Going Dark Aggressively
Patrick A. Randolph, Jr.
Professor of Law, UMKC School of Law
Of Counsel: Lewis, Rice and Fingersh, Kansas City, Missouri
A shopping center has a successful anchor department store tenant - so successful that it is being courted by developers of a proposed new center nearby. The tenant is not happy where it is, but it has a long term percentage lease. The tenant suspects that if it should relocate to a competing location, the very fact of its own competition will doom the present center. If the landlord will be unable to find a substitute anchor tenant to compete with the established goodwill that the old tenant has created, the other, smaller tenants will fail or vacate, and the center itself will become dark. Even though the anchor tenant’s lease contains no express continuous operation duty, would the old center’s owner have remedies against the anchor to prevent it from competing with its own leased space from a nearby location?
As an alternative scenario, consider an anchor grocery store tenant that is unhappy at its present location. A new center is being built nearby, and if a competitor moves into that center, the competition for the grocery shopper’s dollar will be intense, even ruinous. But if the grocery store vacates its present space, a competitor might move into it as well, and create the same difficult competitive environment. The grocery tenant decides that it will move to the new center and either leave the old location dark or rent it to an inoffensive, non-competing use - such as a specialty grocer or a liquor outlet. Perhaps the tenant even intends to enforce the old landlord’s non-competition promise to restrict grocery uses in other parts of the old center. This is real “hardball,” but there is nothing in the lease to prevent it. Can the grocery tenant get away with its scheme?
This article will consider shopping center anchor tenants who relocate their operations and compete with their original space. Do such tenants have any duty to continue to operate as an anchor in the old location to minimize the impact? Do they at least have the duty to cooperate in subletting or assigning their old space to equivalent replacement tenants? What about where the relocating tenant aggressively tries to preserve an economic advantage by “freezing” the old space - renewing the lease but keeping the premises dark or under used in order to prevent a competitor from taking over? Have courts viewed such activities as predatory, or as just plain old American competitive business ethics?
This article is not about construing express continuous operation clauses. There is a significant question as to whether courts will issue injunctions to enforce such clauses to preserve the anchor tenant. About three quarters of the appellate cases answer “no,” and for reasons generally unrelated to the particular equities of the case. The primary reason is that continuous judicial supervision would be necessary to determine what constitutes adequate “operation” in compliance with such covenants.
But even where there is no express covenant, and where no injunction is sought, landlords frequently sue tenants for damages when they vacate an anchor location. The threat of such damage claims might keep some tenants from pursuing the “going dark” alternative. Are such threats real?
I. The Economic Interdependence Rationale:
I.A. Cases Establishing the Theory:
Most of the appellate cases involving implied continuous operation duties in shopping centers focus on the tenant’s implicit responsibility to generate percentage rents. This may be because the established case law provides clearer guidelines for landlords wishing to make a case for a continuous operation duty when the tenant has agreed to pay percentage rent.
Where anchor tenants are involved, however, landlords are likely to be as concerned about the economic impact of the tenant’s leaving the premises as they are about the loss of percentage rent. They argue that the various elements of the shopping center are economically dependent upon one another, that the tenant knew this moving in, and that the tenant agreed implicitly to support the balance of the center by functioning as an anchor. Landlords would like to argue that this is an independent basis for the existence of an implied covenant of continuous operation. Not only is this “economic interdependence” argument often the most honest explanation of the landlord’s real concern and real injury, but also it would expand the number of cases in which the landlord might succeed in leveraging the tenant to remain. Some anchor tenants do not pay fixed rent at all, and some that have percentage rent clauses are not generating rent beyond the stipulated minimum - in fact this often is a primary reason that the tenant wants to relocate. Further, if a landlord could argue that the tenant had agreed to support the “economic interdependence” of the center, the landlord could claim damages for injury to the center, not just for lost percentage rent.
Probably the leading case for the application of the economic interdependence argument involved a tenant who had “gone dark aggressively.” Ingannamorte v. Kings Super Markets, Inc., 260 A.2d 841 (N.J. 1970), involved a grocery store anchor tenant who had relocated to a nearby location and left the old location dark. When the tenant then proceeded to attempt to exercise a renewal option in the old lease, the landlord went to court to terminate the lease so that it could relet to someone else. The lease was for a fixed rental, and had no continuous operation clause. The court nevertheless interpreted the “use clause,” which stated that the premises would be used “only” for a grocery operation, as, in context, an agreement that the tenant would not keep the store dark. It found the tenant in breach of this clause and permitted the landlord to terminate.
The interpretation of the use clause in this manner is inconsistent with the run of cases interpreting such clauses, which almost uniformly view them as barring changes in use, but not requiring continuous operation. But the real thrust of the case in any event was that an implicit duty arose out of the tenant’s understanding and acceptance of its role in the “mutual support” that landlords and tenants provide to one another and to other tenants in a shopping center. The lease, for instance, had a non-compete clause restricting the landlord from leasing any other space to a grocery store. Thus, the center had “nurtured” the tenant and permitted it to establish a market base in the expectation that its economic strength would in turn benefit the balance of the center.
Some more recent decisions have applied Ingannamorte’s “economic interdependence” rationale in the context of tenants who relocate to nearby locations. Perhaps the most notorious example is Hornwood v. Smith's Food King No. 1, 772 P.2d 1284 (Nev. 1989), where the court not only “bought” the argument in a case where a grocery store tenant relocated and sublet its old space to a lower volume user, but agreed to a measure of damages based upon the depreciation in the overall value of the center resulting from the tenant’s actions (including, presumably, its effectiveness in drawing tenants to its new location and away from the old center). The estimated damages discussed by the court exceeded a million dollars.
The Hornwood decision is dramatic, but contains little theoretical discussion of the basis for its decision. It states that it relies upon First American Bank & Trust v. Safeway Stores, Inc., 729 P.2d 938 (Ariz. Ct. App. 1986), where the tenant, relying upon an express absolute right to assign and sublet set forth in the lease, relet to a lower volume tenant. The court found an implied right to continuously operate or to transfer the space to a tenant of the same character. The court mixed its theories, stressing both the economic interdependence argument and the percentage rent features of the lease. The lease also had a landlord’s “no compete” clause protecting the space, which was a factor in the court’s decision.
A case that is more explicit about the basis for its holding for the landlord is Columbia East Assoc v. Bi-Lo, 386 SE2d 259 (S.C. App. 1989), where the anchor grocery tenant relocated virtually next door and refused landlord's request to relet its old space to a competitor, leaving the space dark for a substantial period before it looked for sublet tenants at all. Although the tenant again paid a fixed rent and had a free right to assign or sublet, the court, relying upon arguments of “economic interdependence” to impose a duty of “good faith and fair dealing” upon the tenant to sublet the space to an appropriate tenant. The damages award of $400,000 was not explained in the appellate decision, but presumably was based upon landlord’s lost revenues or value from other space in the center.
Veteran shopping center lawyers may scratch their heads about the above cases. They know that the parties to these leases understand that continuous operation is always “on the table” in shopping center leases, and it is rarely an accident when the parties fail to include it in the lease. This is particularly true where the lease expressly provides for free subletting and assignment (although, of course, such rights are assumed to exist if not addressed in the lease.) Consequently, it is difficult to conclude that parties implicitly intended continuous operation duties to exist when they did not so expressly provide. Perhaps in the rare case of a non-existent or inordinately low minimum rental clause in a percentage lease, some lawyers would concede that the parties necessarily intended that there be some level of operation. But anyone in the business is aware that tenants regularly come and go, moved by the dictates of the marketplace, and landlords who expect tenants to stay ought to pay for that expectation by bargaining for it in the lease.
But once “good faith and fair dealing” raises its head in these cases, lease language often seems to go out the window. The best example of this principle is Olympus Hills Center, Lt.d v. Smith's Food, 889 P.2d 445 (Utah. App. 1994), where there the lease contained an express continuous use clause but coupled it with a provision that said that the tenant could operate “any lawful retail business.” The tenant relocated its full service grocery operation and sublet to a “discount box” outlet, allegedly with the view to driving full service customers to patronize its new location. The court held that the tenant breached its duty of good faith and fair dealing in its selection of substitute tenants. The court further held that a four month shutdown while the old tenant moved out and the discount box operation moved in was also a breach of the tenant’s good faith and fair dealing responsibility. Such applications of the implied duty of good faith and fair dealing are in fact distortions of the real meaning of the doctrine - which is to “flesh out” the transaction as the parties truly intended it. The doctrine of good faith and fair dealing should be used for no more than to apply the parties express intent in ways that are consistent with the overall framework of their deal. Where the parties express intent is that the tenant can operate “any lawful retail business,” then it is difficult to understand how they could have intended implicitly that such businesses ought to generate the same traffic as the original tenant, particularly in light of the understandings of the marketplace that landlords usually are expected to bargain for the use commitments they obtain. Olympus Hills gave the landlord more than it bargained for.
Other cases implementing Ingannamorte principles in relocation situations include Fodor v. First National Supermarkets, Inc., 589 N.E.2d 17 (Ohio 1992) (trial court found duty, but appeals court reverses on basis of remedy - no appeals decision on duty itself); Worcester-Tatnuck Square CVS, Inc. v. Kaplan. 601 N.E. 2d 485 (Mass. App. 1992), (much clearer use covenant than most cases, but rejects notion that there is any express covenant of continuous operation, and instead imposes implied covenant based upon both percentage rent and economic interdependence theories - a rare case granting an injunction to enforce the implied covenant, even where tenant had vacated already); Forehand v. Perlis Realty Company, 400 S.E.2d 644 (Ga. App. 1990) (Tenant denied summary judgment - may not be good law after Piggly Wiggly v. Heard, discussed below); Slidell Investment Co. v. City Products Corp., 202 So.2d 323 (La. Ct. App. 1967) (emphasis on fact that relocated tenant continued to benefit from landlord’s “no compete clause”); Tabet v. Sprouse-Reitz Co., 409 P.2d 497 (N.M. 1966) (both parties to a percentage lease have “extreme duty of good faith,” therefore when landlord leased nearby space to a competitor, tenant excused from implied duty to continue to operate.)
I.b. Cases Rejecting Economic Interdependence:
Wishful thinking landlord’s lawyers might view the above listing of cases as a “trend” favoring broad protection of the landlord’s position when tenants relocate. In fact, the opposite is the case. Ingannamorte has not enjoyed ready acceptance in most of the appellate court decisions that have considered it and the theory that it spawned. The bulk of the appellate cases acknowledge the reality that parties to shopping center lease negotiations are sophisticated, knowledgeable people who know what they want and how to express their desires in formal language.
Although it might seem extreme to permit tenants to leave old space dark to “freeze out” competition, the fact is that they bought that right when they signed a long term commitment to pay rent for the space. If the landlord wanted more than rent - if it in fact wanted the tenant’s continued operations on the premises, then certainly existing recognized practices existed to implement such a requirement in the lease. Probably the landlord would have received less rent, or even a less attractive tenant, if the landlord had bargained hard for continuous operation in the first instance. But if the landlord instead opted to make a deal with the more desirable tenant on terms that otherwise were more suitable to the landlord, then most courts conclude the landlord made a choice to expose its center to a “dark anchor” if economic conditions later so warranted.
In short, the majority rule appears to be that shopping center tenants and landlords are only as economically interdependent as their lease language demonstrates.
Typical of the majority cases is the recent decision in Plaza Assoc. v. Unified Development, Inc., 524 N.W. 2d 795 (Minn. App. 1995). A long term percentage drug store tenant in a shopping center moved across the street after 40 years in the same location. The landlord argued that there was an implied continuous operation covenant both because of the percentage rent provisions and because of the interrelationship of the tenant to the rest of the center.
The court rejected both arguments. It pointed out that the landlord recently had required another tenant in the center to execute a continuous operation provision in its lease. The landlord clearly know how to ask for such provisions when it really was expecting that the tenant would be so bound. The court also stressed the fact that the tenant had been left with free assignment and subletting privileges. As to the Ingannamorte reasoning, the court rejects it as inconsistent with appropriate expectations that parties make clear bargains and live with their results:
“. . . economic interdependence in cases of large tenants in shopping malls inevitably exists . . . Parties entering into such leases are well aware of this interdependence and capable of specifically expressing their desires on the subject so that it can be fully considered by both parties.” (524 N.W.2d at 730)
A recent Massachusetts case also focuses on the precept, well known to all real estate attorneys, that the real estate business is “hardball.” Parties ought to look out for their own interests in drafting the terms of their business agreements, and should not expect their business counterparts to take actions that are not in the counterpart’s economic best interests. In Worcester-Tatnuck Square CVS, Inc. v. Kaplan. 601 N.E. 2d 485 (Mass. App. 1992), a mall grocery store tenant had a percentage lease that was performing above the minimum. Tenant signed a lease in a nearby mall, and attempted to negotiate a “buy out” with the old landlord. These negotiations failed, so the tenant moved out anyway, paying minimum rent and leaving the premises dark in order to repress competition. The court held that there was no implied duty to operate the store and that the tenant had not been guilty of “deceptive conduct” when it did not disclose during “buy out” negotiations the fact that it already had committed to move. On the other hand, the court also held that the landlord, which retained approval over sublets, had no implied duty to approve tenant’s proposal to sublet of the space to a pizza parlor which would have generated insignificant percentage rent.
There have been several strong tenant’s cases decided by the highest state appeals courts, in some cases reversing implications of lower court decisions favoring the landlord. The Wisconsin Supreme Court delivered a particularly strong statement that parties should live with their leases in Sampson Investments v. Jondex Corp., 499 N.W.2d 177 (Wisc. 1993), where the tenant relocated two blocks away from its old location and left the old location dark despite landlord exhortations to relet it. The lease had a restrictive use clause and a landlord’s no-compete clause, “handles” used by courts in the pro-tenant cases to imply a duty of continuous operation. The court commented: “[W]e adhere to the rule that a commercial lessee is not required to continue operating a business in the absence of a lease provision which expressly requires continuous operation.” (499 N.W.2d at 181)
Sampson expressly overruled an earlier court of appeals decision, Century Shopping Center Fund v. Crivello, 456 N.W.2d 858 (Wisc. Ct. App. 1990), which had found a breach of an implied continuous operation duty when the tenant moved across the street and left the old space “in a disheveled and unattractive condition.”
Another important state supreme court decision is Piggly Wiggly Southern, Inc. v. Heard, 405 S.E.2d 478 (Ga. 1991), where a grocery store anchor tenant renewed its lease and one month after the renewal closed its store and moved operations to a nearby shopping center that it owned. Tenant refused to sublet to preferred replacement grocery store tenants. Held: Tenant violated no express or implied duty. The dissent argued that the court should have imposed an implied duty of good faith and fair dealing here, but the majority opinion focused on the ability of the parties to make their own deal. Here, in fact, the tenant had drafted the lease - a fact that the majority found to be insignificant. Piggly Wiggly implicitly rejects a more pro-tenant decision in Fifth Avenue Shopping center, Inc. v. Grand Union Company, 491 F.S. 77 (N.D. Ga. 1980) (remanding for determination of whether percentage rent is “substantial” - in Piggly Wiggly the question was whether the minimum rent was substantial).
For other state supreme court decisions holding for the tenant in relocation cases, see: Frederick Business Properties Co. v. Peoples Drug Stores, Inc., 445 S.E.2d 176 (W. Va. 1994) (strong percentage rentals and landlord “no compete” clause, Tenant relocated and stayed dark for two years, but did not renew; court emphasizes “merger” clause in refusing to imply any new covenants); Great Atlantic & Pacific Tea Company v. Lackey, 397 So.2d 1100 (Miss. 1981) (relocation case - tenant moved one mile away - but not clear whether a shopping center or free standing store.) Brown v. Safeway Stores, Incorporated, 617 P.2d 704 (Wash. 1980) (court finds no breach of good faith and fair dealing duty, but appears to assume that one exists. Anchor general service grocery tenant relocated nearby and sublet to specialty grocer, but tenant first had sought expansion space from landlord at present location and gave landlord advance notice and cooperated with subletting) Fuller Market Basket, Inc. v. Gillingham & Jones, Inc., 539 P.2d 868 (Wash. 1975). Tenant argued that it had economic interdependence with landlord, which also operated store in landlord’s mall. Landlord relocated its own store to a new mall it built nearby, and ultimately closed store where tenant was located. Court finds no duty where no covenant). Kroger v. Chemical Securities Co., 526 SW.2d 468 (Tenn. 1975) (other tenants had leases specifically dependent upon the anchor tenant. Anchor tenant renegotiated lease and got concessions by threatening to move out. Later, anchor tenant relocated and sublet to shoe store with anti-compete provisions protecting anchor in its new location several miles away. Lower court had found breach of good faith and fair dealing covenant - court reverses. Evidence that parties had considered and rejected a specific continuous operation covenant). Stop & Shop, Inc. v. Ganem, 200 N.E.2d 248 (Mass. 1964) (Free standing store. Tenant opened competing stores nearby store in question, thereby arguably reducing percentage rents. Court found no breach of good faith and fair dealing duty, but suggested that there might be if tenant had opened store directly adjacent to this one.)
In perhaps the unkindest cut of all, a subsequent New Jersey court significantly limited the reach of the Ingannamorte reasoning in a clear case of “going dark aggressively.” Monmouth Real Estate v. Manville, 482 A.2d 186 (NJ Super 1984) involved a long term grocery store lease in a shopping center. There was a landlord’s non-compete clause, and a requirement that the tenant would not leave the premises “unoccupied for more than ninety days,” but the tenant’s use clause provided that the tenant would operate a grocery store or “any other lawful business.” The tenant suffered from a problem in traffic patterns in the area, and assigned to a new tenant, which owned a competing grocery store one-half mile away. The new tenant promptly sublet to an unclaimed salvage store.
The court held that Ingannomorte should be viewed as a case interpreting a use covenant, and that it should not apply here because the use covenant was more broadly worded. As to the claim that the new tenant operated in bad faith in restricting competition by tying up the store space, the court held that the purchase of a competitor’s business in order to shut it down is a “legitimate business practice” and is not actionable unless amounting to a restraint of trade. To show an unreasonable restraint of trade, the landlord would be required to produce data to identify relevant market and the impact of tenant’s actions. Landlord did not do so here.
II. A New Good Faith and Fair Dealing Duty:
Dicta in a very recent California case may suggest a new approach for landlords in those extreme cases where tenants renew leases on dark space. In Westside Center Assoc. v. Safeway Stores 23, Inc., 49 Cal. Rptr. 2d 793 (Cal. App. 1996), the tenant was an anchor grocery store in a shopping center. During the life of the center, the landlord had divided ownership of the grocery store premises from the rest of the center. At the time the instant controversy arose, a developer owned the balance of the center property, but a separate trust owned the reversion of the grocery store premises.
In the last year of the grocery store’s twenty year lease, the tenant vacated the premises but continued to pay base rent. Near the very end of the term, the tenant removed all its fixtures from the premises, which tenant had a legal right to do under the lease. Shortly thereafter, however, tenant exercised the first of four five year renewal options, although it continued to little to make use of the premises. In this case, the tenant had not relocated its business nearby, but the developer (owner of the rest of the center property) alleged that the tenant’s objective in removing the fixtures and in renewing the lease was to depreciate the overall value of the property in the center, all as part of a conspiracy whereby tenant and other associates would buy up the balance of the property in the center at a bargain price. The trust, landlord for the grocery store, did not join in the suit as a plaintiff, and the developer sued the trust for failure to compel the tenant to operate continuously.
The court held that the neither the trust nor the tenant had any duty to the developer, and upheld a nonsuit. In doing so, however, the court, in dicta made several comments about the tenant’s duties to its landlord, the trust. It indicated that the tenant had no express of implied continuous operation duty, based in part on a recent California statute negating the existence of implied use covenants. It also indicated that the tenant had no duty of good faith and fair dealing concerning the removal of the fixtures. Somewhat inconsistently, however, the court indicated that the tenant likely did have a duty of good faith and fair dealing in its actions concerning renewal of the lease. As this duty ran only to the landlord, and the landlord was not a plaintiff in the case, the court did not explore the nature of this duty; but the case provides a new basis for argument regarding tenants who renew “dead space” when they know that such action will result in serious injury to landlord.
It is difficult to now how far courts will carry the notion of good faith and fair dealing duties concerning renewal. The question, perhaps, devolves to the same basic issue the courts address in the other cases cited above: Should we assume that the parties have bargained with knowledge of the fact that the tenant may elect to “go dark” for its own economic interests? If we answer “yes” to this question, then it is likely the tenant should be able to pursue these same interests through a renewal period. If the answer is “no,” then the renewal option may be a convenient “hook” on which the court can hang an implied duty of good faith and fair dealing, since it represents the exercise of an express contract choice, and many courts prefer to apply the good faith and fair dealing duty primarily to the exercise of such choices.
III. Antitrust Considerations:
The Monmouth case, although coming down for the landlord, does raise the specter of an antitrust action where a tenant is very aggressive in suppressing competition through its leasing practices. Of course, it would be difficult to make out a strong monopolization argument in most of the markets in which shopping center closures occur. Competition generally is strong and varied, and legitimate economic factors usually justify tenant decisions. But even if a landlord could demonstrate that the tenant had taken actions that truly were in violation of the antitrust laws, a recent Seventh Circuit decision demonstrates that the landlord still has significant problems to face.
Serfecz v. Jewel Food Stores, 67 F.3d 591 (7th Cir. 1995) involved a grocery store anchor tenant with a use clause very similar to that involved in Ingannamorte (“only for a grocery store”). The tenant moved across the street to a competing center and exercised its renewal option on the old space, while leaving it dark while continuing to pay rent. It offered to sublet to a skating rink operator, but the developer of the old center rejected this proposal because it needed a true “anchor” to create traffic and because the rink would have created higher insurance costs.
Allegedly as a consequence of the vacant anchor space, the developer at the old center failed. The operator brought a breach of contract action and also a claim for breach of antitrust laws both by the tenant alone and by the tenant in a conspiracy with the operator of the new center.
The court rejected the contract claim virtually without comment. It held that there was no express covenant requiring continuous operation, and no basis therefore to conclude that such a duty existed.
On the antitrust claim, the court didn’t even let the landlord “get to the plate.” It acknowledged that the trial court had concluded that there was sufficient evidence for a jury to find that the tenant continued to hold on to the old space for the purpose of restraining trade, and that the landlord was injured by the tenant's action. It even acknowledged that the tenant’s conduct might have been unlawful. But the court held that the landlord's injuries alone do not confer standing.
The landlord must show that it suffered an "antitrust injury." In the context of monopolization of the retail shopping center industry, appropriate plaintiffs would be competing grocery stores and customers suffering higher prices. The trial court expressed regret that it had to follow precedent to make this finding, since it doubted that either of the appropriate plaintiff classes were actually likely to sue. But it denied standing, and the Court of Appeals affirmed. A dissenter on the Seventh Circuit panel viewed the fact that there are no other good antitrust plaintiffs and the fact that the defendant was an anchor tenant as sufficient grounds to view the landlord as having standing.
On the conspiracy claim, as to which the landlord did have standing, the court held that the landlord showed no actual plotting on the part of the tenant and its new landlord, but demonstrated a pattern of the tenant moving into new centers established by the landlord and deserting old locations, which then failed. Mere coincidence, said the court. The tenant had a sound economic basis for making the move to the new center (it was able to couple its grocery operation with a retail drugstore ‑ something it could not do in the old center because of anti‑compete clause protecting another drugstore tenant.) Under the circumstances, one cannot infer conspiracy, and there was not enough to permit the jury to even try.
It should be noted that the trial court reserved one additional issue that mayeventually turn the tides on the landlord. The landlord alleged that the tenant's activities violated the "unlawful use" prohibition of the lease. Note that the court here was prepared to send to the jury the question of whether the actions of the tenant were unlawful, but it was not willing to let the landlord have standing. But clearly the landlord does have standing if the tenant's actions are deemed to be an "unlawful use." Consequently, if, in a later case, a customer or competing grocer did establish that the tenant’s activities were unlawful, then the trial court here might have permitted the landlord to use such conclusion as a basis for seeking damages under the “unlawful use” clause. Although the author believes that the unlawful use clause should not be applied in this way, the court’s opinion here does not raise much of a spectre that the issue is likely to arise often.
There are a number of other lower appeals court cases confirming the majority view described above. Courts are content to treat landlords and tenants as sophisticated players in a game of “commercial hardball.” Aggressive behavior that is designed to benefit the economic interests of one party, and not designed solely to do injury to its contract counterpart, is to be expected. If landlords abhor darkness and prefer light, let them put it in the lease!!