How Can A Tenant Use Self-Help To Enforce Its Own Exclusive Use Rights?

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In prior Ruminations postings we’ve explored the inadequacies of damages and inadequacy of a tenant’s right to terminate its lease as remedies for a landlord’s failure to deliver on a lease’s promise that the tenant will have the exclusive right to sell certain goods or services at the property. Briefly stated, figuring out the quantum of damages that will offset a speculative loss of profits is a fool’s errand; and, terminating a lease is like ending your own life to relieve the pain of a headache. OK, that’s not a good example, but you get the idea.

At a minimum, a lease should obligate the landlord to place the protected tenant’s exclusive use restrictions in later-executed leases other than in those kinds of leases for which the restrictions are agreed not to apply. If a later tenant under such a lease, i.e., a lease that says the tenant can’t sell the restricted goods or services, goes ahead and does so anyway, the landlord shouldn’t be able to say “tough cookies, I told her not to do so.” That tenant, who is violating the protected tenant’s bargained-for (and paid-for) exclusive use rights, is a “rogue” tenant, and “rogue” tenants must be made to behave.

Now, some landlords experience “seller’s remorse” in these situations. When they leased to the first tenant, the “protected” tenant, they had to agree to granting the exclusive use right to make the “sale.” Yes, the landlord sold possession to its tenant and took a promise to pay rent in return. The tenant insisted on some “accessories” or “bells and whistles” to go along with the “possession,” and the landlord “sweetened” the package by agreeing to grant certain exclusive use rights to that first, protected tenant.

Along comes a later tenant and the landlord gets that tenant to agree not to sell the protected goods and services. That’s an agreement the second tenant was willing to make to get possession of its premises. It agreed to a restriction on its possession – it wouldn’t possess the leased premises for the purpose of selling those particular goods or services.

Now, suppose the second tenant’s memory fades (to give it the benefit of the doubt) and it starts to sell the listed items. Further suppose that it likes resulting surge in its profits and when asked to stop, it goes “rogue” – it strays from the path it agreed to walk. Perhaps, had the second tenant’s sales of these particular items been insignificant, the first (protected) tenant wouldn’t notice or care. But, that’s not our hypothetical example. Here, everyone notices, and the protected tenant says to its landlord: “Enforce your lease against that rogue, just like you would had it stopped paying rent.” What is the landlord’s response?

We’d all like to think that every landlord will “belly up to the bar,” and enforce the lease against the rogue tenant. Here’s the seller’s remorse part. We forget to include the following in our hypothetical example. The first tenant has 850 square feet of space at ten dollars a square foot. It pays $8,500 a year in rent. The rogue tenant has 35,000 square feet of space at $9.00 per square foot, or $315,000 a year in rent. As if that isn’t a practical dilemma for the landlord, let’s add that the second, higher rent paying tenant is part of a chain of stores and the same landlord has that store at 23 other locations. To make it a little cloudier, while it looks pretty clear that there is a violation of the exclusive use right, there is some room for legitimate argument.

Now we can see how the “seller” (think: the landlord when it persuaded its tenant to “buy” the place) might be experiencing remorse about signing the earlier lease.

Well, the first (protected) tenant thinks this is “just too bad.” “A deal is a deal. I agreed to pay $15,000 a year if, and only if, you (the landlord) agreed to protect me. I’m not willing to terminate my lease; this is a good, profitable location. I’ll never prove damages. Even if it might be possible, I can’t afford the court battle when Ruminations already told me it was a fool’s errand.” So, what’s the first (protected) tenant to do?

Here’s a suggestion. At the time the protected tenant’s least is being negotiated – before the seller has remorse – negotiate for the right to elect to enforce the exclusive use right against rogue tenants, including the right to act on behalf of the landlord to evict a rogue tenant. Yes, protected tenants should ask for the right to protect themselves if their landlord won’t do so at all or even if the landlord won’t do so vigorously. If the protected tenant were to insist that specific agreed-upon words of restriction must be placed in subsequent leases, such as, “Thou shalt not purvey forbidden fruit,” and if the protected tenant believes such a restriction is enforceable in a court of law, then it should be willing to take the risk of failure and “eat” the expense of failing to get an appropriate legal remedy on behalf of its landlord. Of course, if it is successful, its landlord should pay the reasonable and necessary enforcement costs because the landlord was unwilling to take the necessary steps itself without regard to its economic self-interest at the time.

Well, it wouldn’t be illegitimate for landlords and those of us who represent landlords to recoil at giving this power over to a tenant, but it might be illegitimate not to do so. After all, doesn’t “a deal is a deal” go both ways? If the protected tenant in our hypothetical example, finding itself with eunuch-like powers when it comes to enjoying the benefits of its own exclusive use rights, decides to compensate for the lost business by violating yet another tenant’s own rights, would the very same landlord always stand back on the sidelines? What if the newly-skewered tenant occupies 50,000 square feet of space at $11.00 per square foot? Isn’t a deal a deal?

OK, fellow Ruminators, what do you think? Just pop to the top of this posting and add your two cents.

By the way, what we think is left as the last leg of this exclusive use rights table of issues is what to do when the landlord fails to obligate later tenants to honor a prior-granted excusive use right and whether a tenant can get direct rights against later tenants who might be violating the earlier granted right to exclusivity. If you have suggestions, send them along.

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Comments

  1. Simple question for anyone out there, raised by Ira’s last paragraph. Would the protected tenant have a “common law” right to move against the subsequent rogue tenant – assuming the rogue tenant had notice of the exclusive – without getting prior written permission in its lease to do so?

  2. Steve Noll says:

    I’d like to know the answer to Joel’s question as well.

  3. I have seen the self-help rights help long before the court battle as well. In one instance the big book store was there first, then the Landlord leased a smaller store to my client who had roughly 4 aisles of competing books and 8 aisles of specialty books. For 10 years or so Big Books and Little Books cohabitated well. Then Big Books objected. Landlord was of no help, probably because so much time had passed with no conflict. Big Books and Little Books met onsite and measured and measured and measured to the mid-points of the aisles and eventually reached an agreement and store configuration that fell within the de minimus execption (I think 1 aisle was lost, Little Books called itself a book store but home decor and music sales were a large part and 1 type of specialty books were taken out of the equation entirely by agreement of the parties). But they could directly communicate without worrying about interfering with the other contract, using the useless landlord as an intemediary, or even spending the money to fight it out in court. It may have been an unusual case where both parties wanted a solution and not just reduced rent or other remedies, but I tell the story just to add to the Ruminations that sometimes these provisions can help communications and even benefit the Landlord by saving some time by not playing intermediary.

  4. Crystal, good response. I agree that often little help can be expected from the landlord. I had a case where my client signed a lease first, Big Books (with their overbroad exclusive clause) signed a lease afterwards and acknowledged my client’s prior presence in location “A”. Big Books later filed for bankruptcy. My client thereafter was relocating to a bigger store, location “B”, under a new lease and asked the landlord to get an amendment from Big Books to recognizing my client’s new store in location “B”. Landlord refused because he feared it would cost him money to do so. To get the deal done, my client accepted the landlord’s indemnity (landlord was a major developer) and I wrote the indemnity clause from Hell and excepted it from the exculpation clause. The lender refused to sign an SNDA but my client did not have to pay rent until an SNDA was received. Big Books eventually rejected their lease anyway and the lender signed the SNDA. A lot of trouble for nothing.

  5. Mark Kass says:

    Joel:
    Perhaps it depends on jurisdiction. In my jurisdiction (Texas) it seems that the right to protection from a non-compete is purely contractual, with Tenant 1 (having the exclusive) being at third party beneficiary to the lease between Landlord and Tenant 2 ( the predator). In fact, it is not uncommon for Landlord to grant exclusives predicated upon the Tenant 1 agreeing to indemnify the Landlord against Tenant 2 lawsuit against the Landlord under common law theories of illegal restraint of trade.

  6. Joel- how frustrating to go through the gymnastics for nought. As an aside, with all the single asset entities backing up the Landlord entities, maybe we can get Ira to talk about how you ever get a parent company or title company to back lease issues that are not enough to kill the deal. In the retail world, I don’t think title insurance helps until the definition of damages includes lost sales. But as has been pointed out, even if we could change the title industry, those are hard to prove. How would a rogue tenant endorsement read if we could get one?

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