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War of words: The dangers in drafting co-tenancy clauses

Brad Dallet is a shareholder in the Milwaukee office of Whyte Hirschboeck Dudek.

Brad Dallet is a shareholder in the Milwaukee office of Whyte Hirschboeck Dudek.

With the resurgence of the retail real estate market, national retailers are more active than ever.

From mid-box “junior anchors” to smaller specialty shops, national retail operations appear to be 
in an expansion mode. However, while all this seems to be positive for the retail developer, a hidden danger lies around the retail corner.

National retailers are frequently flexing their national muscle, insisting on tenant-friendly co-tenancy clauses to ensure the centers they seek to join will be filled with other national concepts.

There are many facets to the drafting of a co-tenancy clause, but based on the recent case of Michaels Stores Inc. v. RPAI Lakewood LLC, No. 46071-8-II (Wash. App., March 10, 2015), careful attention must be paid to lease termination rights set forth in such clauses, specifically with the words chosen to ensure the true intent of the parties is clearly set forth in the four corners of the document.

In the Michaels case, the landlord and tenant disagreed as to whether the landlord had the right to terminate the lease under the co-tenancy clause. The co-tenancy clause stated: “if … non-satisfaction of the On-Going Co-Tenancy Requirement shall continue for a period of twelve (12) months … for so long as such non-satisfaction shall continue, … Tenant shall have the right to terminate this Lease by sixty (60) days’ written notice delivered to Landlord.” The clause goes on to say: “Landlord shall likewise have a right to terminate this Lease, at the end of the fourteen (14th) month … by giving sixty (60) days prior written notice to Tenant of the termination.”

The parties agreed that the On-Going Co-Tenancy Requirement failed and such failure continued for a full 12 months, but neither party terminated the lease. In fact, Michaels actually extended the lease term, and since the On-Going Co-Tenancy Requirement was still not being met, they continued to pay a reduced rent. Three-and-a-half years later, the landlord notified Michaels that it was terminating the lease pursuant to its termination rights under the co-tenancy clause.

Michaels filed an action in court arguing that the landlord only had the right to terminate the lease at the end of the 14th month, and since that did not happen, the landlord no longer had a termination right. Michaels argued that “at the end of the 14th month” does not mean “after the end of the 14th month.” The landlord argued that the phrase “likewise” used in its termination provision meant that the landlord, like the tenant, had an ongoing right to terminate.

The trial court disagreed, stating that the plain language in the lease “unambiguously granted the landlord a one-time option to terminate the lease” and that “the landlord did
 not timely exercise that right.”

The appellate court agreed, stating “the language of the contract is unambiguous and clearly shows that RPAI did not exercise its termination rights in a timely manner.”

The moral of the story: Choose your words carefully and be clear in your drafting and your intentions. If the clauses are unambiguous, and mean something other than what you thought, you risk a court holding your words against you.

Contact Brad Dallet at 414-978-5525 or email him at bdallet@whdlaw.com.

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