Michaels Stores, Inc. v. Sun Life Assurance Company of Canada

Background

Michaels entered a commercial lease in 2004 for retail space in a shopping center in Eden Prairie, Minnesota. Sun Life later acquired the shopping center and became Michaels’s landlord. The lease included an “On-Going Co-Tenancy Requirement” requiring certain shopping-center premises to be open and continuously operated by an “Anchor Tenant.”

The lease provided that if the requirement was not satisfied for 120 days and other conditions were met, Michaels could pay “Alternative Rent” instead of its regular “Minimum Rent.” Alternative Rent was 3% of Michaels’s gross sales for the preceding calendar month, capped at the amount of Minimum Rent.

Sun Life argued that the lease could not reasonably be interpreted to permit that retroactive exercise of the option and sought dismissal under Federal Rule of Civil Procedure 12(b)(6), which allows dismissal when a complaint does not plausibly state a legal claim for relief.

Legal framework

Because the case was in federal court based on diversity of citizenship, the court applied Minnesota substantive law. The parties agreed that Minnesota law governed under the lease’s choice-of-law provision. Under Minnesota law, the court interprets an unambiguous contract according to its language and reads lease provisions in the context of the entire agreement rather than in isolation. A contract is ambiguous only if it is subject to more than one reasonable interpretation.

At the motion-to-dismiss stage, the court was required to accept the complaint’s factual allegations and reasonable inferences as true, but the complaint still had to state a claim that was plausible on its face.

Court’s analysis

The court held that Section 16.3 could not reasonably be understood to give Michaels the right to exercise the Alternative Rent option more than two years after it was triggered, after Michaels had paid regular rent throughout that period.

The court reasoned that this interpretation would effectively eliminate Sun Life’s contractual demand rights. After Michaels paid Alternative Rent for more than 12 consecutive months, Sun Life could demand that Michaels either terminate the lease or stop paying Alternative Rent and resume paying Minimum Rent. The lease measured Sun Life’s deadline for giving that demand notice from the initial failure of the co-tenancy requirement, not from the date Michaels began paying Alternative Rent. Allowing Michaels to wait until January 2019 would therefore deprive Sun Life of the practical ability to exercise those rights.

The court also found that the lease’s language contemplated a prompt, contemporaneous election. Section 16.3 gave Michaels the right to pay Alternative Rent “in lieu of” monthly Minimum Rent, meaning instead of the regular rent due for a particular month. That language was incompatible with a right to use the option later to recover amounts paid in 2016 and 2017. The lease separately addressed retroactive repayment of rent in a provision concerning rent abatement.

The court acknowledged that Section 16.3 presented some potential interpretive difficulties in hypothetical circumstances. Those uncertainties did not make Michaels’s proposed interpretation plausible in this case. The court also concluded that two cases involving other leases to which Michaels was a party did not resolve the dispute because the lease language in those cases materially differed from Section 16.3.

Disposition

Judge Eric C. Tostrud granted Sun Life’s motion to dismiss. The court dismissed Michaels’s complaint with prejudice and directed that judgment be entered accordingly.

Sun Life also informally requested reasonable costs and attorney’s fees under the lease. The court denied that request without prejudice to Sun Life’s right to file a motion complying with the applicable federal and local rules.