Interpreting use restriction & access to premises clauses.

(The following article is the second in a 14-part series prepared by our law firm examining the standard Real estate Board of New York form commercial lease. This series highlights particular clauses in the REBNY lease and how the courts have interpreted them.)

A commercial lease usually involves a long-term relationship. During this time, many things change - there may be fluctuations in the economy or in the tenant's industry; the tenant may desire to change its use of the premises; or the landlord may desire to change the nature of the property.

Suppose you have a lease with a high class women's clothing retailer or an established commercial tenant, and that tenant wants to assign its lease to a coffee shop or to a lower quality tenant - can you stop it? What if your women's clothing retailer wants to start selling leather goods - can you prevent this change in use? Will restrictions on the tenant's use, set forth in the lease, be enforceable in bankruptcy? What if the landlord wants to "reposition" a building and make physical alterations to the building, or lease to a specific type of tenant other than the type of tenants already present in the building?

The standard REBNY lease contains two provisions addressing these issues.

Paragraph 2 of the REBNY lease states that the "Tenant shall use and occupy de-raised premises for [the use agreed to between the parties] and for no other purpose" [emphasis added].

Paragraph 13 of the REBNY lease (also known as the "Access to Premises" clause) provides that the "Owner or Owner' s agents shall have the right (but not be obligated) to enter the demised premises... to examine the same and to make such repairs, replacements and improvements as Owner may deem necessary and reasonably desirable to the demised premises or to any other portion of the building or which Owner may elect to perform... Owner may, during the progress of any work in the demised premises, take all necessary materials and equipment into said premises without the same constituting an eviction nor shall tenant be entitled to any abatement of rent while such work is in progress nor to any damages by reason of loss or interruption of business or otherwise..."

Use Restrictions: [paragraph] 2 of the REBNY Lease

In General: A landlord has the legal right to restrict the use of its property and may do so pursuant to an express provision in the lease. However, the general principle is that unless the language of the lease clearly shows on its face that no other use, other than that specified in the lease, is intended, the clause will not be construed as a restriction on the tenant's use of the premises. Without the key words "only" and/or "for no other purpose." a specification of the, tenant's proposed use will be held to be "descriptive" only, and hence not binding, rather than "restrictive." (Rasch, New York Landlord and Tenant [section] 15:34.)

The standard REBNY language has been repeatedly recognized as sufficiently restrictive. An illustration of this can be seen in Qwazki, Ltd. v. 107 West 86th Street Owners Corp. In that case, Article 2 of the lease provided that "the tenant shall use and occupy the demised premises for sale of comic books, toys, posters, books, solely." In addition, a rider to the lease stated that any use by the tenant for any other purpose "shall be deemed a default... and as such, a material inducement for landlord to terminate this lease."

When the tenant began to rent and sell video cassettes from the premises, the landlord commenced a suit seeking, inter alia, a declaration that the tenant was in violation of Article 2 of the lease. The Court ruled that the lease provision was "clear and unambiguous in its exclusion of [tenant's] fight to sell and rent video cassettes."

However, where the lease does not contain the key works "only" and/or "for no other purpose" or has been broadened so as to obfuscate the restrictive language in the lease, Courts have refused to restrict the tenant's use. For example, in Rubinstein Bros. v. Ole of 34th Street, Inc., Article 2 of the original lease limited tenant's use of the premises to "retail sale of shoes and of handbags of the type not customarily sold in drug stores and for no other purpose."

However, when the lease was subsequently assigned, the landlord agreed to modify the "use" clause to read: "to allow Tenant to use and occupy the premises for the retail sale of jewelry," and for "related accessories customarily sold in jewelry stores, i.e. watchbands, handbags, scarves and wallets..." When the tenant began selling umbrellas, belts, suitcases and other items, the landlord commenced an action to evict the tenant based, inter alia, on the tenant's (alleged) illegal use.

The Court explained that "[t]here is an escape valve from the absolutism of the words 'and for no other purpose' but it is an escape valve that can only be opened with landlord's consent." The Court ruled that because the landlord had consented to the amendment of the lease to incorporate the broader language, the use clause was no longer restrictive but rather only descriptive. Therefore, the Court ruled that the Tenant did not violate the use clause.

Use Restrictions and Bankruptcy of the Tenant

In 1984, the Bankruptcy Code was amended to provide that the use restriction clause in a lease for shopping centers is enforceable in Bankruptcy. For regular, commercial or non-shopping center retail leases, however, the use restriction clause, by contrast, is not enforceable in Bankruptcy.

As a result, if a regular commercial or retail tenant who has filed for bankruptcy wants to assign its lease, it may do so irrespective of the use restriction provision in the lease. (See, Friedman on Leases, [section] 7.304a at p.304.)

For example, in In the Matter of U.L. Radio Corp., the tenant/debtor operated a television sales and service store at the premises and moved to assume and assign the lease to a third party to be used as a bistro.

The landlord objected to the proposed assignment on the grounds that the assignment would violate the use restriction clause - restricting the use to the operation of a television repair service and sale of electrical appliances only.

The Bankruptcy Court noted that the Bankruptcy Code evidences a clear policy in favor of assumption and assignment as a means of benefitting the bankruptcy estate. Accordingly, the Court held that the use restriction was unenforceable and therefore, authorized the debtor/tenant to assume and assign the lease.

The Landlord's Rights

What happens when the landlord wants to change the nature of the tenants to whom it leases space? In most cases, the landlord can lease space to whomever it pleases. For example, in New York University v. Schurtman, NYU purchased a 12-story building containing 92 apartments. Previously the building had advertised itself as a luxury rental. At the time NYU purchased the building, approximately 75 percent of the units were occupied by rent stabilized tenants. NYU then began leasing vacant units to students, thereby essentially turning the building into a dormitory.

The tenants commenced an action for breach of warranty of habitability and breach of contract based on the landlord's alleged conversion of the premises to a "college dormitory."

The Court determined that the landlord had not breached its contractual obligations to the existing tenants by leasing to students, especially, the Court found, where the lease contained a provision in which the tenants acknowledged that they were not induced to enter into possession by any representations outside of the lease itself. Furthermore, the Court held that the landlord had not undermined the essential residential nature of the building by leasing to students.

Landlords must be careful, however, because a restriction on the tenant's use of the premises can, in some instances, be construed as creating a reciprocal restriction on the landlord.

An illustration is the recent case of Herman Miller, Inc. v. Thom Rock Realty Co., supra. In that case, a commercial tenant of the International Design Center of New York (IDCNY) brought a suit seeking recision of its lease and for damages as a result of the landlord's breach of the restrictive use covenant(s) in the lease.

IDCNY was marketed for use by, and originally leased only to, wholesalers of contract furniture. When the economy took a downturn, the landlord (Thom Rock) changed its plan and leased a block of space to a New York City government agency. The tenant claimed that its lease contained a number of restrictive use clauses that created a reciprocal restriction on the landlord: [paragraph] 2B provided "landlord covenants that [IDCNY] shall be constructed as a first class commercial building intended to be used for showrooms and other related uses"; [paragraph] 2A restricted tenant's use of the leased premises to "showroom display and sale to the trade, at wholesale only, of [contract furniture] and for no other purpose."; [paragraph] 2D prohibited any IDCNY tenant from using the premises in any manner which in landlord's judgment would adversely affect "the appearance, character or reputation of IDCNY as a first class building with showrooms and other related uses."

Based on these provisions of the lease, the Court determined that "the intention of the parties was that IDCNY would be devoted exclusively to contract furniture showrooms." Consequently, the Court held that paragraph 2B was a restrictive use covenant restricting landlord from leasing space in the IDCNY to any non-contract furniture tenants. As a result, the landlord was held liable to the tenant for damages resulting from the landlord's breach of the reciprocal restrictive use covenant.

Landlord's Right to Perform Work in the Building and in the Demised Premises

Sometimes the work that landlord must do to renovate the building conflicts with the existing tenants' uses. For example, in Bijan Designer For Men, Inc. v. St. Regis Sheraton Corporation, the owner of the St. Regis Hotel renovated the hotel. The tenant, a retailer of men's apparel located in the hotel, commenced an action claiming that it should be entitled to a complete rent abatement. During the renovation, the hotel was temporarily closed, the main doors to the lobby were boarded up, and access to lobby and consequently, to the tenant's store was only available through an alternative, makeshift entrance.

The landlord argued that the standard [paragraph] 13 "access to premises" clause in the lease between the parties authorized the Landlord to make the renovations. Specifically, the lease provided that landlord was permitted to "make such decorations, repairs, alterations, improvements or additions as [landlord] may deem necessary or desirable either to the Hotel or the demised premises" and that "the rent shall in no way abate while the decorations, repairs, alterations, improvements or additions are being made and [landlord] shall not be liable to [tenant] by reason of loss interruption of the business of [tenant] because of the prosecution of any such work or otherwise."

The Court held for landlord stating: "[W]here the exculpatory clause [i.e., Lease [paragraph] 13] is so broad, for the court to construe the clause to permit extensive work except where the Hotel must be closed to customers, would constitute a re-writing of the contract by the court."

Nevertheless, standard [paragraph] 13 does not permit landlord to diminish, by such renovations, the actual size of the demised premises.

For example, in Camatron Sewing Machine v. F.M. Ring Associates, Inc., the landlord's planned renovation of the lobby would have led to the elimination of 25 percent of the tenant's space. The landlord relied on the form [paragraph] 13, as authorizing the landlord to perform the work.

The Appellate Division held for tenant, explaining that [paragraph] 13 "does not explicitly or implicitly authorize the landlord to take a portion of the demised area." Absent such a specific reservation, the Court held, the landlord has no right to the possession of a part of the demised premises.

Conclusion

The use restriction clause of the REBNY form lease is enforceable. The key to such a clause, however, is in the drafting. The landlord should carefully tailor the language of the lease to limit the tenant's use of the premises to the parties intended purpose. Any rider or amendment that broadens the use restriction clause may open the door to much broader uses of the premises than the landlord ever intended. Landlords should be aware that such restrictions will not be enforceable if the tenant files for bankruptcy, except in shopping center leases.

The use restriction clause will not, in the ordinary commercial building, create a reciprocal restriction against the landlord. Thus, the landlord can, in such situation, lease to whomever it pleases. However, the use restrictions can also "boomerang" against the landlord and result in the landlord subletting itself to a reciprocal restriction. Again, the advice here is to incorporate an escape clause in the lease allowing the landlord to lease space in the building or development to whomever it deems appropriate.

[paragraph] 13 of the REBNY lease is also fully enforceable. However, the landlord must take care to act within its parameters. While construction and/or renovations will be allowable, even if it infringes on the tenant's business, any taking of the tenant's property will constitute a breach of the lease agreement. Additionally, if any amendment is made to [paragraph] 13 or any rider inserted, a landlord must insure that this clause remains intact and is not altered so as to limit the landlord's rights.

Practical Advice

1. Give some time to defining the use of the space. Does the quality of the tenant's operations matter? Does the tenant need some flexibility to adapt its use to business conditions? Landlord can specify a laundry list of uses that are prohibited in both office leases and store leases.

2. If the property is suitable for using the "shopping center" umbrella for purposes of controlling use in a bankruptcy situation, then define the premises as being a shopping center within the meaning of Bankruptcy Code [section] 365(b)(3).

3. Be careful in obligating the landlord to a specific and limited rental plan. Exclusive uses to tenants should be carefully limited in scope - both a precise definition of the use (e.g. facsimile transmission versus electronic data transmission) and whether a similar private use is permitted within the building (e.g. food services).

4. Access provisions can be expanded to allow a landlord to move entrances and lobbies and recapture reasonable amounts of the lobby and tenant's premises for necessities and redevelopment of a building. You should assume that you will want to move the lobby entrance or install a chaseway through each floor for additional building services and should provide for the right to do so.

5. When you modify the lease or consent to a subletting or assignment be careful that the amendment or consent does not change landlord's rights or tenant's limitations and obligations. If you consent to the assignment of a lease from La Restaurant Luxe to a Nathan's or McDonald's type of operation, you have given up your right to enforce a use provision for a first class, linen and china restaurant use and have consented to a fast food operation.