AT&T Suing Kilroy Realty To Get Out Of Lease At El Segundo Property
DirecTV in 2011 signed a lease extension for more than half the floors at the roughly 300K SF Kilroy property at 2250 East Imperial Highway through September 2027.
AT&T, which acquired DirecTV in 2014, on April 5 filed a complaint in L.A. Superior Court alleging that Kilroy will not allow it to exercise its contractual rights to significantly reduce that space at the end of this year.
DirecTV's lease for the 2250 East Imperial Highway property included all of floors six through 12, plus parts of floors two, three and five, according to the complaint. The lease also included a “must-take space” provision for floors one through five that required DirecTV to expand into that space as it became available, as well as four set “reduction dates,” at which points DirecTV could submit a written request to reduce its space and pay a fee to do so.
The lease included additional rules around the reduction, the complaint alleges, including that if DirecTV elected to reduce its space by multiple floors, it would only be able to do so on contiguous floors. Also, it could not return its space on the top floor or the ground floor of 2250 East Imperial.
The full text of the original lease was not included in the complaint.
AT&T claims on Dec. 23, 2020, it presented Kilroy with a written notice that it was going to exercise its rights to shrink DirecTV’s space and return the portions of floors two and three and the full floors six through 11, effective Dec. 31, 2021. This contraction would dramatically reduce the square footage DirecTV has in the building, taking the company's space in 2250 East Imperial from seven full floors and portions of three others down to one full floor and a portion of another. Kilroy executives noted in the company’s Q1 2021 call on April 28 that the space that would be vacated was roughly 150K SF.
According to the complaint, AT&T also attempted to pay the first half of the reduction fee for the full floors six through 11 — approximately $3.16M — but its wire transfer was not accepted by Kilroy.
According to AT&T's complaint, the lease said that upon the expiration date stated in the written notice, AT&T would be excused from any further rent obligations for the space they'd returned "and the space would be treated as if the Lease had expired with respect to that space."
AT&T alleges that Kilroy rejected the written reduction notice because it claimed that the floors AT&T was attempting to return were not “fully contiguous.” Because it does not recognize the validity of the reduction notice, Kilroy wants AT&T to continue to pay all the rent for all DirecTV’s space through the end of its 2027 lease term.
In the complaint, AT&T calculates the monthly rent as of Jan. 1, 2022, as “an amount not less than $182,193 [for floors two and three] and for floors six through eleven, in an amount not less than $563,023 with such amounts to increase over time.”
Kilroy executives had said in a Q4 2018 earnings call that DirecTV’s rents were actually below market rate. They estimated at the time that rents in El Segundo were "$3.50 full service gross per month," which was approximately 70 cents or 60 cents more than what DirecTV was paying, company officials said on the call.
AT&T is suing to get Kilroy to let it reduce its space by the desired amount, but the company also indicated that it would accept a solution where they just reduce their full-floor space “in the event that the Court concludes that Landlord’s interpretation of the Lease does not permit Tenant to return both floors two and three as well as floors six through eleven of the 2250 Premises,” the complaint said.
AT&T is also seeking “damages in an amount not less than $745,217, to include any rent which is paid to Landlord after December 31, 2021 under protest for the space sought to be returned” and fees associated with bringing the lawsuit.
Though Los Angeles, like many other cities, is seeing companies reduce office space or sublease it post-pandemic as questions about future office space needs remain unanswered, AT&T’s complaint does not include information about why it seeks to reduce the amount of space at the property. The company announced in February that it planned to combine video businesses DirecTV, AT&T TV and U-Verse into a new company valued at $16B. That's a fraction of what AT&T paid for DirecTV alone, the Verge reported at the time of purchase.
The case is scheduled for its first hearing on Aug. 8. AT&T's lawyers did not respond to a request for comment. Kilroy representatives also did not respond to a request for comment, but a footnote in the company’s Q1 2021 supplemental financial report filed with the Securities and Exchange Commission states that “the company strongly disagrees with the contentions made by DIRECTV and will vigorously defend the litigation.”
“We strongly believe the tenant did not validly exercise its option,” Kilroy Senior Vice President, Chief Financial Officer and Controller Michelle Ngo told listeners on a Q1 2021 earnings call last month.