Mar 01, 2002

Shopping Centre Lease - Injunction to Prevent Landlord from Demolishing Mall; Appraiser's Failure to Red Flag Inexact Comparables was Negligent #345


By Gerry Neely

The arrival of the "big box power centres" should lead owners or property managers of existing, enclosed mall shopping centres to reexamine their standard leases. Landlords may find the wording of typical clauses dealing with alterations and relocations of tenants' premises limiting if they decide to change the physical structure of the malls.

The new owners of an underperforming mall decided to redevelop it by replacing the existing structure with four free-standing buildings, for tenants such as Canadian Tire and Wal-Mart, and a small strip mall for the other tenants. When notice was given to the tenants that the mall would be closed for six months to do this work, all but two tenants accepted the landlord's offer to terminate their leases.

The two tenants commenced an action, claiming that the landlord breached the "quiet enjoyment" term of the lease, and applied for an injunction to prevent demolition until the trial of their action concluded. The landlord could not afford this delay because of a tight construction deadline with the major tenants, and the potential liability for substantial damages if the legal action was decided in favour of the two smaller tenants.

The essence of the relocation clause in both leases was that if the landlord wanted to carry out alterations which required the relocation of the tenants, they would have to relocate if the new locations were equal to or better than their stores' sizes, configuration, exposure, access and comparable in all material respects to the existing stores.

This clause was of no help to the landlord because the tentative plans for the small strip mall located it some distance from the principal entry to the present store, and behind one of the big boxes. It clearly did not meet the comparability test.

The alteration clause contained very broad language to alter, expand or diminish the structure, including the right to remerchandise and change the number and location of buildings, but not the word "demolish." As broad as is this wording, if the judge's decision depended only upon the interpretation of this clause, it would have been insufficient to prevent the tenants from getting their injunction.

The judge reasoned that the landlord had expressly agreed in the leases to operate a first-class shopping centre for their terms. The landlord's own expert acknowledged big box centres differ in their retail concept from existing enclosed malls. The lease did not reserve to the landlord the right to both demolish the mall and change its retail marketing strategy. The landlord would have needed appropriate language expressed in the leases to win.

In addition, the judge said that if there was any ambiguity in the clauses he interpreted, this ambiguity would have been resolved against the landlord, because it was the document prepared by the landlord that created the uncertainty. 1

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The facts of the following case describe a relatively rare property for which an appraisal is required, but the results may be of some guidance to licensees who rely solely upon the property information in their real estate board's Multiple Listing Service® system. An appraiser was held to be negligent for a gross overvaluation of a four-plex under construction ten kilometres from a ski hill, and liable in damages to the mortgagee who advanced monies on the strength of the appraisal.

The property was unique in the area and the appraiser used a combination of costs and comparisons to arrive at a value. He made several errors but his main problem was the lack of true comparable properties. As a result, he made large financial adjustments, based upon his local experience, to the three properties he selected. He had neither appraised nor seen them but, instead, relied upon real estate printouts for his information.

The judge concluded that the standard of care required of a reasonable appraiser is to obtain as much information as possible to adequately inform himself about the comparable property, and then alert the person requiring the appraisal to the possibility that his appraisal may be less reliable because of the lack of appropriate comparables.2

 1.Michael Santarsieri Inc. v. Unicity Mall Ltd., 26 R.P.R (3rd), 98.
 2.Kokanee Mortgage MIC Ltd. v. Concord Appraisals Ltd., S.C.B.C., Kamloops Registry, Reasons for Judgment, August 4, 2000.

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