Re-Let it Be
by Ron Davis
Demands that a tenant make special concessions to continue leasing the premises it occupied for 12 years have backfired for an Illinois shopping center owner.
The shopping center is Danada Square in the Chicago suburban town of Wheaton, and the tenant, KFC National Management Company, had leased a stand-alone building there to operate a fast-food restaurant.
Prior to expiration of that lease, however, the two parties agreed to allow another tenant, a KFC franchisee, to assume the lease. Although no longer a party to that lease, KFC did remain a guarantor of the lease terms.
But five years later, the KFC franchisee declared bankruptcy and stopped paying rent. KFC and the center’s owner then negotiated a new leasing deal. KFC agreed to pay the rent due under the assumed lease, and the center’s owner consented to a new agreement to allow KFC to resume operations at the center.
But the new agreement came with special requirements. It allowed the center’s owner to repossess the KFC premises 60 days after giving notice of that intention. KFC balked at those terms. It pointed out that the lease of its successor tenant guaranteed that the terms of the original lease still applied.
The center’s owner disagreed and decided to relet the stand-alone building to another tenant. But the lease agreement between the center and the new tenant did not contain any 60-day vacate provision. Moreover, the rental rate of the new tenant was less than the rate previously paid by KFC.
The center’s owner then sued KFC, contending that KFC breached the lease and owed the center more than $300,000 for back rent, the cost to relet the premises, and the difference between the rental rate paid by KFC and the rate paid by the new tenant.
At trial, KFC argued that the center’s owner had insisted on “unreasonable terms” during lease negotiations. KFC explained that if allowed to lease the premises immediately on the same terms as those in the original agreement, the center’s owner would not have lost rent or other costs involved in reletting the premises. The center’s owner responded that it did not actually insist that KFC agree to the 60-day vacate provision. And, the owner added, KFC at one point was considering accepting that provision.
An Illinois court ruled in favor of KFC, explaining, “Since KFC was ready, willing and able to fulfill the lease and since Danada Square breached its duty to mitigate, then… there are no damages owing by KFC.” The center’s owner appealed that ruling.
An Illinois appellate court agreed with the lower court, stating, “Danada could reasonably have avoided all the damages accruing by entering into a lease with KFC that did not include the 60-day out. Cutting off Danada’s damages after that point is not a per se bar to recovery as Danada claims, but rather a reduction in damages that is supported by Illinois law.” (Danada Square, LLC v. KFC National Management Company, 2009 WL 1698763 [Ill.App. 2 Dist.])
Decision: June 2009
Published: July 2009