Seyfarth Secures Victory for Retail Tenant Regarding the Interplay Between Co-Tenancy and Force Majeure Clauses

Co-tenancy clauses and force majeure provisions are commonplace in commercial retail center leases.  Co-Tenancy clauses afford rent relief where another key tenant in the retail center ceases operating. They typically provide that a tenant is not obligated to pay the full amount of base rent but rather some form of alternative amount of rent (e.g., at a reduced rate or based on a percentage of actual sales) when anchor tenants or a percentage of key tenants or a minimum of gross leasable area in a shopping center are not open and operating. The rationale is that anchor tenants drive foot-traffic to the center that benefits all tenants so that when anchor tenants are not operating, then a corresponding reduction in rent is appropriate. Force majeure (which is French meaning “superior force”) events are those acts, circumstances, or events that are beyond the reasonable control of the parties, such as a natural disaster, act of war or terrorism, riot, governmental action, public health crises, etc. A typical force majeure provision will excuse a party’s performance of its obligations under the lease during the period of interruption. Oftentimes force majeure provisions contain exceptions, such as monetary obligations under the lease, meaning that those obligations are not excused. 

Frequently, a key issue for determining whether a co-tenancy failure has occurred under a lease, affording the tenant rent relief, is assessing the interplay between it and the force majeure provision. That was certainly the case during the height of landlord-tenant disputes during the COVID-19 pandemic, where government shut-down orders throughout the country forced stores to close and thereby triggered co-tenancy failures in many commercial leases.

Seyfarth obtained summary judgment on behalf of Michaels Stores, Inc. in such a case regarding the intersection of co-tenancy clauses and force majeure provisions. Arciterra Olathe Pointe Olathe KS LLC v. Michaels Stores, Inc. (Sept. 21, 2021 Kan. Dist. Ct.) 2021 WL 4290526. The trial court ruled that the confirmed co-tenancy failure was not affected by the application of the lease’s force majeure provision, thereby excusing Michaels’ obligation of paying full base rent under the lease during the period of government shut-down orders. Earlier this year, the trial court’s ruling became a final judgment following Michaels’ successful petition for an award of its attorneys’ fees pursuant to the parties’ lease.

Briefly, the landlord in Arciterra attempted to default Michaels and terminate the lease due to Michaels’ nonpayment of base rent for the period of April and May, 2020 during government shutdown orders. The landlord sought to terminate the entire lease and to evict Michaels, in addition to recovering unpaid base rent and holdover rent that the landlord contended was due when Michaels refused to vacate the premises. Michaels filed an affirmative defense and a counterclaim seeking declaratory relief on the ground that there existed a co-tenancy failure under the lease, so that landlord was not entitled to the relief sought. Specifically, the co-tenants identified in the lease’s co-tenancy clause were likewise shutdown during this period, resulting in a co-tenancy failure. Michaels argued that, therefore, the landlord’s default and termination notices were overstated and defective as a matter of law because Michaels did not owe the full amount of base rent sought. The parties each moved for summary judgment, with the landlord arguing Michaels was obligated to be opening and operating in order to avail itself of the co-tenancy failure and the lease’s force majeure provision contained a monetary carve-out, such that Michael’s obligation to pay full base rent was not excused. The court entered summary judgment in favor of Michaels on both motions. 

In its reaching its decision, the court noted that landlord was in control of information and facts and should have known that the co-tenancy requirement was not met and improperly demanded payment of full base rent instead of alternative rent. The court rejected the landlord’s principal argument that Michaels could not avail itself of the co-tenancy failure because it too was shut down: 

Part of the difficulty the Court has with [the landlord’s] argument is that nowhere in the Co-Tenancy provision does it state any condition for the obligation to pay [reduced rent]. It does not say that the tenant first must be open and operating. In fact, it makes sense that if the same economic conditions (or shutdown) cause the anchors to close, that those same conditions might also require the tenant (relying on anchor foot traffic) to also close.

Arciterra, 2021 WL 4290526, at *9.  The court further concluded that the “Co-tenancy provision bears no relation to the force majeure provision. Neither provision, in fact, references the other.”  Id. at *11.

As is evident, co-tenancy clauses provide tenants in shopping centers with valuable lease rights. As with all lease rights and obligations, however, co-tenancy clauses are heavily negotiated between the parties.  Landlords can protect themselves by negotiating for various conditions precedent to the triggering of a co-tenancy failure and the relief permitted. Some of the more typical conditions include:  (i) a co-tenancy threshold (e.g., that specific anchors or a certain minimum percentage threshold of key tenants or gross leasable space are shut down); (ii) a cure period (e.g., the co-tenancy failure continues for a minimum period of time before the tenant is entitled to rent relief, during which period a landlord is permitted to find a replacement anchor tenant); and (iii) reduced relief (e.g., the specific rent relief to which the tenant is entitled).