Exclusivity and Tenant Mix: The Case of the Missing Shopping Center

In re Toys “R” Us Prop. Co. I, LLC, 598 B.R. 233 (Bankr. E.D. Va. 2019) –

The debtor proposed to assume and assign a lease to a discount grocer. The landlord objected based on the fact that a discount grocery store was located on an adjacent parcel owned by the landlord. The bankruptcy court considered whether the tenant mix in the shopping area and an exclusivity clause in the lease for the adjacent grocery store were relevant to its ruling on the proposed assignment.

A Toys “R” Us retail store and a discount grocery store (Price Rite) were located on adjacent parcels in a shopping area. Originally the parcels were leased from different landlords.

The Toys “R” Us lease provided that the premises could be used for “any lawful use or purpose, except a bank or such similar use restricted by the existing lease …” No other use provisions in the lease were brought to the attention of the court.

Similarly, the lease provided that the tenant had “the right at any time and from time to time during the Lease Term to assign this Lease or sublet the Demised Premises, or any part or parts thereof.” The Toys “R” Us lease did not contain any restrictions on the tenant’s right to assign the lease.

The Price Rite lease contained an exclusivity provision that stated the landlord agreed not to permit any occupants of the “Shopping Center” to sell groceries, and to use “all reasonable legal means” to enforce this exclusivity against other tenants. “Shopping Center” did not include the Toys “R” Us parcel.

The landlord also agreed that “neither it nor any of its principal owners or stockholders or directors or officers of [sic?] their successor or assignees” would lease any premises in the Shopping Center “or in any other premises owned, leases [sic], controlled or occupied by Landlord, or their affiliates within a radius of one (1) mile from the Shopping Center” for a supermarket, convenience food store, wholesale club store, etc. (including stores such as a Super Kmart, Super Walmart and Costco).

The Toys “R” Us lease was entered into in 1996 and the Price Rite lease was entered into in 2002. In 2012 a new landlord acquired both parcels. None of the parties claimed that the Price Rite exclusivity provision was formally incorporated into the Toys “R” Us lease, and a 2015 amendment to the Toys “R” Us lease made no reference to the Price Rite lease.

Section 365 of the Bankruptcy Code includes general requirements for an assumption and then assignment of an unexpired lease. Both assumption and assignment require adequate assurance of future performance under the lease. In the case of a shopping center lease this includes special requirements found in section 365(b)(3), including assurance:

(C) that assumption or assignment of such lease is subject to all the provisions thereof, including (but not limited to) provisions such as a radius, location, use, or exclusivity provision, and will not breach any such provision contained in any other lease, financing agreement or master agreement relating to such shopping center; and

(D) that assumption or assignment of such lease will not disrupt any tenant mix or balance in such shopping center.

The landlord contended that both the Toys “R” Us parcel and the Price Rite parcel were part of a shopping center. Consequently, it argued that the assignment of the Toys “R” Us lease to a discount grocer could not be approved since (1) it violated the exclusivity provision of another lease in the shopping center, and (2) it disrupted the tenant mix.

The threshold question was whether the two parcels were located in a shopping center. The court noted that since the Bankruptcy Code does not define “shopping center,” courts have used a multifactor test in determining whether premises constitute a shopping center. In particular, the court identified a laundry list of 14 factors that it assessed.

Although a few of the factors were technically satisfied (such as leases held by a single landlord, common parking area and access road, and contiguous parcels), the specific facts undercut a finding that the parcels constituted a shopping center. For example, the single landlord was a relatively recent development that occurred long after the parcels were developed, and the common parking area and access road preceded the common ownership.

After analyzing a number of facts, the court concluded that there was nothing to show a purposeful development of the parcels as a shopping center and the acquisition of the two parcels by a single owner did not create a shopping center. Consequently, the special shopping center requirements were not applicable to the proposed assignment.

Further, even if the court had determined that a shopping center existed, the landlord’s concerns about tenant mix would not have prevented the assignment. A landlord “must establish that there was an intended tenant mix and that the mix was part of the bargained-for-exchange of the debtor’s and other tenants’ leases.” A landlord’s stated concern by itself was not sufficient.

Accordingly, the landlord’s objection was overruled and the assumption and assignment of the Toys “R” Us lease to Aldi was approved.

It is interesting to note that there was a reasonable amount of money at stake. The Toys “R” Us lease was sold at an auction with Aldi as the winner with a bid of $3.3 million. This case also presents a good illustration of the need to consider what happens when a successor steps into the shoes of the original party. Are there references to “Landlord” or “Tenant” that should mean only the original party? Will the successor have any issues with the terms given its own circumstances (for example, will the successor landlord’s pre-existing portfolio create issues for an exclusivity undertaking)?

Vicki R. Harding, Esq.

About BankruptcyRealEstateInsights

Vicki R. Harding was a partner in the Detroit office of Pepper Hamilton LLP who moved to Arizona seeking warmer weather. Ms. Harding continues to handle commercial transactions with an emphasis on real estate and bankruptcy issues (but no longer owns a snow shovel).
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