Fashioning a creative solution to a complex problem, his favorite type of situation, Joe Cobert of the Firm quite recently helped “turn lemons into lemonade” for a commercial landlord client. We describe it below, being an example of the many ways in which the Firm, because of its experience and expertise, can provide value in a complicated transactional setting.
The landlord had leased a property in Los Angeles for a 10-year term (plus two 5-year options to renew) to a nonprofit entity serving a valuable community purpose. The tenant had borrowed in excess of $3 million from a private source in order to build its facilities and commence operations, the borrowed amount secured by a deed of trust on the leasehold only. Work was completed and the tenant took occupancy.
So far, so good. Then the problem surfaced, a big problem. It seems that the tenant hired a general contractor without sufficient “deep pockets.” The contractor was fully paid by the tenant but “somehow” ran out of money while still owing a six-figure total amount to some 17 subcontractors. How did that impact the landlord, the Firm’s client? Not having consulted the Firm up front, the landlord failed to post a notice of non-responsibility, which would have notified all subcontractors furnishing labor or materials that their only recourse for payment was the general contractor.
Unfortunately, the landlord’s ignorance of the law relative to communication of non-responsibility left the real property vulnerable to claims. Indeed, all 17 subcontractors either recorded mechanic’s liens against the property or submitted stop notices. Ouch!
Although the lease provided that the landlord was to be indemnified by the tenant, the tenant threatened to close its doors unless some sharing arrangement was reached. The landlord did not want to lose the tenant but also did not want to pay anything. What to do?
Utilizing the Firm’s suggestions, the following was the imaginative and successful solution:
1. The tenant contacted a major law firm which was looking for community-benefitting pro bono projects and explained the dilemma. Amazingly, the law firm agreed to represent the tenant and the landlord (with appropriate conflict of interest waivers) to settle or litigate to completion all 17 subcontractor claims on a pro bono basis! Not bad for the first step.
2. At the landlord’s urging, with the first step accomplished, the tenant agreed to go back to its contributors and to the leasehold lender to get funds to pay the prospective settlement amounts the tenant believed were owed to the subcontractors (much less than the subcontractors had demanded). From the perspective of the Firm’s client, the landlord, the second step was pretty good too.
3. Now for the finale. Recognizing that the landlord was adamant about paying nothing at the outset (except its own attorney fees), the Firm helped negotiate and document a unique arrangement. The deal reached was that the landlord’s only contribution was to provide a rent reduction for lease years 6-10. Therefore, not only did the Firm meet the landlord’s requirement of not paying anything up front but also the solution meant that the tenant had to stay and not default for five years if it were to receive any concession here!