Illinois court rules against tenant exclusive

Crain's moved a story this morning regarding a dispute over a tenant exclusive involving the InterContinental Hotel in Rosemont. As I understand it, Capital Grille occupied a standalone pad in the project under a lease that prohibited another “high-end steakhouse themed restaurant concepts serving liquor with price points above $22.00 per entrée” in the project. Apparently several types of competing restaurants were named.

Apparently an Italian restaurant was supposed to go into the hotel but then blew out of the deal. Along came Wildfire, which was not listed among the competitors although it does sell steaks above $22.00 per entree and is a pretty classic supper club type atmosphere, though certainly noisier and more lively than Capital Grille, in my opinion. The developer's hand was forced because the franchisor declared a breach under its franchise agreement for not having a restaurant on site (and then granted an extension), although you wonder in this market if you can raise the old impossibility/force majeure defense like everyone else is or make it go away through other means....

I haven't read the exclusive language, but in this case Cook County Circuit Court Judge Rita Novak on Feb. 13 denied the preliminary injunction, in part because she found the provision — which singled out a number of restaurants, but not Wildfire — too vague to be enforced in this case." In short? Wildfire gets to open, unless Capital Grille tries to take this up on appeal.

Lawyer lesson? If you are a tenant, you'd better try as hard as you can to make the exclusive as air-tight as possible, and even then remember that litigation can sometimes be a crapshoot.

Finally, I guess the upside for a meat lover is that you get your choice between two more fine restaurants in Rosemont!

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Net, gross, modified, gross...huh?

Someone near and dear to me asked me to draft an office lease for some property that person owns. I received a hand written, one page term sheet with a base rent figure.

What freaked me out until I read it more carefully was the treatment of gross and net items in the lease. Those of you in the know (probably all of you if you are bothering to read this far) are aware of leases such as bond leases, net or triple net leases, gross leases, modified gross or plus-E leases, and the like. (You can find what I think is a good recent summary written by Michael Mandel here. New York is a whole ballgame of its own sometimes, especially dealing with the form Manhattan leases with their crazy long riders.)

All I was reminded of was this: you cannot just draft blindly and assume every deal is the same. And the terms I mentioned above, while very, very helpful, are not always precise. (It reminds me of my first plus-E lease in Texas.) For instance, I am drafting a so-called "gross" lease here, but the tenant will have separately metered premises and will pay for half of the trash removal. The landlord is apparently covering everything else. (We'll see once I finish the first draft and discuss it with the client.)

And for you clients: don't get annoyed when we ask what you think might be crazy or dumb questions. It is for your protection, not to run up the bill.

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Where is the office leasing market going?

That's a good question. Some people are advising big tenants to lock in now while the going is good and the economy supposedly soft. Others are saying, especially here in Chicago, that a big glut will hit the market in 2009 and beyond that will rival that in the 1990s.

Both may actually be right. A downturn is a good time to lock in megaleases for office space because landlords want the certainty of a major tenant while the tenant might get a better deal. But if you were a smaller tenant or not dying to get space now, when absorption decreases and/or more lease and sublease space comes on to the market, then 2009 is probably a good time for you! It's all about the endless supply and demand.

I personally don't see us going back to the 1990s because I don't think we're all that overbuilt. There may be exceptions to this in some markets. As I have said before the other factor that could come into play that might change my mind is a major bloodbath with big tenants dumping space, and we're not seeing that yet.

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Scary times for retail landlords?

That's what this USA Today story (via AOL) implies. The list of retailers on credit watch is a veritable Who's Who of the industry, including "Eddie Bauer, Sbarro, Guitar Center, Blockbuster, Six Flags and Linens 'n Things." I saw a number of other big names there too.

That's the bad news. Let's not forget that some people have been predicting the demise of some of these companies forever, and it hasn't happened yet. This does not mean there will be more trimming, bankruptcies and store closings like we've seen with Wickes, Sharper Image and Bombay Company, but let's not assume every company on the list is a goner, either.

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Wall Street woes and dirt

A few months ago I suggested that law firms lock in leases in busy markets such as New York because, even with the credit crunch, rents were still going up. I had one exception to that advice: big layoffs on Wall Street.

And now that is being predicted by today's Journal. And the numbers are not the prettiest.

It may be that the big boys hold on to some empty space if there is a bloodbath, under the expectation that they will need it again soon. But another likely scenario is that the firms, wanting to eat as little real estate cost as possible, might flood the market with cheap(er) sublease space for subtenants. Of course there are a lot of factors coming into play here (improvements and allowances, the lengths of the deals, landlords that may or may not cooperate), but it could bring some pricing into play in what has been a very friendly landlord market.

There's not going to be a rent collapse in my opinion. Heck, there may not even be much of a decline if any. But any lowering of Manhattan rents may be seen by the naysayers as more evidence of sky falling and all that, so be forewarned.

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