Why Your Exclusive Use Right Will Be Useless, And Even If It Isn’t, Why You Won’t Collect Damages For Its Breach

Print
Print Friendly

Last week we started to tell you a story about a “supermarket” exclusive that we learned about when we read the U.S. District Court’s decision in the Maryland case of Redner’s Markets, Inc. v. Joppatowne G.P. Limited Partnership, Civil No. L-11-1864. If you want to see the Decision, click HERE.

The scenario is a simple one. A supermarket had a lease wherein “its landlord agreed not to lease any space at the [shopping center] or within a five mile radius thereof to be used as a food supermarket, butcher shop, seafood shop, or grocery store.” So, it got pretty annoyed when an “Amish farmer’s market” opened with seven stalls within a single enclosure. Though the farmer’s market was coordinated by a single individual, the stalls were separately owned and operated. You could buy a variety of grocery and supermarket items in the “market” because there were stalls named: “Dutch Delights, Dutch Pantry Fudge, Kreative Kitchen, Lapp’s Fresh Meats, King’s Cheese & Deli, Beiler’s BBQ, and Beiler’s Baked Goods.” If that didn’t satisfy your appetite, there were three other (unaffiliated) stalls outside the enclosure, one of which was “All Fresh Quality Seafood & Produce.”

The supermarket tenant sued its landlord for breach of the lease. Two of the stalls were not a big problem. After all, as you would expect, “Lapp’s Fresh Meats” was a prohibited “butcher shop” and “All Fresh Quality Seafood & Produce” was a “seafood shop.” The court held that none of the other stores within the enclosed “farmer’s market” infringed on the supermarket’s rights. The supermarket decided not to pursue its claim against the other stores within the seven-stall market or against the BBQ or the cheese shop. It did, however, challenge the bakery, though only for injunctive relief, not damages. So, we’ll start there. [Don’t worry, have patience, let us Ruminate. We’ll get to the questions you (and we) still have about the other “competitors.”]

The lease only barred a defined type of tenant, one that qualified as a “retail operator.” To earn that lofty title, you needed to be one whose “’Gross Floor Area is 15,000 square feet or less’ and whose ‘in-store sales areas’ offering [the] specifically enumerated goods exceed[ed] twenty-five percent of the Gross Floor Area.” Sounds like simple arithmetic, doesn’t it? And, it seems like a pretty common formulation. All you do is measure the store and then measure the sales area, then divide – Done!

The judge needed to set down guidelines as to how a “stall” should be measured. He decided that while a typical store has “perimeter walls that encompass its gross floor area,” a stall was not a “bounded” store. That wasn’t a big problem for the judge. He just used the “footprint” of the individual stalls and made sure to ignore any common areas, ones used by anyone just walking past the stall.

Two litigants equals two experts. The supermarket’s expert measured the bakery’s gross floor area as 952 square feet. The landlord’s expert, also using the judge’s definition, came up with 1,117 square feet (17% more, and not a surprise that this, the denominator, was the landlord’s figure). How does one explain the difference? Well, but for 4-1/4 square feet, it wasn’t their respective tape measure skills. The experts disagreed as to whether the 161 square feet of space between the main portion of the baked goods stall and the related display space and coffee bar were part of the store. The judge liked the way the shopping center’s expert did the measurement because the judge, while recognizing that customers shopping at the other stalls might walk through that 161 square foot space to get to those other stalls (as one might walk through a department store to get the a mall’s other shops), ruled that the space primarily was used by the bakery’s customers to select goods from the display cases and by the bakery’s workers to stock those shelves and displays.

Do we have a take-away thus far? Sure do. Make sure the lease or other restricting document gives the parties (and the court) “rules” for measuring floor area. Don’t let the court add its own definition to your lease or other document. And, now that you know about “open-air” stores (and, as shopping centers evolve, you’ll see other “unconventional” architecture), those of you who already have such “rules” might start revising them.

Measuring the entire “store” wasn’t even half the battle. The supermarket’s expert opined that the bakery’s sales area measured about 302 square feet. The shopping center’s expert found only 236 square feet, 22% less. Why the difference? The lower figure excluded 61 square feet of employee work space and a handful of other square feet where one expert’s ruler was shorter than the other’s.

So, should the 61 square feet of work area have been in or out? The lease gave no rules for what was or was not “sales area.” So, the judge said to include display areas, racks, and shelves.

At this juncture, the supermarket was claiming the bakery utilized 31.7% of its store as “sales area,” whereas the shopping center owner insisted the sales area was only 21.18% of the bakery. Remember, the critical dividing point was 25%. Even if the shopping center owner conceded that the store was as small as the supermarket owner claimed, using the sales area opined by the shopping center’s expert, the sales area would have constituted 24.84% of the entire bakery. Close, but no cigar. [From Straight Outta Lynwood.]

The court accepted the shopping center’s expert’s calculations without exception. It dismissed the supermarket’s argument that the space between the display area and the bakery’s counters was a “main aisle” (not part of the bakery) used by customers of the farmers market to get to the other stalls (and therefore should not have been included within the store’s total area). The photographs before the court seemed to show that while market customers could “cut through,” that’s not what really happened in practice. The photos showed that the bakery’s customers used the corridor-like area to peruse the shelves for baked goods and to select products for purchase. That made it “integral” to the store and qualified it for inclusion in the entire store’s floor area.

Including, or not including, the employee’s work area may have been a tougher call. Apparently, the area was open for view by customers. In it, the bakery employees rolled dough, set out baking sheets, and used the ovens. The work area was “part of the show.” Nonetheless, you couldn’t buy what you saw. You had to cross the “aisle” and get the baked goods from the display cases and shelves. The judge didn’t think that constituted sales area under his definition.

What was the result? Simple – the bakery was excluded from the prohibition because it fell below the 25% sales area threshold.

Do we have another take-away? Sure do. Make sure the lease or other restricting document gives the parties (and the court) “rules” for measuring floor area. Don’t let the court add its own definition to your lease or other document. And, now that you know about “open-air” stores, those of you who already have such “rules” might start revising them.

Decide if the table where the fudge is made (and the songs are sung) is going to be counted as sales area. Actually, that’s a general class of “problem.” Think outside the aisle. Not all sales space is occupied by gondolas, shelves, and half-aisles.

Nowhere in the court’s decision do we see the supermarket arguing that the collection of independently owned food stalls constituted an impermissible supermarket, though, had they been all within one store (whatever that is), they almost certainly would have been one. Perhaps, it realized such a claim wouldn’t make it very far. Should it have bargained for a bar against a collection of food-selling stores that, taken as group, would be the functional equivalent of a supermarket or grocery store? Who knows how far that would have gotten in negotiations, let alone before a court?

Is there more? You can bet your bottom dollar there is more. [Attribution: The Marvelettes]. If you can remember way back to when you started reading, you’ll recall that the butcher and the fish store were prohibited “no-no’s.” The supermarket “won” that argument and pretty easily. It then geared up for the big “pay-off.” The court told it to bring its books in and prove its monetary damages. Apparently, that’s what the lease said would be the supermarket’s remedy – not liquidated damages or reduced rent, but the BIG BUCKS!

So, the supermarket brought in the big gun – its Vice President of Perishable Retail Operations. [Growing up, you were told that you could be President of the United States. But, were you told that, one day, you could be a Vice President of Perishable Retail Operations? We weren’t. Oh well, another trip to the shrink.] The court got to see week-by-week sales and profits figures for the supermarket’s meat and seafood departments. The figures clearly showed a drop-off in seafood and meat department profit of $134,077.25 over the period when the offending stores were open.

Close the gates. Lock the doors. Nail the coffin shut. The numbers were right there in black and white.

“Not so fast, court,” said the shopping center owner. Let us tell you a little more about what was going on. Two months before the farmer’s market opened, a competing (low price) supermarket opened 3.3 miles away. In fact, the complaining supermarket actually agreed to allow this competitor within what was a 5- mile radius restricted area. Of course, this newer supermarket had a meat department and had a seafood department (that, like the stall, sold frozen fish). It might have been one-third the size of the complaining supermarket’s store, but it did operate 24-7. That contrasted with the Thursday through Saturday, seven hours a day farmer’s market operation. The seafood stall at the farmer’s market was open on Sundays as well, but sold mostly frozen fish on all of the days it was open. The meat market within the farmer’s market sold red meat and pork, but not poultry. If that wasn’t enough to cast doubt over the connection between the supermarket’s lost profits and the presence of the food-selling stalls, there was evidence of a drop in grocery sales in the overall area during the period in question.

As you might have guessed by now, the supermarket wasn’t going to get a check at this court’s insistence. The law is pretty simple when it comes to the rules for getting such damages: (a) you need to show the breach caused the loss; (b) you need to show that the breaching party could have reasonably foreseen that the breach would cause the loss; and (c) you need to prove the amount of lost profits with reasonable certainty.

Here, the supermarket never could prove that its losses were attributable to the offending stall-stores, nor could it exclude the possibility that some of its lost profits were attributable to the nearby, newer (small) supermarket. It didn’t even show the sales figures for the offending stalls or explain why the limited hours of operation for the stall-stores had more impact than the 24-7 operation of the competing supermarket.

That wasn’t the only reason for “no check,” as if there needed to be another reason. And here is the BIG ONE for any tenant who has agreed to be limited to recovering its losses when it’s exclusive use right is violated. The supermarket’s loss calculation “was based on impermissible speculation and guesswork.” [We would have said that ourselves, but the court beat us to it.] The supermarket’s baseline was its financial performance for the year before the stalls open. The court never heard why that baseline was appropriate. It said, “[i]t could be that the sales of meat and seafood at [the supermarket] during the year prior to the opening of the market were influenced by external factors that render those figures an imperfect baseline from which to compare subsequent years of sales.” Take note, the court refused to accept that the prior period’s sales and profits constituted a proper starting point AND refused to accept the impacted years’ figures as meaning that the meat market or the seafood stalls were the cause of a drop-off for the supermarket.

Yes, the butcher stall and the seafood stall had to close. That, however, wasn’t enough for the supermarket. The shopping center had to pay! So, it spent good money to pursue a fruitless (booo!) damage claim even though lots and lots of leasing attorneys would have told them – “Don’t throw good money in after bad money.” Yes, don’t escalate your commitment to a losing cause. The right to recover something called “lost profits” is generally an illusory right – think about the arguments that will be made against you. It will be the rare situation where one can show “cause and effect” [No, not the Star Trek episode] and even if you can do so, showing the actual amount of loss without speculating as to “what might have been” [No, not the 1993 Little Texas song] is a pretty big barrier.

“Smart money” says to tenants: “Insist on liquidated damages – $X a day during violations.” Whether you get that or not goes back to a Ruminations rubric – “bargaining power is where it’s at.” Half rent never does it. How much in the way of lost sales is the equivalent of half rent? If your “contribution to overhead” is 50% of the sales price, then what amount of lost sales equals “half-rent.” Remember, tenants don’t lose “profits” alone; they lose gross margin that also pays the overhead. As to a termination right, that’s great if the store was a loser to begin with – it is not a real remedy for breach of an exclusive use right, it is a trap door to get out of a bad lease. But, if the location is still a good one, would you terminate the lease just because impermissible competition makes your store less profitable, but still amply profitable?

There’s a lot more that can be said. So, fearless Ruminations readers, say it. Just click the word “comment” or “comments” just below the title to today’s blog posting and share your thoughts with all other readers.

Print

Comments

  1. Wouldn’t the remedy that a tenant really wants for a violation of its exclusive be the power to enjoin the violation? I would love to see a discussion on the tenant’s ability to obtain an injunction, particularly the likelihood of obtaining one against a third-party violating tenant with whom the tenant with the exclusive has no privity.

  2. Many landlords who DO grant exclusivity will NOT agree in the lease that they be held accountable for damages sustained by the aggrieved party.

Leave a Reply