Gordon Feinblatt Podcast

George Ritchie & Searle Mitnick: Protecting Developers in Lease Agreements

• Gordon Feinblatt LLC • Episode 6

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In this conversation, George Ritchie and Searle Mitnick discuss the complexities of real estate litigation, focusing on the challenges developers face when landlords become uncooperative. They explore the importance of detailed contracts, regulatory compliance, and the necessity of estoppel certificates for financing. The discussion emphasizes the role of good faith and fair dealing in contractual relationships, providing insights for both developers and landlords.

Mitnick, Searle E. | Gordon Feinblatt LLC
Ritchie, George F. | Gordon Feinblatt LLC

Real Estate | Gordon Feinblatt LLC
Litigation | Gordon Feinblatt LLC

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SPEAKER_01:

Hello, everyone, and welcome back to another episode of the Gordon Feinblatt Podcast. The conversation we are bringing to you today will discuss the complexities of real estate litigation with a focus on some challenges developers may face if landlords become uncooperative. Our attorneys, George Ritchie, litigation attorney, and Cyril Mitnick, real estate attorney, explore the importance of detailed contracts, regulatory compliance, and the necessity of estoppel certificates for financing. This discussion emphasizes the role of good faith and fair dealing in contractual relationships, providing insights for both developers and landlords. This episode is a great lesson for anyone in the real estate space, whether you are a developer, a landlord, property owner, investor, or a real estate attorney yourself. We think there's useful information in here for everyone. As always, if you need legal assistance or have any questions, you can find contact information for the attorneys featured in this episode, as well as information about the firm Hi, everyone.

SPEAKER_00:

Thanks so much for tuning in. My name is George Ritchie. I am a litigation attorney and head of the litigation department with Gordon Feinblatt, and I'm joined today by my colleague, Cyril Mitnick.

SPEAKER_02:

Hi, everybody. I'm Cyril Mitnick. I'm a member of Gordon Feinblatt in the Real Estate Practice Group, and I'm happy to be here with you today.

SPEAKER_00:

Sir, good afternoon. Good afternoon, George. I want to paint a picture for you that I hope we can address in the next 15 or 20 minutes for our audience. And it's really a grim picture of the litigation world. Imagine a developer who has a project for which they have leased a commercial real estate. And although the project is not finished at the time they enter into the lease, and this could also be a lease option, by the way, while they're developing that project, getting financing, getting construction underway, et cetera, the landlord decides for whatever reason that they don't like the project anymore and stopped cooperating with the developer and helping the developer get necessary documents, permits, etc. that are required for the project to get underway. And the developer is now millions of dollars into this project and is running out of time. And probably most importantly, the commercial world is changing on them, such that if they don't get the project done within a certain amount of time, it may no longer be viable from a commercial situation. As often happens, the developer files suit. There's a dispute between the developer and the landowner as to what the landowner really had to do to cooperate with the developer in doing the project. And trials upcoming and hundreds of thousands of dollars have been spent and the commercial opportunity is slipping away. This is a situation that I've encountered and others have encountered in the past. And my question for you as our real estate expert is, What can the developer, and we can flip it around to talk about the landlord too, but what can these parties do to protect themselves in a lease or lease option situation so that they can feel reasonably secure that the party on the other side will cooperate with the items that need to be done towards a successful development?

SPEAKER_02:

So I think really we could approach this as we would with initially looking at any kind of a contract. the contracting parties want to get what they bargained for. And the way to maximize that expectation is to be as detailed as possible in the document so that the other party, if it gets buyers or sellers or landlords or tenants remorse, doesn't have room to wiggle out of it. So we try to include everything that we can. Often this arises in an option context. We see it very typically these days in renewable energy context, but it can apply anywhere, but parties will, enter into an option agreement, whereby we'll call him the landowner, executes an option agreement with a prospective tenant who will lease the property for whatever purpose. Let's stick with our energy deal. Suppose it's a solar developer and they're going to develop the property, get the necessary permits, get the necessary financing, investment, et cetera, so that they can erect their solar panels and sell the energy generated to the utility company. or to other consumers. So the parties will enter into a lease option agreement. Often we will see agreements that say that if the option is exercised, the parties will enter into a lease which contains the following terms. What's the rent? Is there a different rent during the construction period and the operation period? How long is the term of the lease? Is it renewable? And so on. And sometimes in developments and not only with renewable energy transactions, a prospective tenant will acquire the site control of a large parcel, but give itself the option of the commercial the prospective commercial tenant will take site control of a large parcel but with the expectation that after it does its due diligence and its studies it can reduce it to a certain specific area of the larger parcel when the document is not sufficiently detailed it gives a wide range of latitude in this case to the landowner to get out of it if the landowner doesn't like the deal. And the way to avoid that is to have, one way is to put in the option agreement all the terms of the lease that you can imagine, but a better way is to actually negotiate the lease at that point. fight out all the battles over all the issues, incorporate them in the lease and say, if the option is exercised, this is the lease. And sometimes the parties contemplate that at that point, the landlord and the tenant will sign the lease. I like to do it even more nailed down than that. And that is to provide in the option agreement that this lease attached automatically becomes the lease in effect between the parties and that doing it that way gives a higher degree of expectation that in this case the tenant we'll get what it bargained

SPEAKER_00:

for. So you mentioned the solar context. As we know, these deals can be pretty fluid and dynamic. The parties in year one might think that this project is going to be of a certain size and a certain location, and three or four years later, they find out that the local planning authorities, whether at the county or the state level, have different ideas. How important is it for regulatory counsel and or the regulatory folks dealing with these agencies to keep their attorneys up to date on those developing issues as these deals get hammered

SPEAKER_02:

out? It's essential because the regulatory folks have to present a case to the authorities, often the Public Service Commission and or local authorities and they may have different ideas. Often we find these in the solar context dealing with agricultural property and dealing with large farms. And again, the solar developer in our example would like to maximize its flexibility. So it will say that we can exercise the option as to the entire site or any portion thereof, and pushing back, the landowner will want to know that it's at least going to be a minimum number of acres so that it will have a viable project in terms of the rent that it will receive.

SPEAKER_00:

Can a party, say in this case the developer, include a clause in the lease or the lease option that recognizes the purpose of the project? and then has some language that says that the landlord in this case will take other such steps as is reasonably necessary to carry out the purpose of that project?

SPEAKER_02:

The answer is yes. But I like to put that in after we put in all the details that we can think of, and then we have that clause and anything else reasonably required by the tenant to enable the party, the tenant to fulfill the purpose. And a good lease normally says what the purpose is, whether it's a convenience store, the purpose is to run a convenience store. For a commercial office tenant, that's the purpose. So you want the obligations of the landlord tied to the purpose, which should be articulated in the

SPEAKER_00:

document. There's a well-known case out of the Maryland appellate courts. I think it went to what used to be called the Court of Special Appeals.

SPEAKER_02:

Oh, I remember that, George.

SPEAKER_00:

Yeah. The Intermediate Appellate Court and now the Supreme Court of Maryland. But the case name is CRRSC Tower 1 versus RSC Tower 1. Pretty boring, vanilla name. But in that case, the developer wanted to build apartment buildings on the land that they were leasing and in order to do that of course they had to get financing from lenders and one of the requirements from the lenders was that they provide estoppel certificates to the lenders and they needed to get those certificates of course from the owner Would, in your scenario, what you're describing, would it be possible to include that requirement that upon a reasonable request and within a reasonable amount of time that a property owner would supply a certificate, a stop-loss certificate like this to a developer?

SPEAKER_02:

It's essential if the developer intends to finance its project. And typically, we will provide when we're representing the developer that the landlord will provide an estoppel certificate. Ideally, we'll say in form and substance satisfactory to the lender. There will sometimes be pushback from the landlord who might want to say what it's not willing to give. The problem in that case was that the estoppel certificate was specified in the lease, but the defaulting party didn't want to give it. There, they... A nuance on that, however, is this. As I said before, I like to attach forms of documents to my option agreement. So I could attach a form of option agreement, of estoppel certificate. But suppose the lender has a different form and doesn't like my form. So if one thinks of it, the best way to do it, I guess, is to attach a form but provide in the document itself, in the lease itself that the parties will, they will change the estoppel certificate in conformance with the requirements of a lender.

SPEAKER_00:

And in that case, in fact, first the trial court, then the intermediate appellate court, and ultimately the court of appeals upheld rulings that required the landlord to provide those certificates. It seemed clear from the facts described in that case that the refusal to provide them was strategic, that the landlord didn't like the deal they had struck, and they were looking to essentially squeeze the developer out by hoping that as litigation dragged on, that the market for this apartment building would evaporate and the developer would simply walk away. My experience in general in Maryland state and federal courts is that although no circumstance can be fully contemplated at the outset, I guess, of contracting, judges in the state will will interpret agreements to require reasonable action by landlords or tenants, depending on who's seeking redress there, as long as those requests are reasonably consistent with the clear language of the agreement. How do you feel about

SPEAKER_02:

that? I think that's a good thing. And in other cases, in different contexts, but the idea is pretty much the same. Courts have imposed by implication an obligation of good faith and fair dealing. And that is an appropriate concept, I think, for situations like this. Yes, in the case that you were talking about, it was clear that the party had remorse, if you will, about the deal and was trying to wiggle out of it in any way it could. But the court didn't let him get away with it. And that case was up and down numerous times, cost many, many, must have cost many hundreds of thousands of dollars. But ironically, in that case, up to our point, the contracting party had protected itself with a document that the court could and did enforce.

SPEAKER_00:

And there's the old adage, anybody can sue anybody over anything. But as you point out, in that case, it did have a relatively happy ending and that the court upheld the reasonable requirements.

SPEAKER_02:

Happy ending for the good guys. That's right.

SPEAKER_00:

Well, Searle, it's been a pleasure speaking with you this afternoon. Thanks for coming in and sharing your knowledge and wisdom on all of these topics. And I hope that this message gets through to those listening and provides some guidance in any difficult situations they might encounter.

SPEAKER_02:

But George, if everybody were to listen to me, what would the litigators do?

SPEAKER_00:

Well, that's for another day.

SPEAKER_02:

Okay. We'll look forward to that. Thanks very much. Thanks, George.

SPEAKER_01:

All right, everyone. Thank you so much for joining us on this episode of the Gordon Feinblatt podcast. Here at Gordon Feinblatt, we're not just your lawyers, we're your trusted advisors dedicated to serving you, our clients, and our community. If you ever have any questions or need assistance, you know where to find us. Please don't hesitate to reach out. Information for the attorneys in each episode, the firm, and any other relevant materials will be available to you in the show notes. Be sure to subscribe, reach out directly, and continue to tune in with us each month. And until Until next time, take care.