LITIGATING COMMERCIAL LEASES, DEFAULTS AND REMEDIES: THOSE PESKY AND EXPENSIVE FREQUENTLY LITIGATED LEASE ISSUES By Martin H. Orlick Jeffer, Mangels, Butler & Marmaro LLP ACREL 2007 Mid-Year Meeting San Diego, California March 23, 2007

WHAT HAPPENS IN THE REAL WORLD WHEN THE BRILLIANT LEASE CLAUSE YOU DRAFTED IS LITIGATED  Real estate transaction lawyers do not become judges  Litigators do!  Judges and, more importantly, their research attorneys, do not understand leases like the drafters do, nor do they want to  Jurors know even less about leases  Once your lease is under the litigation microscope, you lose control of the outcome

DEFINING A DEFAULT THAT CAN LEAD TO AN EVICTION AND TERMINATION OF THE LEASE  Monetary defaults – non-payment of rent installments, taxes, insurance, pass throughs  Non-monetary defaults – violation of building codes (Americans With Disabilities Act), quiet enjoyment, use, waste, contamination, unauthorized transfer of the leasehold interest

NEGOTIATING DEFAULT PROVISIONS  Notice Requirements  "Second Bite at the Apple" clauses  Need for notice of non-monetary defaults and a reasonable opportunity to cure  Length of notice and cure period

THE ART OF THE DEFAULT NOTICE  The type of notice may be defined by statute or by the lease  3-Day Notice to Pay Rent or Quit  30-Day Notice to Cure Non-Monetary Defaults or Quit  Requirement of strict conformity to codes and lease provisions  The notice defines the issues for trial  Technical accuracy is essential  A defective notice is fatal and exposes landlords to liability for tenant's attorneys' fees and costs  Rent and charges limited to one year in arrears

EVICTION, DELINQUENT RENT AND NON-MONETARY DEFAULTS  Summary unlawful detainer proceedings – expedited right to recover possession  Expedited trial and limited discovery  Limited defenses  Rent control in the Land of Oz  Vacancy Rent Control the Land of Oz on steriods  Forfeiture of the leasehold interest

LANDLORD REMEDIES  Unlawful detainer actions are creatures of statute  Remedies are typically cumulative  Lease may provide for payments by landlord to third parties for the tenant's account  Right to terminate the lease  Right to terminate possession  Recovery of accrued rent

LANDLORD REMEDIES (CONT'D)  Separate breach of contract action for damages  Right to recover rent as each installment comes due  Rent acceleration remedy provided by statute and the lease

MITIGATION OF DAMAGES  Relation to actions for rent acceleration and damages  Landlords in many jurisdictions have an affirmative obligation to relet the premises to mitigate damages  What constitutes effective mitigation – marketing, listing property with brokers, improvements and other up-front costs

THE PROVISIONSL REMEDIES OF PRE-JUDGMENT WRITS OF ATTACHMENT AND THE APPOINTMENT OF A "KEEPER": REAL ATTENTION GRABBERS  Expedited remedy to freeze or collect Tenant's assets pending litigation  State-wide freeze or seizure of assets

FREQUENTLY LITIGATED NON- MONETARY LEASE DEFAULTS AND REMEDIES  Assignment and subletting  Abandonment: express and implied continuous operating covenants – "Go Dark" Rights  Damage remedies – diminution in value  Injunctive relief – The Limited experience: Could it only happen in Indianapolis?  Exclusive use violations

CALIFORNIA SUPREME COURT HOLDS THAT PRE-DISPUTE JURY TRIAL WAI VER IS UNENFORCEABLE  Trizec Properties, Inc. v. Superior Court (1991) 229 Cal.App.3d 1616 (waiver enforceable)  Grafton Partners L.P. v. Superior Court, 36 Cal.4 th 944 (2005) (waiver unenforceable)

CONCLUSION  Remember: real estate transaction lawyers do not become judges  The most artfully drafted lease will be interpreted by non-experts, so draft for judges and jurors who have little or no experience with leases