Rejecting a Prospective Subtenant

Q: I believe a prospective subtenant won’t fit into the tenant mix of my shopping center. Is it okay to deny the tenant’s sublet request?

A: Protecting the tenant mix is a legitimate reason for denying a sublet request. A proper tenant mix is important for a center’s traffic and sales. Ideally, a center wants to provide products that shoppers want, avoid too much competition in one retail area, and create the right blend of tenants to attract the widest audience.

The suitability of a proposed subtenant is important to your decision on a sublet request. You would have solid legal grounds to deny a sublet request if the proposed subtenant would create undue competition at the center, would be ill-suited to the center’s image, or would attract a different type of shopper.

Several courts have upheld an owner’s right to deny sublets that would adversely affect a center’s tenant mix. For example, an Arkansas court ruled that a center had reasonable grounds for refusing to let a bank sublet its drive-in facility to a savings-and-loan association. The savings and loan already had a location inside the center. Giving the savings and loan a second location would upset the tenant mix, would attract different customers than would a bank, and would reduce traffic within the mall because now shoppers could use the savings-and-loan’s drive-in window instead of entering the center, the court said [Warmack v. Merchants National Bank of Fort Smith, 1981].

In another case, a North Carolina appeals court ruled that an owner’s rejection of a restaurant tenant’s request to sublet to an electronics store was reasonable. The court found that the owner’s preference for a restaurant at that space was reasonable based on the demographics of the neighborhood and the tenant mix of the center. Also, the tenant’s space was built for use as a restaurant at a cost higher than the cost of building a comparable space for general merchandising purposes. And a non-restaurant tenant could not be expected to yield as great a return on the owner’s investment as could a restaurant tenant. The court said that it was reasonable for the owner to now expect a certain return on its capital investment [Jones v. Andy Griffith Productions, Inc., 1978].

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