Exclusive Use Rights – Say What You Mean; Mean What You Say!

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We thought that a good follow-up to last week’s blog posting about the need for talent and attention to language when it comes to drafting (anything, but especially) exclusive use clauses would be to take a look at a relatively insignificant, unpublished New Jersey court decision from earlier this year. With apologies to the liquor store owners who chose to bring this action and then pursue their unsuccessful appeal, because they certainly thought they would prevail, we wonder what they were thinking. On the other hand, we thank them and the well regarded law firms involved for giving us something to write about.

A liquor store was operating on land owned by the store’s owners. The owner of an adjacent shopping center needed a strip of land from the liquor store parcel and negotiated for purchase of that strip. The deal that was struck called for a restrictive covenant to be placed in the deed for that strip and for the same restriction to be incorporated into a Declaration that would govern the adjacent shopping center.

As a result, each document recited a context-appropriate version of the following:

[Shopping center owner agrees that] so long as a liquor store is continuously operated on the Adjacent Property (except for temporary closures for remodeling and the like), not to lease any portion of the [shopping center property] to a liquor package store.

Anything to the contrary notwithstanding, the following shall be permitted to operate on the [shopping center property]: (i) a food market or grocery with an accessory on-site liquor package store sales, … and (iii) any store or operation that sells liquor as an ancillary part of its business. [Underlining ours.]

We aren’t going to ask for a definition of a “liquor store” or of a “liquor package store” or if there is a difference. Our normal thinking when it comes to licensed businesses such as liquor stores or pharmacies is to draft such restrictions based on the presence or absence of a license, but we’re not sure there is a difference. Perhaps the parties could argue about whether a variety store with shelves of wine alongside of aisles of everything else is a liquor package store or if wine or beer is the same as liquor. None of that, however, was at stake here. If anyone has a story about liquor store exclusives to share, send it to imeislik@meislik.com or add a comment at www.retailrealestatelaw.com.

We aren’t even going to fuss about what clever people might make of the word, “continuously.”

What happened is that a genuine supermarket opened at the shopping center (which is what the expansion was all about) and it sold packaged liquor. The wrinkle was that, instead of running that business itself, it subleased space within the supermarket to a liquor store operator. The liquor store business within the supermarket, though owned and operated by a subtenant, appeared (to customers) as if it were part and parcel of the total store. It had no separate entrance; its employees wore supermarket uniforms; the signage used the supermarket’s name; and it advertised under the supermarket’s name.

Ruminations readers might think about the odds of the adjacent liquor store owners persuading a court to shut down the subtenant’s operation were pretty low, but that didn’t seem to matter to the owners of the free-standing liquor store. They sued for injunctive relief and lost. They appealed and lost. The short appellate decision is available at http://alturl.com/msp33.

Just as was the case in last week’s posting about burritos and sandwiches, the aggrieved party (i.e., the one that thought it had the protection of an exclusive use clause) argued that the court should have taken into account “the parties’ intent and understanding as to the scope and meaning of the restrictive covenant.” The court thought otherwise, holding that there was no genuine issue of fact. It expressed itself as follows: “[g]iven the clarity of the restrictive covenant’s language, we can imagine no interpretation, and we can envision no putative set of facts disclosable in discovery, sufficient to render the operation, as it presently exists” to be in breach of the restrictive covenant.

There isn’t any need to detail the court’s reasoning. Our readers are smart enough to figure that out for themselves. Even the complaining liquor store owners conceded that if the supermarket itself “owned and operated the liquor store, the operation would not be in violation of the restrictive covenant.” In fact, Ruminations doubts that the sellers of the strip of land (i.e., the existing liquor store owners) even made such a distinction when they bargained for the restriction at the time of sale. To give them the benefit of the doubt, however, we’ll presume they were willing to compete with a liquor store operated by a large supermarket chain, but not one within the supermarket if it were to be operated by a savvy, independent, and experienced competitor.

Ruminations wasn’t there to argue the case for the complaining owners, but we think we might have presented a stronger argument that clause (iii) of the exceptions to the restrictive covenant created a distinction between how a supermarket could operate a liquor store and how anyone else could do so at the shopping center. We would have pointed out that the supermarket-specific “carve-out” wouldn’t have been needed if it was subsumed by clause (iii)’s carve-out for any store selling liquor as an ancillary part of its business. And, that’s without getting into what might constitute an “ancillary” part of a business. If our argument were to prevail, and we doubt that it would, the court would have decided that supermarkets didn’t come with (iii) because they were specifically covered by clause (i), and thus supermarkets had to own their own liquor store operation. What happened though, is that the court turned this logic on its head, using clause (iii) as sword against the free-standing liquor store when the court wrote: “[i]n fact, if common ownership and operation were essential to qualify, then the restrictive covenant’s other stated exemption [clause (iii)] allowing ‘any store or operation that sells liquor as an ancillary part of the business’ would be meaningless.”

None of that matters. What does matter leads to the same conclusion we reached last week – if you want to get particular protection from certain kinds of competition, you need to say so carefully and thoroughly. You need to think it out. That’s because the law in New Jersey (and pretty much every place else) is as follows:

It is firmly established that the policy of the law is against the imposition of restrictions upon the use and enjoyment of land and such restrictions are to be strictly construed. … Restrictions on the use to which land may be put are not favored in law because they impair alienability. They are always to be strictly construed, and courts will not aid one person to restrict another in the use of his land unless the right to restrict is made manifest and clear in the restrictive covenant. … Generally, in the context of restrictive covenant, a rule of strict construction should be applied. Absent explicit indications of a special meaning, words in such covenants are given their ordinary meaning.

That kind of says it all. If you want it, you’ve got to say it clearly and precisely.

Last week’s posting and our earlier postings about exclusive use rights have brought out a number of useful comments about the wisdom of a landlord (or, in this case, a property owner) even granting such rights in the first place. We have no squabble about any of those comments – their point is correct – restrictive covenants can frustrate owners in the leasing or use of their land. On the other hand, there are two parties to the bargain and sometimes the choice is getting a particular tenant or not. So, grants of exclusive use rights are a fact of life. The ease or difficulty of a tenant getting one waxes and wanes of differences in bargaining power and leasing environments from tenant to tenant, from time to time, and from situation to situation. That doesn’t change anything. If there is going to be an exclusive use right, those who write the words need to pay attention to the little things, i.e., “sweat the details,” because failure to do so deprives the parties of the predictability of outcome they’ve paid for and creates a profit center for the litigation side of the real estate law practice.

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Comments

  1. Ira, I couldn’t have said it better. When I ask a client what is the core business he/she wants to protect, I often found that they haven’t thought about it much. That question forces them to do that because I tell them that without such detailed thinking, their exclusive may be easily evaded and rendered of no value by a court.

  2. A wrinkle that exists, in the Province of Quebec, is that restrictive use easements are not enforceable as real rights. They are contractual covenants (personal rights) that bind the parties who sign the agreement (provided the “normal” rules regarding agreements in restraint of trade are satisfied), but not necessarily third parties, be they subsequent purchasers of the land that is burdened by the easement, tenants of such land, or mortgagees. Therefore, a double challenge exists in Quebec, the first being the one discussed above (i.e. say what you mean) and the second being the steps that must be taken to ensure that the results you have bargained for can be achieved.

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