Ross Dress For Less, Inc. v. Westfest, LLC is a recent Arizona case that nicely illustrates a common scenario: The parties fail to expressly agree on something in a contract, leaving it ambiguous. Then, perhaps years later, one party argues that the contract says something that neither party ever intended. It happens all the time, but as Ross (the party with the creative interpretation in this case) found out , this strategy can backfire.
In this case, Ross, likely aided by an overzealous attorney or two, got creative in its interpretation of a lease and decided that a loophole (read: unintentional ambiguity) allowed Ross to stop paying rent while staying in the premises. All told, Ross withheld $85K in rent . . . until the Court said Ross's interpretation of the lease was absurd and made Ross pay all of the rent back, with interest, and attorneys fees in excess of $120K.
Here is a link to the case Ross Dress for Less, Inc. v. Westfest, LLC, 1 CA-CV 12-0703, 2014 WL 298836 (Ariz. Ct. App. Jan. 28, 2014) [unpublished]). It's an interesting read, and a good one to remember the next time you (or your attorney) spots a hidden magic bullet in your lease.
The ambiguity in the lease:
Ross, as you may have guessed, was leasing space in a shopping center. Ross's lease had a cotenancy clause that said that if a major cotenant left the shopping center without being replaced, the lease would enter into a "Reduced Occupancy Period", and Ross's total rent obligation would be the lesser of minimum rent or percentage rent:
"If a Reduced Occupancy Period occurs or is in effect at any time, Tenant's total obligation for all Minimum Rent and Percentage Rent shall be to pay ... the lesser of (i) Minimum Rent ..., or (ii) a percentage of Tenant's Gross Sales during the preceding month at [a percentage rate of 2 percent]."
That's simple enough. And as the court later reasoned, this provision was meant to protect Ross if the loss of a cotenant resulted in lower sales at Ross's store. If that happened, instead of paying its regularly scheduled rent, Ross would be permitted to instead pay a percentage of its reduced sales. The problem is that generally when a lease calls for percentage rent, the lease also includes an operating covenant requiring the tenant to operate so that there will be gross sales to take a percentage of. Not so in this case -- the lease also gave Ross the right to close its store any time it wanted to:
"Notwithstanding any provision in this Lease to the contrary, it is expressly acknowledged by Landlord that this Lease contains no implied or express covenant for Tenant to conduct business in the Store, continuously or otherwise, or (when conducting business in the Store) to operate during any particular hours or to conduct its business in any particular manner. Tenant has the sole right in its unrestricted discretion to decide whether or not to operate in the Store and in what manner to conduct operations, if any."
You'll see below how Ross's interpretation of these two provisions led to a two year battle that ultimately cost Ross about $120K in attorneys fees.
Ross closes and stops paying rent...
In 2010, there was a "Reduced Occupancy Period" under Ross's lease, meaning that one of the cotenants had left the shopping center. Presumably, Ross was paying Westfest the lesser of minimum rent or percentage rent during this period. However, in September 2010, Ross decided it wanted to close its store to remodel. Ross also decided it would stop paying rent while it was closed.
When the check for November's rent didn't role in, Westfest, the landlord, sent a notice of default. Ross responded by invoking the anything-multiplied-by-zero-is-zero rule and explained that under the lease it had the right to close its store anytime it wanted to and because there was a Reduced Occupancy Period in effect, it's obligation to pay rent was the lesser of minimum rent or percentage rent of gross sales, which was zero. (Remember, Ross closed to remodel, so it had no gross sales.) From the end of September 2010 through February 2011 when it reopened its store, Ross withheld $85,719.19 in rent. The problem with this is that it was almost certainly not the parties' intent that Ross could voluntarily close its store and stop paying rent.
For about a year, Westfest essentially begged Ross to pay its rent by sending repeated notices but never actually terminating the lease. Evidently tiring of Westfest's persistent pestering for its measly $85K, and overly confident in its position, Ross deposited the entire amount of back rent with the court and then proactively sued Westfest, asking the court to rule that Ross owed no back rent and that it's interpretation of the lease was correct.
The Courts Find Ross's Position Absurd
When it got to court, Ross repeated the same argument it made to Westfest -- Ross had no obligation to pay rent because it had the right to close the store and the lesser of minimum rent or percentage rent of no sales, was percentage rent of no sales.
Westfest countered by arguing that that "implicit in an option to pay a percentage of gross sales was a requirement that Ross be open for business."
"Implicit" is just lawyer speak for "the contract doesn't say so, but that's what we meant". In other words, strictly speaking, Ross's interpretation was correct. But again, although Ross's interpretation was correct in the literal sense, it was not what the parties had intended. If Ross was supposed to be able to close for remodeling and have rent abated, neither Ross nor Westfest would have documented their understanding in this round about way.
The trial court agreed with Westfest and ruled against Ross. Ross, ever confident, appealed, but lost for a second time on appeal. (Appeals are rarely successful.) The appellate court held that when the lease required Ross to pay the lesser of two amounts, it "necessarily suggests the existence of such amounts for a comparison . . .." The court went on to reason that the reduced occupancy clause was meant to protect Ross from the closure by other tenants reducing Ross's sales, not to give Ross the right to stop paying rent if it decided unilaterally to close its store.
The outcome of this case was hardly surprising, or even that interesting. What is interesting is the way this case shows how litigation often starts -- with a latent ambiguity that one party then tries to exploit -- and how litigation can backfire. There are three takeaways:
1. Spend the time to get the material provisions right. Whether you are a tenant or a landlord, there are a handful of things you cannot afford to have implied, and one of them is rent. You'll never have the time, money, or foresight to expressly agree on every potential issue, but with key provisions that go to the essence of the lease itself, it's best to spend a little more time to make sure things are clear. Don't just rely on the fact that the rent is nicely summarized on the first page of the lease -- read through the lease and think through other provisions that affect your obligation to pay (if a tenant) or right to collect (if a landlord).
2. When in doubt, go with the common sense interpretation that's in line with what the parties' understanding was (or would have been). Too often parties, and their lawyers, get creative and find ways to interpret contracts that were really never intended. Sometimes it works, especially if the other side's lawyer isn't on top of his or her game. But if the other side's lawyer is just as good as yours, or maybe a little better, you are probably going to lose, and you will pay both your and the other side's attorneys fees. This is because unless the law is so well settled on an area that the judge has no wiggle room, the judge will be looking for the most reasonable outcome and is not going to let one party profit from silent ambiguities that the parties never mutually agreed on.
3. Don't get greedy or be overly confident in your position. As the saying goes, "pigs get fat, and hogs get slaughtered," and this is a good example of how that happens. Ross wasn't fighting for survival or to enforce primary contract rights it had negotiated for. Ross was just trying to save a little on rent, rent that it likely had budgeted to pay anyway. Ross could have made a deal with Westfest and agreed to pay a portion of the rent. The facts show that Westfest sat on its hands for a year, clearly needed Ross in the center, and was probably ripe for settlement. But instead, Ross sued Westfest, marching into court confident it would win on a case that never had more than a 50/50 chance. And then when it lost at the trial level, Ross appealed. In the end, Ross paid 100% of the rent it withheld, plus interest, plus Westfest's $65K in attorneys fees (plus whatever Westfest spent on the appeal), plus $56,298 in Ross's own attorneys fees.