Wednesday, June 15, 2011

Office Depot Learns That an Estoppel Certificate Can Stop a Tenant in Retail Lease Suit Over Exclusive Use Provision, and What About No Waiver Clauses in Leases?

Office Depot Brand Briefcase, Minus Form Lease
Office Depot lost an effort to terminate a lease based on the alleged breach of a restrictive covenant by another tenant after having signed an estoppel certificate after the alleged breach occurred.  Office Depot, Inc. v. The District at Howell Mill, 2011 Ga. App. LEXIS 381, Decided May 6, 2011.  Office Depot filed a declaratory judgment action against its landlord for breach of the exclusive use provision (The "Exclusive") of its retail commercial lease. It also sought a judgment that it could not pay rent or terminate the lease based on the alleged breach of the Exclusive.  The landlord counterclaimed for past due rent, attorney fees, and a declaration that it did not breach the lease.  The trial court granted the landlord summary judgment and the Court of Appeals affirmed. 

The record showed that Office Depot had a lease that was executed in 2005 that prevented the landlord from, among other things, leasing space to a business that "primarily" sold school supplies.  Nonetheless, the landlord leased space 18 months later to a store called The School Box which, naturally, sold school supplies.  The School Box opened in November 2006.  In May 2007, the company ELPF agreed to purchase a majority interest in the shopping center. As is usually the case, in connection with the sale of the shopping center the tenants were asked to sign estoppel certificates, which, as the name indicates, are designed to estop the signatories from claiming breaches based on actions prior to the signing.  The purchaser and lenders rely on these certificates to ensure that they are buying a shopping center without any problems.  On April 24, 2007 Office Depot signed an estoppel certificate that stated, among other things, that to Office Depot's knowledge, the landlord was not in violation of any terms of its lease. 

Obviously Office Depot knew that The School Box was in the shopping center selling school supplies at the time it executed the estoppel certificate.  The Exclusive was a standard one that provided the tenant alternative remedies, (1) to pay reduced or "Alternative Rent" and (2) to terminate the Lease.  On December 6, 2007 Office Depot gave notice it would start paying Alternative Rent in 60 days.  It started paying reduced rent in February 2008 and in May 2009 filed its lawsuit against the landlord.  

Office Depot argued that that the reliance on the estoppel certificate was unreasonable because the landlords knew that The School Box violated the lease.  The court disagreed.  The record showed that the review of the School Box lease (which listed many activities besides selling school supplies), a visit to the School Box store, and the fact that Office Depot made no complaints led the purchase ELPF to conclude that the School Box was not in the "primary business" of selling school supplies.  The record showed that the District at Howell Mill made the same conclusion when it entered into the lease.  Thus the court held that, as a matter of law, the landlords had reasonably relied on the estoppel certificate. 

It is unclear that reasonable reliance should even be a defense against an estoppel certificate in a case where the tenant clearly knows what is going on before signing the estoppel certificate.  Instead, it should be clear that the estoppel certificate operates as a waiver, which is the unilateral and knowing relinquishment of a right.  The landlord should be able to assume that if the tenant signed the estoppel certificate well after The School Box entered the shopping center, then they were waiving any rights to contest The School Box's presence, and thus need not show that the reliance was reasonable at all.  I do not know if the landlord raised waiver as an issue, but landlords and banks absolutely have to be able to rely on the fact that at the time the estoppel certificate is signed, all of the tenants in the shopping center are there legally with respect to any restrictive covenants.  

There may have been a clause in the Office Depot lease called a "no waiver" clause.  Depending on the wording of that clause in the lease, the landlord may have been unable to argue that the estoppel certificate is a waiver.  

Practice Point:  In commercial leases the language of the no waiver clause can make a big difference in the arguments available in a lawsuit.  For example, the waiver clause could read as follows:

No waiver by the parties of any right contained herein shall constitute a waiver of any other rights in the lease including subsequent rights related to the same term herein.

I call this the "one waiver" clause.  It means that one action can in fact be a waiver, such as signing an estoppel certificate or accepting one rental payment.  It just means that all other rights are reserved.  

On the other hand, the clause could read like this:  No action by either party to this lease shall constitute a waiver of any of the rights herein.  

This is a true "no waiver clause."  It means that whatever anyone does, it is not a waiver.  I do not favor this clause in leases, as a litigator, because it means that the parties can argue whatever they want to in a subsequent dispute and claim they are not bound by their actions, such as having signed an estoppel certificate.  What good is an estoppel certificate in that instance?

The court ruled that the term had to mean that the tenant could automatically terminate the lease six months after notice only if there actually was a breach.  This reading of the provision is also questionable, however, because it seems to render the clause somewhat superfluous, in that it requires the landlord to file a lawsuit to prevent termination, but only if the landlord has actually breached the lease, in which case, presumably, the landlord would lose every time.  If there is no breach then the landlord apparently does not have to file a suit.  Thus, in other words, that provision really has no meaning at all and requires the landlord to do nothing.


  1. Wow, Office Depot needs to hire a new team of real estate lawyers and probably new management for the store in question. Most likely, no one from the local store bothered to inform corporate about The School Box opening next door and corporate didn't bother checking locally for any issues prior to executing that estoppel certificate.

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