As shopping center occupancy rates have decreased, enforcing co-tenancy rights has taken center stage for retailers. The key to enforcing rights under a co-tenancy provision is to rely on the plain language of the lease.
For example, in the past year, courts in Michigan and Georgia have ruled in favor of Rainbow, USA in co-tenancy disputes based on the precise language of co-tenancy provisions in the leases. In both cases, the court relied on the plain language of Rainbow’s leases to hold that Rainbow was entitled to pay reduced rent based on the landlord’s failure to meet co-tenancy requirements under the lease.
First, in Rainbow USA, LLC v. Cumberland Mall, LLC, 301 Ga. App. 642 (2009), Rainbow argued that it was entitled to pay reduced rent based on a co-tenancy provision providing for reduced rent if JC Penney or any two anchor stores ceased to remain open and operating in substantially all of their existing space in the shopping center. Under the lease, Rainbow was permitted to pay reduced rent until it received a “Vitiating Notice” stating that a comparable retail replacement anchor was open in the “premises previously occupied by the anchor named in Landlord’s Vitiating Notice which has ceased to operate.” During the course of the lease, the JC Penney store closed, and the landlord demolished the space occupied by JC Penney and built a freestanding Costco warehouse. Once the Costco warehouse was open and operating, the landlord argued it was a comparable retail replacement for JC Penney, and Rainbow was required to once again pay minimum rent. The Court disagreed. Because the Costco warehouse was not open in the “premises previously occupied by” JC Penney, the Court held that Rainbow could continue to pay reduced rent.
Similarly, in Rainbow USA, Inc. v. Seven Grand Associates, LLC, 2010 WL 236877 (Mich. App. 2010) (unpublished), Rainbow had entered into a lease providing that if a specified anchor store or 15% of remaining leasable area went dark for more than 90 days, Rainbow had the option to “convert” its total rental obligation to 4% of gross sales in lieu of minimum rent. During the course of the lease, one of the anchor stores went dark, and Rainbow exercised its option to pay 4% of gross sales in lieu of minimum rent. One year later, a new anchor store opened in the same space, and the landlord argued that Rainbow was required once again to pay minimum rent. The Court disagreed. Since the lease did not provide specifically that Rainbow’s obligations would “revert” back to minimum rent upon the opening of a new store, Rainbow was permitted to continue to pay 4% of gross sales in lieu of minimum rent even after the new store opened in the same space.
These cases illustrate that the key issue in any co-tenancy dispute is what is the plain language of the co-tenancy provisions in the lease. If the lease provides rights to the tenant when occupancy decreases, a Court will enforce those rights based on the plain language of the lease.