Save Time And Money And Screw Up A Lease’s Co-Tenancy Provision

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We don’t know where to start, but we’ll press ahead anyway. Last week, a November, 2013 federal court decision involving a co-tenancy provision in a shopping center lease was brought to our attention. It is captioned: Kleben Holding Company, LLC v. Ann Taylor Retail, Inc. and can be seen by clicking HERE.

At the outset, readers should note that the court’s decision was in the form of a “summary judgment.” For readers who don’t know, this means the court believed there were no disputed facts. In this case, there was no trial. The parties conducted their own investigations and the court thought, based on what was presented to it, that all the facts it needed for its decision were in front of the court and that there was no legitimate dispute about them. Although this procedural device is available throughout our court system, it isn’t often applied, especially by state courts. Federal courts, as is the case with this decision, are more willing to dispose of matters by summary judgment. Whatever be the situation with this dispute, on the face of it, the facts were pretty well set.

The story ends with: “The butler did it.” Well, actually, that’s not the true ending. The true ending is that the landlord lost and was out more than $800,000 in rent. Ruminations understands that the landlord has appealed this U.S. District Court decision. Ruminations predicts the landlord will lose its appeal.

Before we Ruminate about the lessons to be learned here, let’s describe the salient facts. So, we’ll begin with the lease provisions that provide the core of our story. A lease’s provisions (and sometimes the absence of one or more) are always relevant when a landlord-tenant dispute arises, and even more so this time. That’s because the court found the entire “answer” within the words of the lease. Readers, therefore, are urged to study the following:

61. CO-TENANCY. (a) Opening: Landlord agrees that the Delivery Date will not occur until Landlord notifies Tenant that eighty percent (80%) of the retail area of the Center is under construction and that Borders, Inc., Banana Republic and Victoria’s Secret have executed leases on or before March 1, 2001. If Landlord is unable to enter into such leases by March 1, 2001, Tenant shall have the right to terminate this Lease and Landlord shall reimburse Tenant for its reasonable out-of-pocket legal and architectural expenses. Notwithstanding the foregoing, Landlord may replace Victoria’s Secret or Banana Republic with a suitable replacement tenant.

(b) Operating: In the event Borders, Inc. or fifty percent (50%) of the other retail space in the Center, excluding Tenant, are not open and operating, Tenant shall be entitled to abate Minimum Annual Rent and in lieu thereof pay five percent (5%) of Gross Sales, not to exceed the Minimum Annual Rent otherwise payable in the absence of this paragraph, until the tenants meeting the foregoing requirements are again open and operating. Within thirty (30) days after the end of each calendar month that this Paragraph 61(b) shall be applicable, Tenant shall provide Landlord a statement showing the Gross Sales for such month and shall pay the amount due as percentage rent for such month. …

In case you’ve just awoken from a coma, Borders closed its last store on September 18, 2011 as part of its liquidation under Chapter 7 of the Bankruptcy Code. Obviously, that implicates part (b) of the quoted lease text. Borders had already signed a lease when this particular tenant’s lease was executed (Banana Republic and Victoria’s Secret signed theirs later). So, when Borders closed its store, Ann Taylor (whose lease we are dissecting) began to pay rent equal to 5% of its gross sales, and that was (and remained) a lot less than the lease’s stated rent.

No one argued that Ann Taylor was not entitled to “go to percentage rent.” Clearly, it had bargained for that right. The issue was: “When must it return to the lease’s stated rent.” The tenant said: “Never.” Its landlord said: “When we replace Borders as a tenant.”

Although there will be deniers among us, we all “know” that the landlord’s position is what the deal “should have been.” We can argue about whether the bargained-for remedy should have limited the reduced rent period to a year or two before the tenant had to choose between terminating its lease or returning to full rent. We can argue as to whether a 5% percentage rent was the right amount or remedy. But, we shouldn’t be arguing about whether the landlord should have had an opportunity to “cure” this co-tenancy failure in the first place. The symbiotic relationship between a women’s clothing store (Ann Taylor) and a bookstore (Borders) is not the same as that between an eyeglass store and an adjacent optometrist, nor is it the same as the one between a BYOB restaurant and a neighboring liquor store. Clearly, Borders was the generic “anchor” tenant at the property and was named because it filled that role.

Unfortunately for the landlord, it was only afterwards that it understood what the lease “failed to say.” So, it struggled into court in a failed attempt to get its tenant to start paying full rent from the time a replacement tenant took over the Border’s space. It didn’t matter to the court that the replacement tenant was a college’s book store; the landlord still lost.

Basically, what the court faced was a battle between two arguments, with the tenant contending that the lease “clearly and unambiguously” entitled it to pay 5% of its gross sales as rent until Borders, and only Borders, re-occupied the property; and the landlord contending that the intention of the parties was that the reduced rent would end when Borders was replaced with another retailer.

Here are some principles expounded by this particular court, but don’t think it scratched around to find these words. These are pretty universal and not at all jurisdiction-dependent.

  • A lease is a contract subject to the same rules of construction as other contracts.
  • A contract must be construed to effectuate the intent of the parties, which is determined from the language used interpreted in the light of the situation of the parties and the circumstances connected with the transaction.
  • In ascertaining the contractual rights and obligations of the parties, we seek to effectuate their intent, which is derived from the language employed in the contract, taking into consideration the circumstances of the parties and the transaction.
  • The intent of the parties is to be ascertained by a fair and reasonable construction of the written words and . . . the language used must be accorded its common, natural, and ordinary meaning and usage where it can be sensibly applied to the subject matter of the writing.
  • In construing contracts, we give effect to all the language included therein, as the law of contract interpretation . . . militates against interpreting a contract in a way that renders a provision superfluous.
  • Where the language of a contract is unambiguous, a court must give the contract effect according to its terms.
  • A contract is unambiguous when its language is clear and conveys a definite and precise intent . . . . The court will not torture words to impart ambiguity where ordinary meaning leaves no room for ambiguity.
  • The mere fact that the parties advance different interpretations of the language in question does not necessitate a conclusion that the language is ambiguous.
  • It is well established that where there is definitive contract language, the determination of what the parties intended by their contractual commitments is a question of law.
  • If a contract is unambiguous within its four corners, the determination of what the parties intended by their contractual commitments is a question of law.
  • Where a party’s intent is expressed clearly and unambiguously in writing, however, the determination of what the parties intended … is a question of law over which our review is plenary.
  • The question is not what intention existed in the minds of the parties but what intention is expressed in the language used.
  • Thus, courts do not unmake bargains unwisely made. Absent other infirmities, bargains moved on calculated considerations, and whether provident or improvident, are entitled nevertheless to sanctions of the law.
  • Although parties might prefer to have a court decide the plain effect of their contract contrary to the agreement, it is not within a court’s power to make a new and different agreement; contracts voluntarily and fairly made should be held valid and enforced in the courts.
  • A presumption that the language used is definitive arises when . . . the contract at issue is between sophisticated parties and is commercial in nature.

Here is a definition aimed at keeping all readers on the same page. “Parol Evidence” is evidence that is not included in the relevant written document. With that in mind, what courts say is that they don’t need any help in understanding the words in a contract that are clear in what they say. “Ambiguous” means capable of having more than one meaning where the “choices” as to meaning are contained within the words of the contract. Contrast that with “vague,” which means a court has “no clue” absent investigating what the contracting parties might have meant.

Why is all of this relevant? We think it is because of the following. The landlord presented a significant number of well-crafted arguments based on construing the lease’s words in its own favor. Ruminations highly commends readers to look at the court’s opinion to see how very good a job the landlord’s attorney did in that regard. Unfortunately, the court wasn’t biting, clearly (in our view) because, despite that valiant effort, the lease was pretty clear – “no Borders; no full rent.”

Here’s the real guts of the landlord’s “legal” argument, actually “a plea for mercy (or, in legal terms, ‘equity’)” – the landlord asserted that its tenant’s interpretation of the lease was illogical because “[n]o reasonable owner … would have agreed to a clause that would create the result that [its tenant was claiming].” How many times have we heard that as the reason to apply a contract’s provision in a way that would twist the provision’s words?

Too bad for the landlord because the court ruled, without the need for a trial because the “lease’s text said it all,” that the negotiated bargain could be found within the lease’s own words – that was the deal – the tenant was to pay rent at the 5% of gross sales rate if Borders wasn’t a co-tenant. We’ll repeat one of the maxims listed above: “The question is not what intention existed in the minds of the parties but what intention is expressed in the language used.”

There are a couple of big lessons here. The biggest might be that when you are going to sign a lease, engage someone who knows about leasing. Experienced practitioner-readers of this blog are scratching their heads – “Who would ever have negotiated such a provision on behalf of the landlord? This is leasing 1-2-3.” Well, don’t be “that” surprised. How many readers have sent out a small space draft lease to an inexperienced attorney (at least when it comes to leasing), only to get back a handful of irrelevant comments, and more importantly, none of the kind that should have been raised?

If you are going to “do” a lease for someone else (or wade into any other area), you’ve got a responsibility to know what you are doing. IT ISN’T INTUTIVE. Everyone has to start somewhere, but that somewhere might really be by educating yourself. And, everyone’s skills are enhanced by listening to what the “other side” has to say. None of us has to agree, but we all have a duty to ourselves and to those we represent to figure out if what we are hearing is correct or not. If it is correct, we have learned something. If it is not correct, we learn something when we figure our “why” what we are being told is not correct. Also, there are books and programs at all “levels.” Further, we are also fortunate to have colleagues who are open to helping us be better negotiators and craftspeople.

Even those experienced with leases (and, in other contexts, with those special documents) need to “walk through” technical provisions. You’ve got to play the game of “if ‘X’ happens; then what?” What should have happened had Borders disappeared? Let’s play that game with clause (a), the one that gave the tenant the right to terminate its lease if both Banana Republic and Victoria’s Secret failed to execute leases before March 2, 2001. Suppose the later of them executed its lease on March 10? That raises not one, but two, issues. First, and most obviously, could Ann Taylor (the tenant for the lease in front of us) terminate its lease on the following June 1 and demand that the landlord pay the listed costs? Second, could the landlord ever set the “Delivery Date” without the tenant’s assent given that the landlord could never send the required notice? That’s just plain poor drafting, consistent with the problem resolved by the court.

We’re going to save the “nuts and bolts” of negotiating co-tenancy clauses for a later posting because we are already beyond 2,000 words and also because we need to maintain an inexhaustible list of blogging topics. If you are still hungry for more reading, we highly recommend that you return to the first paragraph of this posting and click for a copy of the actual court opinion. The arguments made beginning on page 10 make for good reading, as does the way the court disposes of them.

Co-tenancy war stories are invited. If you want to share any, please find some variant of the word “comment” just below the big print title to this posting and give it a click.

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Comments

  1. Hi Ira,

    It is my understanding that Barnes & Noble purchased the marks and customer lists of borders at the conclusion of the Chapter 7 proceeding. (I’m not affiliated with B&N in any way). I wonder if the outcome of this case would have changed if the landlord had managed to lure Barnes & Noble into the space. The tenant bargained to have a national mega book store chain in that space. Borders’s once competitor who has managed to survive the same economic factors that proved to be a terminal event to borders, and now owns the “scraps.” Ann Taylor bargained for a book retailer, which in hindsight doesn’t seem like the strongest anchor tenant in today’s market. filling the space with B&N would seem to put this case into a “materiality of breach” scenario which might have achieved a different result.

    John Cowherd
    http://www.wordsofconveyance.com

  2. The question was asked of Ira, and I defer to his expertise in this area of the law, but as the Landlord specifically indicated that Borders (not a book retailer, or as B&N was also in existence, Borders or B&N) would be the anchor tenant, and only upon Borders occupying the space would Ann Taylor’s rent be more than 5% of gross sales, I think you still have the same problem.

    Now, if this case appeared before another judge, the court may have said that equity requires Ann Taylor to pay the full rent IF a book retailer occupied the space, but as the court in this case has ruled, and Ira highlights, the language is so specific, a different result might have been equitable, but a complete modification of clear and unambiguous language of the contract.

    Martin L. Bearg

  3. Laura Journeay says:

    I was fortunate enough to be in charge of the Co tenancy audit after the 2008 meltdown for a mid size mall retailer and I went for every dime. My favorite was the big box that closed (Circuit City- not a named tenant BUT defined at 45,000 sf) and replaced by Someone Else at 44,000 sf. – mall built a storage area. Yes, we took it – permanent rent abatement with a tough Landlord. Now, this could this make the next deal we negotiate a tough one and perhaps lose any relationship that existed between tenant and Landlord. That is always something to consider before doing the Co tenancy battle. However, it is the best ROI for a lease admin to save a company the most money. Just remember that there could be consequences.

  4. As with EVERY lease provision, the devil is in the details. Having negotiated about 2,000 leases in 39 years, I’ve seen almost everything that can possibly happen between landlords and tenants. And I’ve seen and parsed every lease concept imaginable. And after reading about this case above and the lease language provided, my non-lawyer take was instantaneous: “In the event that Borders…” —– “…are not open and operating.” ? The landlord didn’t have a chance. It NAMES Borders -specifically.

    What landlord would agree to such a clause? A CARELESS one.

    The lessons are:

    1. Anticipate and address in detail every possible scenario you can think of.
    2. UNDERSTAND and know the ramifications of everything you agree to.
    3. If you aren’t prepared to abide by it, don’t agree to it.
    4. Don’t ever assume anything.

    Finally, as EVERY element of a lease is either an asset or a liability, make sure (if you are the landlord) that you fully understand how you are burdened by the liabilities the assets you grant the tenant (rights / options) represent.

  5. With all due respect to those who read or write on this topic, the landlord was participating in nothing more than lease arbitrage. The landlord guessed wrong and lost. Your collective comments assume the landlord didn’t know how to sit at the gambling table much less play the game. I think the attorneys’ creative arguments suggest otherwise. You know what they say about those that assume.

  6. Margaret D. Petersen says:

    Here’s a twist on the theme “turnabout is fair play”: I was the in house r/e counsel for Borders, and several years before the company entered BK, when we were looking closely at co-tenancy clauses ourselves, we took a rent reduction in exactly this type of scenario, i.e., the lease named a specific co-tenant, which had closed. Of course we took the rent reduction and also the same position as Ann Taylor did in this case. As with the lease at issue, that particular lease did not include any “replacement co-tenant” type language. (If I recall correctly, the named tenant was Mervyn’s…) To the best of my recollection, Borders took that rent abatement through to the termination of the lease in BK. I don’t know which rent figure the LL used in calculating its BK lease rejection damages…

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