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”No Problem!” Problem?
by Ron Davis

Hesitation in protesting a competitor’s leasing of space at a Georgia shopping center has proved costly for an office-supply tenant.

The shopping center is The District at Howell Mill, in Atlanta. And the tenant, an Office Depot store, has an “exclusive-use” clause in its lease agreement with the shopping center’s owners. But that clause was tested when a school-supply company named The School Box applied for space to operate at the shopping center.

At first, Office Depot seemed to accept the competitor. All that changed, however, not long after the shopping center’s owners sold a majority interest in the property.

The new co-owners apparently wanted to make sure that the tenants were satisfied with their current status. They therefore asked each tenant to explain any lease problems the tenant was experiencing. Office Depot replied to that request: “To tenant’s knowledge, landlord is not in default in the performance or observance of any of its obligations under any terms or provisions of the lease.”

Office Depot was not so accommodating six months later, however. At that time, Office Depot informed the shopping center’s owners that The School Box lease violated the exclusive-use provision of Office Depot’s lease agreement.

Office Depot then notified the center’s owners that within 60 days, it would start paying reduced “alternative rent.” And when the center’s owners failed to respond to that challenge, Office Depot did indeed begin paying a lesser amount of rent.

A year later, Office Depot asked the courts to declare that the center’s owners had breached the exclusive-use provision in the lease agreement. That breach, Office Depot explained, authorized it to pay reduced rent or terminate the lease. Office Depot further demanded payment for “damages flowing from the breach.”

A Georgia court ruled in favor of the center’s owners, concluding that they were not in default and awarding them past-due rent, interest, attorney fees, and legal expenses.

Office Depot appealed that ruling.

A Georgia appellate court agreed with the lower-court ruling, explaining, “At the time Office Depot executed its certificate, The School Box had been in operation for several months, and Office Depot officials had considered whether presence of the store violated its lease. Nevertheless, Office Depot represented to the landlords that no default had occurred…. As part of the due diligence, a representative also spoke with the Office Depot store manager, who stated that the store had no problems with the lease or landlord.

“Simply put,” the court concluded, “the lease-termination right does not arise if there is no breach.”

(Office Depot, Inc. v. The District at Howell Mill, LLC, 2011 WL 1715775 [Ga.App.])

Decision: May 2011
Published: May 2011



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