By Rebecca Byrne
11/26/2001 10:12 AM EST
It would be logical to assume that because the World Trade Center no
longer exists, former tenants shouldn't be bound by their leases. In fact,
that's far from clear. Silverstein Properties -- the effective owner of the
buildings -- has not unilaterally terminated these contracts, igniting some
suspicion about the landlord's motives.
With roughly 10% of the office space in Manhattan obliterated in the
terrorist attacks, many companies were forced to set up business elsewhere.
Lehman Brothers, which had offices both in the World Trade Center and World
Financial Center, relocated to its backup offices in Jersey City and in
Midtown, a spokesman said.
Meanwhile, Morgan Stanley signed long-term lease agreements for office space
on Varick Street and on Third Avenue. Some 600 people are temporarily
located in Jersey City while another 150 are in Brooklyn, a spokesman said.
According to a survey by TenantWise.com, the majority of companies
that once resided in the World Trade Center have made long-term plans to
relocate outside of Lower Manhattan. And yet Silverstein has not nullified
their old leases.
This has raised questions as to whether tenants could be forced to pay rent,
even though the buildings were demolished.
Experts say it's possible because of a clause that is common in many
commercial agreements known as force majeure, or act of God. This stipulates
that tenants cannot ask for rent reductions in the event of war or any other
matter that is beyond the control of the landlord. Meanwhile, the casualty
clause, which could have offered tenants a way out, probably won't be
"Under a typical casualty clause, the tenant has the right to cancel the
lease if repairs are not made within 18 months," said M. Myers Mermel,
CEO of TenantWise.com. "But the Port Authority never allowed any
negotiation on this issue, and since no one imagined that the buildings
would be destroyed, few people argued. So we believe most tenants do not
have the right to cancel."
Some speculate that Silverstein Properties needs to collect rent in order to
pay for its enormous financial obligations. The company must continue paying
The Port Authority of New York and New Jersey $120 million a year for the
World Trade Center even though it's no longer there, according to Marc
Wolinsky, an attorney representing Silverstein. That's because the company
signed a "ground lease" agreement and effectively purchased the buildings.
In addition, Silverstein is contractually responsible for the rebuilding
process, Wolinsky said, something that New York recently estimated could
cost over $80 billion. The company also owes creditors roughly $180 million.
"Under New York State law, just because a landlord doesn't send a bill
doesn't mean it's not due, so the leases are still in full effect,"
Mermel noted. He said CEO Larry Silverstein "has the right to collect
rents, and all the debt holders are expecting him to collect it."
Still, Wolinsky noted that "no rent is due post Sept. 10." He added that the
firm's own commitments are being paid through insurance.
But that is another contentious issue.
The World Trade Center was insured for $3.5 billion, but Silverstein is
arguing that since both towers were destroyed, the covered damages should
run to $7 billion. SR International Business Insurance, a unit of Swiss Re,
is not convinced of the legitimacy of this claim and has filed a lawsuit
saying it "won't pay twice."
By keeping tenants on the books, Silverstein at least has the option of
drawing rent from tenants. It may also be hoping to bring companies back
into the newly built complex a few years down the road. Firms that signed
long-term agreements elsewhere could be forced to sublet the space.
Across the Street
As for businesses located at the World Financial Center, there is no
question that they are contractually obliged to pay rent. Brookfield
Properties, which owns buildings 1, 2 and 4, said it has received $50
million for property and business interruption claims relating to 1 Liberty
Plaza and 1 World Financial Center. Towers 2 and 4 are covered by insurance
in place under tenant leases, the firm said in a press release. Merrill
Lynch has already started to move back into its offices at 4 WFC.
As for the more badly damaged 3 World Financial Center, the building is
jointly owned by Lehman Brothers and American Express. American Express has
signed some "short- to medium-term" leases in Stamford, Conn., and in New
Jersey but said it remains committed to keeping its headquarters in New
TenantWise noted that an initial inspection of tenants from the
damaged properties surrounding the World Trade Center showed that they
intend to return to their offices once the offices are repaired.
"However, a closer inspection reveals that the largest of these tenants
(accounting for 44% of the square footage of the damaged properties) have
also made provisions to leave Lower Manhattan."
Before they make any long-term plans, they might want to check that lease.
© 1996-2001 TheStreet.com, Inc. All rights reserved.