Jury Trial Needed to Determine Ambiguous Lease Terms

Facts: A national sunglass store rented 500 feet of space in a mall. The mall owner’s lease with the tenant required the tenant to pay on the first day of each calendar month “minimum rent, without any deduction or setoff” in an amount set forth in a schedule to the lease. In addition to the minimum rent, the lease obligated the tenant to pay as “percentage rent” during each lease year, without any deduction or setoff, the percentage of gross sales in excess of the minimum basis of sales set forth in the schedule. While the minimum rent was due monthly, the percentage rent, if applicable, was due the 30th day of the month following the end of each lease year.

Under the miscellaneous provisions section of the lease, there was a provision, referred to as the “cotenancy provision,” that provided for an “alternative rent” in the event that a certain occupancy threshold of other tenants wasn’t met in the mall. The alternative rent was calculated based on 6 percent of the tenant’s gross sales. The provision provided that “Tenant may elect to pay [alternative rent] in lieu of minimum rent and percentage rent” until the occupancy threshold for tenants is satisfied.”

The tenant paid the minimum rent for the first few months of the lease, until it discovered that the cotenancy provision was never satisfied. Thereafter, it “elected” to pay alternative rent and proceeded to take credits against future rent.

The owner sued the tenant, alleging that it breached the lease by failing to pay rent. The tenant asserted a counterclaim, seeking a declaratory judgment from the trial court that it had properly elected to pay alternative rent for the period during which the cotenancy requirement had not been met. According to the tenant, since the cotenancy requirement hadn’t been satisfied at the rent commencement date and for a period of time after, it was entitled to elect to pay the alternative rent and was entitled to a credit toward future rent.

The trial court found that the tenant properly elected to pay the alternative rent and, therefore, ruled in its favor and awarded it a credit against rent. Specifically, the trial court awarded the tenant an amount that equaled the difference between the minimum rent paid up until the cotenancy violation was discovered and the alternative rent actually owed under the lease for that same period. The owner appealed.

Decision: An Ohio appeals court reversed the decision and sent the case back to the lower court.

Reasoning: On appeal, the owner argued that the lease doesn’t allow the tenant to elect to pay alternative rent two years after the fact and then retroactively credit itself for the difference between the alternative rent and the minimum rent that it has already paid. Conversely, the tenant argued that the cotenancy provision doesn’t explicitly require the tenant to elect to pay alternative rent before a certain date nor does it state that failure to exercise such right waives it.

The appeals court found the trial court’s interpretation of the lease contract was flawed. In finding that the tenant could retroactively elect to pay alternative rent, the trial court expressly ignored a provision requiring the tenant to pay the alternative rent at such times and in the same manner as set forth for percentage rent.

“Reasonable minds could reach differing conclusions as to the deadline to elect to pay the alternative rent, and the answer did not appear to lie in the four corners of the lease,” said the appeals court. And the lease was silent as to any duty of notifying the tenant of occupancy threshold levels on the landlord’s part or a duty to inquire on the tenant’s part, it noted. The appeals court said that while it couldn’t rewrite the contract by reading into it language or terms that the parties omitted, the absence of these terms added to the confusion of when the alternative rent could be elected.

Finding that the contract was ambiguous, the appeals court determined that it was incorrect to rule in favor of the tenant based on the “four corners of the contract.” The matter had to be resolved by consideration of extrinsic evidence—that is, evidence outside of the lease document, at a trial.

• DDR Rio Hondo, L.L.C. v. Sunglass Hut Trading, L.L.C., May 2013