Clearly Defining “Gross Leasable Area” in Opening Co-Tenancy Provisions
Q Several tenants have already moved into the shopping center I own, although parts of the center are still under construction. When the project is complete, the center will consist of five freestanding buildings. One tenant's lease has an opening co-tenancy requirement permitting it to pay only half of its monthly rent if less than 50 percent of the center is leased, and to continue paying reduced rent until the opening co-tenancy requirement is met. The tenant has been paying 50 percent of the rent, claiming that I violated its opening co-tenancy requirement because only 40 percent of the space on the center's site plan—including space still under construction—is leased.
I told the tenant that leases for only the completed buildings can be used to determine whether the requirement has been met. But the tenant is arguing that all construction shown on the site plan—completed or otherwise—should be used to trigger its opening co-tenancy right. Who is right?
A It depends on the lease terms. A recent similar case dealt with an owner and tenant who disagreed on whether the square footage of the already-constructed buildings or all of the buildings on the property's site plan should be used to calculate the square feet that had to be leased to comply with an opening co-tenancy right.
In that case, a national big box store signed a lease to be one of the anchor tenants of a lifestyle center. The lease's opening co-tenancy clause provided that, “as used herein, the Opening Co-Tenancy Condition shall mean that, as of the Commencement Date, Tenant shall not be required to open for business unless 60 percent (not including Tenant) of the gross leasable area of the Shopping Center is open and operating at the Shopping Center, or are to open concurrently with Tenant.” Additionally, under the opening co-tenancy provision, at least two of three specific anchor tenants were required to be open to fulfill the condition.
If the opening co-tenancy commitment was not met, the anchor tenant had the option to either delay opening its store or open and, if the opening co-tenancy condition remained unsatisfied when the tenancy was set to start, pay 50 percent of the monthly rent until it was met. A site plan detailing the square footage of all the buildings on the property—completed and still under construction—listed the total gross leasable area as 743,908 square feet.
When the anchor tenant opened, only 320,000 square feet were occupied by other businesses. The anchor tenant began making monthly rent payments for 50 percent of the rent, contending that the owner hadn't met the opening co-tenancy condition in the lease because less than 60 percent of the gross leasable area was open and operating. The owner argued that the condition had been satisfied because buildings that had not fully been constructed at the time the anchor tenant opened were not included in the shopping center for purposes of the condition. Therefore, the owner argued, more than 60 percent of buildings that had been fully constructed were open and operating at the time the anchor tenant opened its store for business. But the anchor tenant sued the owner, which asked for a judgment in its favor without a trial.
The owner's request was denied by the trial court because the issue was the differing interpretations of the phrases “gross leasable area” and “shopping center” in the opening co-tenancy condition. The anchor tenant interpreted the gross leasable area of the shopping center to refer to the figure in the site plan that included all buildings on the property regardless of whether they had been completed. However, the owner claimed that gross leasable area was calculated after a building had been constructed.
Because the lease provisions were ambiguous, it was possible that gross leasable area referred only to constructed space and, thus, the measurement of leasable area could occur only after a building had been completed. However, this explanation of how to measure gross leasable area did not definitively prove that the owner's interpretation was correct, the trial court stated. The definition of “shopping center” also was open to two reasonable interpretations because it had been used inconsistently in the lease. It could, as the anchor tenant asserted, be defined as the buildings outlined in the site plan. But it could also, as the owner argued, refer to only those buildings already constructed for purposes of the co-tenancy condition.
The trial court concluded that there was no concrete evidence showing the intent of the anchor tenant and owner regarding these terms. Because the anchor tenant had a reasonable interpretation of the lease that supported its claim against the owner, a trial was necessary [Best Buy Stores, L.P. v. Manteca Lifestyle Center, LLC, May 2010].
Set Specific Standard
Commercial leases should provide the standard that must be used when calculating square footage to determine whether owners have breached their leases by violating co-tenancy rights. It's crucial that the definition of “gross leasable area” in the leases you sign with future tenants at your shopping center isn't ambiguous. “This case illustrates once again how careful commercial real estate attorneys need to be when drafting, reviewing, revising, and negotiating opening or ongoing co-tenancy provisions in retail leases—especially with sophisticated tenants like national big box stores,” says Jeremy D. Cohen, partner at Hartman Simons & Wood LLP in Atlanta.
Owners need to pay particular attention to several different phrases within the co-tenancy provisions, stresses Cohen. This case demonstrated that the definition of “gross leasable area” can often lead to different interpretations of the lease, which could have dire and unintended consequences, he warns. In this particular case, a reasonable argument could be made that both the owner and tenant correctly interpreted the co-tenancy provision in their lease.
“One way that the owner could have better protected itself would have been to insert the words ‘then-constructed’ before ‘buildings’ when defining what portion of the shopping center shown on the site plan had to be open in order to satisfy the 60 percent threshold,” Cohen points out. The tenant could agree to the “then-constructed” qualification, but be aware that a tenant's savvy attorney would then require that a minimum square footage be inserted when calculating the threshold, says Cohen. He points out that this co-tenancy provision would be fairer to owners and tenants and certainly less ambiguous:
Model Lease Language
Landlord and Tenant hereby agree that Tenant shall not be required to open for business unless the following conditions have been satisfied: (i) three (3) anchor tenants occupying at least 20,000 square feet of gross leasable area (GLA) also open for business in the Shopping Center (or fixturing or preparing to open for business at the same time as Tenant or open within 30 days following Tenant's opening); and (ii) sixty (60) percent of the remaining GLA of the then-constructed buildings in the Shopping Center are also open for business in the Shopping Center (or fixturing or preparing to open for business at the same time as Tenant or open within 30 days following Tenant's opening), provided that in no event shall the GLA of the Shopping Center be deemed less than 400,000 square feet for purposes of calculating the satisfaction of this Opening Co-Tenancy provision.
Cohen notes that, in the event that the condition is not satisfied, the tenant would be entitled to certain remedies. For example, paying 50 percent of the rent until the condition has been satisfied. “Inserting a minimum threshold like in the clause above in which the parties agree to exact GLA—400,000 square feet—is the simplest solution to avoid these kinds of arguments down the road,” advises Cohen.
Owners and tenants should also include a one-year terminate or waive provision for co-tenancy provisions. Namely, that if the condition has not been rectified within one year following the tenant's opening for business, then the tenant would have to elect to either: (1) waive the co-tenancy condition and return to the payment of full rent under the lease; or (2) terminate the lease within 30 days following the expiration of the one-year period.
The intent of an opening co-tenancy provision is to protect a tenant from opening in a shopping center that does not have a critical mass of tenants open that will draw customers to the shopping center, says Cohen. “In this case, four anchor tenants and 320,000 square feet of additional retail tenants would seem to satisfy the critical mass component,” says Cohen. But there's always a risk that no matter how good a situation seems, it might not stop a tenant from using an ambiguous provision to its advantage.
Insider Source
Jeremy D. Cohen, Esq.: Partner, Hartman Simons & Wood LLP, 6400 Powers Ferry Rd., NW, Ste. 400, Atlanta, GA 30339; jeremy.cohen@hartmansimons.com.
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