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Pitfalls in Commercial Real Estate Leases

Commercial Property Pitfalls – No Recovery without Harm

Just because a commercial lease requires the tenant to maintain a parking lot, does not mean the tenant always has to maintain the parking lot – especially if the failure to do so does not cause any harm. Here’s an example of lease terms not being met, but the lessee was not responsible for paying damages.

United Rentals, an equipment rental business, signed a lease that required it to “maintain the parking area and fence, such parking area and fence shall be surrendered in a condition similar to that existing at the time.” The asphalt parking lot deteriorated over time and United Rentals attempted to repair it with scoria (volcanic rock).

The trial court concluded this repair did not meet the requirement to surrender the parking area in a similar condition to its original pavement. The trial court, however, did not award the landlord any damages. At the time the lease to United Rentals began, the property was worth $750,000. After United Rentals moved out, the landlord, Three Aces, relet the parcel to a convenience store.

The convenience store planned to demolish the parking lot as part of a plan to redevelop the property. At the time of this new lease, the property was worth $1.7 million, and the convenience store rent was based on that capital value.

The condition of the old parking lot was immaterial to the parcel’s capital value or new rental value. Accordingly, the court denied Three Aces’ claim for the cost to properly repair the parking lot ($2.7 million). In doing so, the court noted that North Dakota requires landlords to mitigate damages.

On these facts, the landlord’s damages were essentially mitigated to zero by the new rental value of the property, so the landlord could recover nothing. Three Aces Properties LLC v. United Rentals (N. Am.), Inc., 2020 ND 258, 952 N.W.2d 64 (Dec. 17, 2020)

In many respects, this decision seems right. Given that the convenience store tenant didn’t want the parking lot, the landlord likely would not have spent the money on the parking lot anyway. Any other decision would simply have granted the landlord a windfall.

Let’s assume the convenience store tenant DID want a fully paved parking lot, or the landlord wanted to sell the property instead. If the properly maintained parking lot it would have sold for $2 million instead, the outcome may have been very different.

Let our experienced real estate lawyers, litigators, and dispute resolution experts help you analyze the best likely outcome for your commercial property. The Horenstein Law Group will draft commercial real estate lease agreements that protect you, whether you’re the landlord or the tenant. Contact us today for more information.

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