Restaurant tenant is refusing to pay rent, claims breach of exclusivity

[Legal Jones]

Jurisdiction

New York

Hello.

I have a small commercial building with two restaurant tenants on a main commercial corridor (not shopping/retail center). One of the restaurant's lease ("Tenant 1") has a sentence that says "Lessor shall not lease to other tenant that may create the conflict with Lessee's current use." This is the only potential mention of any type of exclusivity. My other restaurant tenant vacated and I signed a new lease with a new tenant ("Tenant 2").

The crux of the issue that is about 5 menu items overlap between the two restaurants. Both restaurants serve food from the same country in order to serve the demographic of the neighborhood. Inevitably, some items overlap but Tenant 1 has over 80 menu items with certain specialties that do not overlap and Tenant 2 has about 20-30 total menu items.

I have been by the building several times and Tenant 1 is packed most times while Tenant 2 is empty. However, Tenant 1 has not paid rent since late last year and refuses to negotiate and even demanded a longer lease term and reduced rent, which indicates that their business is doing well or they are trying to sell it. They are claiming that I have breached the lease by allowing a competing business next door. The whole block also has restaurants that serve similar food.

I don't know how much time Tenant 2 has left in the space because they are not doing well, if they cannot pay rent and are forced to leave, that will solve the issues. I am going to start an action in landlord/tenant court against Tenant 1.

My question is whether Tenant 1 has a good case to enforce the supposed exclusivity based on the broad and vague language. I understand that broad and vague language is construed against the drafter but when looking at the totality of the circumstances, especially that Tenant 1's business seems to be thriving, that there isn't much of a case for them. They have also acted in bad faith by operating rent free for over half a year even though I have demanded payment every month.

Appreciate the help.

 

[Zigner]

Hello.

I have a small commercial building with two restaurant tenants on a main commercial corridor (not shopping/retail center). One of the restaurant's lease ("Tenant 1") has a sentence that says "Lessor shall not lease to other tenant that may create the conflict with Lessee's current use." This is the only potential mention of any type of exclusivity. My other restaurant tenant vacated and I signed a new lease with a new tenant ("Tenant 2").

The crux of the issue that is about 5 menu items overlap between the two restaurants. Both restaurants serve food from the same country in order to serve the demographic of the neighborhood. Inevitably, some items overlap but Tenant 1 has over 80 menu items with certain specialties that do not overlap and Tenant 2 has about 20-30 total menu items.

I have been by the building several times and Tenant 1 is packed most times while Tenant 2 is empty. However, Tenant 1 has not paid rent since late last year and refuses to negotiate and even demanded a longer lease term and reduced rent, which indicates that their business is doing well or they are trying to sell it. They are claiming that I have breached the lease by allowing a competing business next door. The whole block also has restaurants that serve similar food.

I don't know how much time Tenant 2 has left in the space because they are not doing well, if they cannot pay rent and are forced to leave, that will solve the issues. I am going to start an action in landlord/tenant court against Tenant 1.

My question is whether Tenant 1 has a good case to enforce the supposed exclusivity based on the broad and vague language. I understand that broad and vague language is construed against the drafter but when looking at the totality of the circumstances, especially that Tenant 1's business seems to be thriving, that there isn't much of a case for them. They have also acted in bad faith by operating rent free for over half a year even though I have demanded payment every month.

Appreciate the help.

I suggest that you turn your insults around. It is clear that YOU have breached the lease.

 

[Legal Jones]

What insults. I'm asking for constructive feedback.

I suggest that you turn your insults around. It is clear that YOU have breached the lease.

.

 

[adjusterjack]

One of the restaurant's lease ("Tenant 1") has a sentence that says "Lessor shall not lease to other tenant that may create the conflict with Lessee's current use."

You're screwed.

Renting to another restaurant is exactly a breach of that lease provision.

 

[Legal Jones]

You're screwed.

Renting to another restaurant is exactly a breach of that lease provision.

A restaurant selling similar food (but no overlapping items) was there previously before the new tenant came in. They operated side by side for over 15 years without issue before one of them vacated.

If what you're saying is right, what would damages be, if they haven't lost any business? Would a court allow them to stay for the remainder of the lease (6 years) without paying any rent?

 

[adjusterjack]

A restaurant selling similar food (but no overlapping items) was there previously before the new tenant came in. They operated side by side for over 15 years without issue before one of them vacated.

Because there was no conflict with the then "current use."

That changed when the new tenant did conflict with "current use."

If what you're saying is right, what would damages be, if they haven't lost any business?

How would you know that? They could be thriving but at a lower profit level because of whatever profits are lost to the other restaurant even if the other restaurant is failing. Any amount of loss, though small, would still be damages that an accounting could prove.

Would a court allow them to stay for the remainder of the lease (6 years) without paying any rent?

Probably not.

But there could be an offset.

They have also acted in bad faith by operating rent free for over half a year even though I have demanded payment every month.

That's on you. You should have filed for eviction when they were first in default.

I don't know how much time Tenant 2 has left in the space because they are not doing well, if they cannot pay rent and are forced to leave, that will solve the issues.

But until they are out, this is an ongoing thing, Tenant 2 loses profits, you lose rents.

Consider offering cash for keys to tenant 2 to get them out sooner. You'll have to decide which option will cost you less.

 

[zddoodah]

One of the restaurant's lease ("Tenant 1") has a sentence that says "Lessor shall not lease to other tenant that may create the conflict with Lessee's current use."

This is horrible language to use: "may create the conflict." It's completely ambiguous. Who came up with this language? Was there any negotiating about the language?

My other restaurant tenant vacated and I signed a new lease with a new tenant ("Tenant 2").

When did Tenant 2 open for business? At the time you were considering renting to Tenant 2, did you contact Tenant 1 and ask for an opinion about whether, in its opinion, leasing to Tenant 2 "may create the conflict"? If so, what response did you receive?

Tenant 1 has not paid rent since late last year

Since when last year?

and refuses to negotiate and even demanded a longer lease term and reduced rent

A demand for a longer term and reduced rent sounds an awful lot like negotiating to me.

which indicates that their business is doing well or they are trying to sell it.

I disagree, but it's beside the point.

My question is whether Tenant 1 has a good case to enforce the supposed exclusivity based on the broad and vague language.

Absolutely - especially if you're the one who came up with the language in the lease and there were no negotiations about the language.

but when looking at the totality of the circumstances, especially that Tenant 1's business seems to be thriving, that there isn't much of a case for them.

How Tenant 1's business is doing is legally irrelevant to the threshold question, which is whether you breached the lease, as it seems you have. It will, however, be relevant to the question of damages.

They have also acted in bad faith by operating rent free for over half a year even though I have demanded payment every month.

That's not what "bad faith" means, and the only reason Tenant 1 has been operating rent free is because you failed to take action to address the tenant's breach.

It's worth noting, by the way, that, while you appear to be in breach, Tenant 1 is also in breach (unless the lease expressly gives Tenant 1 the right to withhold rent in the event of a breach by you). This is a bit of a clusterfuck from which neither of you will likely emerge unscathed, so I'd strongly suggest that you retain legal counsel ASAP to review the situation, advise you, and help you negotiate your way out of this at the least expense possible. Alternatively, explore options for getting Tenant 2 out of the place (as "adjusterjack" discussed).