Perez Morris’ recent successes for retail tenants underscores importance of co-tenancy provisions
With the financial uncertainty and closing of retail establishments and restaurants due to the COVID-19 pandemic, retail tenants are advised to review their leases to determine if they can obtain some relief on their rent obligations. Specifically, in leases with “co-tenancy” provisions, tenants may be entitled to pay a lesser amount of rent due to vacancies in the shopping center where the tenant operates.
Common co-tenancy provisions include “opening” and “operating” (sometimes referred to as “continuing”) co-tenancy obligations. The opening co-tenancy conditions dictate what requirements must be satisfied at the time the tenant opens or has the option of opening its store. For example, a lease might include an opening co-tenancy requirement that at the time the tenant opens, large “anchor” tenants must be open and operating in the shopping center. If the anchor tenant, sometimes referred to as an “inducement tenant,” is not open and operating, the tenant may have the option to delay its opening or, as is more often the case, open and pay a reduced rent until the inducement tenant- opens.
An “operating” co-tenancy provision usually concerns issues where one or more identified tenants who previously operated a store in the shopping center are no longer open and operating in the shopping center. If the operating co-tenancy is violated due to the closing of one or more identified stores, the violation can be cured by replacing the departed business with a comparable business. Sometimes, instead of specifically identified tenants, the operating co-tenancy will have a maximum percentage of vacant area in the shopping center and, if the vacancy rate exceeds that maximum percentage, the tenant can pay reduced rent until the rate falls back below that percentage.
Earlier this year, Perez Morris represented two retail tenants in cases where the Franklin County Court of Common Pleas examined co-tenancy provisions in commercial leases. In DN Reynoldsburg, LLC v. Maurices, Case No. 18CV007616, the landlord asserted the tenant, Maurices, was in breach of the lease by only paying a reduced rent. Maurices argued that the opening co-tenancy condition had never been satisfied and, as a result, Maurices’ obligation to pay full rent was never triggered. In that case, the opening co-tenancy provision expressly stated that Sports Authority, an inducement tenant, had to open and operate in the shopping center before Maurices would be required to pay full rent. However, Sports Authority declared bankruptcy and never opened in the shopping center. Because Sports Authority never opened, satisfying the opening co-tenancy condition, Maurices continued to pay reduced rent.
The landlord argued that because it would be impossible for Sports Authority to open in the shopping center due to its bankruptcy, the opening co-tenancy provision should be disregarded. The landlord also argued that it “cured” the opening co-tenancy provision by replacing Sports Authority with a regional furniture store. Maurices argued this was not sufficient as the opening co-tenancy provision did not allow for Sports Authority, an “inducement tenant,” to be replaced. Thus, the only way the opening co-tenancy condition could be satisfied is by Sports Authority opening in the shopping center.
The court granted Maurices’ motion for summary judgment relying on the express language in the lease. The court also denied the landlord’s request for a declaration that the opening co-tenancy condition created an unenforceable penalty as it allowed Maurices to pay reduced rent for the entire term of the lease. The court explained the opening co-tenancy was clearly a condition precedent that had to be satisfied before Maurices was obligated to pay full rent. While acknowledging enforcing the lease as written would create a hardship for the landlord as it could never satisfy the opening co-tenancy condition, the court explained “it is not the Court’s job to alter, re-write, or reconsider the Lease Agreement reached between these two sophisticated parties” and that the court “cannot disregard the clear and unambiguous language” of the lease.
Less than six (6) months later, the court was faced with a similar issue in River Ridge Dublin Investments LLC v. AnnTaylor Retail, Inc., Case No. 19CV007510. The lease in that case also included opening and operating co-tenancy provisions. The opening co-tenancy required a specific tenant to open and operate in the shopping center and also required four (4) retail tenants and two (2) restaurant tenants to open and operate in the shopping center before AnnTaylor was required to pay full rent. The landlord did not dispute the opening co-tenancy condition was not satisfied but argued that AnnTaylor should have terminated its lease pursuant to terms in the operating co-tenancy provision and, when it did not terminate, waived its right to pay reduced rent. The court rejected the landlord’s argument.
Much like in the Maurices case, the court focused on the language of the lease defining the opening co-tenancy requirement as a “condition.” The court explained that there “is a 24-month cure period in the ‘Operating Co-Tenancy’ subsection, but it was not adopted by reference for the separate ‘Opening Co-Tenancy Condition’ subsection. Thus, the ‘Opening’ condition was either satisfied at some point, or it was not…but it did not lapse after 24-months” as set forth in the “operating” co-tenancy provision. Further driving home the importance of the phrase “condition,” the court explained:
This Lease used the capitalized words “Opening Co-Tenancy Condition.” The plain language including the word ‘condition’ meant that the landlord was obligated to fill this shopping center to a definite, minimum degree before AnnTaylor became obligated to pay ‘full rent under the Lease Agreement.’”
The court concluded by declaring that due to the opening co-tenancy condition not being satisfied, “AnnTaylor was never obligated to commence paying full rent” and “no time requirement limited AnnTaylor’s rights under the Opening Co-Tenancy Condition in the Lease.”
As these cases demonstrate, courts will enforce clear and unambiguous co-tenancy provisions, even if they might create a hardship for one of the parties. Thus, when negotiating leases, retail tenants should be sure to pay attention to the express language of such provisions and consider the different scenarios that could unfold if a landlord is not able to deliver on its promise of anchor tenants or, if due to a national emergency, shopping centers find themselves with higher than normal vacancies. Both leases in the cases discussed above clearly stated that the opening co-tenancy requirement was a “condition precedent” that had to be satisfied before the tenants had to pay full rent. Because those conditions were not satisfied (and still are not satisfied) the tenants are properly paying reduced rent. There is simply no reason for tenants to pay full rent for space in a shopping center where the tenants that were supposed to drive business to the shopping center do not exist. Clearly stated co-tenancy provisions can prevent this.
Kevin brings 20 years of litigation and trial experience representing clients in complex, commercial litigation matters to Perez Morris LLC. He focuses much of his practice on defending product liability cases. Kevin also represents financial industry clients in all facets of securities disputes.
Kevin resides in New Albany, Ohio with his wife, Elizabeth, and their two children. Read more