Estoppel Letters Can Matter – But, is the Office Depot Decision Really an Exclusive Use Case?

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So, on May 6, 2011, the Court of Appeals of Georgia, an intermediate appellate body, upheld a lower court’s decision that stopped Office Depot from pursuing a breach of an exclusion use right it thought it had.

I’ve seen some discussion about the Opinion (Office Depot Inc. v. The District at Howell Mill LLC, A11A0383) and how it should scare parties who sign estoppel letters or certificates. Why the decision should come as a surprise puzzles me. Shouldn’t people bear the consequences of their own acts? When someone says: “is this true or not, I’m going to change my position in reliance on what you tell me,” shouldn’t there be some consequences if the respondent says “true” or “not true,” when the opposite was the case?

Sure, there are weasel words and attorneys do and should look for ways to get their clients out of such consequences, but the starting point is for respondents to take the “questions” seriously.

What am I talking about? In the Office Depot case, Office Depot had a December 27, 2005 Lease. Under the Lease, the Landlord agreed not to lease any other premises to a tenant whose primary use at the time of its Lease was the sale, leasing, distribution or display of … school supplies. In November, 2006 “The School Box” opened at the same shopping center. As its name might suggest, it sold school supplies, but also sold other educational items, many that could and would be used outside of a school. In April of 2007, Office Depot delivered an estoppel letter to a prospective buyer of the shopping center. In it, it stated that “[t]o Tenant’s knowledge, Landlord is not in default in the performance or observance of any of its obligations under any terms or provisions of the Lease.” The buyer closed on its purchase in June. Office Depot sent a default letter to the new owner on December 6, 2007. It asserted that its Lease had been breached by the lease to “The School Box.”

Lost in all of the discussions I’ve seen to date about the binding effect of Office Depot’s estoppel letter is the court’s acceptance that there may not actually have been a breach of the exclusive use right. The lease for The School Box had a permitted use clause that went well beyond the sale of school supplies. If The School Box was operating a business along the lines of its permitted uses, it could sell school supplies, but that wouldn’t have been its primary business. Both the buyer and the original Landlord had concluded that The School Box’s “primary” business was not that of selling school supplies, certainly not at the time The School Box lease was executed. That was a factual issue, and by looking only to the effect of Office Depot’s estoppel letter, the court didn’t even get there.

I’m going to leave the estoppel letter analysis for my next blog entry, but before “signing off,” let me share a question with you – if The School Box was a new business, what was its primary business at the time its lease was executed? What comfort did Office Depot get when it signed a Lease barring the sale of school supplies by another tenant if the sale of this small category of goods had to be the primary business of that tenant, let alone if the test of “primariness” came at a time when the other tenant wasn’t yet in business? Exclusive Use Rights are strictly construed to limit the prohibitions sought to be imposed. So, if you write it “sloppily,” you get what you asked for – sloppy assurance that you’ll be protected.

Yes, the “estoppel letter” title was a trick to get you to read about exclusive use rights, but I promise to say something about estoppel letters next time.

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  1. Jack Levey says:

    An Ohio court considered a similar case in 2004. A landlord granted a supermarket an exclusive on the sale of food products in the shopping center. The landlord then gave Walmart a lease that did not prohibit the sale of food, and Walmart started selling food as permitted by its lease. A few years later, a prospective buyer noticed the apparent conflict . The buyer asked for and obtained a clean estoppel from the supermarket. The sale closed, and the buyer was later sued by the supermarket’s subtenant for violating the exclusive. The court of appeals remanded to the trial court for to determine whether the buyer was unreasonable in relying on general language in the estoppel instead of insisting on an estoppel that specifically referred to Walmart’s sale of food. As far as I know, there was no further reported opinion; they may have settled. The case is at 2004-Ohio-411 (4th Dist. App. Scioto County).

  2. Robert J. Shansky says:

    There is a chapter specifically addressing the use and imisue of Estoppel Certificates in the 2011 version of Commerical Leasing Treatise published by the NYS Bar , editor in Chief, Joshua Stein.

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