Tenants with Manhattan Office Space are trying to understand their lease rights and obligations given the challenges presented with COVID. Larry Hutcher, Managing Partner of Davidoff, Hutcher & Citron sat down to with us to discuss what options are available to tenants who may be struggling.
My guest Larry Hutcher is a professional problem solver, and when you-know-what hits the fan, he’s the guy you want on your side. Larry is a co-founder and managing partner at Davidoff, Hutcher, and Citron. In this time of crisis, getting an expert lawyer’s insight into a legal perspective on current real estate issues made a ton of sense.
Larry’s got one heck of a resume. He’s built his career on commercial law and litigation, where he has significant expertise in real estate litigation, representing tenants in lease disputes, as well as development issues. Those experiences have gotten him noticed, as he’s been published in places like the New York Times, the Post, the Wall Street Journal, and others such as Real Estate Weekly. Larry really is an expert, so listen up close on this episode of “Conversations with Cohen,” as we chat about some of the most pressing issues facing tenants in our current climate.
I’ve got a lot of tenants with midtown office space asking some tough questions about their existing lease obligations. Always hoping for the best but, understandably, planning for the worst. Simply put, these tenants want to know their options, and this is precisely where I started off my conversation with Larry.
Larry clarified his position as someone who can offer guidance that’s based off the lease when it’s already signed. In other words, the people coming to him are those who are trying to navigate existing lease agreements. More often than not, Larry notices that the tenants’ lawyers never envisioned something like a pandemic – and understandably so. The caveat here, is that Larry is speaking generally, rather than actually giving any reader or listener actual legal insight.
There’s a distinction to be made between two different types of commercial property for lease: their are office tenants and retail tenants. Typically, retail tenants in a place like New York are in a slightly better position than office ones, as a lot of retail places have been shut down by the state. That fact enables retail tenants to make their case of inability to use their space. Commercial office tenants on the other hand, face a tough position. Almost all landlords of office buildings have kept their buildings open throughout this time. From that point of view, it can be challenging for l tenants to make their case.
So, what can an office tenant do? According to Larry, their first move should always be talking to their landlord. You might get lucky and your landlord will waive some rent, but what Larry’s seen virtually every time is that landlords are willing to defer payment to a later date. That way, if your rent is straining your business’ very existence, you can restructure your agreement to give you some more time.
We just left off with the idea of deferring payment to later dates to spread out your payments into more manageable chunks. But isn’t that kind of just kicking the can down the road? It doesn’t seem like a solution to a business that’s struggling in the long-term – only for one that’s experiencing short-term issues. Similarly, security deposits are often viewed as an area of negotiation, but the reality is once your landlord has yours in hand, you as the tenant have little leverage in those negotiations. So, what can a tenant actually do?
Starting off on the retail side, Larry recommends the tenants actually stop paying rent altogether. Given the unique circumstances of New York State’s response to Covid-19, Larry argues that the policies are an actual frustration of purpose in the lease agreement. As such, the tenant should not be required to pay at all. Furthermore, if the tenant goes to the Supreme Court to get a declaratory judgement before they enter the landlord tenant court, they will get their security deposit back as well. Basically, Larry claims the tenant’s got to be aggressive in this case to come out on top.
Office tenants are in a trickier situation. Often, it needs to be evaluated on a case by case basis. Larry mentioned a client of his who was told their business was not allowed to operate. So, despite the fact that the office building was technically “accessible,” their business being unable to operate could potentially qualify as an impossibility of performance or frustration of purpose. Unfortunately, however, for more typical tenants who haven’t been told their business can no longer operate, there isn’t much good news on this front, generally speaking. That being said, this is a case by case basis as mentioned before. Some tenants may have clauses in their lease surrounding things like an inability to perform that can help them out. As a tenant, you should go back and check out what you’ve got in your lease to see where you can draw some leverage.
I keep hearing from clients, “Gregg, I’ve got a personal guarantee,” – a legal guarantee that a person assumes for the debt of either another individual or corporation. It’s basically guaranteeing you answer for a potential default. Unfortunately, lots of clients sign these agreements even though they aren’t in their best interests. Larry’s best advice is to not sign it at all. That being said, if you already have, it’s often a good idea to use it as a bargaining chip. Offer another year on the lease for the landlord to drop the guarantee.
There are other forms of guarantees than those unlimited personal ones though. Larry advises his clients to get a “good guy guarantee,” as opposed to the personal or unlimited ones, so they have some more flexibility. Under that clause, it’s much more feasible to walk away from a sticky situation so long as you’ve been a responsible tenant up to that point and leave your space in good condition. All that being said, it’s still better not to have to sign any guarantees, so if you have that option (and putting more security up front can be a factor), don’t sign!
Larry mentioned that a lot of lawyers aren’t too clear on the parameters of the good guy guarantee, so it’s imperative that you as a tenant find good representation. He also mentioned that there have been recent developments in legislation surrounding this guarantee that have added to complications. It’s unclear what a tenant or landlord is able to use in negotiation and with leverage, so Larry’s been doing his best to keep clients up to date on the latest news.
Larry’s Tips & Tricks
Larry’s seen a lot of lease agreements in his time as a lawyer, so he’s got plenty of advice on what to do or not to do in your next lease agreement and suggests your commercial real estate broker should be able to help you through the office leasing process. His first piece of advice is to ensure that when catastrophe strikes and you can’t use your office space, you won’t have to pay. That goes for things like hurricanes, floods, or any other unpredictable disaster. Put a clause in your lease agreement to protect you from those times!
One of the most common questions Larry hears from clients is whether they should pay their rent as lease negotiations are moving forward. This can come up quite often particularly when you’re re-signing a lease and staying in a space. Larry’s typical answer is “no,” because then your landlord doesn’t have the greatest motivation to get the deal done. That being said, there’s no one answer. If you love where you are and have a great relationship with the landlord, you may want to continue paying during that time to keep everything in high spirits. Part of what makes Larry’s job fun for him is the case by case basis that these deals need to be structured by.
So, how early in the office leasing process should you get Larry involved? Well, the earlier the better according to him because then he’s got the greatest ability to help you, but but you can give him a ring at a later time too and he’s happy to see what he can do.
A Little Something Extra…
Anyone who’s read my blogs or watched my podcasts knows I like to end off with some talk of food. I asked Larry if he’s got a favorite restaurant to celebrate closing a big deal at. It turns out that Larry actually represents a couple of restaurants in NYC! Among them are Campagnola on 73rd and 1st Avenue for some great Italian food and La Grenouille for some delicious French cuisine. I made Larry promise me a meal at Campagnola when the time comes.