The Massachusetts Land Court erased the final three years on its Boston lease and walked away from $9 million in rent payments by triggering a termination clause.
That fact is raising new uncertainty about the value of leases with state agency tenants, while shining new light on the seldom-used clauses, which the state tries to insert into every lease it signs.
The Land Court issued a press release last month informing its landlord, the Archon Group, about its decision to leave its space at 226 Causeway St. three years before its lease expiration date. The court is decamping for the publicly-owned Suffolk County Courthouse.
No Liability ‘Whatsoever’
The announcement came less than two years after the Land Court expanded into 52,000 square feet at the former Stop & Shop bakery building. At the time of the announcement, Archon threatened to seek legal damages if the court made good on its threats.
“It’s our conviction that we have a binding lease in effect, and we will pursue any and all avenues to that effect,” Archon Spokesman Michael Vaughan told Banker & Tradesman, after learning of the Land Court’s impending move.
But the Land Court’s lease, which Banker & Tradesman obtained through a state public records request, contained a clause allowing the court to abandon its space “without any liability whatsoever” if legislative appropriations weren’t sufficient to meet its monthly rent obligations. The Legislature has cut the Massachusetts Trial Court’s budget by 12 percent over the past two fiscal years.
Such termination clauses are “absolutely not common” in the private sector, said Joseph Torpy, a partner in the Boston law firm Brennan, Dain, Le Ray, Wiest, Torpy & Garner. “It’s one of the risks a landlord runs when doing deals with the state,” Torpy said. “Generally, you’re getting a high-credit tenant that fills empty space, but the downside is these appropriation clauses can come back to bite you. You have to go into the deal with your eyes open.”
Normally, commercial leases contain either buyout clauses, or provisions that pay landlords damages to compensate for broken leases; those damages can either be paid out monthly, or accelerated into a lump sum. The Land Court’s lease, on the other hand, specifically shielded it from “damages, penalties, or other charges arising from early termination.”
The termination clause was written so it applied both to the Land Court’s original 2003 lease at 226 Causeway, and to any extensions or renewals of that lease.
The lease was signed by the building’s original developer, Intercontinental Real Estate Corp. Archon purchased the 193,000-square-foot commercial condominium at 226 Causeway St. in 2006 for $52.3 million. The property carries a $43.7 million mortgage.
Archon explored selling the building earlier this year, but pulled it off the market, reportedly because the property was producing healthy returns.
Archon and Intercontinental spent millions of dollars customizing 226 Causeway for the Land Court, building out courtrooms, document storage areas and security checkpoints that are of little or no use to typical commercial tenants.
Out Of Luck
The state’s Division of Capital Asset Management (DCAM) is the executive-branch agency responsible for managing most publicly-owned buildings, as well as placing public tenants in private space. State courts maintain their own administrative structure, but land-use matters ultimately run through DCAM. The Land Court lease was signed by both Robert Mulligan, the courts’ chief justice for administration and management, and David Perini, DCAM’s commissioner.
DCAM tries to insert termination clauses into leases it signs; the language is included in the boilerplate sample lease it makes available to landlords, although final lease language is determined in deal-by-deal negotiations.
State House observers believe that, with the state budget deficit ballooning amid falling tax revenue and the withdrawal of federal stimulus funds, DCAM will look to squeeze more savings out of its commercial leases.
“It’s very possible,” one insider said. “If it’s subject to appropriation, and the appropriation’s not there, the landlord’s out of luck.”
DCAM has already terminated 16 leases for lack of appropriation or insufficient funds since the state budget came under strain in late 2008. As of Aug. 1, state agencies leased roughly 6.9 million square feet from private landlords, a DCAM spokesman said.
The Land Court announcement marked the opening of a far wider reorganization of the state courts. Mulligan is preparing to terminate seven other court leases in privately-owned buildings, from Dedham to North Adams. All of those leases include do-damages termination clauses, similar to the clause that allowed the Land Court to walk out of 226 Causeway.
Archon did not return calls seeking further comment on the structure of the Land Court lease.
