I attended the ICSC (International Conference of Shopping Centers) Law Conference last month in Orlando, Florida, along with my GSB partner, Rob Spitzer. Fortunately, Hurricane Sandy stayed off the coast of Florida during our stay, and the conference was a great success. Unfortunately, Sandy continued north, took a sharp left turn, and introduced itself to the East Coast. Perhaps it was a coincidence, but several of the presentations at the ICSC Law Conference included a discussion of damage and destruction provisions found in retail leases.

Damage and destruction provisions in retail leases are often overlooked by the parties at the time the lease is negotiated. Frequently appearing towards the end of a lengthy lease document, the damage and destruction provisions are often considered to be less important than the key business terms of the lease, such as the commencement date, base rent, rent escalations, common area maintenance expenses, parking and restrictions on assignment and subletting. However, because a disaster like Hurricane Sandy, or any other event which causes damage or destruction to a shopping center, will be a significant disruption to the tenant’s business and the parties’ relationship, it is important the damage and destruction provisions be considered at the outset of the lease negotiations.

The typical retail lease will require the landlord to restore the leased premises in the event of damage or destruction. The landlord will often condition that obligation on the receipt of insurance proceeds or provide for a right to terminate the lease if the damage is substantial or the lease is near the end of the term. However, there are several other issues that the lease should address, including (1) whether the tenant is entitled to rent abatement pending restoration, and if so, whether additional rent (pro rata share of CAM charges) is abated in addition to base rent; (2) whether the tenant will have additional time after the landlord restores the leased premises to complete tenant improvements and stock inventory before rent re-commences; and (3) whether the tenant should have a right to terminate the lease if the damage is near the end of the term or if the landlord has not restored the premises within a specified period of time. Related to these issues are the insurance provisions of the lease, which should be drafted to work in concert with the damage and destruction provisions, so that adequate insurance proceeds are available to the landlord to restore the property and to the tenant to restore the tenant’s property.

While events such as Hurricane Sandy are infrequent, parties to a lease should not wait until such an event occurs to review the damage and destruction provisions of their lease.

Bob Weaver and Adam Kelly of Garvey Schubert Barer recently obtained summary judgment in favor of Old Navy, LLC in the Oregon federal court enforcing the plain and unambiguous terms of the Co-Tenancy requirements of Old Navy’s retail lease. Notably, the Court held that that the Co-Tenancy requirements are conditions that must be satisfied in order to require Old Navy to operate at the mall and pay full rent. The Court also held that Old Navy’s contractual right to pay reduced rent during the period of a “Co-Tenancy Failure” is (1) not a liquidated damages provision as a matter of Oregon law, and (2) required a refund to Old Navy of the more than $550,000 in excess rent mistakenly paid during the Co-Tenancy Failure as a result of the landlord’s failure to provide notice of the Co-Tenancy Failure.

The Co-Tenancy requirements of Old Navy’s lease provide that if three of four identified retailers (“Key Stores”) are not operating their businesses at the shopping center (termed a “Co-Tenancy Failure”), Old Navy is entitled to pay “Alternate Rent” during the Co-Tenancy Failure period. The lease also provides for an express process by which the landlord can substitute a retailer for a departing Key Store for purposes of satisfying the Co-Tenancy requirements. That process requires the landlord to obtain Old Navy’s prior approval of the proposed substitute retailer. Landlord is only required to comply with the substitution process if it wants the substitute retailer to satisfy the Co-Tenancy requirements. (more…)

A recent New York case illustrates the importance of having a carefully drafted co-tenancy clause in a commercial lease. In Staples the Office Superstore East, Inc. v. Flushing Town Center III, L.P., a shopping center Landlord had entered into a Lease with Staples, the large office supply store, for Staples to open a new store. The Lease included a co-tenancy provision that granted Staples certain rights and remedies, including the right to terminate the Lease, in the event certain co-tenancy requirements were not met. One of those requirements was that “Home Depot (or a national retailer having not less than 100 stores and occupying not less than 100,000 square feet)” be open for business in a specified area of the shopping center. The Landlord subsequently leased the specified area to BJ’s Wholesale Club instead of Home Depot. Staples claimed this was a violation of the co-tenancy provision, triggering the termination rights that Staples had negotiated into the Lease. After the parties exchanged several threatening letters over the dispute without resolution, Staples filed suit seeking a declaratory judgment that the co-tenancy requirement was not satisfied by the Landlord and that therefore Staples could terminate the Lease. (more…)