Clearly Defining Replacement Tenant in Cotenancy Clause

Q: A prospective tenant for my shopping center wants its cotenancy clause to provide that a specific well-known retailer that takes up a large space in the center must be replaced with a “major tenant” if the retailer goes out of business. I assume this means a tenant that’s large enough to fill the entire square footage of the vacant space. I’ve been focusing on some other hotly contested issues during negotiations. Should I be concerned about this term?

A: Yes, it’s crucial to avoid ambiguity in cotenancy clauses. Very often, a tenant will demand that vacant space at a center must be filled with a tenant that’s not necessarily “identical” to the outgoing tenant, but has specific similar characteristics. If you don’t clearly define what those characteristics are, the tenant could argue that a replacement tenant you’ve found isn’t “similar” enough to the last tenant to qualify as an acceptable replacement.

You might envision a “major” tenant to be one that’s large in size in terms of required square footage. But your tenant might actually mean that the tenant is a national tenant, not a local or regional but large tenant. An undefined term in a cotenancy clause could lead to a dispute that allows the tenant to pay reduced rent, or ends up in court. That was the case for a North Carolina shopping center owner who wasn’t specific enough about the characteristics of a replacement tenant. 

Differing Interpretations Require Trial

In that case, a tenant’s shopping center lease contained a cotenancy clause that provided for a change from paying minimum rent to 4 percent of its gross sales in the event that a specific clothing retailer in the center left and wasn’t replaced by a “similar major tenant.” The term “similar major tenant” wasn’t defined in the lease. The retailer moved out of its space, and was replaced by a Christian bookstore.

The tenant didn’t assert its cotenancy rights until several years later, when it argued that it was entitled to a reimbursement for its overpayment of rent for the time period during which the retailer wasn’t replaced by a so-called similar major tenant. The owner disagreed. It argued that the Christian bookstore that had replaced the retailer fulfilled the cotenancy requirement. The tenant and owner each asked a trial court for a judgment in its favor without a trial, but the court determined that because the term “similar major tenant” was ambiguous, a trial was needed.

The court acknowledged that the bookstore was not identical to the retailer, which was a national women’s fashion store. But it noted that the lease didn’t specify the criteria for a replacement tenant, and the owner’s interpretation of the provision as meaning a retailer (satisfying the “similar” portion) with a significant market presence to drive customers to the center (satisfying the “major” portion of the definition) wasn’t necessarily wrong. “The phrase ‘similar type and size business’ is obviously susceptible to honest differences in interpretation, and is indistinct and uncertain as to its application,” the court said. While it is clear that “similar” means something less than identical, there is no guidance provided in the lease concerning how “similar” another business must be to qualify as an acceptable replacement for a named major anchor tenant that vacates the shopping center,” it added.

The court pointed out that, likewise, the lease is unclear regarding the intended qualifying characteristics that must be used to judge the required similarity. For instance, does a “similar type” business refer to the types of goods offered for sale and, if so, how “similar” must they be? Also, does “similar size business” refer to the square footage occupied by the replacement business, or does it refer to the amount of its sales?

When lease terms are not clear, courts are hesitant to insert their own definitions when the provision is reasonably susceptible to both parties’ interpretation, the court said. Accordingly, it couldn’t conclude that the cotenancy provision was not satisfied during the time period the bookstore occupied the former retailer’s space [Shoe Show, Inc. v. One-Gateway Associates, LLC, September 2015].