Watch Your Language with Condemnation Clauses in Commercial Leases

(“Say what you mean, precisely, or a judge will decide what you meant” #9)

As established in other “Watch Your Language” articles for this Blog, as a general rule, courts will uphold language in commercial agreements (including leases), unless it is contrary to statutory law or public policy. Because of this judicial deference to “commercial language”, you must say what you mean, precisely, or a judge will decide what you meant. Failure to follow this axiom left the tenant in Rite Aid of Ohio, Inc. v. Monroe/Laskey Ltd. Partnership, 2009-Ohio 519 (6^th Dist. Ct. of App., Lucas Cty.) without a right to terminate its lease after the City of Toledo took a potion of the real property owned by the Landlord, by eminent domain.

In this case, the appellant-tenant, Rite Aid of Ohio, Inc., entered into a commercial lease with appellee-landlord, Monroe/Laskey Limited Partnership ("Monroe/Laskey"), for lease of real property located at 3466 West Sylvania Avenue in Toledo, Ohio.  A number of years later, a portion of the property under the lease was taken by the City of Toledo under eminent domain for use in a road improvement project. Specifically, the City of Toledo took .0861 acres of land from the real property set forth in the legal description exhibit to the lease. This land was a 3,200 square foot strip fronting Sylvania Avenue that resulted in a loss of 5 of 107 parking spaces and a change to a nearby roadway resulting in a limitation of available egress from the site.

In 2007, Rite Aid brought a declaratory judgment action in the Lucas County Court of Common Pleas to declare its right to terminate the lease. The trial court ruled that the terms of the lease did not provide Rite Aid with a right to terminate the lease.

At issue was construction of Article 23 of the Lease, establishing when termination after a condemnation is permitted, and Article 1, establishing the definitions of “Premises” and “Property”.

Article 23 provides, in pertinent part: “In the event that the entire Premises shall at any time after execution of this Lease be taken in public or quasi-public use or condemned under eminent domain, then this Lease shall terminate and expire effective the date of such taking… Tenant shall [also] have the right of termination of this Lease …… if , as a result of such eminent domain proceeding or other governmental or quasi-public action: (i) Any portion of the Premises shall be taken and the remaining portion shall be unsuitable for Tenant's continued business operations, determined in Tenant’s sole business judgments; (ii) The total number of parking spaces established for the Premises shall be reduced by twenty percent (20%) or more, or Tenant, its customers, agents, employees and visitors are for more than thirty (30) days denied reasonable access to the Premises or parking areas."

"Premises" is defined in Article 1 of the lease as "[a] certain free-standing, one story storeroom (hereinafter known as 'Premises') to be constructed at 3450-3466 Sylvania Avenue." Article 1 defines "Property" as the "real property upon which the Premises are located" as described in the legal description attached to the lease and marked Exhibit "A."

The trial court basically held that there was no right to terminate pursuant to Article 23(i), of the lease because such provision expressly provides that the tenant may only elect to terminate the lease based upon a taking of any portion of the "premises," and since no part of the Rite Aid building itself, was taken, no portion of the premises was taken (recall that Article I defines the premises to be the building only). The trial court further held that there was no right to terminate pursuant to Article 23(ii), because the five parking spaces taken represented 5%, not the 20% of parking taken which was required to trigger the Article 23 (ii) termination right.

At the court of appeals, Rite Aid argued that the term "premises" should be interpreted as including the land upon which the building is located. It claimed that limiting the term "premises" to the building was ridiculous and that Rite Aid had a leasehold interest not only in the building but also the surrounding land. It argued that a premises is a “building along with its grounds, as provided in a definition from Black's Law Dictionary.”

The landlord countered that the lease was clear and unambiguous in treating the terms "premises" and "property" differently and that the trial court was correct as to the meaning of the terms. The landlord further argued that the lease consistently distinguished between the word “premises” and “property”, and that if they were intended to mean the same thing, there would have been no reason for an Article 23 (ii) regarding parking spaces and access.

The court of appeals had no problem affirming the trial court’s holding in favor of the appellee-landlord. It cited numerous decisions of established contract law, basically providing that while contracts need to be construed to ascertain and give effect to the intent of the parties to a contract, such intent must be presumed within the language used in the written instrument. In other words, "[w]hen the language of a written contract is clear, a court may look no further than the writing itself to find the intent of the parties.”

Applying the law to the facts, the court of appeals established that the lease (contract) clearly provided that a partial taking of the building (defined as the “premises” under the lease) was necessary under Article 23(i) for the tenant to have a right to terminate the lease, and since the eminent domain did not take any part of the Rite Aid store building (and the requisite 20% of parking spaces was not taken under Article 23(ii), the tenant had no right to terminate pursuant to the lease.

In a second assignment of error, Rite Aid argued that a constructive taking occurred in terms of a non-physical, substantial interference with the leasehold interest. The court of appeals disagreed, stating that considering damage to business operations generally to prove a constructive taking of the building as a basis for a right to terminate under the lease would be inconsistent with the plain meaning of the lease contract, and that where a contract is plain and unambiguous between sophisticated business entities, it does not become ambiguous by reason of the fact that in its operation it may work a hardship upon one of the parties.

What are the morals of this story? Presumably, the tenant intended a greater right of termination in the lease than that interpreted by the Court. Perhaps there would have been a different outcome had the non-discussed termination language in Article 23 (ii) of the lease (i.e. “…denied reasonable access to the Premises or parking areas for more than thirty (30) days”) read “…denied reasonable access to and egress from the Premises”. In other words, “Say what you mean, precisely, or a judge will tell you want you meant.”  Ohio commercial lease and contract cases are replete with these warnings to “watch your language.”

Another moral of this story is “do sweat the (seemingly) small stuff”. Have your entire lease reviewed by a legal professional. While condemnations/eminent domain proceedings may not occur often, if they do, your only protection (or non-protection) will be the applicable lease language that is often ignored at the outset.

 First, clearly spell out when the condemnation provision applies. The “condemnation clause” should apply: to the acquisition of property for any public or quasi public purpose or use under any statute; to the right of eminent domain under any statute; or to the purchase by any governmental authority or public authority in lieu of the exercise of the right of eminent domain.

Second, clearly delineate the circumstances under which the lease can be terminated if only part of the property or premises is taken. Usual standards or termination triggers include determinations of: (i) whether the remaining property not taken is tenantable or still usable for the reasonable operation of tenant’s business, (ii) whether a specific percentage of the leased premises or property (building and/or land area) is taken, (iii) whether ingress/egress has been impaired, and (iv) whether a certain amount of parking has been taken. The condemnation clause should also specify who decides whether the partial taking is sufficient to terminate the lease – landlord, tenant or an independent third party.

Finally, the condemnation clause should (1) specify when the termination becomes effective and the date through which rent must be paid; and (2) address the respective rights of the landlord and tenant in the event the taking of part of the property does not result in the termination of the lease (e.g., apportionment of rent, restoration of premises, apportionment of the condemnation award).

Many disgruntled tenants having to live with lower sales volume due to partial takings, and many disgruntled landlords abating rent and restoring tenant improvements have one thing in common; they forgot to watch their language with condemnation clauses in commercial leases.