Real Property Law

The Importance of Lease Drafting: Lease Language Takes Center Stage in Cinemex

Mark Ellinghouse

By Mark Ellinghouse

When in the throes of protracted lease negotiations, frustrated clients often ask me whether a proposed term is truly necessary to the contemplated transaction.  Most clients start these discussions with the goal of achieving a fair form of lease, but as consideration of the minutiae of lease provisions continues, clients typically hit a point where they no longer wish to spend any more money on legal fees and simply want to “get the deal done.”  This sentiment is both understandable and reasonable, especially where the risks associated with a provision may not outweigh the cost in legal fees required to resolve it in a favorable manner.  This sentiment can also cause mistakes, however, if either side is so committed to consummating a transaction quickly that it is willing to sacrifice clarity or accuracy in its lease.

A recent decision out of a Florida bankruptcy court highlights the importance of the language of a lease, as something as simple as a misplaced phrase can have disastrous results. The case, In re Cinemex, involved a movie theater operator who filed for Chapter 11 bankruptcy protection and sought to avoid its obligation to pay rent under one of its leases pursuant to a force majeure provision. That provision excused either party’s obligation to perform its obligations under the lease for certain enumerated conditions as follows:

If either party to this Lease, as the result of any … (iv) acts of God, governmental action, condemnation, civil commotion, fire or other casualty, or (v) other conditions similar to those enumerated in this Section beyond the reasonable control of the party obligated to perform (other than failure to timely pay monies required to be paid under this Lease), fails punctually to perform any obligation on its part to be performed under this Lease, then such failure shall be excused and not be a breach of this Lease by the party in question, but only to the extent occasioned by such event.

Cinemex, the tenant, relied on the fourth subsection to circumvent its rental obligations, claiming that the Florida Governor’s orders closing movie theaters fell squarely within the “governmental action” exemption.  The Landlord argued that the subsequent parenthetical (emphasized in bold above) carved out Tenant’s obligation to timely pay rent from this exception.  The carve-out on which the Landlord relied is very common in commercial leases, where landlords insist on the continued payment of rent regardless of the circumstances.

The court found that, because of its placement immediately following the fifth subsection (for matters beyond the reasonable control of a party) rather than before or after the entire five-subsection list, the Landlord’s carve-out only applied to the fifth subsection and did not apply to the fourth subsection.  As a result, the Tenant was permitted to claim application of the force majeure provision and was excused from its obligation to pay rent during the period in which the governmental action prevented its operations at the premises. This was undoubtedly not the Landlord’s intent, and resulted in lost rent to the Landlord.

This case is a good reminder that the specific language of a lease, and its placement within the document, can be critical to determining its application.  When lease negotiations bog down, it can be difficult for clients to appreciate how a provision can be applied or why it is so important, especially when the negotiations have been ongoing for weeks or months.  But part of the reason clients hire attorneys is to ensure that this language is drafted precisely to have its desired effect. As the Cinemex decision illustrates, inartful drafting can lead to disastrous results for parties to a lease (the court in Cinemex conclude the lease was not a “well drafted document”).  While they can be stressful and expensive, protracted lease negotiations are sometimes necessary to ensure that the lease matches the parties’ intent and will be interpreted exactly as the parties desire.

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