Avoid Terminations if Replacement Anchor Isn't ‘Operational’ by Cotenancy Deadline

If you must give a desirable tenant a cotenancy right to terminate its lease if an anchor tenant—or other key tenant—in your shopping center closes, you'll undoubtedly want that right to be as narrow as possible. One typical way to do this is to give yourself a set time—say, six months—to find a replacement anchor. If you can find a replacement anchor in that time, the tenant can't exercise its termination right.

This typical strategy may not give you as much protection against terminations as you expect, though. You may think that all you must do to keep the tenant from terminating its lease is to sign a lease with a replacement anchor within the set time. But if your lease with the cotenancy clause isn't clear, the tenant may argue—and a court may agree—that you must have the replacement anchor open its business in the space within the set time. That's often an impossible task for you and the replacement anchor.

Owner Stuck Despite Lease with Replacement

For example, a Connecticut owner's lease gave the tenant the right to terminate if a department store stopped operating in the center for six months. But if the owner could replace the department store with a “comparable department store” within those six months, the tenant couldn't terminate the lease. When the department store stopped operating in the center, the owner found a replacement tenant within six months. But the replacement didn't begin to operate—that is, open for business—within that time.

The tenant said it was exercising its termination right, and it closed. The owner sued, claiming the tenant had violated the lease. The owner said that the lease didn't require it to replace the outgoing department store with an operating department store within six months because, it argued, “such a task is commercially impractical.” So the tenant couldn't exercise the termination right.

The court ruled that the tenant could terminate the lease. Because no specific language in the lease dealt with whether the replacement department store had to be operational, the court analyzed each word in the lease's termination right clause. It interpreted the words “comparable department store” to mean a store that operates [Rubin v. Venator Group Retail, Inc.].

Limit Your Obligation to Signing Lease with Replacement Tenant

If you must give a tenant a cotenancy termination right like this, limit the right further. Say that your obligation is only to sign a lease with a replacement tenant within the applicable time limit, says Toronto attorney Harvey M. Haber. This way, you can avoid the tenant's termination of its lease if the replacement anchor tenant doesn't open for business within the time limit, he explains. For example, if the lease's cotenancy clause gives you six months to replace an anchor, add the following language to that clause:

Model Lease Language

Tenant may exercise its option to terminate the Lease, as provided in Paragraph [insert #] hereof, only if Landlord has not signed a lease with a replacement [insert type of store, e.g., department store] within six months after [insert name of existing anchor store] ceases operating at the Center.

Expect a strong, savvy tenant to require that you add some deadline—say, one year—by which the anchor store must be operational, says Haber. The tenant won't want to get stuck in a center with an anchor that never opens for business, he explains.

Practical Pointer: Because the number of department store chains is decreasing, as a result of mergers and acquisitions in the industry, you should consider lengthening the amount of time you'll have to find a replacement store, says Haber. Six months may not be long enough, he adds.

CLLI Source

Harvey M. Haber, QC, LSM: Partner, Goldman Sloan Nash & Haber LLP, 250 Dundas St. W., Ste. 700, Toronto, ON M5T 2Z5 Canada; (416) 597-3392.