Don’t Lose Lease Rights by Missing Deadline

If you’re like many shopping center owners, some of your tenants might have cotenancy rights. That is, you’re obligated to keep a certain space or spaces in the center leased to stores the tenant has specified in the lease. If you don’t, the tenant might have a right to pay lower rent, or even terminate its lease. But in some cases, owners have negotiated mutual termination rights if a cotenancy clause is triggered because a specified tenant has stopped operating. You may be keeping track of the deadline by which the tenant has to exercise its cotenancy rights. But don’t forget that just because you have the option to terminate the tenant’s lease, you can choose to do so at any time you wish. It’s important to keep track of the deadline by which you must exercise your right. The owner of a Washington shopping center made the mistake of thinking that it could terminate a tenant’s lease at its leisure. But a court decided otherwise. 

Cotenancy Clause Is Triggered

When an anchor tenant closed its store at a shopping center, the cotenancy clause in a lease between an arts-and-crafts supply retailer and the center’s owner was triggered. When the owner had failed to obtain another anchor tenant after six months, the tenant started paying the lower alternative rent provided for in the cotenancy clause.

The owner and tenant both had the right to terminate the lease in this event. Two years later, the owner notified the tenant that it would terminate the lease in 60 days unless the tenant agreed to resume paying the minimum rent. The tenant said that it would keep paying the alternative rent until the cotenancy requirement was satisfied and wouldn’t move out of the center. The owner refused to rescind its termination notice.

The tenant asked a trial court for a declaratory judgment that the owner failed to exercise in a timely manner any right it had to terminate the lease. The trial court granted the tenant’s request. The owner appealed, but a Washington appeals court upheld the lower court’s decision.

Owner's Termination Right Wasn't 'Ongoing'

The owner argued that the lease allowed it to give notice of termination at any time after the end of the 14th month following the initial cotenancy failure. The tenant asserted that the owner’s right to terminate was a one-time opportunity to be exercised at 14 months after the cotenancy clause was triggered, or not at all.

The appeals court said that the lease provisions didn’t give the owner an ongoing right to terminate the lease. Only the tenant had an ongoing right. It concluded that the owner had waived its right to termination by not exercising it in a timely manner. The owner was prohibited from terminating the lease and the tenant was allowed to pay alternative rent until the cotenancy requirement was met.

The appeals court acknowledged that it was “commercially reasonable” to give the tenant greater termination rights because satisfaction of the cotenancy requirement was a major part of the parties’ bargain and because it was the owner’s duty to satisfy that requirement. If the owner had a continuing right to terminate in the event of nonsatisfaction, it would have far less incentive to satisfy the cotenancy requirement [Michaels Stores, Inc. v. RPAI Lakewood, LLC, March 2015].