It is often said that co-tenancy provisions in leases usually lead to unintended consequences. Nowhere was this adage more vividly demonstrated than in a recent case decided by a federal district court in Connecticut, titled Kleban Holding Co. LLC v. Ann Taylor Retail, Inc., 2013 U.S. Dist. LEXIS 168231 (D. Conn. Nov. 26, 2013). The facts of this case are as follows. Borders had signed a lease at a Connecticut Shopping Center (the “Center”) in April 2000, but as we now know, it later filed for bankruptcy and had to close its store at the Center in May 2011. At the time, Ann Taylor was also a tenant at the Center, and its Lease contained the following co-tenancy provision:

CO-TENANCY. (a) Opening: Landlord agrees that the Delivery Date will not occur until Landlord notifies Tenant that eighty percent (80%) of the retail area of the Center is under construction and that Borders, Inc., Banana Republic and Victoria’s Secret have executed leases on or before March 1, 2001. If Landlord is unable to enter into such leases by March 1, 2001, Tenant shall have the right to terminate this Lease and Landlord shall reimburse Tenant for its reasonable out-of-pocket legal and architectural expenses. Notwithstanding the foregoing, Landlord may replace Victoria’s Secret or Banana Republic with a suitable replacement tenant.

(b) Operating: In the event Borders, Inc. or fifty percent (50%) of the other retail space in the Center, excluding Tenant, are not open and operating, Tenant shall be entitled to abate Minimum Annual Rent and in lieu thereof pay five percent (5%) of Gross Sales, not to exceed the Minimum Annual Rent otherwise payable in the absence of this paragraph, until the tenants meeting the foregoing requirements are again open and operating. (Emphasis added.)

Upon Borders’ vacating its space, Landlord attempted to replace Borders with another bookstore; however, the bookstore closed in September 2011. Two months after Borders vacated the Center, Ann Taylor started paying an abated monthly rent of 5% of its Gross Sales instead of its regular monthly rent, in accordance with the co-tenancy provision. Landlord responded by defaulting Ann Taylor for failure to timely pay its minimum rent. In spite of the putative default notice, Ann Taylor continued to pay the abated rent. Landlord then commenced a lawsuit against Ann Taylor that was premised on the following causes of action: (1) breach of lease; (2) anticipatory breach of lease; and (3) unjust enrichment.

Both parties moved for summary judgment to attempt to resolve the controversy before trial. In its papers, Landlord argued, among other things, that the use of the generic word “tenants” in Section (b) contemplated that any reasonable tenant could replace Borders at the now vacated space. Ann Taylor disagreed, contending that the co-tenancy provision was clear and unambiguous-that it calls for the payment of reduced rent upon the occurrence of either one of these two conditions: (1) fifty percent (50%) of the retail space in the Center, excluding Ann Taylor, is not operating; or (2) Borders is not open and operating at the Center. Ann Taylor argued that because Borders had vacated the Center, Ann Taylor was in compliance with the Lease and therefore was entitled to continue to pay the reduced rent. The Court agreed with Ann Taylor and held that “the plain language of the Lease dictates that Ann Taylor may pay abated rent until [Borders] is again open and operating. The only tenant who could fill such requirement is Borders, Inc.”

Landlord argued that were Ann Taylor to prevail, it would unfairly provide Ann Taylor with an “$800,000+ windfall” in rental savings and that “no reasonable owner would have agreed to a clause that would create the result that Ann Taylor claims.” Landlord further attempted to introduce additional extrinsic evidence to support its contention, such as deposition testimony from the original Landlord’s President who signed the lease and also from Landlord’s agent who had drafted the Lease, in order to support Landlord’s proposition that the results being sought by Ann Taylor could not possibly have been intended by the parties at the time the Lease was negotiated. Again, the Court was unpersuaded. It reasoned that both parties’ presenting two different interpretations of the co-tenancy provision does not necessarily make the provision itself ambiguous. Furthermore, because the Lease was clear and unambiguous, the Court was prohibited from considering any of the extrinsic evidence being proffered by Landlord. The Court thus ruled that Ann Taylor neither breached, nor anticipatorily breached, the Lease. It further denied Landlord’s claim that Ann Taylor was unjustly enriched by Landlord’s apparent oversight, because such an unjust enrichment claim is actionable in Connecticut only in instances where there was no valid lease or contract in place-unlike the scenario in this case. Lastly, because the Lease contained an attorney’s fees provision for the prevailing party, the Court requested that Ann Taylor submit evidence of attorney’s fees for the Court’s consideration.

What are the take-aways from this decision? Well, for one thing, Ann Taylor made out like a bandit-an exquisitely dressed one at that. Unless this decision is appealed and overturned, or unless Borders returns to the space (which is highly unlikely given its bankruptcy status), Ann Taylor may continue to pay only five percent (5%) of its Gross Sales (instead of its minimum rent) for the remainder of its Lease term. (Ann Taylor’s current Lease runs through January 31, 2017, with a five-year option through January 31, 2022.) No individual on earth could have negotiated a sweeter deal.

Lessons abound for landlords. First, co-tenancy provisions must command precise and meticulous attention to detail-and then be further perused again for good measure, simply because the unintended economic consequences could be devastating for landlords, as demonstrated in this case. Secondly, a co-tenancy provision must contain an expiration date well short of the tenant’s lease term. The potential benefit that a tenant should be allowed to realize from a violation by the landlord must not endure through the expiration date in its lease, or be allowed to carry over to any extensions, renewals or options. Thirdly, exceptions must be carved into the provision to inoculate the landlord from situations beyond its control. For example, allowing for when the co-tenant files for bankruptcy, or for situations where the co-tenant is forced to vacate as a result of being evicted because of a monetary or non-monetary default. Lastly, while some tenants have more gravitas than others, and many push for them, Landlords should nonetheless attempt to steer clear of co-tenancy provisions in leases altogether, simply because in most situations, these provisions are extremely difficult to monitor and manage. The events triggering a default of a co-tenancy provision in a lease are seldom within the landlord’s control; most violations have less to do with what the landlord failed to do than what a co-tenant caused solely on its own. If in today’s dynamic and ever-changing retail landscape, very few tenants are able to guarantee that they will never be in a position to file for bankruptcy, or close a store due to reorganization, then landlords surely should not be in the business of arbitraging such uncertainty to their detriment.

Clearly, this decision should be a wakeup call to landlords who heretofore never imagined that the absence of a sentence or two in a lease would have such a devastating economic impact to their bottom line.

[Postscript: As of the date of publication, the Landlord has now filed a motion in court to alter/amend judgment and for reconsideration. The Tenant will have an opportunity to respond.]