketed.  If he were to negotiate a new rent with his renewal I'm sure "market rent" would entail a huge increase off of whatever he is paying.

Over the years regardless of the language of leases I've seen landlords act in ways that defied the lease terms if and when they wanted to make changes for whatever reasons they had.  I'm not familiar with court cases of this ilk.  In my experience when landlords tried to change conditions regardless of the language of a lease there was usually some kind of negotiated buyout.   It usually ended up about the money.   As I'm writing this I think most of the reason this case landed in court is because the landlord and tenant are way way apart on some kind of buyout.

All of these comments are my opinion and nothing more.  I just find it interesting.

[jayandstacey]

That all makes sense - can I assume that in a typical lease for this situation, if there's an option to extend, it is SOLELY the tenant's option?   Regardless of the formula used to calculate the rent for the option period - to landlords give tenants the chance to walk away...but not give themselves the same chance? 

[DaveO]

@jayandstacy:  I'm not an attorney and never thought through that question nor recall it being discussed.  (though it might have been). My response is not legal.

It gives the tenant the right to extend the lease.  It does not give the landlord the right to walk away from a lease extension.

So much of the dynamics about these situations are solely based on market conditions and have nothing to do with "right or wrong".  In most cases tenants that are making it, want to stay.  In most of those cases landlords would want to keep them.  From the landlord's perspective its a pain in the neck and expensive to try and release a vacated space.   Also there are risk and credit risks associated with a new tenant.

On the other hand if rents have soared in between the time a lease was written and the point of renewal landlord's perspectives might change a lot.  Regardless of how much more they might negotiate with an existing tenant they might get more with a totally new tenant.   Finally landlords sort of want to play god and director with their properties and determine who or what type of business goes into the spaces in terms of look and feel.  (they have that right--its their building(s).  But when they do that they have no idea how a new tenant will play out and operate.

Lastly, while I leased a lot of space and a good bit of retail in the city and suburbs over time, reading through this forum has given me new and different insights about operating a restaurant that I hadn't considered before.  Its tough to run a restaurant.  I give kudos to the operators that do so successfully, especially in this high rent environment.

[ktmoomau]

That all makes sense - can I assume that in a typical lease for this situation, if there's an option to extend, it is SOLELY the tenant's option?   Regardless of the formula used to calculate the rent for the option period - to landlords give tenants the chance to walk away...but not give themselves the same chance? 

A landlord could never require that a tenant extend their tenancy past a lease date against their will, so yes a lease extension is solely the tenant's option.  Plenty of leases have provisions for undefined extensions that turn into month to month or other timed periods, that either party can walk away from with enough notice.  But a lease extension of a defined period, such as in this case, is only a tenant's option.

[DaveO]

thanks ktmoomau:   A legal response.  That adds clarity in my mind.

Over the years I experienced situations where landlords tried to affect the ultimate new lease rates or terms and/or tried to push a tenant out via some sort of slick trick which works around the basic terms.

In this case if you take the tenant at face value, and if he has some proof wherein the landlord didn't respond then I would think the tenant has some standing to take this situation to court and a chance at a more favorable decision if they don't settle beforehand.

On the other hand if this restaurant was able to successfully prevent this proposed development because of this case, a buyout offer could become astronomical.

[smithhemb]

Assuming (which I generally wouldn't without seeing actual contract language) that the lease extensions are solely the tenant's option, the landlord can just breach the contract and pay damages.  No court will order specific performance (i.e. keep the building intact and housing the restaurant until all lease extension options run out) in a case like this.

The logic of contract law (much to my surprise when I first took the class) is that you should breach whenever you can make more than enough money to compensate the person you contracted with and still come out ahead yourself.  So it actually is all about money (specifically what was the anticipated benefit of the bargain to Chef Geoff) rather than right or wrong.  Makes sense when you realize contract law is about capitalism and managing risk rather than about morality and keeping promises. 

[DaveO]

I worked in this area for a long time as a broker.  I bowed to attorneys on their expertise and frankly always looked for relationships where we could complement one another.

Its refreshing to get legal clarity on this lease extension issue.

From my perspective go Chef Geoff.  Try and get more $$$.   I suspect if you do have to relocate and try and find a new comparable location the rent is going to be far far far more expensive than what you are currently paying (assuming you are still on that original lease)

[jayandstacey]

Assuming (which I generally wouldn't without seeing actual contract language) that the lease extensions are solely the tenant's option, the landlord can just breach the contract and pay damages.  No court will order specific performance (i.e. keep the building intact and housing the restaurant until all lease extension options run out) in a case like this.

The logic of contract law (much to my surprise when I first took the class) is that you should breach whenever you can make more than enough money to compensate the person you contracted with and still come out ahead yourself.  So it actually is all about money (specifically what was the anticipated benefit of the bargain to Chef Geoff) rather than right or wrong.  Makes sense when you realize contract law is about capitalism and managing risk rather than about morality and keeping promises. 

Yeah, that makes sense.

I suppose not allowing the tenant to stay is itself the breach.  Seems the damages could be anywhere between minimal moving costs and the revenue/profit of the restaurant for the next 10 years.

I'm surprised they don't find a solution, like developing part of the property and making a space for the restaurant to move into with the new building.  I mean, successful tenants are the goal of the landlord, right?

[DaveO]

Chef Geoff's and the landlord made a deal....and nobody is talking about how big a payoff it is.