When former real estate lawyer and current Austin Mayor Steve Adler cancelled SXSW in February there was one upside. Given his deep experience as a real estate lawyer he would appreciate the vast economic complexities of the sudden contraction of the cash flow to the Live Music Capitol of the World.
In fact, Mayor Adler didn’t need to look past the recommendations for venue retention in the City of Austin’s groundbreaking 2015 Austin Music Census which states that Austin could help preserve its venues by:
“[Creating p]roperty tax breaks to landlords that sign venues to 10 years or longer leases, potentially with a stipulation to remove rental rate acceleration clauses for the venue tenant for the duration.”
Instead, the City of Austin established a short-term moratorium on evictions during the COVID, but what they ignored was the recommendation in the Census to require a removal of rent acceleration clauses for defaults. In other words, if a landlord can’t evict commercial tenant, they can still sue them for breach of contract and use the rent acceleration clause to beat them over the head and essentially do indirectly what they couldn’t do directly. Because let’s face it–Austin commercial landlords would like nothing better than to kick venues to the curb so they could rent their space to someone really important like Spotify, Google, Facebook or Uber Eats.
Of course, this must have been a difficult thing to anticipate for an experienced real estate developer lawyer like Mayor Adler. Even though the Census called it five years ago.
Now that the COVID shutdown is finally choking the life out of the venues that cannot stay open, every few days we hear of another venue closing and going out of business. But wait–there’s more.
Kevin Curtin reports in the Austin Chronicle that those very rent acceleration clauses that the Census warned of in its dive into the fragile economy of the Live Music Capitol of the World are coming into full use by landlords licking their chops and drooling on street corners. Remember, this is not because the landlords expect that they will get the accelerated rent payments, it’s because it’s a loophole in the eviction moratorium.
It goes something like this: I can’t evict you, but you defaulted on a month of your rent so I can sue you for breach of contract and a year (or more) of rent (duration may vary). You can’t pay one month’s rent, so you won’t have the money for the acceleration. But I will settle my lawsuit with you if you move out. Don’t say I evicted you though, because I didn’t. I just sued you. Or said another way, I kicked the crap out of you when you were down and did my part to kill the culture of the City of Austin and music tourism in general.
But this is such an obviously sophisticated tactic, who can blame the real estate lawyer Mayor Adler for not seeing it coming.
Kevin’s reporting describes how the game is played with the popular venue, Stay Gold (which provided employment for many Austin musicians):
An attorney representing the landlord of Eastside music lounge Stay Gold threatened its operators with a breach of contract suit totaling roughly half a million dollars. The warning, following strained negotiations, arrived after the tenants were five days late on August rent.
Dan Castro of Castro & Baker LLP sent an email on Aug. 5 informing Stay Gold owners Nathan Hill and Will Tanner that their landlord, David Contreras of El Leon Cantina, Inc., “has chosen to accelerate the rent due for the entire term of the lease.”
“You now owe in one lump sum the entire amount that would normally be spread out over the entire length of the lease, plus attorney’s fees,” Castro’s letter specified.
Hill estimated rent for the remaining four years of the lease totals around $500,000. He and Tanner paid full rent April through July while staying closed because of COVID-19. During extended attempts at renegotiating the lease amid the pandemic, both sides drafted offers the other found unsatisfactory….
“What really matters is how much time you have left to pay back the debt,” [Hill] reasons. “At the White Horse [which he co-owns], I still have 10 years [on the lease], so I can still take on debt because I have time to make that back. For Stay Gold, with four years, I have to hope for the best, but plan for the worst, which is that we won’t be open until 2021 and maybe we can’t have bands.
“By that time, we have three years left and I’ll be in as much debt as it took to open the bar originally, when I had 10 years of lease to look forward to and no global pandemic looming.”
As Austin’s small-business community awaits a wave of evictions, Castro’s letter provides a glimpse into possible future scenarios involving landlords.
“Mr. Contreras may not be able to evict you right now, but he certainly can sue you personally for breach of contract, and file a motion for summary judgment for a quick win,” Castro wrote in the missive.An order issued by Mayor Adler maintains a moratorium on initiating evictions through Sept 30. In the meantime, breach-of-contract lawsuits may function for landlords eliminating tenants who can’t pay full-price amid pandemic.
In the same letter, he points out that even if the tenants file for bankruptcy, the landlord will seek to collect on future value of the lease.
“Moreover, if you file personal bankruptcy, El Leon Cantina, Inc. will file an adversary proceeding in Bankruptcy Court and continue to pursue its breach of contract claim in that court,” writes Castro. “Eventually, El Leon Cantina, Inc. will get its money. And eventually, El Leon Cantina, Inc. will rent the building to someone else.”
In closing, the attorney informs the lessees his client’s latest proposed lease amendment is the last: “I don’t need another email whining about COVID, or complaining about how much money you’re losing.”
If we try hard enough, the post-COVID Austin (and New Orleans and New York and Boston and San Francisco….) will be just another college town with a Google campus. And, oh, right, the State Legislature.
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