Legal Briefs

No Uncertain Terms

A court defines unclear language in a shopping center lease.

What does it mean to vacate the premises in commercial leases? The denotation can be critical, particularly in cases where vacating the premises triggers a default.

Last August, the District of Columbia Court of Appeals was called on to construe the meaning of the term vacate in the case Saul Subsidiary II Limited Partnership v. Venator Group Specialty, Inc. The precise meaning was significant because the rent due to the landlord changed upon the tenant's vacating the premises. The landlord contended that the tenant had vacated, while the tenant claimed it had not because it had intended to reopen in the space. Both property owners and tenants should take note of the court's decision, as similar situations may arise in their lease negotiations.

Is Ceasing Operations Vacating?

The case arose in connection with the closure of F.W. Woolworth Co. (now known as Venator Group Specialty) stores nationwide. In 1949 Woolworth entered into a lease with Saul's predecessor for approximately 24,000 square feet of shopping center space in northwest Washington, D.C. The parties subsequently extended the 40-year lease through Jan. 31, 2000.

The lease allowed Woolworth to make any desired physical changes to the space and to operate in whatever fashion it elected. The rent provisions contained two parts: a minimum annual rent and an additional rent, which was a percentage rent equal to 6 percent of the store's sales over a specified threshold. The lease stated that if the tenant vacated the premises, the additional rent computation changed from percentage rent to an annual sum equal to one-third of the total additional rent paid for the three calendar years immediately preceding the tenant's vacating. The lease termed this additional rent "one-of-three" rent.

In 1997 Woolworth shut down its entire chain of general merchandise stores. The company closed the store in question, removed inventory and trade fixtures, and turned the keys over to the landlord in October. Woolworth then signed an agreement allowing Saul to enter the premises prior to lease termination. One month later Saul notified Woolworth in writing that it had vacated the premises and specified the annual one-of-three rent that would be due for the lease term's duration.

At the time it closed, Woolworth planned to convert the location into a Foot Locker. However, the store was too large and the lease term was too short for this to be a feasible option. Also, negotiations for a new lease between Woolworth and Saul ultimately foundered in early 1998.

Woolworth then decided to convert the space to a temporary Foot Locker outlet, which would operate only until the lease expired. Woolworth notified Saul of this decision and denied that it owed one-of-three rent, as it intended to reopen and would pay additional rent calculated on the percentage rent basis. Saul responded by notifying Woolworth that it was in default for failure to pay the one-of-three rent for 1997 as demanded.

Woolworth tendered a check equal to its percentage rent for 1997, which Saul accepted but did not consider full payment. Woolworth then sent a second payment equal to one-of-three rent starting October 1997, noting that it was being made under protest and only to avoid the consequences of being in default.

Woolworth ultimately abandoned its plan to reopen the location as a Foot Locker outlet. Saul filed suit for breach of the lease, contending that Woolworth was liable for one-of-three rent for all of 1997 and succeeding years until the lease expired.

Woolworth contended that it had not vacated until 1998, when it gave up on reopening the location. The trial court concluded that Woolworth vacated in 1998 and was responsible for one-of-three rent from that year forward. The judge reached this conclusion by construing vacate to mean cessation of operations coupled with an express intention to discontinue any operations at that location.

Appellate Court Differs

Saul appealed the court's determination as to when Woolworth vacated the premises. Noting that its decision turned on the proper construction of the word vacate, the appellate court analyzed a number of cases dealing with contract interpretation. Citing several previous cases, the court determined that "Where the language in question is unambiguous, its interpretation is a question of law for the court. The language of [the lease in question] is not ambiguous merely because Woolworth and Saul disagree over its meaning."

The court then consulted various cases construing vacate in the real property context. Citing cases and a legal dictionary definition from the 1920s and 1930s, the court found that to vacate "means simply to move out; to make vacant or empty; to leave; ... to cease from occupancy." The court held that the act of moving out alone was sufficient and that stating intent to vacate was not required.

The court further considered the lease term stating that percentage rent was the measure of additional rent so long as the tenant continued to operate. Since sales would be nonexistent once the tenant vacated, at least for some period, it made economic sense that the additional rent would become the one-of-three rent. The court found that the one-of-three rent provision addressed the contingency of the tenant ceasing operations and that this construction was consistent with vacate's plain and established meaning.

Woolworth contended that the lease allowed it to shut down to remodel or make whatever changes it sought without triggering the one-of-three rent provision. The court conceded that Woolworth's contention was correct, but it found that no remodeling or renovation and reopening occurred; hence the argument, which might have been persuasive had the Foot Locker outlet opened, failed under these facts.

Therefore, the appellate court decided that Woolworth vacated the premises in 1997 and was liable under the lease to pay one-of-three rent for 1997 and succeeding years until the lease expired.

As this case illustrates, property managers and tenants need to understand the denotation of the word vacate in leases or other real property contracts and to use the term correctly to protect their positions. The word has a fairly narrow, well-established meaning from which courts are unlikely to deviate, absent some true ambiguity or unusual fact situation.

Carol C. Honigberg, JD

Carol C. Honigberg, JD, is a partner in the real estate group at Reed, Smith, Hazel, & Thomas LLP in Falls Church, Va. Contact her at (703) 641-4220 or chonigberg@rssm.com. The discussion of legal issues in this column is for informational purposes only. Results may vary depending on state laws and individual circumstances.

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