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Oregon's Federal Court Enforces Co-Tenancy Requirements in Retail Lease, Holding they are Conditions to Tenant's Payment of Full Rent

Bob Weaver and Adam Kelly of Garvey Schubert Barer recently obtained summary judgment in favor of Old Navy, LLC in the Oregon federal court enforcing the plain and unambiguous terms of the Co-Tenancy requirements of Old Navy’s retail lease. Notably, the Court held that that the Co-Tenancy requirements are conditions that must be satisfied in order to require Old Navy to operate at the mall and pay full rent. The Court also held that Old Navy’s contractual right to pay reduced rent during the period of a “Co-Tenancy Failure” is (1) not a liquidated damages provision as a matter of Oregon law, and (2) required a refund to Old Navy of the more than $550,000 in excess rent mistakenly paid during the Co-Tenancy Failure as a result of the landlord’s failure to provide notice of the Co-Tenancy Failure.

The Co-Tenancy requirements of Old Navy’s lease provide that if three of four identified retailers (“Key Stores”) are not operating their businesses at the shopping center (termed a “Co-Tenancy Failure”), Old Navy is entitled to pay “Alternate Rent” during the Co-Tenancy Failure period. The lease also provides for an express process by which the landlord can substitute a retailer for a departing Key Store for purposes of satisfying the Co-Tenancy requirements. That process requires the landlord to obtain Old Navy’s prior approval of the proposed substitute retailer. Landlord is only required to comply with the substitution process if it wants the substitute retailer to satisfy the Co-Tenancy requirements.

In May 2009, following the closure a GI Joe’s store at the shopping center, a Co-Tenancy Failure occurred. The landlord did not notify Old Navy of the Co-Tenancy Failure as required by the terms of the lease, and Old Navy did not discover the Co-Tenancy Failure for 18 months, during which time Old Navy paid full rent under the lease substantially in excess of the Alternate Rent. After its demand for a refund was rejected, Old Navy filed a lawsuit to enforce the terms of the lease and recover its excess rent payments made during the Co-Tenancy Failure. Landlord filed counterclaims asserting, in part, that Old Navy was not entitled to a refund of the excess rent payments because Old Navy did not exercise its rights to pay Alternate Rent until 18 months after the Co-Tenancy Failure first occurred, and because the Alternate Rent provision is an unenforceable liquidated damages provision under Oregon law.

The Court ruled in Old Navy’s favor on the parties’ competing claims, holding that a Co-Tenancy Failure existed as of the closure of GI Joe’s in May 2009, and Old Navy had paid more rent than was owed during the two-year period of the Co-Tenancy Failure. The Court held that the Alternate Rent provision is not a liquidated damages provision by definition under Oregon law. Because the Co-Tenancy “requirements” do not actually impose any requirements on the landlord, but rather identify conditions that must be met for landlord to require Old Navy to operate at the mall and pay full rent (i.e., that certain retailers also operate at the mall), and because the lease provides that landlord is free to lease its space to any retailer it desired, the Alternate Rent provision does not provide for “damages.” Rather, the lease merely provides that if the conditions for operating the Old Navy store at the mall and paying full rent are not met, Old Navy has the express right to pay Alternate Rent. Accordingly, Alternate Rent provision is merely part of the lease’s tiered rent structure.

The Court also rejected the landlord’s argument that Old Navy is not entitled to a refund of the excess rent payments made during the period of the Co-Tenancy Failure because of Old Navy’s alleged delay in informing landlord of the Co-Tenancy Failure. Landlord relied on the language in the Alternate Rent Remedy provision of the lease that Old Navy was entitled to Alternate Rent “effective immediately” upon the occurrence of a Co-Tenancy Failure, and thus could not apply retroactively. The Court held that there was no evidence that Old Navy had notice of the Co-Tenancy Failure, and that because landlord failed to comply with its obligation under the lease to provide notice of the Co-Tenancy Failure to a specific Old Navy department identified in the lease, Old Navy was entitled to a refund of the excess rent payments despite the 18-month gap between the occurrence of the Co-Tenancy Failure and Old Navy’s notice of its right to pay Alternate Rent.

The landlord has appealed the rulings.

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