SBM Real Property Law Section eNewsletter

December 2012

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Co-Editors:
Howard A. Lax, Lipson, Neilson, Cole, Seltzer & Garin, PC

Patricia Paruch, Kemp Klein Law Firm

Majestic Golf Lesson for Tenants

By Lawrence Shoffner

Tenants often overlook default provisions during commercial-lease negotiations. Focusing on the economic terms of the deal, tenants simply accept the default provisions as presented, assuming that there will never be a default, or that if any dispute should arise, they will be able to convince the court not to enforce any draconian lease remedies. The fallacy of such thinking is illustrated in Majestic Golf, LLC, v. Lake Walden Country Club, Inc., (Mich App No 300140, July 10, 2012).

In Majestic Golf, the trial court refused to enforce a lease-termination provision, finding the tenant's default to be immaterial. Moreover, because the tenant had invested over $6 million in leasehold improvements, and had always paid rent on time, the trial judge concluded that forfeiture would be an "unduly harsh and oppressive" remedy. The Court of Appeals reversed, stating: "the trial court refused to allow plaintiff to terminate the lease because it concluded, under the 'material breach doctrine,' that forfeiture of a lease pursuant to a termination clause is not warranted where the breaching party committed an immaterial breach. We find that the trial court erred by not applying the plain language of the contract." By reading the requirement of a "material breach" into the default clause, the trial court improperly "rewrote or reformed the contract." The tenant lost both its leasehold interest and an option to purchase the property.

The Majestic Golf lesson is clear: never ignore the default provisions of the lease. Tenants should carefully review and negotiate these provisions before the lease is executed—and again carefully review and consider them in the event of a dispute. For related considerations, see Enforced as Written: The Impact of the Rory Doctrine on Commercial Lease Disputes, 35 Mich Real Prop Rev 141 (Fall 2008).

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December 6, 2012
2012-2013 Homeward Bound Series
Real Estate Joint Ventures

2:00-5:00 p.m.
Inn at St. John's, Plymouth

January 17, 2013
"Groundbreaker" Breakfast Roundtable
Dealing with Distressed Properties, Part II—The Lawyer's Guide to Buying Distressed Property
Breakfast at 7:30 a.m.
Roundtables 8:00-9:30 a.m.
Townsend Hotel, Birmingham

March 14-16, 2013
Winter Conference 2013
J.W. Marriott, New Orleans

Interested in writing a future article for the e-Newsletter?
Please contact co-editors:
Howard Lax at HLax@lipsonneilson.com or Patricia Paruch at Pat.Paruch@kkue.com.

YES! The Michigan Bankruptcy Specific Exemptions are Constitutional

By Winnifred P. Boylan, Lambert, Leser, Isackson, Cook & Giunta, PC, and Karen L. Rowse-Oberle, Butler, Butler & Rowse-Oberle, PLLC

Bankruptcy debtors may choose the "federal exemptions" in Section 522(d) of Title 11, or the exemptions in the Michigan statutes (MCL 600.6023, 600.2807(2), and 600.5451) to exempt certain debtor's property from the bankruptcy estate.

Since its enactment, the Michigan statutory exemption (MCL 600.5451) faced numerous constitutional challenges because it only applies to federal bankruptcy cases. The Sixth Circuit BAP found the statute unconstitutional because it treated debtors in and out of bankruptcy differently. However, the Court of Appeals concluded that "an interpretation of § 522 that permits states to enact bankruptcy-specific exemption schemes does not run afoul of either the Bankruptcy or Supremacy Clauses of the Constitution." In reSchafer, 689 F.3d 601 (CA6 2012). The Court found that the Bankruptcy Clause permits Michigan to enact an exemption which may only be used by debtors in bankruptcy, and such an exemption does not violate the "geographic uniformity" requirement to treat all debtors equally.

The effect of this ruling on collection and bankruptcy practices may vary, and each debtor has a number of issues to consider. A debtor with equity in real estate who is sued in state court may choose federal bankruptcy protection to take advantage of the real estate exemption in MCL § 600.5451. However, a quick bankruptcy filing forces the debtor to disclose all non-exempt assets which may be liquidated to pay unsecured creditors. This disclosure may be disastrous for a debtor needing to preserve other large-equity assets. On the other hand, if a debtor is looking for finality to its debt crisis, a bankruptcy filing may provide such relief. Ultimately, the debtor must decide whether it is more advantageous to litigate, or to file bankruptcy.


The views and opinions expressed in these articles are those of the authors, and they do not reflect in any way the positions of the State Bar of Michigan or the Real Property Law Section. These columns are meant for informational purposes only and should not be construed as legal advice.
IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the Internal Revenue Service, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, by any person for the purpose of (i) avoiding tax-related penalties or (ii) promoting, marketing, or recommending to another person any transaction or matter addressed in this communication.