Can A Tenant Just Pay-Up And Close Its Store In Violation Of A Continuous Operating Covenant?

Print
Print Friendly, PDF & Email

Continuous operation lease provisions are contentious. The ability of a landlord to impose such an obligation within a particular lease is determined by the relative bargaining power of the parties. All bargaining power, like all politics, is local. If a tenant doesn’t really “need” to be at a particular property and the landlord really “needs” that (or any) tenant, then it’s unlikely that any resulting lease will include one. At least, in a rational world, that’s the way it would be.

Today, Ruminations will describe two unusual court decisions with the caveat that the fat lady hasn’t yet sung. Each are at the “preliminary injunction” stage, actually at the stage where two courts, in geographically distant jurisdictions, have ordered two different tenants, with different landlords, to keep their stores open. That’s where the similarity ends, as today’s blog posting will tell.

[As to the two cases, each being in the preliminary injunction stage, no final decision has been reached. All the separate courts have ruled is that what the tenants were “doing yesterday,” i.e., operating a store, they need to do “today,” i.e., keep operating that store (at least until a final decision is reached). That means not all the facts and legal arguments are yet on the table. For that reason, Ruminations won’t be analyzing the living daylights out of either case. We’ll be waiting for a final “call” as to one of those cases (the Indiana one) before going down that road.]

Last Sunday, heading into a holiday week, we gave an overview of three stages of a legal remedy courts use to maintain the “status quo” while deciding a dispute. Generally, this is done when a court realizes that failing to order temporary relief will allow a situation to deteriorate to the point that any final decision could be moot – the feared damage will be permanent and done. We are not going to repeat any part of last week’s posting today. If you missed it last week, it would be very helpful to look at that posting now. Readers can do that by clicking: HERE.

Another reason to be familiar with last week’s posting is that it introduced the “efficient breach” theory. Basically, that’s a well-accepted doctrine to the effect that a party has the right to breach an agreement with the only consequence being that it will have to pay damages to the other, aggrieved party. That would be in contrast to a rule that says a contracting party can be barred from breaking a contractual promise. The two continuous operations cases described in today’s blog posting challenge the “efficient breach” theory. That’s what is going on – under what circumstances can a tenant close its store, despite promising it would “continuously operate,” with the only consequence being that it has to monetarily compensate its landlord.

At the end of the day, the only effective recourse one party has against the other, breaching party is to get a court to assess damages against the “bad” actor. Yes, courts can write orders requiring a party to act in a certain way or requiring a party to refrain from acting a certain way, but what happens if that party doesn’t obey? Yes, a court can jail individuals, even those who control a business’s decisions, but how does that benefit the “wronged” party? So, what is the reason for someone to ask a court to order another to do what a contract (think: lease) already requires be done?

In some communities, more commonly in days gone by, people taking an oath (a solemn appeal to a deity) are (were) thought to tell the truth even if, without taking an oath, they would not. Basically, oath-takers are (were) thought to fear the consequences even though, absent taking an oath, they would not tremble. Translating for today’s purposes, persons who would breach a contractual obligation are far, far less likely to violate a court order than to violate the same obligation in a contract.

None of our thoughts placing oaths and court orders in the same basket are critical for understanding the two cases we’ll be describing. It’s just what we think is the underlying basis for seeking the remedy of specific performance – essentially getting a court to incorporate an existing contractual obligation in a court order demanding the same behavior. Basically, whether it is out of fear or reverence for the court or for the deity, people who are willing to ignore a contractual obligation are very, very reluctant to cross a court that imposes the same obligation on that party.

In each of the two cases, one in Indiana and the other in the state of Washington, the leases required the tenant to keep its store open, really, truly open just like one would expect it to be. Notably, the leases included provisions allowing the landlords to seek an order of “specific performance,” one where a court could compel the respective tenants to stay open and not merely getting away by paying the piper if they closed their stores at the burdened locations. Those are all of the significant similarities between the two cases. That’s because, in Washington, the affected store, a chain supermarket, was (or might have been – that’s still at issue) the “anchor” store at a shopping center. [At least to the Washington court, it will ultimately make a difference if the supermarket is an “anchor” store.] In the other, quite unusual situation, an Indiana state trial court ordered that 77 stores across the country remain open even though each had a different (though related) landlord and only three of the stores were in Indiana. Here, there was no issue that any of the stores were “anchors.” The stores before the Indiana court included 54 that measured between 586 and 999 square feet in size; 23 occupied between 1002 and 1567 square feet of floor area; and one was 2,099 square feet in size. In contrast, the Washington supermarket occupied 34,000 square feet of floor area. The 77 stores were mostly in very large malls. Yet, each court ordered the same relief – “Stay open while we decide whether you can just close and pay monetary damages.”

[For those who have already heard of the Indiana case (and, to a lesser extent, those who haven’t), the tenant (on December 19, 2017) persuaded the Indiana Supreme Court to hear a direct appeal of the lower court’s preliminary injunction, thereby skipping over the usual intermediate appellate court review process. That’s unusual and points to the importance of the issue.]

One of the criteria for getting a court to issue a preliminary injunction is that the party seeking such an order needs to have “a likelihood of success” at the end of the day. Frankly, we were surprised at the standard used in Indiana to gauge “likelihood of success.” The best we can do is to reprint what the trial court said:

A party seeking a preliminary injunction must establish a prima facie case at the preliminary injunction hearing. The party is not required to show that he is entitled to relief as a matter of law, nor is he required to prove and plead a case which would entitle him to relief upon the merits. … The likelihood of success is met if the party seeking injunctive relief shows that it has a “better than negligible” chance of succeeding on the merits.

Basically, if an Indiana court agrees that the aggrieved party “might” win, it will “freeze” the status quo if the other three criteria for a preliminary injunction all exist. [What are those other three? – look at last week’s blog posting.]

So, what “chance” does a landlord have to get a court to specifically order a tenant to stay open and operating? In the Indiana case, the tenant “noted that no court [Ed: in the United States] has ever entered preliminary or permanent injunctive relief to specifically enforce a continuous operations covenant against a non-anchor tenant extending nationwide.” Notably, the Indiana court conceded, “[a] review of the case law suggests [the tenant] appears to be correct on this matter.”

[Back to the state of Washington for a moment.] So, though rarely seen, the order issued against the Washington supermarket was not a shot across the bow. There, the supermarket might be found to be an anchor store. [That is a determination yet to be made.] There, the court (preliminarily) thought the harm that the landlord would experience might not adequately be compensated by the payment of money. Though the Washington court has not yet reached a final conclusion, it did want to preserve its right to ultimately decide whether this particular supermarket could just close its store and make a monetary payment. After all, it is obvious that once the store closes, to reopen it would be like untangling a ball of string. It’s a lot easier to keep a string from tangling in the first place. The Washington state court’s Order Granting Injunction is pretty straight-forward and all or almost all readers can easily understand the court’s reasoning. If you’d like to do so, you’ll find that Order by clicking: HERE.

So, what makes the Indiana case stand out? Well, there are a number of things (and maybe that’s why the Indiana Supreme Court agreed to accept an expedited, court-skipping, appeal). At this writing, we’ll suggest three.

First, this court, in the home state of the landlord’s ultimate owner treated that owner as if it were the actual, unitary landlord for all 77 stores. We wonder had the tenant been 77 different entities “owned” by the same parent company, it would have done the same had that tenant-owner asked the landlord’s home court to do so. We don’t ask that lightly – we hold courts in high regard. But, at a minimum, what the court has done here gives us and others the opportunity to speculate.

Second, we wonder about the propriety of a single state court, issuing a nationwide preliminary injunction affecting three in-state store and 74 out-of-state stores. We concede that the tenant was identical for all locations and that the court had jurisdiction over that tenant. But, the court’s injunction rested on whether the landlord would have a “likelihood of success” on the merits. Indian’s threshold for this factor at the preliminary injunction stage doesn’t seem like a very high barrier, whereas the threshold where the other 74 states might be much greater. Further, the out-of-state leases were governed by the law of those locations, and the law might be against the landlord in those places. From our reading of the Washington state court’s decision, it would not have thought a landlord would likely succeed in keeping a non-anchor store open.

Third, and most perplexing, is what appears to be a central argument made by the landlord and glommed on by the court. A senior officer of the landlord testified, by affidavit, that:

The premature closure of [this particular tenant’s] stores would cause harm to [the landlord’s] relationship with other tenants because … his experience tells him that many other tenants will consider following [this particular] tenant’s lead and attempt[] to repudiate their own continuous operations covenants. Each premature closure is viewed by the tenants as an indication of a larger possible problem with the retail mall environment and emboldens other tenants to approach [the landlord] and ask to close some or all of their stores.

To Ruminations, that sounds a lot like Benjamin Franklin’s (though good friend and colleague Rick Mallory insists that the more accurate source of the following version is James Baldwin):

For want of a nail the shoe was lost. For want of a shoe the horse was lost. For want of a horse the rider was lost. For want of a rider the message was lost. For want of a message the battle was lost. For want of a battle the kingdom was lost. And all for the want of a horseshoe nail.

For a more legalistic understanding of that proverb, take a look at our blog posting about “consequential damages” by clicking: HERE.

For those readers desiring to learn more about the Indiana court rulings, we report that we don’t think they are available on-line. But, if you want to read the initial 55 page decision and see some of the court documents that followed the issuance of the underlying decision on November 27, 2017, send an email request to: imeislik@meislik.com. Otherwise, we will both await further developments for both cases.

Ruminations wishes all readers and their family and friends a happy and health year to come and for many, many years thereafter.

Print

Leave a Reply