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Displaced Businesses Revisit Leases Amid Search for New Office Space

By SHEILA MUTO And PATRICK BARTA
Staff Reporters of THE WALL STREET JOURNAL

Sep 24, 2001

The destruction of the World Trade Center and the resulting damage to surrounding buildings prompted many commercial and residential tenants in the area to look at a document that they thought much about: the lease agreement.

Under the law, walking away may be an easy proposition for residential tenants displaced by the destruction of the World Trade Center, since most are entitled to break their lease agreements if they remain ousted from their units for more than 30 days. For displaced businesses, however, walking away is a more complicated matter.

To be sure, everything from small inconveniences, such as a water leak or power outage, to bigger disasters, such as earthquakes, hurricanes and fires, prompt landlords, tenants and attorneys to scrutinize, debate and litigate provisions of their lease agreements. The catastrophic events in lower Manhattan have sparked renewed attention to how these lease agreements will play out now.

Provisions for terminating an office lease vary widely and usually are agreed upon during the original lease negotiations. The conditions for terminating a lease may depend on the size of the deal, they type of space and the conditions of the real-estate market when the deal was set, which often dictate whether the landlord or the tenant has the upper hand.

Despite the legal differences between a residential and commercial agreement, these deals typically have one thing in common: The displaced tenants generally are under no obligation to pay rent.

“Even if the leases don’t say, under the law in New York, the situation would constitute an eviction and tenants have no obligation to pay,” says Harry Heching, a real-estate group partner at law firm Thelen Reid & Priest LLP in New York.

For instance, according to a standard lease form used by the Port Authority of New York & New Jersey for office space in World Trade Center, which the Port Authority owns, the agency can terminate a lease with a tenant or retain the lease and rebuild. The clock on a tenant’s lease would continue to run. However, the so called force majeure-or the “Act of God” clause that is common in many commercial property agreements –could be invoked by the Port Authority to enforce the lease and require that companies continue paying rent, even though their office space is destroyed.

Law firm Thacher Proffitt & Wood, which had 330 employees working at 2 World Trade Center, recently signed two subleases-one for four years, the other for six- to occupy space in midtown Manhattan. Thacher Proffitt Managing Partner Omer S.J. Williams says the law firm considers the lease with its World Trade Center landlord terminated.” At least our intention is to treat it that way,” he says.

Many real-estate brokers and attorneys believe the events of nearly two weeks ago are sure to change lease negotiations and agreements. M. Myers Mermel, chief executive of TenantWise.com Inc., and online real-estate brokerage in New York, says standard lease agreements that didn’t clearly outline periods of rental abatement and relocation costs likely will do so now.

People who live in the area and are allowed to move back into their buildings before 30 days are up may find backing out of leases difficult. “Legally, they’re obligated” to fulfill their leases, says Richard LeFrak, president of Lefrak Organization, which owns apartment buildings in the area, none of which have reopened. Mr. LeFrak says his company hasn’t determined a policy for handling requests to break leases, though he says he expects the company will provide “consideration” to tenants for the time they weren’t able to access their apartments. He says most tenants that his company has heard from intend to stay, though “a few” have indicated they might go.

A Web site devoted to news on the neighborhood near the World Trade Center was flooded with postings from residents complaining about the status of their apartments.

Some reported that property owners had said they weren’t willing to let tenants break their lease. May other, however, say their landlords, who can collect insurance for lost rents, have signaled they intend to be flexible, and, in some cases, have offered to waive a month or more of rent; some have said they will let tenants break their leases without penalty. One thing that might induce tenants to remain in their building is that process for comparable apartments elsewhere in the city are often higher, and supply is slim.

Newmark & Co. Real Estate Inc. represents commercial tenants in buildings where landlords have a year to a year and a half to restore their properties before the tenants can break the lease.

“A good chunk of [buildings damaged in the terrorist attacks] will be fixed in that time frame,” says Barry Gosin, chief executive of the New York real-estate brokerage. “It will be hard to operate the building if they can’t fix it in time and they lose a tenant.”

On the office-lease side, the terms of lease agreements may have wide implications for the real-estate market, particularly in the downtown area, where one real-estate firm estimates that nearly 16 million square feet of office space was damaged. Companies are signing long-term lease agreements at other locations to get back to business. As a result, they may be forced to sublease the space at their downtown offices once those locations are habitable again.

“It’s all such a remind that every time I go down there, I wonder if it’s something I can get over,” says Michele Manuel, a 33-year-old marketing consultant for a health-car company who has an apartment in the area. “It’s really devastating.” She says her property owner’s management company told her that the owner had insurance that would allow it to be flexible with tenants, as well as apply September rent to future months. Even that might not entice any to stay, she says.

Copyright © 2001 Dow Jones & Company, Inc. All Rights Reserved.
 

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