Why Can’t We Write An Exclusive Use Clause That Says What It Means and Means What It Says? – Yet Another Example

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It wasn’t our intention to return to the subject of exclusive use clauses this quickly, but a “low hanging grape” type court opinion crossed our desk. And, on top of illustrating a problem with how the court in 2000 Clements Bridge, LLC v. OfficeMax North America, Inc.” addressed a particular clause, this posting also illustrates the rule of “write what you mean; mean what you say.”

In today’s example, we have a shopping center where the tenant in focus is OfficeMax. At the time of its lease, there were three other “major tenants” at the center – Michael’s; PetSmart; and Circuit City. A battle erupted after Circuit City “disappeared” from the retail scene. The landlord replaced Circuit City with Gregg Appliances (“h.h.gregg”). Circuit City sold computers; so did h.h.gregg. Readers, Ruminations knows what you’re thinking, but here’s what the OfficeMax lease said:

… Landlord … shall not enter into a lease or sale of any portion of the Shopping Center … for the following:

(a) for the purpose of, or which is permitted to be, the sale of office, home office, school or business products, computers and computer products, office, home office, school or business supplies or equipment; office furniture; or electronics (including by way of example those businesses operated by Office Depot, Staples, Office Shop Warehouse, Mardel Christian Office and Education Supply Store; Mail Boxes etc., and Workplace); or for use as a business support center… .

Now, the h.h.gregg lease expressly gave that tenant the right to sell electronics subject to the “Exclusive Uses and Restrictions” included in the lease as an Exhibit. And yes, the OfficeMax exclusive use provision was part of that Exhibit.

OfficeMax cried “foul,” claiming that h.h.gregg, by selling “electronics,” was violating the prohibition barring the sale of “electronics.”

In deciding a Motion for Summary Judgment, a United States District Court judge found nothing wrong with what h.h.gregg was doing. By way of background, the Court looked to New Jersey law. Here are some of the things that it said: “Normally, under New Jersey law, the construction of a written contract is a matter of law.” “When construing a contract ‘it should not be interpreted to render one of its terms meaningless.’” “Literalism must give way to context.” “Where there is uncertainty, ambiguity or the need for parol evidence to aid in the interpretation, then the doubtful provision should be left to the jury.”

So, the Court set out to determine “what was actually prohibited.” It saw the Exclusive Use provision as containing two lists. The first list barred the sale of certain products, “electronics” among them. The second list identified “examples of prohibited entities.” h.h.gregg was not on that second list. Thus, it wasn’t bound by the first list.

Here’s the tricky part. The court then concluded that the overall provision “must be interpreted to prohibit the sale of the listed products, but only when sold through a prohibited office superstore.” h.h.gregg was not listed as one of those “prohibited office superstores.”

The Court was satisfied with its interpretation, saying that it “harmonize[d] both the h.h.gregg Lease and [the OfficeMax] Lease. It also comports with common sense.” It explained that “to place undue emphasis on the list of prohibited products, as [OfficeMax suggested], would cause several problems. First, the list of office superstores [would] be rendered meaningless. Second, hhgregg’s Use Provision would directly contradict [OfficeMax’s] Prohibited Uses Provision attached as Exhibit D to the hhgregg lease.”

The Court found that the Exclusive Use provision was “unambiguous.” Further, expressly said that it could not “fathom that any electronics retail store [h.h.gregg] would intend to enter a contract that prohibited the sale of electronics.” Ruminations doesn’t see this is clearly as did the Court.

We think everybody got this one wrong – the landlord, the old tenant, the new tenant, and the Court. And Ruminations thinks that’s because OfficeMax’s exclusive use provision mixes up some concepts.

We’ll start with the Court. Yes, there are two lists. But no, they don’t seem to work the way the court says they work. There is no place in the first list that says the first list only applies if you have a store on the second list. You wouldn’t need the first list (prohibited products) if you just had the second list (and if the second list said that the landlord couldn’t lease to any of the stores on the second list).

Another thing about the court’s analysis. Why would OfficeMax’s exclusive use rights (whatever they might be) be diminished by what its landlord writes in a later lease to a different tenant? Does the court think that a landlord can “avoid” its earlier promise to protect a prior tenant by expressly giving a later tenant the right to sell an otherwise restricted item?

As to the tenant, how many leases had it signed with this particular clause, one that Ruminations believes makes no sense? Either you are going to prohibit the sale (or display) of a list of items or product categories or you are going to try to bar later leasing to certain types of stores (such as, and by way of example only… ). Here the tenant tries both in the same paragraph. It never made clear what relevance the list of stores really had to the exclusive use restriction. So, the court, challenged as it was to understand our “industry,” resorted to its “rules of construction.” Basically, the tenant’s “standard exclusive use restriction language invited the court to try to give effect to every word, and the court “found” a way to do so, however nonsensical the result might have been. If we were trying to “honor” the original author by changing the least number of words, we might have written: “… electronics (including, by way of example only, and not of limitation, sales of any one or more of those items or product categories by stores operated by Office Depot, …). If we were less kind to the original author, we would have started from scratch.

As to the landlord, why did it agree to such text in the first place? Opting for uncertainty isn’t usually a good business model. Just because there was a Circuit City store at the shopping center when OfficeMax became a tenant didn’t automatically mean that the Circuit City premises, itself, was grandfathered as an electronics store. The Court cited no language in the OfficeMax lease that would have preserved those premises for the sale of “electronics” once Circuit City departed (for whatever reason). If that’s what the landlord expected, it should have bargained for that.

And, lastly, what about h.h.gregg? How certain was it that it could sell electronics given the OfficeMax exclusive use restriction?

Of course, readers who believe the court got it right must think Ruminations has gone off the deep end by not couching its opinion with “probably,” “perhaps,” and other weasel words. But, is there anyone out there who doesn’t believe that another court could easily have reached the opposite conclusion? Again, uncertainty is what we who negotiate leases and other contracts get paid to eliminate.

In the words of Oliver Wendel Holmes, Jr., “A word is not a crystal, transparent and unchanged; it is the skin of a living thought and may vary greatly in color and content according to the circumstances and time in which it is used.”

Brickbats, other examples of troublesome exclusive use clauses, and all other comments can be shared with everyone by clicking just below this entry’s headline where it says “Leave Your Comment.”

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  1. Randall Gunn says:

    The world of retailers and retail development have changed over the past 20 years. There was a time when there was synergy among the retailers. Developers were happy because they could fill their development with a variety of retailers that customers wanted to come on the property. There was a time when virtually every neighborhood shopping center was comprised of the grocer, an in line drug store, a dollar store/general merchandise retailer. pizza/chinese restaurant, and most likely something for hair.

    In Florida, the grocery clause wars and the relocation of the drugstores to freestanding created the war. Retailers no longer wanted to live together. WInn Dixie v. 99Cent Store is the case that knocked everything out. The good judge went to Websters Dictionary to define “grocery” The end result was that ANYTHING sold in the grocery store was deemed an exclusive, This included paper goods, soap, candy…in short NOT restricted to to food. This led to issues of whether the candy line at a Blockbuster violated the grocery restriction. The dollar stores could not sell detergent or even t-shirts if the grocer sold them.

    Retailers now want to be one stop destinations regardless of their size/square footage. Developers are moving to a group of free standing retailers with cross easements. To complicate matters more, every planning and development department thinks that their community has to follow the “urban village concept” that they have read about. Whether the retailers want to be in their urban village or if the customers want the select retailers, the development departments ad some times county managers will give a list of the approved retailers as a condition of the permits.
    ( Permit will require a certain percentage of the development to be two story office/residential over retail. This could be in the middle of a parking lot and nobody has a desire to live there.)

    Bottom line, not just a matter of better drafting. Retailers want more, developers have less control. Local governments dictate tenant mix. Recipe for conflict.

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