Increased Commercial Leasing and Redevelopment Projected for the Twin Cities

Tis’ the season for commercial leasing, according to figures from a new report from Colliers International. The report shows office space vacancy falling over the last few years and predicts that there will be growth in commercial leasing in the Minneapolis and St. Paul areas for the rest of 2013 and into the short-term future. Most of the increase in commercial leasing has been prompted by increasing demand for office space.

Since the recent recessionary years, businesses have not been expanding and have continued to participate in a process of densification, which is the concentrating of office space per workers. This has occurred much more in recent years as businesses have started to hire more employees, but have not expanded space usage. Trends are beginning to develop which suggest that this may change. However, unlike in periods of expedient growth in which businesses sometimes create their own new spaces, companies are currently turning to existing properties for redevelopment, and this has spurred the market for commercial property leasing and redevelopment.

The Colliers report makes mention of several buildings being renovated for this purpose including 510 Marquette, the William E. McGee Building, the Northwestern Building, and Block E. The Star Tribune reported that the Miller Bag Building in North Minneapolis is also being renovated into new office spaces. In addition, many entrepreneurs are eyeing the commercial property sector in the Warehouse District such as Nicolas Thomley, the 33-year-old founder of Pinnacle Services. He recently purchased a 111-year-old warehouse building that he plans to renovate and also partly turn into his own private residence, from which he can survey the development of the Warehouse District. According to him, the Warehouse District is one of the hottest neighborhoods for redevelopment since there is “literally nowhere else to do so.” Other major signs of redevelopment are also accompanying this trend such as the demolition and erecting of the new Vikings Stadium as well as the recently-approved Target Center renovation.

With the expected influx of new commercial property leases and redevelopment, property owners will face the need to draft complex agreements which not only protect their interests, but also shield them from liability. This will be a boon to the legal industry in the Twin Cities since property owners usually defer to legal counsel when drafting complex agreements. They should, too; there are subtleties in commercial real estate law concerning topics like gross vs. double net lease terms as well as indemnification, improvements, dispute resolution, etc. In the arena of commercial leasing, there are fewer laws protecting the parties, no standard forms, long-term and binding provisions, and more negotiable terms.

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How Complex Agreements, if Improperly Drafted, Cause Complex Problems

On October 11, 2013 in the U.S. District Court in Minneapolis, arguments began in a complex legal dispute that showcases the importance of thorough contract review. The lawsuit was initiated by ORIX Public Finance (“ORIX”) against the Lake Country Housing and Redevelopment Authority (“Lake Country”) and has been in litigation for almost two years.

The lawsuit stems from a Bond Purchase Agreement (“Agreement”) between both parties made in 2011. The Agreement called for ORIX to purchase bonds issued by Lake Country so that Lake Country could finance a massive expansion of fiber-optic internet lines to homes throughout Northern Minnesota. The entire undertaking was projected to cost over $60 million, but ORIX  would only buy bonds for $3.5-6 million of the total amount, The rest would be provided by federal government grants and stimulus monies.

The circumstances leading up to the dispute were such that the federal government’s Rural Utility Service (“RUS”), which originally planned to fund most of the project with grants and loans, did not like the terms of the Agreement between Lake Country and ORIX because of the Agreement’s high interest rates. The entire Agreement was conditioned on RUS’s involvement, however, so RUS’s approval was needed for the contract to become enforceable. After various negotiations, Lake Country decided that it would simply use its own funds to finance the project instead of selling bonds to ORIX.

Naturally, ORIX was frustrated by this decision because it meant that it would not be able to buy any bonds. In the Agreement, there were multiple conditions which the agreement may be terminated, but Lake Country’s decision to pursue alternative methods was not one of them. Conditional terms are great ways to ensure that a contract is only enforceable if the purpose of the contract is fulfilled by specific circumstances. Obviously, since the entire Agreement was conditioned on RUS’s involvement by a certain date and other factors, termination could have resulted if RUS was not involved by a certain date.

But the Agreement also provided any party with the right to waive compliance with any condition for the time of performance of the contract. Therefore, even if the RUS funding was not secured by the originally-proposed date, ORIX could simply waive the condition and extend that requirement until RUS’s funding was secured. The agreement, then, would be continuously binding on Lake Country indefinitely, and Lake Country would need to sell bonds to ORIX once it received funds from RUS.

Since Lake Country did end up receiving RUS funds but did not offer any bonds to ORIX, ORIX sued Lake Country for breach. It argued that it had waived the time conditions to the contract, keeping the Agreement enforceable. Lake Country could only turn to the termination clauses provided in the Agreement.

There were many terms that allowed ORIX to terminate the Agreement, but Lake Country could only terminate the agreement in the unlikely event that ORIX refused to pay for bonds offered by Lake Country on an undetermined future closing date. This was a grave oversight by Lake Country’s attorneys, who drafted the agreement, and one which they stated later in court was a result of their forgetfulness to edit boilerplate, standard language they had used when representing other clients. Because of this mistake, Lake Country’s own contract provided ORIX with more power to terminate the agreement than it gave itself. If Lake Country’s lawyers had been more careful, such traps could have been avoided.

Now, the District Court is hearing arguments because it feels that it may be reasonable that Lake Country breached its own contract with ORIX, largely due to the “clerical errors” and mistakes of Lake Country’s drafting attorneys, which have a material effect on the contract. As a result, Lake Country may be liable to ORIX for upwards of $4.5 million.

This case clearly underscores the importance of retaining experienced counsel for complex contracts such as bond purchase agreements. A talented transactions attorney can expertly spot issues like the ones involved in ORIX v. Lake Country case and ensure that complex litigation does not result. As was reported by Watchdog.org, the legal fees as a result of these drafting debacles have reached over $250,000. Not only will proper drafting and review save time, it will also save organizations from substantial legal costs, lengthy litigation disputes, and extreme risks.

If you are in need of contract review and drafting, big or small, consider contacting Vlodaver Law Offices, LLC, which has experience proofing complex agreements for small, medium, and large businesses throughout Minnesota.