Lifestyle Tenant Can Terminate After Co-Tenancy Requirements Not Met
Facts: A lifestyle center comprised of condominiums, retail stores, and restaurants was to be constructed in three phases. A bookstore tenant signed a lease with the lifestyle center's owner for retail space in a building that was not yet completed. Under the lease, the tenant was required to accept the space on the condition that a movie theater, four full-service restaurants, one of which had to be located on “Pad 37” of the property, and at least 50,000 square feet of specialty retailers were open and operating at the time it moved in. The lease stated that if the status of construction of those tenants' buildings had not proceeded to a state of construction comparable to that of the completed shell of the tenant's building by the time the lease was set to start, then the tenant had the right to terminate the lease.
The lifestyle center development experienced delays. As a result, the tenant was concerned that the co-tenancy requirements in the lease would not be completed on time, and it advised the owner that it would defer acceptance of the premises until Nov. 15, 2008.
On Nov. 13, 2008, the owner sent a certificate of compliance to the tenant, indicating that the owner had completed the co-tenancy requirements, obligating the tenant to accept the premises. However, instead of accepting the premises, on Nov. 17, 2008, the tenant provided the owner with written notice of termination alleging that the owner had not complied with the lease conditions before the extended deadline of Nov. 15, 2008, because no restaurant was built on Pad 37 and there was less than 50,000 square feet of specialty retailers at a comparable stage of construction to the tenant's completed shell.
The owner sued the tenant, claiming that it had complied with the conditions and that the tenant had breached the lease by not accepting the space, thereby causing the owner significant financial loss. The tenant asked the court for a judgment in its favor without a trial.
Decision: The court granted a judgment in favor of the tenant without a trial.
Reasoning: The court noted that the issue in the case was whether the buildings and leased premises required to be completed before the tenant moved into its space under the lease had “proceeded to a state of construction comparable to that of the completed shell,” and, if not, whether that failure justified termination.
The lease required, at the time the tenant's shell was delivered and no later than Nov. 15, 2008, a restaurant on Pad 37 and 50,000 square feet of specialty retailers either open and operating, or in “a state of construction comparable to that of the completed tenant's shell.” The court determined that the owner had not complied with the requirement regarding Pad 37.
The tenant argued that Pad 37 had not “proceeded to a state of construction comparable to that of the completed shell” because as of Nov. 15, 2008, Pad 37 consisted of a vacant lot, which merely included utilities, street lighting, and sidewalks. The owner contended that “proceeded to a state of construction comparable to that of the completed shell” was ambiguous, and that it should have been interpreted based on the scheduled grand opening date due to the dramatic differences of each building structure on the property, and that, when viewed in light of the April 1, 2009, grand opening date, was on schedule to open. However, the court pointed out that the building permit to begin construction on the restaurant had not even been issued until Nov. 14, 2008—one day before it was supposed to be comparable to the completed shell.
Because the “status of construction” of Pad 37 had “not proceeded to a state of construction comparable to that of the tenant's completed Shell,” the court ruled that the tenant could exercise its right of termination.
- Riverstone Center West, LLC, et al. v. Barnes & Noble Booksellers, Inc., July 2010