The Chickens Come Home To Roost – Pretext And Tenant Control Over Development

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According to Lawrence Peter “Yogi” Berra (May 12, 1925 – September 22, 2015), late of Montclair, New Jersey, “You can observe a lot by just watching.” That’s how we get our “experience” – by watching what we ourselves have done and by what others have done. We can learn from those experiences, “ours” and “theirs.” That’s one reason we read court decisions. Doing so allows us to safely observe what others have done without getting burned, even when the situations covered by these decisions invoke another Yogiism: “It’s deja vu all over again.”

We came across a late August court decision out of the U.S. District Court for the Northern District of Alabama. It involved a lease dispute at an enclosed mall, one emblematic of the history of such malls. At 300,000 square feet, it opened in 1970 with 32 inline tenants and two department stores as anchors. By 1982, one had disappeared and its parent company soon followed. The following year, a national retailer relocated its own department store from downtown to the now-vacant space. In the mid-1990s, plans were made to expand the mall, based in part on the addition of a third department store building. Some physical impediments delayed those plans and then the contemplated additional department store chain was acquired by yet another. This resulted in a further delay. But, the mall’s expansion opened in 2000, and the mall grew to 700,000 square feet of space.

A food court was added, as was a movie theater. Other “brand name” retailers moved in (and later went out of business). The population shifted; a large competing mall was built “on the other side of town.” A “plethora of shiny new retail … popped up on a by-pass still several years from completion.” One nearby military base closed. A few years ago, the store that relocated from downtown to the mall closed. The developer bought that building and demolished it, leaving the mall with 610,000 square feet of space. At the end of the day, gross sales at the mall fell by 56%. A foreclosure followed.

Foreclosures serve to reset the “investment.” So, even if a developer’s future income might not have paid the old (foreclosed) mortgage, it could provide an attractive return going forward. But, keeping the mall as it had previously been conceived would make the foreclosure just another stop on the property’s downward slide. So, the mall cried out for repositioning, and that’s what the new owners had in mind. So, last year, “the mall began major renovations to transition into a lifestyle center, including overhaul of the interior spaces, conversion of some stores to external entrances, [and] outparcel development.”

So, you ask, “What was the problem?” Nattering nabobs of negativism may have already guessed. The surviving original department store tenant’s lease gave that tenant certain approval rights over most changes to the mall property. Its lease:

included provisions obligating [the] Mall to keep the mall substantially the same except for within areas specifically reserved for expansion and construction. [It] also stated that the mall would not be changed or expanded, except within the designated area, without [this original anchor tenant’s] prior written consent [,and] also provided that the mall would not fence off or obstruct the parking lot and would keep the common areas of the mall clean and in good repair as an “enclosed air-conditioned mall.”

Though the need for the tenant’s approval might have been the “real” dispute, these provisions were indirectly addressed within the U.S. District Court decision [one that can be seen by clicking: HERE.] The tenant did not seek injunctive relief; instead, it sought damages. The most we’ll say is that the landlord’s position was that when it verbally asked the store’s local manager if the expansion was “OK” (so to speak), and the store manager didn’t object – this constituted approval. The court let that issue go to trial.

The landlord had another approach though, one, even though we never took a course in mind-reading, we would characterize as a pretext. So, don’t take our word; make up your own. Whatever the landlord’s reasoning, it was willing to lose this tenant if that’s what it took to avoid the need for the (seemingly) required approval. On the other hand, maybe it was about the rent being too low. We don’t know.

On what thread did the landlord’s “eviction” case rest? Well, as often is the case, it was based on how to read a lease’s provisions.

The original lease had been executed in 1968, fifty-two years ago. Then, it was amended nine times. As to this dispute, there were three relevant ones, each one dealing with the tenant’s right to extend the lease’s term. Originally, the tenant signed for 20 years (until 1990) with four successive extension options of five years each. Then, in 1985 when the new, third department store building was added to the mall, the lease was extended by four years to 1994. That amendment retained the original four extension options. The first of them would now begin in 1994. That extension option was exercised.

In 1997, in connection with the addition of yet another department store, a lease amendment (its eighth) added two more five-year extensions, bringing the total to six, one of which had already been exercised. A year later, in connection with the addition of a drug store to the mall, the lease was further amended, including by use of this provision:

Option to Extend-the text of the article of the Lease captioned “Options to Extend,” as amended by the Eighth Amendment, shall be, and the same hereby is, deleted therefrom, and the following text is substituted in lieu thereof: “Tenant shall have five (5) successive options to extend the term of this lease each for a separate addition period of five (5) years from the date upon which the term would otherwise expire. Each such extension shall be upon and subject to the same terms, covenants, and conditions as those specified in this lease, except that Tenant may not exercise again any option previously exercised. If Tenant elects to exercise any of said options, it shall do so by […]”

This ninth amendment also provided that, “[t]o the extent that the terms and provisions of the Lease conflict with any of the terms and provisions of this Agreement, this Agreement shall be deemed to be the controlling instrument.” It also expressly stated it replaced the “Eighth Amendment” and that the lease was set to expire on August 31, 2009 (followed by the remaining extension periods, if exercised). In 2009 and 2014, the tenant exercised extension options, making for a total of five extension options exercised since taking occupancy.

The foreclosure sale took place in 2017, at which point the tenant was three years into its most recently exercised extension period. Then, in 2019 when the tenant sent yet another extension option notice, the new landlord, in the midst of the mall’s major repositioning, rejected that notice. Its claim was that because the ninth lease amendment “replaced” the prior (eighth) one, the “five (5) successive options to extend the term of this lease from the date upon which the term would otherwise expire” related back to the original lease. Accordingly, following the landlord’s argument, when the tenant extended the term for the fifth time, it has exhausted all of its extension options.

Fearing that we’re on the path to exceed the number of words in the Declaration of Independence, we’re not going to explain why the court dismissed the landlord’s attempt to reject the latest extension option exercise. Readers can easily figure out why the court did so. Even readers who sympathize with the landlord’s plight and argument can “think like the court” even without our revealing some other provisions in the lease and the ninth amendment. In addition, “we all know,” that one of the landlord’s objectives was to terminate the lease because doing so would eliminate the lease’s requirement that it obtain approvals from the tenant.

Each party argued that the lease was unambiguous when it came to how many extensions options were left. Of course, they held opposite views of what the “unambiguous” provision meant. The court dealt with those contrasting arguments as follows:

The court finds [the tenant’s] argument persuasive because of the unambiguous language of the lease when read as a complete document. … Just because the parties set forth different interpretations of the provision governing options to extend does not render the provision ambiguous. … Here, giving the terms of the contract their ordinary and natural meaning and reading all of the terms in the contract together as a whole rather than in isolation, the court finds no ambiguity.

Now, let’s ask ourselves, as Ruminations often beseeches us, “could this trip to court been easily avoided?” Imagine what would have been the arguments had the ninth lease amendment included a list of the dates upon which each of the remaining extension periods would begin and also a list of the dates by which an extension notice needed to be given for each of those periods. Simple? An idea from left field? No, it would have been unremarkable language, easily and simply written.

The following end note-like text will take us over our intended word limit, but they are the ones that drew us to this court’s decision. We’ve cut out the surplusage and hope our readers appreciate what remains:

In wading through the filings in this case, the court cannot help but think of a refrain often heard crooned by Don Henley on classic rock radio: “I’ve been trying to get down to the heart of the matter but my will gets weak and my thoughts seem to scatter [. . .].” DON HENLEY, The Heart of the Matter, THE END OF INNOCENCE (Geffen Records 1989).

The song goes on to extol the virtues of forgiveness, but Henley’s focus on “the heart of the matter” and getting past distractions and scattered thoughts still calls the instant case—which has little or nothing to do with forgiveness—to mind for the court.

After cutting through the distractions and examining the lease that forms the heart of the matter in this case, the court finds that [the tenant] has shown entitlement to summary judgment solely on its claim for declaratory judgment regarding its options to extend the operative lease.

Oh, by the way, the tenant involved in this dispute is now in bankruptcy – emblematic of what is going on. Let’s not think of the “new normal” to come. Instead, we ought to be thinking of the “next normal” with more to follow.

[By reason of an upcoming calendar conflict, expect that next week’s blog posting won’t appear until Monday, September 21.]


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