Lease Didn't Give Owner and Tenant Same Right to Terminate

Facts: A large national retailer of arts and crafts materials and a shopping center owner signed a lease with an ongoing cotenancy provision requiring the owner to lease the anchor store in thecenter to a regional or national tenant meeting certain criteria. If the owner fails to maintain an anchor tenant, the tenant would pay reduced “alternative rent.” The lease gives the tenant a continuing right to terminate if the ongoing cotenancy requirement isn’t met for six months or more. The lease also gives the owner a right to terminate the lease in the event it fails to satisfy the requirement.

The owner initially satisfied the ongoing cotenancy requirement by leasing the anchor store to a supermarket. After the supermarket went out of business, the owner failed to find another anchortenant, so the tenant began paying alternative rent. In 2012, the owner notified the tenant of its intent to terminate the lease—unless the tenant nullified the termination by agreeing to resume paying minimum rent. The tenant refused, and claimed that the owner didn’t have the right to terminate the lease. The owner asked a court for a declaration that it has an ongoing right to terminate the lease and that it acted within its rights under the lease by sending a termination notice to the tenant. It also asked for reformation of the lease.

Specifically, the owner asserted that the lease provides it with an ongoing right to terminate in the event the ongoing cotenancy requirement isn’t satisfied, just as it does to the tenant. In the alternative, the owner argued that the parties contemplated that the lease would provide each with an ongoing right to terminate; therefore, the court should reform its language to conform to the parties’ intent.

The tenant sued the owner for breach of contract. It asked the court for a judgment in its favor without a trial. The court granted the tenant’s request and denied declaratory relief for the owner. The court found that the provision of the lease granting the owner’s termination right is unambiguous: Its plain language grants the owner a one-time option to terminatethe lease at the end of the twelfth month following non-satisfaction of the cotenancy requirement; the owner didn’t exercise its right to terminate in a timely manner, and is barred from doing so now. The court supported its finding with the fact that the same language granting the tenant an ongoing and continuing right to terminate isn’t included in the provision on the owner’s right to terminate. Given the different language used to state the tenant and the owner’s respective rights to terminate, the court inferred that the parties considered whether to grant the owner an ongoing right to terminate, but ultimately decided to limit that right to the tenant.

In the meantime, while the tenant had been paying alternative rent, the owner signed a lease with its competitor, another arts and crafts supply store, but made it contingent on the actual termination of its lease with the tenant. That is, the new tenant would move into the center only if the tenant refused to resume paying minimum rent, terminated its lease, and moved out of the center.

The tenant asked the court for an injunction, an order from the court compelling the owner to cancel its lease with the new tenant. It claimed that the owner had breached its lease by signing a new lease. The court denied the tenant’s request for a preliminary injunction, finding no danger that the owner would lease to the new tenant and evict the tenant. The parties entered into a “stipulated order” in which the owner agreed to terminate its new lease with the new tenant and the tenant agreed to resume paying the minimum rent pending a determination of the parties’ rights under the lease. Following that order from the court, the case proceeded on the owner’s claim for reformation of the lease and the tenant’s claim for breach of its lease.

Decision: A Michigan court denied the owner’s request for judgment without a trial on its reformation claim; the court ruled in favor of the owner on the tenant’s claim for breach of contract for alleged violation of the exclusive use provision, and ordered a trial to determine damages.

Reasoning: The court noted that the tenant argued that the lease gives the owner aone-time option, at a fixed point in time, to terminate the lease in the event it fails to satisfy the ongoing cotenancy requirement, while the owner argued that its right to terminate is continuing, the same as the tenant’s. The court agreed with the lower court’s ruling that the lease provision concerning the termination right is unambiguous and gives the owner only a one-time option to terminate the lease, which the owner failed to exercise in a timely manner. It agreed with the lower court that the lease clearly meant that the owner didn’t have the same termination rights as the tenant.

The tenant alsoargued that the owner’s entering into a lease with its competitor breached the tenant’s lease by allegedly violating the exclusive use provision. It said that the mere fact of the new lease with a competitor establishes a breach. The owner admitted that it entered into a new lease with one of the tenant’s main competitors, and that it understood that it was barred by the lease with the tenant from allowing the new tenant to operate in the center in competition with the tenant. But it argued that the fact that the new lease was contingent on its termination of the lease with the tenant meant that it wasn’t a violation. The court found that the provision requires the granting of a possessory interest for it to be violated. Because the lease was never terminated and the tenant never vacated, the owner never granted a possessory interest to the new tenant. Accordingly, it never “leased” in violation of the exclusive use provision.

• Regency Realty Group, Inc. v. Michaels Stores, Inc., July 2013