The Real Deal New York

Lemme out

Office tenants sniff out whether breaking leases is possible and engage in battles with landlords over when they have to start paying rent

January 01, 2013
By Adam Pincus

It was something of a rite of passage for Lower Manhattan office workers just after Hurricane Sandy hit: Alone, or in small groups, they climbed dark stairwells holding flashlights in order to retrieve computers and files from their offices.

Now, with the lights back on, many office tenants are gingerly stepping back into unchartered territory to reoccupy their spaces, which are not all ready for prime time. While 49 office buildings (with 35 million square feet of space) were closed after Sandy, all but about six buildings were expected to be opened by press time.

But, as The Real Deal and others have reported, some are finding unpleasant realities — bad smells, mold, spotty heating and a lack of telephone or Internet service.

In fact, many tenants that have been moving back are dissatisfied with what they are finding. Some (including those whose buildings have technically reopened) are sniffing around to see if they can break their leases, while others are readying for legal battles with their landlords over when they have to start paying rent again.

“Most leases give the tenant the right to stop paying rent during the restoration period. And the question is: When has that restoration been completed?” said Ronald Sernau, a partner and co-chairman of the real estate department at law firm Proskauer Rose.

“That, I think, is kind of a ripe dispute,” Sernau added.

Nicholas Bienstock, one of the heads of Savanna, and 100 Wall Street

Officials at one company, which as of late December had not moved back into its space at 100 Wall Street, said that based on a review of its lease they do not believe they are responsible for paying rent.

An executive at the company, who asked not to be identified, said, however, that the landlord, Savanna, was pressing the firm to pay even before it technically opened the building last month.

“If I am unable to access my space for reasons outside of my control, I am entitled to a rent rebate,” the tenant claimed.

A Savanna spokesperson said: “We are working to resolve any tenant concerns amicably and have worked tirelessly to move tenants back as quickly as possible.”

In another instance, a top partner at the law firm Gordon & Rees said it would not move back into its office at 90 Broad Street even though the building officially reopened in early December, because the landlord, Swig Equities, admitted that an air quality study had turned up mold. Swig did not respond to requests for comment by press time.

During an interview early last month, Managing Partner Mercedes Colwin said it was improper to allow tenants back until the mold was remediated.


Battles brewing

While the rent battle is currently playing out between landlords and tenants, it will almost certainly involve their insurance companies soon (see related story, “Insurance rates spike for hard-hit landlords”).

Indeed, most property owners and tenants are protected by “business interruption” insurance, which covers them in the event of a disaster. But some policies exclude certain casualties, such as a flood, said Jacob Bart, a partner at law firm Stroock & Stroock & Lavan.

The unlucky landlords who do not have flood insurance often want their tenants’ insurance companies to pay the rent — and that’s not coming easy.

Bart said he’s representing some landlords who have sent letters to tenants telling them their buildings are up and running, even though some tenants may not agree that the space is fully ready.

“Sometimes they want rent to start immediately. The issue here is, no one size fits all,” he said.

Francis Greenberg, head of Time Equities and 125 Maiden Lane

At 125 Maiden Lane — a commercial condo building developed and managed by Francis Greenburger’s Time Equities — about 85 percent of tenants are back in. (The building, which also leases out unsold condo units, was closed for more than a month post-Sandy, but reopened Dec. 5.)

Of the tenants who have not yet moved back in, some had signed temporary leases at other locations, and some were reluctant to move back without Verizon service restored, according to Richard Recny, director of asset management at Time

Equities. (Verizon’s copper cables, which carried phone and Internet service, were destroyed in the storm. Service is not slated to be restored until the second quarter, though more modern fiber optic wires will be used.)

While frustrated tenants at many buildings may be pining to break leases, that seems like it will be an unlikely outcome. That’s because most leases require a tenant to be displaced for nine to 12 months (or more) before they can get out of a lease, said Neil Tucker, a partner at law firm Kramer Levin Naftalis & Frankel.

“It is very unlikely that [a tenant] would have a termination right after just two months,” Tucker said.

In many cases, tenants are simply stuck in limbo — trapped in leases that they no longer want, but left without many options for how to proceed. In that regard, landlords have the upper hand because leases generally provide them with more control when it comes to breaking leases.

William Rudin and 110 Wall Street

For example, one landlord, Rudin Management, terminated all of its leases at 110 Wall Street, which has 38 tenants including investment advisory firm First Investors and the law firm DeCorato Cohen Sheehan and Federico. The landlord had the right to terminate leases within 60 days of the storm, said William Rudin, the company’s president.

“We felt it was appropriate,” Rudin told TRD.

“We did not want to drag this out or hold our tenants up,” he said, explaining that he opted to terminate the leases after several building analyses revealed that it would take months to restore the tower. He said he’s still looking at where the mechanicals should be located.

While he suspected that most building owners are communicating effectively with their tenants, he said those that are not could suffer.

“The market will determine what happens with those properties going forward,” he said. “We all live on our reputation.”

At least one tenant at 110 Wall Street — who does not have business interruption coverage for floods — said her company was not happy with Rudin’s decision to terminate leases at the building. She said she thought the decision was made too soon.

“It is a terrible situation. We built out our space,” and have several years remaining on the lease, said the source, who asked to remain anonymous.

Rudin said he hasn’t decided whether to keep the tower as an office building or convert it to residential, as Crain’s New York reported was being considered last month.


Future leases   

Going forward, landlords and tenants will negotiate their rights more aggressively in connection with how to deal with disasters.

Real estate attorneys say some tenants will push to add clauses delaying when rent is due if the building isn’t fully operational or push for more lenient terms when it comes to terminating their leases sooner after a disaster hits.

“There is a term of art when it comes to leasing: tenantable, which means habitable. If you can’t use it to such a level where a reasonable party might say you can’t inhabit this office … depending on what the lease says, the tenant might be entitled to stay out,” Stroock’s Bart said.

Daniel Ansell, co-chairman of the real estate litigation practice at law firm Greenberg Traurig, said the definition of tenantable in New York State revolves around whether the space is “usable.”

However, it’s often modified and “in some leases untenantability is limited to damage to the core and shell of the tenant’s space — other leases include lack of essential services and denial of access to the building,” he said.

It may come down to arriving at a better definition.

“It would be foolish for either party — landlord or tenant — to negotiate a lease as if a future disaster, like Sandy, were impossible,” said Ansell.

“Leasing is all about allocation of risk,” he added. “It has always been about allocation of risk and always will be.”