Nothing Standard About Standard Lease Forms

April 1, 2005Article
Stewart Title of California's Commercial Update

It is widely accepted that standard form contracts account for more than 90 percent of all contracts used to complete business transactions today.  That percentage may be even higher when it comes to commercial real estate transactions.  Unfortunately, most people do not spend the time to carefully review the specifics of a contract up front, instead relying on the form contract to be an agreement equitable to both parties.  However, in most cases, terms in a standard form contract favor the party that uses it.

A recent judgment in California underscores the importance of negotiating unfavorable provisions out of what are presented as form contracts.  As a result of doing so, a landlord was able to collect 15 years of rent from an outdoor sign company even though the company was prevented by law from constructing a sign on the landlord’s building.

In 1998, an owner of a commercial office building in the Westside Los Angeles community of Westwood was approached by a leading outdoor sign company about placing a large advertising sign on the roof of his building.  After reaching an agreement about rent and term, which totaled $750,000 over 15 years, the sign company presented the building owner with its “standard” lease form.  The lease form provided that if the sign company could not obtain a building permit, or if the applicable building codes changed, the sign company could terminate the lease with no penalty or payment.  The lease form therefore placed on the building owner the risk that the sign company could not construct the sign.

The sign company was indeed the expert in the field and familiar with the building permit process.  Unknown to the landlord, the sign company was aware of a prior attempt in the Los Angeles City Council to ban new signs.  Since the possible ban did not affect existing signs, it made the sign company that much more anxious to get this deal done and the sign constructed.  Once any ban went into effect, all existing signs became that much more valuable.

Instead of the provision allowing the sign company to terminate the lease if it could not obtain a building permit, Greenberg Glusker, representing the building owner, negotiated a replacement provision reciting that the sign company had done all investigation it deemed necessary concerning city regulations and the availability of building permits.  Because it was anxious to acquire this valuable site and to get started on the construction of the sign, the sign company agreed to change its provision, allowing termination of the lease, to the replacement provision.

Immediately after the parties signed the lease, the sign company engineer re-measured the distance from the proposed sign location and the nearest competing sign on Westwood Boulevard, since city codes provide minimum distances between billboard signs.  The preliminary measurements had been slightly off and the sign location set forth in the lease violated city codes.  The sign company therefore announced that the lease was terminated because it was illegal and impossible to construct its sign.  Subsequently, a citywide ban on new signs was instituted, giving the sign company a second basis to claim a lease termination.

Believing that the sign company assumed the risk of an inability to construct its sign, the building owner filed suit in order to enforce the lease.  The sign company vigorously protested, asserting that no court would require it to pay 15 years of rent for a sign that was illegal to construct.

On behalf of our client, we argued that the sign company had knowingly assumed a foreseeable risk, and that the parties had allocated this risk to the sign company, not the building owner.  From the judge’s point of view, the key fact arose when the building owner elected not to simply sign the form lease.

The court concluded that the deleted sign company provision, which allowed termination if the sign company couldn’t obtain a permit, proved that the risk was foreseeable.  The replacement of that provision with the provision drafted by Greenberg Glusker established that the parties agreed to shift that risk from the building owner to the sign company.  Consequently, the trial judge agreed with the landlord’s position and granted summary judgment in favor of the building owner for the entire 15-year term, regardless of whether a sign could ever be constructed.  Additionally, the court awarded the building owner the attorney’s fees which were incurred in the enforcement of the lease.