Exclusive Use Restrictions: Some Will Rob You With A Fountain Pen

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It seems fitting that for the 200th Ruminations blog posting we would return to a recurring theme: “Words matter,” and do so in the context of a very recent court decision interpreting a lease’s exclusive use restriction. If you want to read the December 16 North Carolina Court of Appeal’s opinion in Charlotte Pavilion Road Retail Investment v. North Carolina CVS Pharmacy, click HERE. If you don’t, here’s a short synopsis.

The tenant lost because the restriction wasn’t written in a way so as to protect the tenant against what it could have foreseen. The tenant’s negotiators in the North Carolina lease should have read the Texas case that their litigators found when the North Carolina lease dispute went to court. That way, even if they didn’t intuitively understand the deficiency in their “formula” exclusive use language, they might have gotten a clue as to what they should have written.

Yes, we know that our “generalization” is cryptic, so please follow along.

From the case’s caption, you can safely guess that the losing tenant was CVS, the drug store chain. The allegedly offending tenant was the department store, Walmart. Walmart intended to operate a pharmacy in its store and intended to sell “health and beauty aids.” That should come as no surprise.

The facts are simple and were uncontested. A landlord owned a 15 acre parcel and divided out two acres for the drug store. The drug store’s lease (and a matching recorded document) placed a restriction on the use of the remaining 13 acres. Along comes a developer, aware of the restriction. It buys that 13 acres and also acquires an adjacent parcel. It plans to construct a building on that adjacent parcel to serve as a store with the offending pharmacy and HBA uses. That adjacent parcel was clearly free of the drug store’s restrictions. So, what was the issue?

Did anyone ask where the parking for that building would be located? Oh, yes – on the restricted 13 acres. There was no factual dispute that the department store couldn’t operate (and the developer couldn’t get land use approvals) unless the restricted 13 acres were used for parking.

Now for the words of the drug store’s exclusive use right:

During the term of the existing [drug store] lease … no owner of any portion of the [remaining 13 acres] shall allow its parcel to be leased or to be used for the purpose of a health and beauty aids store, a drug store, a vitamin store, and/or a pharmacy. A “pharmacy” shall include the dispensing of prescription drugs by physicians, dentists, or other health care practitioners, or entities such as health maintenance organizations, where such dispensing is for profit or a facility which accepts prescriptions which are filled elsewhere and delivered to the customer. A “health and beauty aids store” shall mean a store which devotes more than 10% of its retail selling space to the display and sale of health and beauty aids.

The disputing parties agreed that they had no dispute about the facts and that the North Carolina lower court could rule “as a matter of law.” For law aficionados, that meant the court could issue a summary judgment based on its interpretation of the contract provision cited above, and it did. The (unhappy) drug store appealed, but to no avail.

Knowledgeable readers and those who have been Ruminations loyalists for a while will know that courts pretty much universally employ a “strict construction rule when interpreting restrictive covenants.” [Especially when it gets them to the result they have in mind.] The North Carolina court’s pithiest explanation of what that rule means in disputes such as this one, said:

The law looks with disfavor upon covenants restricting the free use of property. As a consequence, the law declares that nothing can be read into a restrictive covenant enlarging its meaning beyond what its language plainly and unmistakably imports.

In fairness, it also expressed one balancing factor (though it wasn’t very helpful to the drug store today):

The strict rule of construction as to restrictions should not be applied in such a way as to defeat the plain and obvious purposes of a restriction.

With that as background, go back and read the exact words of the lease’s restrictive covenant. Was the department store going to have a “health and beauty aids store” or a “drug store” or a “pharmacy” on the 13 acre parcel? No, not according to the court. After all it was reaching its decision in accordance with its mandate of: “nothing can be read into a restrictive covenant enlarging its meaning beyond what its language plainly and unmistakably imports.”

What was Ruminations saying about a “Texas case”? Let’s start by offering in a link to the Texas court decision relied upon by the drug store when arguing that a parking field for any of the prohibited kinds of stores or uses would violate its exclusive use right. You can read the opinion it by clicking: HERE.

In that case, we had the same kind of subdivision and proposed parking lot use arrangement. The lease included this relevant provision:

For benefit of [the grocery-supermarket], its successors and assigns, [Landlord-property owner] hereby places the following restrictions on * * * against the use of any portion thereof for the purpose of conducting thereon a food-store or food department for the storage or sale for off-premises consumption of groceries, meats, produce, dairy products, frozen foods, baking products * * *. This covenant and restriction shall run with the land and shall bind [Landlord-property owner], its successors and assigns. In the event of the breach of this restrictive covenant [the grocery-supermarket], its successors and assigns shall be entitled to obtain relief by injunction or any other modes of legal action permitted by law.

Even though the Texas court applied the same “we look as these restriction covenant with great disfavor and will interpret them quite narrowly” rule, it found for the grocery-supermarket. Why? Read on.

The North Carolina drug store’s lease prohibited a “store” and even defined what made up each kind of store. The Texas grocery-supermarket’s lease prohibited use of the subdivided land “for the purpose of conducting thereon a food store or food department.” That meant the Texas lease banned “the business activity of operating a food store” whereas the North Carolina lease banned a store. In each leasing situation, the potentially offending store, by ordinance, needed consumer parking in order to operate and in each case that parking fell on the subdivided land.

Two leases – same legal principles to be upheld – two different results. Could the North Carolina court have ruled in favor of the drug store by deciding that the lease’s text was ambiguous and that the parties’ intent was to bar parking on the 13 acres? Yes, but it didn’t want to do that. And, the lease’s language gave it a pretty solid way of ignoring what the tenant would have liked to be the result. So, even if you, the reader, “KNOW” what the parties meant in the first place, the lease didn’t exactly say so when it could have.

[Rhetorical question:] Do words matter? If you think so, then you’ll want to make sure that a lease’s exclusive use restriction (if, as a business matter there will be one) covers or doesn’t cover use of the property for a competing use’s parking field or ingress or egress or signage or whatever.

Wherefrom today’s title? From Woody Guthrie’s words (in Pretty Boy Floyd), “Yes, as through this world I’ve wandered I’ve seen lots of funny men; Some will rob you with a six-gun, And some with a fountain pen.” For context, click: HERE.

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Comments

  1. Very good points on restrictive uses within a given property. My guess is both the NC and the TX retail entities now have put “parking uses” by adjacent properties as part of their definitive restrictions on any new leases or future renewals.

    There will come a time in the future when air rights over the subject property will be a factor to consider. “Beam me up Scotty, I need to fill my prescription.” 🙂

    Best wishes for the new year.

  2. In regard to “air uses” — one can only imagine a restriction on the use of a store’s free wireless network by its customers to comparison shop and then order the exact item from a different online store (or online with in-store delivery to another store brand) because the price is less, the delivery charge is less or nonexistent, or the warranty is cheaper or longer.

  3. William Neville says:

    Words in the lease should matter. However, it is very hard to anticipate every situation that can come up in a ten or fifteen year lease. Unfortunately, that gives the judge a lot of power to render a result oriented decision that is not what the parties intended. That leaves it up to the litigators to find and focus on facts that will convince the judge that their client is the “good” guy and the judge should rule in their client’s favor.

  4. Tim Scott says:

    Words do matter. But different outcomes, even when technically justified, often reflect the different judges’ perspectives, rather than different words. While nobody can anticipate every situation, our job as drafters is to 1 anticipate everything we can and 2 to make the language clear enough that a judge who is ignorant about business & contracts won’t be liable to screw it up. If you do that, the parties (and their litigation counsel) are likely to see a reasonably clear answer and avoid litigation. So the best drafting must always speak to civilians not contract drafters. The twists and turns of legalese, and all the “hithertwinks” make it difficult for business people to read a contract and come to a true meeting of the minds on the smaller issues, and hard for the civilian to discern the judges likely ruling – while being arcane enough that the judge can justify a decision that is not the parties intent.

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