With building vacancies increasing in most major markets and trillions of dollars in financing due in 2024, the U.S. commercial real estate market is undergoing major changes.
At the same time, most government agencies are rethinking their long-term space needs.1 As remote and hybrid work becomes the norm, our footprint is also shrinking. Adding to the impact of these reductions in office space, approximately 50% of General Services Administration (GSA) leases are scheduled to expire within the next five years, and as tenant agencies continue to extend their contracts, GSA We are increasing the number of lease contract extensions. Consider their real estate requirements.
These dramatic changes in market and government requirements directly impact landlords and developers in a number of ways. This Holland & Knight Alert focuses on early termination of leases by the government and what to do if the government attempts to vacate the lease before the end of the lease term. This is the first of two alerts addressing special considerations for government leases in the rapidly changing commercial real estate market. Part II deals with distressed assets leased to the federal government and the transfer of ownership of government leased assets.
Background: Know your rights if the government tries to terminate your lease early
Good news: Unlike traditional government contracts, leases with GSA (and most other federal agencies with leasing authority) do not give the government the right to terminate the lease at its discretion.2 In fact, the government's only right to terminate a GSA lease early is for the lessor's default;3 Additionally, it is rare for a lessor to be unable to cure a default after construction is complete and the lease term has begun.
If the government elects to vacate the building early, its only contractual remedy is through the vacant building clause in the lease, which allows the government to pay rent by a fixed amount (usually about 1.50 per rentable square foot). (from $2 to $2). This is intended to offset any windfall profits that the lessor may receive in operating costs associated with the vacant space.
The bad news: Just because you don't have a legal right to terminate your lease doesn't mean the government won't try to terminate it. We have recently seen numerous situations in which governments either try to terminate contracts on their own terms (by asking lenders to agree to early termination) or try to escape their obligations by making dubious claims of default or fraud. I encountered it. Industry players are also witnessing governments attempting to force rent reductions when holding only a portion of a property after a lease expires. Increased remote work and reduced agency requirements appear to be driving the rise of this trend.
When the government abandons the leased property and stops paying rent, it effectively forces the lessor to bring a claim under the Contract Disputes Act to protect its rights. However, as we discuss below, early involvement may prevent the government from early termination, or provide more favorable acquisition terms or litigation advantages if the government chooses to terminate the lease. It is possible to obtain a good position.
What to do if the government tries to leave early
- Please consult a lawyer. Lenders should consult an attorney with federal real estate expertise at the first indication that the government may seek early termination of the lease. This helps lenders make informed decisions with a full understanding of their legal rights and remedies. Additionally, the best defense against an early government exit may be for the lender to communicate early and effectively to the government that it understands its rights and is prepared to litigate if necessary.
However, even if early engagement with the government fails, an attorney can effectively document the lender's refusal to agree to early termination, and also provide evidence to justify termination. must be able to rebut the government's claims of nonperformance or default that may be used as a pretext for And in any case, if the government were to try to buy out the landlord for the value of the remaining term, effective settlement negotiations would require a thorough understanding of the legal situation.Four
- Reduce damage. If it becomes clear that the government intends to abandon the lease in breach of its obligations, the lessor must take reasonable steps to mitigate damages. It is a fundamental provision of Government Contract Law that a party injured by a breach of contract has an obligation to mitigate the damages.look Indiana Michigan Power Company v. United States; 422 F.3d 1369, 1375 (Fed.Cir.); Reig denied (2005). In mitigating damages, the law requires only that the non-breaching party make “efforts that are fair and reasonable under the circumstances.” First Heights Bank, FSB v. United States; 422 F.3d 1311, 1316 (Fed.Cir. 2005) (cited) Home Save Am, FSB vs. US, 399 F.3d 1341, 1353 (Fed.Cir. 2005)). In particular, “a party cannot recover damages for losses that could have been avoided.” reasonable efforts. ”Robinson v. United States, 305 F.3d 1330, 1333 (Fed.Cir. 2002) (emphasis in original) (cited) Restatement of contract (second time) § 350, centimeter. b (1981)).
This raises the question of what constitutes a “fair and reasonable” mitigation measure. Although this will be a fact-specific analysis for lessors and their attorneys, the case law dealing with mitigation obligations in the context of lease procurement provides some limited, but reasonable, examples of mitigation efforts. ing. Landlords should consider whether it is appropriate to re-advertise or find a new tenant and be prepared to justify their actions as reasonable mitigation. It should be noted that the market is sophisticated enough to understand that if the tenant is the federal government, the lender may not be able to provide a clear availability date for the space. Nevertheless, advertising your space can be a wise approach to pursuing mitigation.
- Submit your claim. This claim is the first step in enforcing your rights in the event of a government violation and is a necessary preliminary step in filing a lawsuit against the government. In principle, under the doctrine of sovereign immunity, governments are immune from lawsuits unless they explicitly waive immunity by statute.contract dispute lawFive is just such a law, providing a legal basis for lawsuits against the government.
However, this waiver of sovereign immunity is conditional on the lender filing a claim with the contracting officer and receiving the contracting officer's final decision.6 The U.S. Court of Appeals for the Federal Circuit defines a “claim” in valid contract dispute law as “a written demand or written assertion by one of the parties to a contract for the payment of an amount of money as a matter of right.” . Adjustment or interpretation of the terms and conditions or any other relief arising under or in connection with this Agreement. ”7
A claim must be filed within six years after it arose, and when all the facts that resolve the alleged liability and enable the assertion of the claim were known or should have been known. You will be charged.8 While six years is a fairly generous time period, it is beneficial for lenders to submit claims as early as possible to ensure speedy resolution and prevent loss of relevant evidence over time.
If a claim is denied by the government, or if the government does not respond within the allotted time period, the lender has 90 days from the denial or deemed denial to either the U.S. Civil Contracts Appeals Board or the U.S. Court of Federal Claims. can sue. Within one year of the denial or deemed denial.
- Establish damages. Although the Court of Federal Claims has not yet issued an opinion on the calculation of damages for unreasonable early termination of a lease, the Civil Contracts Appeals Board held that:9 In the event of such a violation by the government, the lessor is entitled to “expected” damages. This is defined as the discounted profit that the landlord could have realized (basically rent less expected operating expenses) but for the government's violation. Present value and the possibility that the lessor can mitigate damages by subsequent tenants.
conclusion
Unfortunately, in the current real estate market, and with government agencies under pressure to reduce their real estate footprint, governments may seek to terminate leases early even though there is no legal basis to do so. There are very real risks. The best way to protect yourself from this risk is to know and understand your rights and to communicate effectively with the government as soon as it becomes clear that they intend to seek early termination.
Note
1 Office of Management and Budget (OMB) Memorandum M-22-14 (whitehouse.gov) authorizes government agencies to develop capital plans for fiscal years (FY) 2024 through 2028 and provides OMB and federal real estate We are seeking to restart the annual planning process by submitting a submission to the Department. The council takes into account “broad workforce and workplace trends” and “lessons learned from agency operations during the COVID-19 pandemic.”
2 The Federal Acquisition Regulation (FAR) requires government agencies to include convenient termination provisions in all contracts for supplies and services. See 48 CFR Subpart 49.5: Termination Provisions. These provisions give the government the right to terminate the contract at any time “if the contracting officer determines that termination is in the government's interest.” 48 CFR § 52.249-2(a). Courts have interpreted this clause to give the government wide discretion to terminate the contract. However, the F.A.R. do not have Applies to government leases. See 48 CFR § 570.101(d). (“The FAR does not apply to the acquisition of real estate leases.'') Because the FAR provides the only requirements that apply to the termination of convenience rights in government contracts, there is no argument that the FAR does not apply to government leases. This has historically meant that government leases have not included the right to: Such Termination Rights Against the Government.
3 Standard GSA lease default clauses – 48 CFR § 552.270.18 and 48 CFR § 552.270.22 – set forth the government's default termination rights and obligations.
Four GSA's Lease Desk Guide acknowledges that GSA can and will provide buyouts to lessors in certain circumstances if requirements change and decline. See Lease Desk Guide – Chapter 6, page. 6.2-18.
Five 41 U.S.C. § 7101 onwards
6 41 USC § 7103(a)(1).
7 Zafar Constra.Company vs. United States40 F.4th 1365, 1367 (Fed. Cir. 2022) (citing 48 CFR § 52.233-1(c)).
8 A claim “occurs” if “all the events that resolve the alleged liability and enable the assertion of the claim were known or should have been known” and any injury If this occurs. 48 CFR § 33.201.
9 PJB Jackson American LLC v. General Services Administration (February 11, 2016).
The information contained in this alert is for the general education and knowledge of the reader. It is not designed to be, and should not be used as, a sole source of information in analyzing and resolving legal issues. It also should not be used in place of legal advice that relies on specific factual analysis. Additionally, the laws in each jurisdiction are different and constantly changing. This information is not intended to, and receipt of this information does not create, an attorney-client relationship. If you have specific questions regarding your particular factual situation, you are encouraged to consult the author of this publication, a representative of Holland & Knight, or other qualified legal counsel.
