The real estate market has been so hot in Nashville over the past 6-7 years that, any time an old building in an in-demand area burns down, I’ve wondered if the culprit was a crafty real estate developer looking to build a high-rise condo. (Kidding, of course.)
But, as matter of law, a disaster can provide a landlord a way out of a long-term lease (whether they’re happy to be out or not), where the premises are fully destroyed.
I thought of this today, when reading the Nashville Post article Old Spaghetti Factory loses lease after 40-year run. Per local news, after total destruction of the building on Second Avenue, the landlord “will be terminating the lease agreement, although the restaurant reportedly has 16 years remaining on that lease.” The article notes that the restaurant is offering to spend more than $1 million of its own money to help rehab the space.
Seems unfair, right? It may be, but it’s probably allowed under the Lease.
Most commercial leases have a “Casualty” section, which dictates what happens when rental premises are totally destroyed, whether by fire, earthquake, or some other huge event.
Those provisions generally require the Landlord to restore the premises to substantially the condition that existed prior to the disaster. If the Landlord does that, then the Tenant is most likely stuck in the Lease. (Yes, even if losing the use its rented space during the repair period kills the Tenant’s business.)
Having said that, the provisions also generally give the Landlord an “out,” if the destruction is so total that the premises can’t easily be restored. In making this determination, a number of factors are considered, including if the cost to restore the building exceeds the ultimate value (and/or insurance money), if the Landlord’s lenders scoop up all the insurance money, the lease is near the end of the term, or if would take too long to restore (180 days from the event is a common measure).
In most cases, the landlord is motivated to repair or rebuild quickly, hoping to get the tenant back in the space–and back paying rent–as soon as possible.
There is no indication in the story whether the landlord here is relying on a similar provision or what types of other issues exist.
It may be that the cost to restore this historic building is so high that the landlord can’t (or isn’t financially ready to) quickly go into rebuilding mode. If the lease uses a typical 180 day requirement, the owner may know that there’s no way to do it in that time with all the special challenges presented by this terrorist event and during a global pandemic.
A skeptic would wonder if this owner wants to renovate a building to a newer, better use (like condos, offices, etc.) or may want to get rid of a long term–possibly below market–lease.
Leases are just like any other contracts. The plain text of their terms control. But, casualty provisions are a rarely negotiated point. When I prepare leases for commercial real estate, it’s often a few paragraphs at the end that I review quickly and move on.
But, when they do apply, it’s a big deal. Just like COVID got every Nashville commercial real estate attorney talking about force majeure, maybe this situation will get us negotiating casualty paragraphs.
In the end, though, yes, this is probably allowed under the lease.
The Tennessee Legislature is, again, considering debtor-friendly changes to the homestead exemption statute.
The one most likely to pass is House Bill 1185, which seeks to increase Tennessee’s homestead exemption from the existing $5,000 to $35,000 for single homeowners and from $7,500 to $52,500 for jointly owned property.
Before you complain too much about that proposal, consider Senate Bill 566, which provides an unlimited exemption for a judgment debtor’s residential real property (and, after the debtor’s death, it passes to the heirs).
Back in 2019, I talked about the importance of exemptions for debtors, since exemptions can preserve and protect a basic necessity level of assets for debtors (picture the clothes on their back, a few thousand dollars in the bank, a car, tools).
As I wrote in 2019, though, “if this new law passes, the downfallen debtor can keep 100% of the equity in his $750,000 house entirely out of the reach of creditors.” I then said:
Wait a second. Is this law designed to protect downtrodden debtors seeking a fresh start in life (who very probably do not have high value real property at all) or, maybe, is it designed to protect high income individuals whose businesses fail?
Because that’s all this proposed law does. It grants fairly absolute protection to the high value real property owned by judgment debtors in Tennessee, and all the garnishments, levies, liens, and bankruptcies will never touch a penny of that equity.
I feel the same way about these new proposals. If we’re talking about protecting the working poor and preserving the necessities of life from garnishment, let’s start somewhere other than $750k of equity in a mansion. Let’s talk about debt relief measures, eviction support, access to justice, etc.
But, these new laws aren’t about basic necessities of life for poor people. Most poor people don’t live in lien-free mansions. Instead, these new measures are being lobbied for by the construction industry.
These are bad proposals. Unless you’re a debtors with big, lien-free McMansion. Then, sure, it’s a great new law.
My first job as a lawyer was on Second Avenue in Nashville.
This was in 1999, and my future boss had me come to the office to interview on a Saturday morning (partly to avoid the suspicion of the lawyer I would be replacing).
At the time, I didn’t know much about downtown Nashville, since most of my trips to Nashville were either to Opryland as a kid or driving on I-40 on the way to law school in Knoxville.
I had clerked one summer in Nashville at the Tennessee Attorney General’s office, but, back then, Second Avenue didn’t have much to attract folks in their mid-20s. In 1999, the vibe was Gatlinburg-esqe, with a Hooters, Mere Bulles, Graham Central Station (three stories of bars, each with a different theme), a palm reader, The Wild Horse, and other tourist-centric places that catered more to out-of-town grandparents.
I got the job, and I spent about 8 years on Second Avenue. A lot changed during that time.
Before Fan Fair moved downtown, the big show was Dancin’ in the District, which was set up in Riverfront Park. My office window was a perfect vantage for these shows; I saw Kanye West (with a then unknown John Legend on the piano), the Strokes, and many others, from about 500 feet away. It’s strange to think about all the big-time, national acts that performed at these free concerts to such relatively small audiences. Part of that, of course, was that, back then, hardly anybody wanted to go downtown.
In fact, in the early 2000s, that lack of “busy-ness” was part of what I loved about downtown Nashville. On a Friday night, we’d hit 6-7 Broadway honky tonks (generally via the back doors in the Ryman alley) looking for any bars with a crowd, which we rarely found. Needless to say, there were no “all points” pedestrian crossings downtown in 2005.
As a lawyer, there was always a bit of unease about being in a “Second Avenue” office, especially as that part of downtown started to take shape as an entertainment district. The tallest building on Second Avenue was 4 stories high, and no white collar firms would dare move in next to a karaoke bar.
Things really got bad in 2005 when Fan Fair became CMT Fest and moved downtown. During this all-day and all-night music festival, my very serious lawyer phone calls were always at risk of interruption by country music and–definitely worse–the pre-show sound checks at the “River Stage” in Riverfront Park (generally, 5 second snippets of Rod Stewart’s “Do Ya Think I’m Sexy,” played over and over and over in the days before the festival).
The CMT Fest move was a spark for downtown’s growth. Before that, people just didn’t go downtown at night. There was wasn’t much to do and not much interest in what there was. This single event showed 50,000 folks (and countless others watching on TV) how awesome the historic downtown venues were.
This process was accelerated in 2010, when the Nashville Flood hit, and the buildings on Second Avenue flooded and many were then sold and renovated for new uses. Nashville’s overall recovery from the Great Recession was far quicker than other cities, and the rebuilding (and, yes, the developer opportunities) resulting from the devastation of the flood caused a rapid growth in downtown property investment and in tourism.
And, out of nowhere, people saw downtown Nashville not just as a “night out” option, but as a vacation destination. Maybe it was the TV show, but, in 2014 or so, you couldn’t even get in the door (front or back) at the old honky tonks. And, where there’s a happy tourist, there will be no shortage of a honky tonks willing to sell them a $6.50 Coors Light. As a result, dozens of new bars took over any available spaces downtown. Tootsies even built a new Tootsies on top of the old Tootsies.
Soon, all the Second Avenue lunch places and the ground-level offices were turned into bars and gift shops, while the upstairs offices were converted into condos and, later, AirBnBs.
In fact, in 2015 or so, the new owners of my old office building converted it into a residential condo building with a tourist-centric snuff shop on the ground floor.
I moved to a different firm in 2008 on the “business” side of downtown, and, personally, got married and had kids and just stopped going downtown very much–if ever–at night. When I did go downtown, I was always amazed at the crowds. Just an oppressive amount of people that, frankly, made me wonder who all these people were and where they came from.
Locals began to avoid downtown, and local media had fun mocking the bachelorettes and references to the “It City.” It became a sort of estranged relationship, and that always made me sad to see.
The Nashville bombing on Christmas morning was a tragedy on all levels. A senseless, terrible act that risked many peoples’ lives and absolutely destroyed their homes and businesses. Some of the businesses destroyed–like Old Spaghetti Factory and The Melting Pot–had been there when I walked to that first job interview in 1999.
Both had held on through all of the ups and downs on Second Avenue and three different recessions, and then this happened.
As I watched the news coverage all day on Christmas, I’d see my old office building, with broken windows and blown open doors. It made me profoundly sad, as a human being and as a resident of Nashville. These buildings on Second Avenue are part of our city’s history, having made it through thousand-year floods, fires, and wars.
And, maybe this is just typical New Year’s Eve sentimentality talking, but I’m also sad on a personal level that the Second Avenue that I first visited 20 years ago is gone and most likely will never come back.
The entire city of Nashville has changed so much in the past 7-10 years, and it sometimes feels like, if you don’t drive down a certain street for a few months, that, when you do, you’re going to see something old gone and something new being built, whether it’s downtown, Music Row, or even far away places like Madison. There hasn’t been an end in sight, and the Nashville Post must be running out of ways to report that the old “price per square foot” real estate sale records get broken on a monthly basis.
Maybe my broader sadness for Second Avenue is a feeling of loss over the city that I first moved to, over that office I was sitting in when that jerk opposing counsel yelled at me, or the places Lena and I went when we were dating. (Cue the Dan Fogelberg music now.) Maybe it’s a bit of maudlin loss for that version of me who walked cautiously past the Lazer Tag place while rehearsing for that job interview. Maybe it’s sadness that we live in such a divisive world where somebody felt compelled to bomb a building for political reasons.
I’m hopeful that these old buildings can be saved. At the same time, I’m also a realist, and I remember all the day-to-day structural and mechanical issues that arose in that 150+ year old building that I worked in. In my old conference room, the floor was so un-level that, if you lifted your feet off the ground, your chair would roll to the side.
If that’s the case, then, I hope this isn’t just another in a long line of disasters to hit Nashville and lead directly to investors’ property-prospecting and redevelopment. I hope our city leaders do what they can to protect the character. I’m hopeful that, instead, our state and federal governments will offer aid to the businesses and people affected.
I’m hopeful that, whatever happens on Second Avenue, that there aren’t a row of glass fronted condos and high rise offices there someday. I hope it’s never shiny or, worse, fancy.
I hope that Second Avenue comes back strong and serves as a vibrant rebuke to this despicable act. And, when it does, I hope that it preserves some of that unique charm that it’s had all these decades.
I hope it never becomes a place where big law firms want to move to.
In a post from last month, I mentioned that, when a commercial tenant defaults and leaves a leased property, the landlord is faced with a hard decision: File the lawsuit for unpaid rent now, or do you wait 6-9 months until a replacement tenant can be found?
One thing we know for sure: A landlord can’t just file a lawsuit for all the rent due for the remainder of the term. Instead, the landlord has a duty to mitigate its losses, which means–in this situation–to try to find a replacement tenant.
As of last Thursday, the next available civil hearing date for new and pending cases was December 9, 2020.
Since last Thursday, 357 new cases have been filed in Sessions Court.
Given the usual holiday court schedule, I’d bet that–as of this blog post— there are no more open civil dockets in 2020.
The Nashville Bar Association hosted a General Sessions Court Town Hall today to talk about these issues, but, given the unprecedented nature of this problem, nobody knows what’s next and how to solve it. Will there be afternoon dockets? Staggered morning dockets? Video appearances?
I’ve received a handful of calls from local lawyers, for advice on how to navigate all this. In some cases, the best move is to file the matter and just get a date locked down before things get worse (even if it’s in mid-January).
Another option, though, if you aren’t going to get into Court until January or February, is to file your commercial eviction lawsuits in Circuit Court (which has jurisdiction, per Tenn. Code Ann. § 29-18-108).
If you file an eviction action in Circuit, today, and get it served this week, you may be able to get a judgment by early December (or early January).
And, yes, I know I’ve criticized lawyers for filing Sessions-sized and eviction matters in Circuit Court (a move that generally presents no tangible strategic advantage, other than the lawyers get more billable hours).
But these unprecedented times call for novel ideas.
I represent a lot of commercial landlords, and, when there’s a payment default and they want to evict a tenant, there’s an early strategy question that they all face: (1) Do we sue for possession only; or (2) Do we sue for money and unpaid rent (through the date of the court hearing)?
It’s a nuanced question. Most landlords choose # 2, especially since detainer lawsuits are filed in General Sessions Court and, due to a little-known exception, you can take a huge money judgment in “small” claims court.
But, they’ll generally say, what about the unpaid rent for time periods after we get a judgment and evict them from the property? That’s a second lawsuit. Isn’t there a rule against two lawsuits on the same issues?
Last week, the Davidson County General Sessions Court entered an Administrative Order that limited the number of cases that can be set on the civil dockets in Courtrooms 1A & 1B, with a cap of 25 cases per day (effective October 5, 2020).
That sounds like a lot of cases. It is not.
A typical General Sessions civil docket might have 50 to 100 cases on the docket. Davidson County has civil dockets every day of the week.
By my math, this represents a minimum 75% cut in capacity.
Granted, when I first heard about the 25 case limit, it didn’t sound like too much of a problem, since I don’t have a high volume consumer or residential eviction practice. The high volume lawyers who routinely have 25 of their own cases on each docket would be the ones with the problem, right?
Then, I got a call from a commercial landlord whose tenant hasn’t paid rent since March and has “gone dark.” The landlord asked me to get a judgment for possession as soon as possible.
I represent a lot of landlords all over Tennessee. I also represent a lot of Tennessee small businesses who are, invariably, tenants.
Since COVID-19 hit, I’ve probably read 60 different leases. Sometimes, I’m looking at force majeure provisions or for ambiguities that would provide an argument against payment of rent. Other times, I am reading those same provisions (different leases) hoping for the opposite outcome.
Over the last 4 months, when scheduling my client calls, I’ve joked that “I do all my calls with my tenants in the morning, and I do all the landlord calls in the afternoon. I need to remember which argument to make.”
Even by lawyer standards, it’s rare to see such a equal distribution of misery on both sides of an issue.
[T]here’s no blueprint for how small-business owners should deal with their landlords during an economy-toppling pandemic.
Here’s one option: ignore your landlord and plan on resuming rent payments when sales hopefully improve, and try to not get evicted in the meantime. Another option? Stay current on rent and pray that the economy recovers before you run out of cash.
Neither one of these options are really good, but the tenant doesn’t have any better options. Making matters worse, the Bankruptcy Code isn’t much help, unless the lease assumption statute gets changed, to provide relief to tenants:
One possible solution is that Congress temporarily change bankruptcy law so that small businesses can be allowed to pay their landlords more reasonable amounts until the pandemic is behind us.
Some quick background: Under the Bankruptcy Code, a Chapter 11 debtor can generally stop paying its creditors during the time the case is pending and, even after a plan of reorganization is confirmed, that plan may provide drastically modified (reduced) payments to its creditors.
That’s not the case with landlords, though: Under 11 U.S.C. Section 363 of the Bankruptcy Code, landlords are entitled to demand their full monthly rent due the entire time, and, in order for a lease to be included in a bankruptcy plan, the landlord must be paid current. Long story short, a tenant’s bankruptcy filing is a temporary speed bump for landlords, but the path to payment in full for a landlord is pretty direct.
As a result, many landlords have been aggressive during the pandemic, emboldened by state and federal law. The article mentions that many landlords are starting to see the writing on the wall (and that, maybe, there aren’t any replacement tenants) and are considering “pay what you can” agreements.
States have offered limited help to tenants, in the form of moratoriums on evictions (though such efforts are not reducing or stopping the financial payment obligations for the accruing rent). Plus, deep-pocketed large retailers are cooking up some innovative legal arguments (the article cites Valentino and Victoria’s Secret, but it could have also cited the Nashville lawsuit filed by The Palm Restuarant against the Nashville Hilton).
To the landlord’s defense, the article notes that landlords, themselves, may be small entrepreneurs with mortgages of their own and who depend on the rental income stream. The article advocates for tax cuts for commercial lessors.
Again, the article presents a fairly even-handed consideration of a “no win” situation. If the landlords win, then thousands of small businesses go under in the next 6 months.
Posting the proper bond in an eviction appeal in Tennessee is confusing and, sometimes, very expensive. Remember, though, if a landlord is granted an eviction judgment, the tenant can still have a valid appeal, even if the tenant doesn’t post the possessory bond required by Tenn. Code Ann. § 29-18-130(b)(2).
The Tennessee Court of Appeals issued an opinion yesterday, affirming this line of decisions, in Thomas v. Millen, W2019-00086-COA-R3-CV (Tenn. Ct. App., Dec. 19, 2019). This case cited the Court’s own recent, similar opinion at Belgravia Square, LLC v. White, No. W2018-02196-COA-R3-CV, 2019 WL 5837589 (Tenn. Ct. App. Nov. 7, 2019).
Long story short, the possessory bond is not jurisdictional, meaning the circuit court has jurisdiction to consider the issues, and an appeal remains valid despite the failure to post the § 29-18-130(b)(2) bond.
As a practical matter, most eviction appeals will die once the tenant loses the right to possession. But, not all. In that situation, the tenant could be dispossessed of the property, but the tenant can still challenge the landlord’s rights and, if successful, seek monetary damages against the landlord if the tenant wins.
That type of fight does happen. I’ve had an opposing party / tenant lose in Sessions, appeal to Circuit, lose possession in Circuit, but continue fighting my matter…all the way to the Supreme Court. The United States Supreme Court.
A new opinion from the Tennessee Court of Appeals provides valuable guidance to attorneys foreclosing on commercial properties.
The matter is Tennessee Funding, LLC. v. William Worley (No. M2019-01099- COA-R-CV, Tenn. Ct. App. Nov. 26, 2019), and the issue was whether a foreclosing lender took ownership of the contract rights associated with the real property–specifically, whether the foreclosure sale of the entire residential development transfer ownership of the “developer’s” or “declarant’s” rights of the property.
The actual issue was more nuanced than that and, trust me, I know (I represented the prevailing party in both the trial and appellate courts). The full opinion can be found here.
For purposes of this blog post, I won’t bore you with the deep analysis, but here are the main takeaways from yesterday’s decision:
In many development loan/construction loan transactions, the lender will be granted both a lien on the real property and a UCC lien on all the “other stuff” associated with the development project.
A real property foreclosure pursuant to the Deed of Trust and Tenn. Code Ann. § 35-5-101, et. seq., transfers to the foreclosure buyer all of the dirt.
The real property foreclosure does not transfer ownership of all the “other stuff,” including contract rights associated with the development.
These contract rights can include plans, drawings, and, yes, developer’s rights under a Master Deed or Declarations (i.e. the right to manage the development/developed property).
The rights are personal property, and those rights must be transferred by a creditor’s UCC Sale under Article 9, including Tenn. Code Ann. § 47-9-610.
Ultimately, that was the critical factor in this case–that the foreclosing lender did a dual sale–a foreclosure under the Deed of Trust to purchase the dirt and a UCC sale under the Security Agreement to purchase the personal property.
Keep this case in mind the next time you represent a creditor contemplating a foreclosure on a property development. You may not be doing your job if you only foreclose on the land.