Why Courts Aren’t Real Keen About Enforcing Exclusive Use Rights Or Other Kinds Of Restrictive Covenants

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It’s been a while since we Ruminated over exclusive use lease provisions, and a while since we’ve written: “Say what you mean; mean what you say.” In fact that was the subheading for a 2012 posting about this very same general topic: restrictive covenants / exclusive use rights. If you doubt us, click HERE.

We’ll start with a recent Ohio Court of Appeals case dealing with a Reciprocal Easement Agreement (or Declaration of Restrictions or something like that; we aren’t told which). The case is captioned Fettro v. Rombach Center, LLC, 2013-Ohio-2279 (OH Ct. App., Dist. 12, Jun. 3, 2013). If you click HERE, you can read the decision. This is NOT an exclusive use right case. So, why are we writing about it? That’s because exclusive use rights are a subset of a larger category of real property law: “restrictive covenants.” And, when you know something about restrictive covenants, you know something about exclusive use rights.

Before we begin our storytelling, here are some juicy statements about restrictive covenants from the Ohio court. Take them to heart because the enforceability of exclusive use rights depends on whether you consider these statements when you write a lease or easement or declaration or whatever.

  • [The] legal system does not favor restrictions on the use of property.

  • However, restrictive covenants containing a general building scheme or plan for development are enforceable if the covenants are not contrary to public policy.

  • … one of the requirements for creation of an enforceable restriction on the use of land by covenant is, “the restriction cannot be implied, but must be express.”

  • [T]he general rule, with respect to construing agreements restricting the use of real estate, is that such agreements are strictly construed against limitations upon such use, and that all doubts should be resolved against a possible construction thereof which would increase the restriction upon the use of such real estate.

  • Furthermore, “[i]f the covenant’s language is indefinite, doubtful, and capable of contradictory interpretations, the court must construe the covenant in favor of the free use of land.”

  • [T]o be enforceable, a covenant must expressly prohibit the restricted use.

  • While referring to the property as a shopping center might show that the parties intended the property to be used for retail, this is not enough to prohibit all uses that are inconsistent with retail stores… .

    and, finally:

  • This court is without the power to rewrite contracts.

Do you get the flavor?

And now, our the story:

There were three adjacent parcels of land and their respective owners set about to develop a shopping center. To make it a unified development, they struck an agreement in the form of a reciprocal easement agreement (REA) or something like that. The agreement was infused with “the shopping center.” It required one of the parcels to be “developed as a supermarket.” It also required the two other parcels to “include a ‘retail drug store’ as well as ‘other retail shops.’” The parties were to “develop, maintain, and improve the property as a retail shopping center.” In addition, the REA (or whatever) expressly stated that there could be none of the following uses:

Movie theater or cinema

State or local employment office

Night Club

Bingo parlor or bowling alley

Any non-retail business except those business services consistent with community standards

Any retail business selling used merchandise except rent to own furniture and appliance stores

Any lounge, restaurant, or games parlor located within 180 feet of …

Got it so far?

The property was developed and, as required, a supermarket was built and then opened for business on the required parcel. Much later (we think), the supermarket closed and a church took its place. The other two parcel owners cried “foul” and sought a declaratory judgment that the church had no right to be at “the shopping center.”

Don’t look for more of the “facts” or ask anything else about the REA or other agreement. All relevant information is now on the table, so to say.

Knowing that crying “foul” alone would not be legally sufficient, and knowing that the word “church” appeared nowhere in the governing document, the aggrieved parcel owners tried the following arguments. [While we are at it, we recommend that you don’t limit yourself to “churches,” at least when it comes to writing leases. “Houses of worship” might cover more of what you are seeking to regulate or restrict.]

Basically, there were two pitches made to the court. One was that the entire REA or other agreement was, as pointed out above, infused with an “understanding” or “agreement” that the combined properties would be a shopping center and that the liberal sprinkling of the words “retail shops” within the written document further supported this overall  “agreement.” The aggrieved parcel owners beseeched the court to consider the agreement as a “whole” and to agree with them that a church couldn’t operate at the property. The other pitch they made, in an attempt to find some thread within the agreement to hang from, was that a church violated the prohibition against “any non-retail business except those business services consistent with community standards.”

As did the court, we’ll first dispense with the second argument. The cited prohibition only covered “businesses” and a church is not a business because a business is a “commercial enterprise carried on for profit.” [No, we are not going there. We aren’t going to discuss politics or religion here.] In addition, even for those of you who might have a different view from that of the court as to whether churches are businesses, you’d have to agree that churches are “consistent with community standards.” So, for either the first part of the “non-retail” restriction or its second part, houses of worship weren’t covered by its text.

Simply put, what the court was saying was, “Look here, the text of that restriction does not contemplate that it would include a “house of worship” under its umbrella. Don’t pretend that it did.” Think about that when you write the “catch-all” prohibited “non-retail” use restriction.

As to the ample use of “shopping center” and “retail” within the document, the court spit out all of those principles of law in the first set of shaded boxes above. Finding there were no provisions of the REA or other document that expressly prohibit a church, it refused to find that the document impliedly did the same. Its words were:

[T]o be enforceable, a covenant must expressly prohibit the restricted use. The general language in the agreement that refers to the property as a “shopping center” is insufficient to prohibit a church. While referring to the property as a shopping center might show the parties intended the property to be used as retail, this is not enough to prohibit all uses that are inconsistent with retail stores such as a church. This court is without the power to rewrite contracts. If the parties wished to restrict churches from operating on [the particular parcel], they should have expressly stated this in unambiguous language.

Say what you mean; mean what you say.

This leads us to start to tell you about a second, unrelated court decision, but only so that you can start thinking about the situation. When you do so, think about those maxims in the first set of shaded boxes above because they lie hidden in the mind of a judge whenever an exclusive use right dispute shows up in her or his court.

All we’ll tell you for now is the following. A supermarket’s lease prohibited the landlord from leasing space at the shopping center, or within five miles of the shopping center, for use as a food supermarket, butcher shop, seafood shop or grocery store. The landlord later permitted a group of ten farmers’ market stalls to operate at the shopping center. How did it turn out? Was anyone happy with the outcome? Review the principles set out in the first set of shaded boxes above and tune in next week. Until then, let us know what you think about today’s subject by clicking the word “comment” or “comments” just below the title to today’s posting.

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Comments

  1. John Lovett says:

    Ira,

    Thanks for sharing this interesting case. In my neck of the woods (Louisiana), we are in a transitional phase and courts seem to be showing more receptivity to exclusive use agreements in all sorts of development deals, despite a long civil law tradition disfavoring them. See John Lovett, Title Conditions in Restraint of Trade, in Mixed Jurisdictions Compared: Private Law in Scotland and Louisiana (Palmer and Reid, eds, Edinburgh).

    I look forward to next week’s installment. I bet the Farmers Market stalls come out smelling like a rose.

    John Lovett
    De Van D. Dagget Jr. Distinguished Professor
    Loyola University New Orleans College of Law

  2. I would venture that courts aren’t keen on restrictive covenants because generally speaking they inhibit competition and may impair the alienability of property, although they can be useful if they do not overreach.

  3. Jim Henegan says:

    The shopping center industry is changing in many ways and one change is that non-traditional uses are being put into shopping centers. Rehabilitative uses like Athletico are very good tenants especially for outlots in centers. If you have an REA that says you can only use the Center for “Retail uses” can you have an Athletico or similar use.

    Other medical uses are pretty common in centers and good tenants.

  4. Adam Taylor says:

    Ira-

    Thanks for the article. Jim, I agree with your comment that the shopping center industry is really changing in a variety of ways (with respect to both retail and non-retail uses). This is something we all likely need to pay particular attention to as we negotiate lease agreements going forward (at least with respect to the tenant’s request to place various use restrictions on the property).

  5. Elliot Warm says:

    As others have said, there are ongoing changes in the shopping center world. The “standard” restrictions that tenants have been imposing for years don’t always make sense. The prohibition against “massage parlors” may prohibit the leasing to Massage Envy and other “legitimate” facilities of such nature. The prohibition against operations in the nature of drug clinics would not allow for a medical marijuana dispensary, which may ultimately be a use in keeping with community standards. A house of worship can be a good use for a movie theater that would otherwise be unused at certain early-day times. The moral is that landlords need to be very careful in evaluating tenant lists of perceived “noxious” uses.

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