Last week and the week before, we wrote about some substantive aspects of exclusive use covenants – promises by a landlord to its tenant that only that tenant will be permitted to sell certain goods or services at the shopping center. Our goal was to point out some of the difficulties and challenges faced when writing rules as to what can and can’t be sold and the extent to which certain other tenants could be free, in some or all regards, of those crafted restrictions.
We received some direct comments and a number were posted to various other web sites, notably on those hosted by Linked In. We also received some private comments. Most focused on the remedies an aggrieved tenant might have against its landlord if the landlord’s covenant (promise) was broken. None (yet) addressed how, when, and with what success a “protected” tenant might directly act against a neighboring tenant alleged to sell those goods or services even though the neighboring tenant knows or should know of the restriction. We promise to discuss this within the next few months, but not now. We’re waiting for a friend’s law review article to be published so that we can point interested readers to a “real” legal analysis, not just this Ruminator’s ramblings.
Now that we’ve told you what the comments we have seen thus far didn’t say, we’ll tell you what they did say. A common theme was that landlords shouldn’t have any liability for “rogue” tenants. In that context, a “rogue” tenant is one whose lease says it can’t sell a particular good or service, but it does so anyway.
Let’s agree to disagree without being disagreeable. That’s what one says when they disagree with someone else. Today, that’s Ruminations. That’s not to say that we always think a landlord should be responsible. We don’t. It’s just that in the normal situation, we think the better argument is that it should. It’s also not to say that we think this is other than a business issue. It is. And, as such, whether a landlord will or will not be liable for the acts of a “rouge” tenant will depend on the relative bargaining power of the parties for that particular lease.
“‘Enough stalling’; enough ‘set-up’; tell us why you think a landlord should be liable.” OK, here’s why:
A tenant doesn’t bargain for its landlord to add specific text to the leases of other tenants. It bargains for exclusivity. It doesn’t bargain for the right to sue another tenant over whom it has little if any power to control. It bargains for its landlord to deliver a certain selling environment.
This wouldn’t be Ruminations if we didn’t digress. We’ll try to tie this in to the central theme of today’s posting. Please have patience.
When a tenant signs a lease, it is expecting exclusive possession of the given leased space in return for paying rent. Basically, a tenant wants actual possession, not merely the right to possession. It wants the leased space to be free of other occupants and free of anyone else with the right to occupy the leased space. It doesn’t want just the right to eject another occupant. It wants its landlord to get all other occupants out of the space. So, tenants need to read their leases carefully to make sure they are to get actual possession, not merely the right to obtain actual possession. Yes, it is possible to contract only for the right, not for actual possession.
Here’s the tie in. It’s the same principle when it comes to “rogue” tenants. A tenant who has bargained for an exclusive use right should get more than just the right to enforce that right on its own. It shouldn’t wind up with only a promise that its landlord will include a clause with certain restricted use provisions in later tenant’s leases. If that’s all it winds up with, all that it has gotten is a promise from its landlord that it will write future leases in a certain way, and nothing more.
A landlord has a lot of power over a defaulting tenant. It holds a key remedy. It can evict a defaulting tenant. To the defaulting tenant, that’s pretty draconian. If a landlord promises its tenant an exclusive use right, there should be some consequence to the landlord if the protected tenant doesn’t get one. Protected tenants don’t just want the right to seek an injunction against a “rogue” tenant or a basis upon which to seek damages against a “rogue” tenant. That’s not the simple meaning of bargaining for an exclusive use right. Yes, it would be one thing if the “deal” struck at the outset was only that the landlord would impose a restriction against future tenants at the shopping center. Certainly, that could be the “deal” even though we’ve never seen it that way in a term sheet. All that we’ve ever seen is some form of promise that “the tenant will have the exclusive right to” sell such and such, sometimes continuing with a hint of the “carve-out” language that will show up in a the lease. Perhaps our mantra of “say what you mean, mean what you say” should extend to deal sheets.
Yes, if a landlord agrees to grant exclusivity, it should deliver exclusivity.