X

Thank you for sharing!

Your article was successfully shared with the contacts you provided.
The incessant battle between landlord and tenant to shift the burden of rising costs and the risks of unanticipated expenses from one to the other has suddenly become far more complex as that battle now proceeds under the threats of terrorism. And just as some claim that those who were charged with protecting us before Sept. 11, 2001, may have been sleeping, those persons charged with negotiating leases continue to fail to address adequately the material impact that issues of terrorism have on the expense of one’s tenancy, the management of one’s building and the ability of a tenant to conduct its business in a leased premises. Terrorism issues have an impact not just on the costs of a lease and of operating a building, but the manner in which a building is run and in which a tenant may operate its business. The trend seems to be moving decisively in favor of taking whatever action is necessary to protect against perceived terrorist threats even if the consequence is substantial � additional cost and substantial disruption to a tenant’s business. A 2004 ruling that involved New York City’s famed Rainbow Room provides a vivid example. In Cipriani Fifth Avenue, LLC v. RCPI Landlord Properties, the operator of the nightclub/restaurant objected to the landlord’s anticipated installation of metal detectors and inspection of all patrons. The plaintiff claimed that such security measures addressed solely to the Rainbow Room would amount to its death knell given a stream of customers who often arrive decked out in tuxedo tails and gowns. In a wonderfully written opinion, the lower court acknowledged that such installation might adversely impact the success of the Rainbow Room. The court also recognized the clear conflict between freedom of access and the landlord’s obligation to protect the premises and its occupants from danger. Even so, the court permitted the security installation to proceed. The court held that the need for the landlord to address security concerns for the complex exceeded the potentially adverse impact on the tenant’s business. In finding for the landlord, the court also sighted various provisions of the lease permitting the landlord to control access to the project. If leasing is like marriage � entry into a long-term commitment where each party attempts to anticipate the needs of the other and resolve conflict � perhaps we can look to the federal government for assistance in bringing the security expectations of landlords and tenants closer together; and perhaps, the conflict over the Rainbow Room could have been avoided. The Homeland Security Advisory System, established by President Bush and implemented by the Department of Homeland Security, may provide a key to reducing conflict. The Homeland Security Advisory System includes five threat condition levels ranging from low (green) to severe (red). As the color changes so does the perceived threat to security along with the level of response undertaken by the national and local governments. For example, in a Code Red condition, the authorities may close public facilities or constrain transportation systems. How can leasing attorneys make use of the code levels in furthering the interests of their clients, be they landlords or tenants? If a tenant is concerned about ease of access to its premises, the tenant may request that the lease prohibit certain security measures unless the government has declared a particular code level. A garage operator may not want to inspect the trunk or underside of every vehicle that comes into its garage on a daily basis, but the operator may agree to such a heightened inspection when a certain code level is declared. An office tenant may balk at the requirement that all briefcases be inspected by all who enter an office building, and a retail tenant in a mall or a theater operator may not want their patrons to pass through a security check on a daily basis. But they might accept such burdens and expense at times of heightened security. Without explicit language in a lease limiting the ability of a landlord to implement security measures and pass on terrorism-related security costs, courts have uniformly permitted landlords and lenders to pass on such costs to their tenants or borrowers and implement what procedures they deem necessary. Lenders successfully impose upon borrowers the obligation to pay for terrorism insurance despite the fact that such insurance may constitute almost one-half of the borrower’s cost of insurance. Similarly, it is highly likely that when a landlord purchases terrorism insurance and passes it on to her tenants, the tenants will not be able to avoid paying their share of such costs unless they have explicitly negotiated either an exclusion in their respective leases or, perhaps, a ceiling on the cost of such insurance. Tenants can limit such expenses explicitly in their leases. But they must overcome the inherent, unequal bargaining power of the landlord and the fact that the issue of security, though looming large, does not drive the economics of a lease transaction. What can tenants do to avoid or limit the impact of rising terrorism costs and avoid the necessity to undergo burdensome security procedures? Perhaps a tenant may include in a lease a provision that the landlord will not lease space to a foreign power or an entity, which might generate additional demands on the building’s security. An overly broad prohibition may raise issues of constitutional dimension as well as raise questions under various civil rights laws. But perhaps a lease could preclude a landlord from leasing space to an entity, which by its conduct might attract undue attention and therefore require additional security. Surely, it is accepted practice in leasing for a landlord to prohibit a tenant from undertaking certain uses in an office building or a shopping center. And it is accepted practice for a tenant, with some bargaining strength, to require that the landlord not lease to competitors. But with regard to tenants that generate unwanted attention and potential security threats simply by their mere presence in a building and not by the nature of their conduct, the ability to exclude such a potential tenant or impose additional costs on such tenant is far from clear. To preclude a tenant from a project solely because of its identity � the Arab League, for example � might lead to racial profiling and discrimination under the guise of a lease negotiation. Moreover, how could one determine, in advance, when a party is a potential magnet for unwanted security threats and their ensuing costs. When a small bomb was placed in front of the British Consulate in Manhattan, who would have thought that a British government office would become either a neighbor one would want to avoid or the cause of increased security costs? Notwithstanding the initial discomfort in singling out a tenant and requiring it to pay for additional security necessitated by its mere presence in an office building, is it fair to pass on to all other tenants in that building the cost of security necessitated by leasing space to a particular tenant which, by its nature, requires additional security? Landlords routinely provide in leases that they may impose additional costs upon a tenant if its use generates additional cleaning services or electric usage. Why not simply expand that requirement to security costs? As leasing is first and foremost a creature of contract, the issue of security costs could be addressed easily in a lease provision providing that no security costs would be passed on to a tenant through operating expenses if the security costs were necessitated by occupancy in the building of another party, such as, for example, the Republic of Iran. Why should the cost of security be any different than the cost of electricity, which can be metered and adjusted throughout a lease term? The need for heightened security measures may not be limited to tenants traditionally associated with terrorists. What about tenants that bring unwanted attention to a building by the nature of their business, such as a reproductive rights clinic or, as was the case many years ago, the Republic of South Africa? Are landlords entitled to exclude these tenants unless they agree to absorb directly the additional costs associated with their tenancies? And what would happen if cities like New York or San Francisco slowly became inhospitable to unpopular tenants? Would the diverse character of these cities disappear if high-profile tenants were effectively denied the freedom to lease in quality office buildings? While a landlord may wish to avoid leasing to certain tenants, recent legislation actually prohibits landlords and others from dealing with certain persons known as Specially Designated National and Blocked Persons (SDNs). This refers to persons contained on a list prepared by the Office of Foreign Asset Control (OFAC), which is housed within the U.S. Treasury Department. These lists contain thousands of names of entities and persons with whom it is a crime for a landlord or a tenant (or any person) to do business. Yet the amount of ink found in a lease pertaining to prohibited persons is almost nonexistent. Despite the fact that contracting with a prohibited person may constitute a crime, the potential exposure to a landlord or tenant has generated virtually no concern on the leasing landscape. Leasing attorneys ignore this risk at their peril, particularly when the insertion of disclaimer in a lease may protect both the landlord and tenant and where one might undertake simple due diligence to ascertain that a party to a lease or a sublease is not a prohibited person. Title companies might undertake such a chore, for example. Ultimately, in a conflict between the landlord’s decision to implement certain security measures and the tenant’s desire to avoid the expense and burden associated with security, the landlord will surely prevail unless the lease explicitly protects the tenant. Through aggressive drafting, however, a tenant may restrain a landlord from passing on all the security costs to the tenant. And by attempting to control the tenant mix of a building, the landlord might reduce the need for costly security measures. David M. Rubin is a real estate partner at Golenbock Eiseman Assor Bell & Peskoe in New York City.

This content has been archived. It is available exclusively through our partner LexisNexis®.

To view this content, please continue to Lexis Advance®.

Not a Lexis Advance® Subscriber? Subscribe Now

Why am I seeing this?

LexisNexis® is now the exclusive third party online distributor of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® customers will be able to access and use ALM's content by subscribing to the LexisNexis® services via Lexis Advance®. This includes content from the National Law Journal®, The American Lawyer®, Law Technology News®, The New York Law Journal® and Corporate Counsel®, as well as ALM's other newspapers, directories, legal treatises, published and unpublished court opinions, and other sources of legal information.

ALM's content plays a significant role in your work and research, and now through this alliance LexisNexis® will bring you access to an even more comprehensive collection of legal content.

For questions call 1-877-256-2472 or contact us at [email protected]

 
 

ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2020 ALM Media Properties, LLC. All Rights Reserved.