Define “National Retailer” in Cotenancy Clause

A smaller tenant that's negotiating a lease for space in your shopping center may want to negotiate a cotenancy clause that requires you to rent to a “national retailer.” You may be willing to include such a clause, especially if you're already negotiating a lease with a specific national tenant. But if that deal falls through and you end up renting to a tenant that's well known, but operates in only one region of the country, your smaller tenant may claim that you've violated the cotenancy requirement in its lease.

To eliminate that risk, define “national” broadly, or try to limit your obligation to a “national or regional” tenant. If you use the term “national retailer” but don't define it, a court may use a standard definition to determine that your replacement tenant violates your cotenancy clause. That's what happened to a New York shopping center owner whose tenant claimed that a well-known tenant with only East Coast locations was not a “national” retailer that would satisfy its lease's cotenancy clause.

Tenant Tries to Terminate Lease

In that case, a major office supply retailer signed a 15-year lease for space at a shopping center, including a cotenancy clause requiring the addition of a specific national tenant, a home improvement supply chain store, or a similar “national” retailer. The lease provided that if the cotenancy requirement hadn't been met by the rent commencement date, the tenant could postpone opening for business, open for business and pay only percentage instead of base rent, or terminate the lease.

Before opening, the tenant learned that the owner was considering renting the space it had promised to rent to the home improvement supply store to a wholesale club instead. The tenant informed the owner that the club's occupancy wouldn't satisfy the lease's cotenancy requirement because it was a regional, not a national, retailer. The tenant informed the owner that it would terminate the lease. The owner sued the tenant.

The owner argued that the club was a national retailer because: (1) it has stores in three of the four official U.S. Census regions; (2) its products and services are available throughout the nation via e-commerce; (3) it's a Fortune 500 company listed on the New York Stock Exchange with total revenues in excess of $10 billion; and (4) it has millions of members.

The tenant stressed to the court that having a national retailer as a co-tenant was a key provision because it considered the shopping center to be a high-risk project and a national tenant would bring customer traffic to the center, giving it strength and stability. The tenant argued that: (1) the term “national” retailer means stores spread across the United States, and not only in one region or section of the country; (2) U.S. Census data was generally not used to determine whether a tenant is a national retailer; (3) even if a retailer is nationally known or nationally recognized, it would generally not be considered a national retailer absent physical locations across the country; and (4) cotenancy provisions are not intended to capture Internet retailers.

Court Defines “National”

Because the tenant and the owner had not defined “national” in the lease, the “ordinary and natural meaning of the words national and retailer are dispositive,” determined the court. It used the Black's Law Dictionary definition of “national” as “nationwide in scope.” The court pointed out that the term “nationally known” is not the equivalent of “national” retailer. Moreover, the court said that the club consistently holds itself out as a leading operator of membership warehouse clubs in the eastern United States. And while the club sells some merchandise to its members via its Web site, and permits nonmembers limited access to such sales, the fact that merchandise may be purchased online does not transform the club into a “national” retailer within the meaning of the lease, stressed the court.

Because the club's retail operations are not nationwide in scope, the court concluded that it's a regional, not a “national” retailer within the meaning of the lease's cotenancy requirement, and therefore, the owner failed to satisfy the cotenancy requirement. Accordingly, the tenant was entitled to terminate the lease [Staples the Office Superstore East, Inc. v. Flushing Town Center III, L.P., February 2011].