What Is A Similar Major Tenant? Take A Guess.

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A shoe store had a 5- year 1999 lease with three 5- year extension options. Notably, the lease had a continuing co-tenancy provision and that’s what today’s blog posting is based upon and what was before a United States District Court judge in a case that can be seen by clicking: HERE.

The story and its outcome turn on the text of that co-tenancy provision, so it pays to read it before plowing on. Here it is:

In the event either Wal-Mart or Cato shall cease the conduct of business in the Shopping Center, and is not replaced within thirty (30) days of closing for business by another similar major tenant occupying at least ninety percent (90%) of the leased premises, then Tenant shall have the right to pay, twenty (20) days in arrears, monthly, four percent (4%) of Gross Sales in lieu of Minimum Annual Rent and all other to this charges pursuant Lease [sic]. In the alternative, should the similar major tenant not be in place within six (6) months of said closing for business, then Tenant shall have the right to cancel and terminate this Lease on thirty (30) days written notice to Landlord anytime thereafter.

The Cato store (3,680 square feet of floor area) closed at the beginning of 2006. About 17 months later, a bible book store took over the space. The book store operated a nationally branded catalog sales department in a small area of its store. The tenant lasted 4 years before closing. It took only a month for a new tenant to take its place. That new tenant lasted about 2-1/2 years before it, too, closed.

Not a pretty story for the landlord, but this is about the shoe store and whether it could take advantage of the rent reduction and termination right in its lease’s co-tenancy provision.

It took until the middle of 2009, almost 42 months after the Cato store closed (and a little less than 2 years after the bible book store took its place) for the shoe store to “notice” and first assert its right to reduced rent. At that point, it notified its landlord and claimed a credit going back to the beginning of 2006. As would be expected, the landlord told the shoe store that it would be in default if it stopped paying rent. The show store responded by paying the full rent “under protest” and by suing its landlord. By then, the amount in dispute had reached about $230,000.

Here is a warning about today’s blog posting. The outcome of this dispute is yet unknown (and since these disputes are often settled between the parties, we’ll probably never know the outcome). The warring parties have paid for two publically available court decisions and that only took them through procedural and technical issues, and not to any palpable resolution. Keep those litigation dollars rolling! It’s fine with us that the court hasn’t ruled on what constitutes a “similar major tenant” because the actual outcome will only affect the shoe store and its landlord. To Ruminations, what is more important is “why these two parties had to go to court” and what they could have done at the negotiating and drafting stages to get greater predictability of outcome.

Ruminations readers: what do you think qualifies as a “similar major tenant” to Cato? As we will reveal a little further down, the tenant thought that phrase was unambiguous and that the bible book store didn’t qualify. In contrast, the landlord argued either that the phrase was unambiguous and that the bible book store qualified or, if the court didn’t agree with the landlord’s definition, then the phrase was ambiguous and a full trial would be needed to determine its intended meaning. Do the positions taken by the landlord and tenant, respectively, surprise you? Of course not.

Cato is a public company that sells women’s fashions and related accessories throughout the United States; has about 9,000 employees; and has annual sales of about one billion dollars.

The former Cato space was the bible book store’s only location; it moved there from a nearby location it had occupied for about 20 years. Its sales in the Cato space were actually greater than what Cato had done before moving out. On top of that, the brand on the catalog “deck” was that of a well-known national department store retailer that emphasized the fashion category.

[To round it out, though not at issue, the retailer that replaced the book store had about 300 stores and sold both men’s and women’s fashions.]

Was (or was not) the bible book store a “similar major tenant”?

As we have seen so many times before, one advocate pulled out its dictionary and insisted that nothing more was needed to be known. Here, it was the tenant and it focused on the definitions of “similar” and of “major.” Its chosen dictionary was Webster’s Dictionary. That publisher defined “similar” as follows:

(1) exactly corresponding; resembling in all respects; precisely like; (2) nearly corresponding; resembling in many respects; somewhat like; having a general likeness.

It defined “major” in this way:

(1) greater in number, quantity, or extent; (2) of greater dignity; more important.

So, relying on those definitions, the bible book store was not a qualified because it was not a “ladies’ fashion apparel retailer” (i.e., it wasn’t similar to Cato) and was neither a regional nor a national retailer (which would make it “major”).

[Dictionaries don’t share a single voice when it comes to definitions. For an example, take a look at the Ruminations blog posting of April 6, 2014 by clicking: HERE.]

Take that landlord!

The landlord said, “Don’t write our obituary just now.” It argued that the bible book store was similar to Cato because it was a retailer, just as was Cato, and it occupied the same floor area as Cato. Further, it was just as major as Cato or even more “major” in that the book store drove business to the shopping center as demonstrated by its higher sales volume and by its presence in the marketplace. In fact, the book store was the only one of its type in a nearly 50 mile radius that encompassed five counties.

Interestingly, there was a similar case in Missouri also involving Cato Stores. The following quotation from that case may be instructive in helping readers decide for themselves what would qualify a replacement tenant as a “similar (major) tenant.”

The phrase “similar type and size business” is obviously susceptible to honest differences in interpretation, and is indistinct and uncertain as to its application. While it is clear that “similar” means something less than identical, there is no guidance provided in the Lease concerning how “similar” another business must be to qualify as an acceptable replacement for a named major anchor tenant that vacates the shopping center. Likewise, the Lease is unclear regarding the intended qualifying characteristics that must be used to judge the required similarity. For instance, does a “similar type” business refer to the types of goods offered for sale and, if so, how “similar” must they be? Also, does “similar . . . size business” refer to the square footage occupied by the replacement business, or does it refer to the amount of its sales?

We’re not going to opine as to what will be the outcome of the shoe store’s lawsuit. Suffice it to say that the court ordered a trial to determine what the phrase was intended to mean. On the other hand, we will express an opinion and it is, “What a stupid way to write the co-tenancy provision.” We’ve seen these dozens of times. That’s why we advise, “Write what you mean, and mean what you write.” There is a passel of Ruminations blog postings on avoiding ambiguity in our agreements, too many to efficiently list. To see them, use the search box and look for “ambiguous.” That will bring up postings that describe how courts interpret agreements. The short answer is they do it by looking at the entire agreement, not just at words or phrases, and then by reaching outside of the document to figure out “what they could have intended.”

We’ll return to this North Carolina dispute next week because we want to tell readers about a creative (though unsuccessful) argument made by the landlord and especially what effect the shoe store’s delay in complaining might have on the ultimate outcome of the dispute.

 

 

 

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Comments

  1. Jack R. Crumpacker says:

    Ira, I’ve followed your blog for some time. It is a true service for those involved in the leasing profession — thank you! For an example of a perhaps better negotiated and drafted co-tenancy provision used in a footwear retailer context, see Hickory Grove, LLC v. Rack Room Shoes, Inc., United States District Court for the Eastern District of Tennessee (No. 1:10-CV-290) — Memorandum by Chief Judge Curtis L. Collier filed May 21, 2012. https://www.gpo.gov/fdsys/pkg/USCOURTS-tned-1_10-cv-00290 Jack

  2. Whether or not the replacement tenants were “similar” and “major” seems irrelevant if the replacement tenants were retail in nature and shoe store traffic counts and revenue were up after the replacement tenants took possession (all other factors affecting traffic counts and sales being equal). What else does (should) the shoe store care about? I don’t see what the big fuss is all about (he said with tongue in cheek)…

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