End Retail Tenant's Special Rights and Remedies Upon Renewal

Your lease with a retail tenant probably gives it certain special rights and remedies. For instance, the lease may include a cotenancy clause that lets the tenant abate its rent if you don't replace another tenant—typically, an anchor—when it goes dark. Or it may include an exclusive that lets the tenant sue you for damages or terminate its lease if the exclusive is violated. And it might have a performance kickout right that lets the tenant terminate its lease if its gross sales don't meet a minimum sales threshold during a set time period.

You might assume that a disgruntled tenant that is exercising its special rights and remedies because you violated its cotenancy, exclusive, or kickout right will want to leave the space when its lease is over. But that might not be the case. If you agreed to a renewal, there could be a big loophole in the lease: those rights and remedies—and their cost to you—may continue after the renewal. So you could wind up getting less rent than you expected, having to continue renting space to your adversary in a lawsuit, or getting stuck with an empty space, depending upon which right or remedy the tenant is using.

To plug this loophole, which would allow your tenant to unfairly enjoy desirable space, ask it to waive its special rights and remedies for violations that exist at the time it exercises its renewal.

Benefits Continue After Lease Renewal

“If the lease is desirable enough for the tenant to renew, it must not be too hurt by the cotenancy violation, the exclusive violation, or the current level of gross sales,” New York real estate attorney Howard M. Rittberg points out. “It's critical to end a tenant's special rights and remedies after a lease renewal to stop it from continuing to benefit from remedies like abated rent because of a violation that occurred during the initial lease term.”

It seems unfair to have to take a loss on rent, defend yourself against a lawsuit, or run the risk that the tenant will terminate its lease only days or weeks after renewing it if the renewal occurs during a period that a kickout clause gives the tenant the right to terminate its lease. However, courts have sided with tenants taking advantage of this loophole.

In a seminal case on this issue, a West Virginia shopping center owner had to deal with a similar loophole that reduced its rent. In that case, the lease had a cotenancy clause that gave the tenant the right to either abate its rent to only 4 percent of its gross sales or terminate its lease if one of the listed tenants didn't open or stopped operating. The lease also had a renewal option.

When a department store in the center went out of business, the tenant chose to pay only the abated rent, as the lease permitted. Then the tenant exercised the renewal option, continuing to pay the abated rent (because the owner hadn't replaced the department store). The owner sued the tenant for not paying its full rent. The tenant argued that its rent was still abated because the cotenancy requirement hadn't been met.

A federal appeals court ruled that the tenant was entitled to continue to pay the abated rent during the renewal term until the owner replaced the department store. The lease clearly said that it would be renewed under the same terms and conditions as the original lease [Retail Designs, Inc. v. Cato Corp.].

Plug Loophole with Waiver

To plug this loophole, Rittberg suggests a lease provision that requires the tenant to waive its special rights and remedies for then-existing lease violations if, at the time it exercises its renewal option:

• The tenant is paying abated rent under the cotenancy clause;

• You or another tenant has violated (or the tenant claims that you or another tenant has violated) the tenant's exclusive; or

• The tenant is eligible (or claims it's eligible) to exercise its kickout right.

“This requires the tenant to return to paying full rent, drop any lawsuits against you for exclusive violations, and waive its right to terminate the lease under the kickout clause,” Rittberg explains.

Remember that the tenant isn't waiving its special rights and remedies forever. It's waiving only those rights and remedies available to it at the time of its renewal. A brand-new violation of the lease provisions or a failure to meet the minimum sales threshold during the renewal term will entitle the tenant to use the rights and remedies in those clauses again.

Show the following special rights and remedies waiver language to your attorney before adding it to your lease's renewal (or extension) option clause.

Model Lease Language

Notwithstanding anything herein to the contrary, if at the time Tenant exercises an option to [extend/renew] under this Clause:

1. Tenant is paying a reduced Minimum Rent in accordance with Clauses [insert # of cotenancy clause] hereof; or

2. Landlord or another tenant at the Center is, or Tenant has claimed that Landlord or another tenant at the Center is, in violation of Tenant's exclusive; or

3. Tenant is eligible or claims to be eligible to exercise its right to terminate this Lease under Clause [insert # of kickout clause] hereof because its gross sales failed to meet the Minimum Sales Threshold; then:

     a. Tenant shall be deemed to have waived its available rights and remedies for then-existing (but not future) violations of Clauses [insert # of cotenancy and # of exclusive use clauses] hereof, including, without limitation, Tenant's right to pay a reduced Minimum Rent or terminate this Lease; and

     b. Tenant shall be deemed to have waived its right to terminate the Lease under Clause [insert # of kickout clause] hereof; provided, however, that if such right has not been permanently waived under the terms of the Lease, then such termination right shall again become available if, during the first [insert #, e.g., three (3)] full calendar years of the Renewal Term, Tenant has not achieved a level of annual Gross Sales (as defined in Clause [insert #]) hereof that is at least equal to $[insert amt.].

Insider Source

Howard M. Rittberg, Esq.: Member, Levene Gouldin and Thompson, LLP, 450 Plaza Dr., Vestal, NY 13850; (607) 584-5656; hrittberg@binghamtonlaw.com.

Search Our Web Site by Key Words: special rights and remedies; rent abatement; cotenancy clause; kickout right; minimum sales threshold