Lease Terms Don’t Apply to Expansion

Lease Terms Don’t Apply to Expansion

Consolidation of two commercial properties has allowed purchasers of a Minnesota shopping center to fend against a challenge by one of the center’s tenants.

The shopping center is Birch Run Station in suburban St. Paul, and the challenge by the tenant—Jo-Ann Stores, Inc.—came not long after the center changed hands. The previous owner of the property had agreed not to lease space to a “second-hand or used-goods store.” But when the new owners gained control of the property, they had other plans.

A retailer that offered second-hand and used goods negotiated for space at an outparcel of the shopping center. That property, known as the “Toys Parcel,” was previously owned by Toys R Us, Inc., but in a separate deal was acquired by the center’s new owners at the time they bought Birch Run Station. When the center’s new owners revealed the lease of that property, the Jo-Ann Stores tenant sued.

The shopping center owners pointed out, however, that the agreement with Jo-Ann Stores referred only to the shopping center site itself and not the Toys Parcel. Jo-Ann Stores disagreed with that argument and contended that the Toys Parcel is a cohesive part of the shopping center property. But is it?

Apparently, it wasn’t until the current center owners bought the property. And they reminded Jo-Ann Stores that the Toys Parcel was owned separately (by Toys R. Us, Inc.). They also emphasized that when they bought the shopping center itself, they also bought the Toys Parcel and consolidated the two properties.

So, the new owners explained, they gained control of both properties. And they added that one of the first moves they had made was to eliminate the prohibition against leasing to a second-hand or used-goods merchant.

The Jo-Ann Stores tenant sued, charging that the new owners of the shopping center had violated the lease terms and threatening to pay rent at a reduced amount.

A Washington district court concluded, however, that the tenant’s lease prohibited certain uses only within the shopping center itself and does not extend to stores located at the outlying Toys Parcel.

Jo-Ann Stores appealed that ruling.

A Washington appellate court concurred with the lower court, explaining, “The district court did not err by construing the lease agreement to apply only to that part of the shopping center and shopping center site of [the previous owner] at the time the lease was signed. As such, the lease term prohibiting rental to a second-hand or used-goods store does not apply to the Toys Parcel, which was not part of the shopping center or shopping center site, as those terms are defined in the lease agreement, at the time the lease was signed.”

(C.W. Birch Run, LLC v. Jo-Ann Stores, Inc., 2010 WL 5071394 [Minn.App.])

by Ron Davis

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