Exclusive Use Clauses – Can We Achieve Clarity and Avoid Redundancy? Enforceability Depends On It.

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It’s been a while since we Ruminated about exclusive use provisions and it’s been a while since we posted a (relatively, by our history) short piece. We thought we’d cure both problems today. It also gives us yet another opportunity to rant about inartful drafting. That rant appears near the bottom of this posting.

Restrictive use covenants are narrowly interpreted and enforced, and exclusive use provisions are one type of such covenants. People feel betrayed if they think they have bargained for an exclusive use right and then see someone else selling the same goods, or providing the same services, in seeming violation of their agreement. When the party intended to be burdened by the use restriction knowingly engages in the seemingly prohibited use or allows someone holding under them (e.g., a tenant) to do so, it is either because it doesn’t believe the restriction applies or thinks that “might makes right” and that it can bully the seemingly protected party.

All of that makes for litigation.

A recurrent Ruminations theme is that “words have meaning.” The 2012 unpublished opinion in GMK Properties, LLC v. Developers Diversified Realty Corporation (findable by clicking HERE) is another illustration of that principle.

Here’s the story.

For $2.4 million, a shopping center developer purchased a strip of land from its neighbor in order to widen a road for the shopping center. The neighbor operated a liquor store on its land. Consequently, the sales agreement for the strip of land included the following:

“[Developer-Buyer] agrees, that so long as a liquor store is continuously operated on the Adjacent Property [meaning the balance of the seller-liquor store owner’s lot] (except for temporary closures for remodeling and the like), not to lease any portion of the [shopping center] to a liquor package store.”

There was a carve-out for certain businesses at the shopping center. It read:

“Anything to the contrary notwithstanding, the following shall be permitted to operate [at the shopping center]: (i) a food market or grocery with an accessory on-site liquor package store sales, (ii) any restaurant holding a Broad C Liquor License, and (iii) any store or operation that sells liquor as an ancillary part of its business.”

Before we report what went on, it might be timely to ask what it means to “continuously operate” or what the difference is between a food market and a grocery or how (i) really differs from (iii). We might also ask if the shopping center developer can operate its own liquor store at the shopping center.

Also as an aside, in New Jersey, a “Broad C License” is an old name for a Type 32 – Plenary Retail Consumption License with Broad Package Privileges. It allows the sale of any alcoholic beverages for consumption on the licensed premises by the glass or other open receptacle and also the sale of any alcoholic beverages in original containers for consumption off the licensed premises. You can have both a restaurant and a package store with the same license. So, that means you can have a bar with a liquor store or a liquor store with a bar. Whether a menu listing only three types of hamburgers makes a bar into a restaurant is for readers to ponder. Thus, we also ask whether there is any difference between carve-out (ii) and carve-out (iii).

We’ll stop picking apart the casual language that the seller agreed would protect its liquor store business, and continue with the story.

A major supermarket signed a lease at the shopping center in 2003 and opened in 2006. In 2009, “as an accommodation to its patrons,” it subleased space to a liquor store. The liquor store operated entirely within the supermarket. It operated under the supermarket’s trade name. The supermarket was remodeled to incorporate the liquor store as if it were part and parcel of the store. The only access to the liquor store was from inside the supermarket. The liquor store’s employees wore supermarket uniforms. All advertising was jointly run.

For those who wonder: “why the artifice,” here’s the reason. In New Jersey, no corporation or person can own more than two retail liquor licenses. Our guess is that the supermarket was tapped out on that account. Nonetheless, we doubt that more than one percent of the consuming public had any inkling that this particular liquor store was not as much a part of the supermarket as was its canned food aisle. As in commercial property leasing, when it comes to solving liquor license problems, “where there’s a will, there’s a way.”

For some reason, the neighboring liquor store owner, the seller of that strip of land, thought this supermarket’s way of selling liquor did not fall within any. It “tacitly concede[d] that if [the supermarket] itself owned and operated the liquor store, the operation would not be in violation of the restrictive covenant,” but argued “that because the operator and owner [was] another entity, the [subtenant’s] operation [did] not fall within the exclusionary language.”

The court rejected the selling-liquor store owner’s argument. We think there were more direct ways to do so, but the court chose to say: “… if common ownership and operation were essential to qualify, then the restrictive covenant’s other stated exemption allowing ‘any store or operation that sells liquor as an ancillary part of the business’ would be rendered meaningless. We [the court] do not, of course, presume the drafters of the restrictive covenant intended any such redundancy.”

To us, the court’s ruling and outcome is far from a surprise. We speculate that the owner of the liquor store parcel had seller’s remorse and was seeking to get something it expressly bargained away – to get rid of liquor sales within a supermarket. If we are wrong, there was possible malpractice and, if so, the liquor store owner sued the wrong party.

As obvious to us as the suit’s outcome appears from reading the court’s opinion alone, the parties took it seriously. Three fairly large law firms, with fairly stiff billing rates, pursued or defended this matter. The liquor store owner’s attorneys didn’t think a frivolous argument was being made; nor, did the court.

So, what’s our take on this?

First, here’s the law in New Jersey and pretty much everywhere else:

“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 covenants, a rule of strict construction should be applied. Absent explicit indications of a special meaning, words in such covenants are given their ordinary meaning.”

In other words, restrictions upon the use and enjoyment of land must be “made manifest and clear in the restrictive covenant.”

Any “ambiguities and uncertainties in the restrictive provisions of grants are to be resolved in favor of the owner s free use of his [or her] property.”

“All doubts and ambiguities must be resolved in favor of the owner’s unrestricted use of the land.”

Second, why don’t those who craft leases and other documents read what they write? If the seller only wanted to permit supermarkets at the shopping center to sell liquor when the supermarket held the license, it should have said so. Perhaps it thought that the two-license-per-owner rule would protect it?

If the seller wanted to bar the sale of alcoholic beverages for off-premises consumption, it should have said so. What would have been the outcome if a store selling beer, wine, and soda, but not liquor, had opened at the shopping center?

What would have happened had the shopping center operator, itself, owned a liquor store at the shopping center? We’ve seen a situation where a laundromat owner sold land to an apartment complex and negotiated for a restrictive covenant barring the complex from leasing space to a laundry room operator, only to have a court permit the apartment complex owner to operate its own facility there without being in violation of the restrictive covenant. So much for the laundromat expecting that a neighboring apartment complex would bring it scads of business.

Go back to the carve-out language near the top of this posting. Doesn’t (iii) embody (i) and (ii)? We would use the word “redundant” to describe that situation. Then, ponder the breadth of the court’s statement: “We [the court] do not, of course, presume the drafters of the restrictive covenant intended any such redundancy.” How often do we see redundant language in a document and think nothing of it? Courts believe that words have meaning and that they need to apply that meaning when confronted with an issue. If, in one place, a document reads, “which consent will not be unreasonably withheld,” and in another place, the same document reads, “which consent will not be unreasonably withheld or delayed,” will a court allow “delay” in the first instance while punishing “delay” in the second?

Our question is not whether you or we think the outcome of a court battle will be clearly in favor of the way “we” read the document. If there is any uncertainty at all, the parties will suffer the consequences of that uncertainty, usually at least in the form of a loss of time and money.

Leases and other contracts, as best as can be done, should provide certainty of the expected result. Lazy drafting, far, far too prevalent, cheats the parties of that certainty. Let’s all strive to do better. Let’s read what we write. Let’s think about what we have written. The contracting parties deserve at least that.  And, that includes having a willingness to rewrite text that we think is perfectly clear when “the other side” does not.  That includes being gracious about it.

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  1. Randall Gunn says:

    I know that exclusive use provisions are normally interpreted exclusives narrowly. In FL, the precedent for “grocery” went the other way. The result has been that a grocer can exclude the sale of ANYTHING that they sell, not just food. This has blocked hardware stores, dollar stores, and paper goods stores from some grocery anchored centers. Winn Dixie v. 99 Cent Stuff, 811 So. 2d 719 (Fla App 2002)

    “Parties are bound by the clear words of their agreements and a subsequent interpretation in conflict with the clear meaning cannot be given effect. Unless the document in question contains a glossary of terms requiring a different meaning, see Specialty Restaurants Corp. v. City of Miami, 501 So.2d 101, 102 (Fla. 3d DCA 1987), which is not the case here, to find the plain and ordinary meaning of words, one looks to the dictionary. See Beans v. Chohonis, 740 So.2d 65 (Fla. 3d DCA 1999); City of Miami Beach v. Royal Castle System, Inc., 126 So.2d 595 (Fla. 3d DCA 1961). Groceries are generally defined as `articles of food and other goods sold by a grocer,’ and a grocer is defined as `a dealer in staple food stuffs … and many household supplies (as soap, matches, paper napkins).’ Webster’s Third New International Dictionary 1001(1986).

    Employing this definition, we conclude that the trial court tailored the relief granted too narrowly. The commonly recognized definition of the term groceries includes more than just food. While it may not be easy to pinpoint each item to be considered groceries, that is no reason to ignore a clear and obvious element of the contracts at issue. The supermarket negotiated its lease with the promise that another purveyor of items like soap, matches, paper napkins, and such, would be quite limited in its ability to compete. It has the right to enjoy the benefits of its agreement. Similarly, one can only assume that the 99 Cent Store negotiated its lease with the promise that its sale of items such as soap, matches, paper napkins would be severely limited. To permit the unfettered sale of those items limited by the terms its lease, would create a windfall for that store. The trial court’s failure to give the terms at issue their plain and ordinary meaning mandates reversal.

    Likewise, the leases at issue provided that the prohibited items would occupy no more than 500 square feet of selling space. Limiting the amount of sales area to just the “footprint” of the actual fixtures is not a reasonable construction of the clause at issue. Shoppers do not arrive by chopper, sending ropes down to hoist up their purchases. Shoppers make their choices while standing in aisles and the 500 square feet provided for in the leases at issue obviously contemplated customers viewing and purchasing products from such aisles. Thus, on remand, the temporary injunctive relief granted should be revised to make clear that the 500 square foot figure includes fixtures and their proportionate aisle space. Because only tenant 99 Cent Stuff can make the ultimate decision what products to stock in its store, we find no error in the trial judge’s decision to grant the relief sought as to the tenant only.2″

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