Real Estate

Major tenants sometimes have special requirements that require discretionary government approvals. If the approval doesn’t happen, then the tenant no longer wants the space. In these cases the tenant and the property owner will often negotiate to give the tenant the right to terminate the lease if the approval doesn’t come through.

Recent litigation in San Francisco demonstrates just how tricky these procedures and termination rights can be. Their outcome and timing can become very expensive for one party or the other.

The San Francisco dispute involved two major real estate companies: Vornado, which owns Class A office and retail buildings around the United States; and Regus, an international operator of co-working facilities that existed long before WeWork.

Vornado owned a building at 345 Montgomery Street known as The Cube. Regus agreed to lease 78,000 square feet in the building, perhaps the entire building, but wanted prominent signage high up on three sides of the building. This required city approval.

The parties agreed that Regus could terminate its lease if “Regus does not receive the necessary governmental approvals and permits on or before the Delivery Date.” But Regus had to deliver the termination notice “if at all, following Tenant’s rejection of the necessary governmental approvals but no later than the Delivery Date.” (Both those quotations from the lease were simplified and shortened without substantive effect.) The Delivery Date meant the date when Vornado finished some work in the building and delivered the space to Regus, which was expected to happen on September 30, 2019.

Months before the Delivery Date, Regus and Vornado opened a conversation with the city planning authorities about signage. The planners regarded 345 Montgomery Street, a mid-century monumental granite and dark glass box, as a special historic structure. They cared very much that Regus’s signage should somewhat match the previous Bank of America signage. This entailed months of meetings and bureaucratic back and forth. The city tried to persuade Regus to install signage that the city apparently found more aesthetically pleasing than the signage Regus wanted. (The same level of municipal aesthetic sensitivity does not seem to apply at street level, where the same city government has abandoned entire city blocks and plazas to homeless tent cities.)

The discussions among Regus, Vornado and the city looked like they were headed toward a significant reduction of Regus’s signage. Regus wasn’t happy. A few days before the originally anticipated Delivery Date, Regus gave Vornado a notice terminating the lease on the basis that the city had rejected Regus’s signage. The next day the city approved Regus’s original signage plan. Apparently, the city’s efforts to trim it back were just posturing.

Litigation followed. Regus’s termination right could have been interpreted to allow Regus to terminate at any time before the city approved Regus’s signage. The courts didn’t agree with that.

Instead, Regus had to wait until the Delivery Date. Only then, if the city hadn’t approved the signage, Regus apparently had a brief window in which it could terminate. Regus had that right only if the city signoff had not come through for Regus’s original signage design.

Regus also had a right to terminate “following Tenant’s rejection” of the required sign permits. The courts interpreted “Tenant’s rejection” to mean the city’s rejection, but said this didn’t amount to rewriting the lease, just interpreting it. The courts then concluded that the months of bureaucratic back and forth with the city about sign design never amounted to an actual rejection by the city. It was just the usual process for sign permits. That proposition is supported by the fact that the city ultimately gave up and approved the Regus signs as originally proposed. Since no city “rejection” occurred, Regus didn’t have the right to terminate based upon a “rejection” of the Regus signs.

Vornado won a substantial judgment for Regus’s breach of the lease. Vornado was represented by Greenberg Traurig, Regus by Quinn Emanuel.

Moral of the story: termination rights can be intricate. Details matter. A tenant that wants a termination right should define it very precisely and then pay close attention to what it means and what needs to happen when.

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