Be Aware of Obligations During Store Closure
If your lease gives you the right to stop operating under certain circumstances, don’t assume that you’ll also have the right to stop paying rent for the period during which you’re closed. A recent case highlights the importance of checking your lease to find out what your continuing obligations are during a period when you’re permitted to close.
There, a retail tenant’s lease for shopping center space gave it the right to stop operating for a “reduced occupancy period” if a major co-tenant left the center until it was replaced. While a reduced occupancy period was in effect, the tenant decided to change its retail concept and remodeled the store during the closure. The tenant claimed that the reduced occupancy clause when read together with a “disputed sums” clause in the lease permitted it to pay the lesser of minimum rent or 2 percent of gross sales for the previous month—whichever was lower—while a reduced occupancy period was in effect. It asserted that since there were no sales during the closure, it owed no rent.
The owner sent a notice of default to the tenant, asserting that the alternative of paying a percentage of gross sales was not available because the tenant had closed the store. The owner sued the tenant for unpaid rent. A trial court ruled in favor of the owner, stating that the tenant wasn’t permitted to forgo paying rent while the store was closed.
An Arizona court of appeals upheld the lower court’s decision. The owner argued that implicit in an option to pay a percentage of gross sales rather than minimum rent was a requirement that the tenant be open for business. It contended that the tenant’s interpretation of the two lease clauses taken together led to the absurd result that the tenant was permitted to occupy the premises indefinitely without paying rent. The appeals court agreed that this was unreasonable, and that the tenant was required to pay minimum rent during the disputed period. The appeals court noted that if the tenant were allowed to pay no rent during a reduced occupancy period, it would effectively allow it to tie up the property [Ross Dress for Less, Inc. v. Westfest, LLC, January 2014].
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