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Dark Anchor, Happy Rainbow
by Ron Davis

A strict interpretation of a lease has forced the owners of a Michigan shopping center to accept a reduced amount of rent from one of their tenants.

The shopping center, located in the Detroit area, had leased space to the tenant to operate a Rainbow USA store. That lease initially seemed to favor the center’s owners. But certain events soon changed all that.

At signing of the lease, the terms required Rainbow USA to pay rent in a variety of forms. First, the tenant had to pay percentage rent of 4 percent of gross sales. Then, the tenant agreed to pay a proportionate share of taxes and assessments. The lease defined a term “all rent” as “minimum rent, percentage rent, and all others sums of money or charges required to be paid by tenant under this lease….”

Still another section of the lease required the tenant to pay a pro-rated share for the “operation, use and maintenance of common areas, including the cost of insuring all property provided by landlord which may at any time comprise the shopping center.”

But the lease also included an “anchor tenancy clause.” That clause gave a concession if an anchor tenant of the shopping center or more than 15 percent of the remaining gross leasable area of the shopping center should “go dark” for more than 90 days. In such a case the Rainbow USA tenant could simply convert its total rental obligation to 4 percent of gross sales.

In fact, an anchor tenant later did close its store and move from the shopping center. So Rainbow USA exercised its option to convert its rental obligation to 4 percent of gross sales—and without the other rental obligations.

Within a short time, however, the center’s owners leased the anchor tenant space to another retailer. Then the owners notified Rainbow USA that its rent reverted to the former commitment.

Rainbow USA refused to pay the extra rent. A lawsuit resulted from the impasse. A Michigan court sided with Rainbow USA, finding that the rent did not convert to the original terms after the leasing to another anchor tenant.

On appeal of that ruling, a Michigan appellate court agreed with the lower-court finding, explaining, “Contrary to the [shopping center owners’] interpretation, the plain language of the lease does not provide for a subsequent conversion of the rental obligation, from 4 percent of gross sales back to the original rental obligation, upon the occurrence of another condition, such as occupancy in [the anchor tenant’s] leasable space. That interpretation would amount to a modification of clear and unambiguous language. Such a modification is not permitted by contract law.” (Rainbow USA, Inc. v. Seven Grand Associates, 2010 WL 23687 [Mich. App.])

Decision: November 2009
Published: January 2010



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