Stuck in the Middle. What if the Tenant’s Use of the Premises Becomes illegal?

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So your out parcel Tenant is doing great with their check  cash and coin change business, But next thing you know the municipality limits or outlaws these businesses in the area where your Center is located. The tenant  has no way to implement an alternative use and the existing uses in the Center prohibit them from mailing packages or providing other “same day” financial services, the only easy alternatives to their specific use. Even worse, the lease states the Tenant is prohibited from “any other use other than specifically described herein.”

Yes it happens. All the time.

What to do? What rights does the Landlord or Tenant have to terminate the Lease? Can Landlord hold them to their Lease obligations while they cannot operate?

Many jurisdictions have struggled with this issue and come up with various interpretations of law with varying results. In North Carolina, the Court of Appeals recently ruled on this issue in the case Town of Beech Mountain v. Genesis Wildlife Sanctuary, Inc., 2016 WL 2646664 (N.C. Ct. App. 2016).  In that civil action,  the Court was called upon to decide the rights and obligations of  the Landlord and the Tenant where the Tenant’s use was limited to construction and operation of an education center relating to how people and animals can peacefully co-exist. As part of the use description, Tenant was allowed to bring wildlife onto the premises “from time to time.”

The Town later passed an ordinance that outlawed the caging or storing of animals within 200 feet of a recreational lake adjacent to the premises. Thus the Tenant’s use of animal habitats and storage was in direct violation of the ordinance. The Town demanded that the Tenant remove all animals in the specified vicinity , which the Tenant promptly complied with.  Not content, the Town then defaulted the Tenant again for violation of 4 other ordinances dealing with fuel tank storage, setbacks, buffers and accumulation of waste on the premises. The basis for the Town’s position was a catch all phrase in the use clause stating that Tenant was permitting the premises from being used for any purpose (italics mine) that “violates  any law”.

The tenant moved for summary judgment on this claim, which was granted by the trial court and upheld by the NC Court of Appeals. In affirming the lower court ruling, the Court stated that the Town could not show that the specific use of the of the premises was a purposeful violation of the law and thus not a basis for a breach of the lease.

Although a somewhat strange case on its facts, the Beech Mountain decision points out the problems that can arise when an operating use is later found to violate the law.  Perhaps in retrospect the lease should have been more specific as to what “violates any law” meant. It seems the Court may also have been troubled by the Town’s use of its own law-making abilities to target this tenant.

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Turning back to the example at the top of this post, how could the landlord and tenant have avoided the result of the use allowed by the lease from being problematic if the law changed and made it illegal for the tenant to so operate. Here are a few ideas:

  1.  Add language that outlines any ancillary uses that may be close substitutes to the stated use description (i.e. “provision of financial advice or counseling” or “online services for financial payments”);
  2. Specify the rights of the parties if the use is rendered illegal – such as Tenant’s right to terminate or negotiate alternative uses, as well as Landlord’s ability to seek removal of the tenant and/or sue for damages if the tenant continues to operate illegally;
  3. Explore opportunities for insurance coverage if this situation arises; or
  4. Allow Tenant limited rights of assignment or sub-letting.

In the end, the parties cannot always control what governmental bodies may choose to outlaw or restrict after a lease is signed. However, there certainly ways to provide for this risk and it is well worth exploring, especially for all landlords who are negotiating with tenants whose use is inherently dangerous, politically controversial or that may create a public nuisance.





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