“Another Similar Major Tenant” – What Did You Say? A Co-Tenancy Failure Saga

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Last week, we described, in some detail, a long story about a tenant seeking the benefit of a continuing co-tenancy provision in its lease and its landlord’s less than favorable response. We’re not going to repeat the “long story” this week. If you want to read it (to catch up, and you should), just click: HERE. Today, readers get the “short” version.

A shoe store’s lease gave it the right to pay reduced rent and even to terminate its lease if either of two particular businesses at the property vacated and were not timely replaced by “another similar major tenant.” The dispute, which was narrowed by a United District Court, but not resolved to conclusion, was whether a particular bible book store that replaced one of the designated “co-tenants,” a women’s fashion retailer, satisfied the criterion of being “another similar major tenant.” There were also issues of whether the shoe store’s long delay in “complaining” would adversely affect the specific remedies the tenant got under its lease.

The bible book store was long established in the marketplace and had relocated from a nearby location into the entire space occupied by the fashion retailer. Its sales in that same space exceeded those of the fashion retailer it replaced.

At the conclusion of last week’s blog posting, Ruminations asked its readers to Ruminate or cogitate on what could have been intended by the lease negotiators when they settled on the phrase, “another similar major tenant,” essentially, what kind of replacement tenant would have qualified.

There is a pretty well known book titled: Eats Shoots And Leaves, (described as “The Zero Tolerance Approach to Punctuation,” a non-fiction book written by Lynne Truss.) If you have a box of commas lying around, sprinkle some of the commas between various of that title’s words.

Here, we may have a similar (oops, there goes that word) problem, but without any spare commas handy. The word, “another” would seem to mean that the dearly departed fashion retailer was already a “similar major retailer” or at least a “major retailer” or maybe just a “retailer.” There was no issue here that the bible book store, like the vacating fashion retailer, was a retailer. So, the shoe store and its landlord were fighting over what it meant to be “similar.” Without knowing what made the fashion retailer “major,” we who plough these retail real estate fields (that’s both this Ruminator and our 3000+ weekly readers) probably can’t ever answer the question. Basically, the shoe store argued that a qualifying replacement co-tenant had to be similar in “feel” to the dearly departed fashion retailer by reason of having a national or regional brand name. Perhaps it was asking for a nationally or regionally known fashion retailer. The landlord argued that what qualified the bible book store was that is was just as “major,” or even more “major” to the shopping center, in terms of the traffic it brought, than the departed fashion retailer had been.

All of the above is why there was no agreement as to whether the continuing co-tenancy bargained-for relief had been triggered. It’s hard to understand why a tenant who insisted that it get rent relief if certain businesses stopped operating at the shopping center didn’t make sure that the “test” was crystal clear. The same goes for the landlord. Why didn’t it insist that the standards for an acceptable replacement tenant be easily testable? Ruminations doesn’t have an answer as to whether the bible book store qualified, but it does have an answer to another question: “Was the co-tenancy provision well written.” That question is a rhetoric one, but we’ll say it anyway, “No.”

Last week we promised that this week’s posting would describe an interesting (though unsuccessful) argument made by the landlord. Well, a covenant is a covenant (actually, it was an unsupported promise we made, not a contractual one). Here, the landlord argued that there was a “similar major tenant” occupying a 20,000 square feet store just 75 feet away from the shoe store. That store opened between the time the shoe store moved into the center and when the named, required co-tenant left the center. The court rejected the landlord’s argument that this “additional” retailer was a substitute for the called-for “replacement” tenant. It didn’t matter to the court that this additional tenant had a 20,000 square foot store whereas the departing co-tenant only occupied a 3,680 square foot store because the lease required that the landlord find a replacement tenant for a particular vacated space. In addition, the court had no ear for the landlord’s argument that the presence of an unbargained-for, additional, major store made loss of the named co-tenant into an immaterial default.

The court was probably right, but the argument made by the landlord is an intriguing one and one that should change the way most co-tenancy provisions are written when they are directed to the presence of a particular retailer. Why should it be required that an otherwise qualified replacement tenant occupy the exact same space as the departing tenant? We can envision the logic of such a requirement for a store that is adjacent to a major department store at a large mall because the foot traffic to that department (or similar) store might be critical to a small tenant’s business. Basically, if being at a “dead end” corridor is a business killer, then “location, location, location” would be important. On the other hand, if the naming of a critical co-tenant is for the reason of boosting or maintaining traffic to the shopping center as a whole, then it shouldn’t matter where in the center a qualifying replacement tenant winds up.

Those readers who remember the shoe store tenant’s saga told last week (and those whose were quick to click the “HERE” in today’s very first paragraph), will know that the shoe store was asleep at the wheel and waited several years after the required co-tenant left the center before the shoe store claimed its right to the bargained-for rent reduction. Was that a “waiver” of its right to a rent reduction? What is a waiver? Here is how a North Carolina case defines “waiver.” There are a lot of other perfectly acceptable ways, but they all sound like the following:

Waiver involves both knowledge and intention; one being essential to the other. … [W]aiver depends upon what one himself intends to do. . . . [Waiver] is a voluntary act, and exists only where one with full knowledge of a material fact does or forbears to do something inconsistent with the existence of the right or of his intention to rely upon that right. Knowledge of the existence of the right, benefit, or advantage on the part of the party claimed to have made the waiver is an essential prerequisite to its relinquishment. No one can be said to have waived that which he does not know, or where he has acted under a misapprehension of facts. Waiver or acquiescence, like election, presupposes that the person to be bound is fully cognizant of his rights, and, that being so, he neglects to enforce them, or chooses one benefit instead of another, either, but not both, of which he might claim. The knowledge may be actual or constructive; one cannot be willfully ignorant and relieve himself from a waiver, because he did not know. The question of waiver is mainly one of intention, which lies at the foundation of the doctrine. Waiver must be manifested in some unequivocal manner, and to operate as such it must in all cases be designed, or one party must have so acted as to induce the other to believe that he intended to waive, when he will be forbidden to assert the contrary.

Since intent is an operation of the mind, it should be proven and found as a fact, and is rarely to be inferred as a matter of law. It should clearly be made to appear by the evidence, and the best evidence of intention is to be found in the language used by the parties, though it may appear in their conduct. The true inquiry is what was done, said, or written, and whether it indicated the alleged intention.

After a long discussion of the facts, the court adjudicating the shoe store’s situation could not find an intentional relinquishment of the shoe store’s right to “go to” reduced rent. Keep in mind, this determination was very fact specific. In this case, the court felt that the shoe store had not realized that the named co-tenant had left the center even though the store manager certainly knew and there were clues inside the annual common area and tax reconciliations. Had the court used a “should have known” analysis and then treated the tenant as if it had “known,” the outcome might have been different. So, in this instance, the tenant went on to live another day (i.e., it could still have its full argument heard at a later trial).

Another defense raised by the landlord was based on the “voluntary payment doctrine.” Ruminations admits that it doesn’t know how many jurisdictions recognize such a defense even though it knows of states that do. So, we’ll leave it to our readers to figure out if their state does. What is this defense? Again, we’ll resort to republishing the court’s words. In North Carolina, the:

voluntary payment doctrine is a “well established rule of law that the voluntary payment of money by a person who has full knowledge of all the facts can not be recovered. … The doctrine enforces a “waiver in the nature of an estoppel. … Where a person with full knowledge of all the essential facts dispenses with the performance of something which he has the right to exact, he therefore waives his rights to later insist upon a performance. A person may expressly dispense with the right by a declaration to that effect, or he may do so with the same result by conduct which naturally and justly leads the other party to believe that he has so dispensed with the right. … Under the North Carolina doctrine of voluntary payment, a payment cannot be recovered if it is voluntarily made by a person with full knowledge of all facts relevant to the payment.

In this particular case, the court found that the “voluntary payment doctrine” and the “waiver” argument substantially overlapped and, for the same reasons why the “waiver” argument failed, so did the “voluntary payment doctrine” argument.

What about the “statute of limitations”? Basically, a litigant doesn’t recover damages for things that happened “too long ago,” with “too long” measured by some applicable statute. North Carolina allows a relatively short period of time for recovery under contractual disputes, three years. [Many, many jurisdictions have a six year limit.] The claimed rent reduction covered a period that was more than three years before the tenant’s suit was filed. So, the tenant looked for a way to avoid the three-year limitation for contract actions and argued that lease disputes should be governed by a separate North Carolina statute, one that set a ten- year period. Here is a “clip” from that statute:

[A law suit based upon] a sealed instrument or an instrument of conveyance of an interest in real property must be commenced within ten years.

It was undisputed that the lease was NOT a sealed instrument. It WAS disputed whether the lease was “an instrument of conveyance of an interest in real property.” If it was, then the ten- year limitation might be applicable. Loyal readers have often been reminded that a lease is somewhat two-headed, one head looking like a contract and the other looking like a conveyance. So, for today’s purposes, which head was the co-tenancy dispute wearing? Without any analysis, the federal court reported that no North Carolina court had ever applied the ten- year limitation to a lease damages dispute and that there were many cases that applied the three- year limitations period. We don’t know how close the landlord came to winning on this one, but at the end of the day, it didn’t get the cigar. As a result, even if the tenant succeeds in showing that the bible book store was not a qualified replacement for the fashion retailer it replaced, it will get no rent relief for any rent that was payable more than three years before it filed its suit against the landlord.

So, at this point in time, the landlord and tenant have obtained two written opinions from a federal court and still don’t have a resolution as to the underlying dispute. If the co-tenancy clause was crafted by outside attorneys, let them be awarded their law firm’s “Rainmaker Award” for generating litigation business. If that wasn’t the business plan, then how about writing what you mean (or should have meant) next time?

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