By Paul Kiernan, Holland & Knight
Being happy may be a little harder than it was 20 years ago when Bobby McFerrin sang that tune.
Worrying? It’s back in style.
Our current credit/financial/economic/kitchen-sink crisis is so worrisome because no one wants to bet his own dollars on how long the crisis is going to last or who it’s going to whack next. Just like a good horror movie where you hear “The Nameless Beast” and you sense it’s out there in the dark, but you never quite see its exact shape. That’s much scarier than seeing “The Beast” face-to-face.
The autumn-into-winter freeze on productive activity is showing up in court. Deals that were a lock are falling apart. Sterling lenders are tarnishing. And household names are being posted on the docket down at the bankruptcy court. Things that pundits said just a year ago “would never happen” seem to happen on a weekly basis.
For the commercial and retail landlord, the issue is timing. As you see your tenant’s problems multiplying — or you are worried that the problems may be snowballing — at what point do you think about litigation? The first late check? The first request to offset an amount due? Maybe the hesitation about exercising the option?
In this climate, the answer is: You always have to be thinking about litigation. Every significant business decision over the next 3 years will have a litigation aspect. When the normal marketplace rules seem inadequate, folks will wisely seek shelter in a courtroom where the rules have not changed and where there is at least the opportunity to get a bad decision reversed. People will be tearing apart contracts to find escape clauses, or wrestling with workout issues, or just bringing matters into court so they can show the stockholders they tried everything they could think of.
You have to plan for the worst, plan to have your partner walk out. It used to be said: “No one ever got fired for buying IBM” (or Xerox or Microsoft). Now it’s going to be: “No one ever got fired for planning to be fired.”
But always thinking about litigation is very different from always litigating. While you have to be ready to do battle, you also have to be nimble enough to tack in another direction because the apparently defaulting tenant may pull through, the lender in trouble may have a suitor. If you have placed all your chips on a scorched-earth litigation, you may miss the better opportunity. If you sue to void the contract — as opposed to suing to determine what the contract means — you may get less than you want.
Does this mean you have to stay your hand? No, not when action is essential. But it does mean that uncertain times call for more deliberate action, more careful consideration of what legal theories might be effective in the long-run, not just the short-run. A tenant or partner who has little or no running room is not going to be frightened into settlement when it does not have the assets for a settlement. Your best play may not be getting the other side to cry “uncle!” Your best play may be figuring out how Uncle Sam can help.
Businesses are demanding from their lawyers more creativity than ever. Lawyers are going to be dusting off their books — more likely, warming up their laptops — to analyze issues that they have not considered in many years, if ever:
- What can you do if the government “excuses” the other side’s failure to perform?
- How far does your “force majeure” clause reach? (And, yes, there is one somewhere in your contract.)
- Should you arbitrate a dispute if your tenant is teetering on collapse?
- Since you don’t have a replacement tenant on deck, do you want your defaulting tenant in bankruptcy or out of bankruptcy?
The hardest question is the one that has no absolute answer: When do you know which way you’re heading with your tenant, your lender, your partner? You may have to keep one foot on the platform and the other one on the train for a long time — leading to stress, expense, and uncertainty. And you will have to keep the litigation gun loaded and at the ready in the meantime. If you have thought through the options, considered the defenses, kept an eye on the market, you will be better positioned to handle whatever happens.
And that might leave you sleeping with less worry and more happy.
Paul Kiernan is a trial and appellate lawyer who focuses on commercial disputes, real estate, and local government law. He serves as executive partner for Holland & Knight’s Mid-Atlantic Region.