What if it isn’t a Rogue Tenant Violating an Exclusive Use Right?

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I thought we’d take a break away from the vigorous debate about whether lease renewal (and other) options should be conditioned on the absence of a default, and return to the more mundane discussion about exclusive use right issues.

A number of contributors thought that our industry should have a different name instead of “Rogue Tenant” for a tenant who violates the prohibition, in its own lease, against conducting a use that was granted to another tenant as that other tenant’s exclusive use at the project. You can see those comments at our August 11 Ruminations entry.

What do you call a tenant that is violating another’s exclusive use right, but that isn’t a “rogue tenant”? Absent any knowledge on its part that the other tenant has bargained for an exclusive use right, you probably can say: an “Innocent Violator.”

How does this come about? Well, the landlord should have placed a properly worded restriction in the Innocent Violator’s lease, but didn’t. And, the tenant who thinks it is protected should have recorded a memorandum of lease or a short form of lease or should have negotiated for the recordation of a Declaration or some other form of recorded document that would give constructive notice to later arriving tenants. I’m not sure of the efficacy of merely recording a memorandum of lease or a short form of lease. I think the “effect” of such a document varies from jurisdiction to jurisdiction. I leave that for research on a case by case basis. If people want to chime in as to how their home state treats this, please, please do so.

Another kind of Innocent Violator might be one who was already at the property. So, you say – of course, but why would the exclusive use right have been applicable to an existing tenant? Answer – the landlord “over promised.” It didn’t carve out pre-existing tenants – the lease granting the exclusive use right just said: “Landlord shall not permit any other tenant at the project to sell widgets on Thursdays.” “Any other tenant” means: “any other tenant.” Now, I’ve seen a case that said the “protected tenant” should have had no expectation that “any other tenant” would encompass pre-existing tenants, but that kind of case, to me, was wrongly decided. A landlord can take such a risk if it wishes to do so in order to persuade a new tenant to lease space. If a landlord want to take the chance that no existing tenant with a broad use clause will change its use and thereby trample on a newer tenant’s exclusive use right, I don’t see why it shouldn’t have the freedom to do so.

How about this kind of Innocent Violator, the kind that is down the block at another property close enough to fall within the “and no premises owned by the same landlord or by any affiliate of landlord, if located within three miles of the demised premises, may be used for the sale of widgets.” So, a partner of the landlord is also a partner in a nearby shopping center, and the restriction never go into the other shopping center’s leases. Further, the recorded memorandum of lease would never be found while searching the remote shopping center’s title. And the landlord granting the exclusive use right doesn’t have the right to record a declaration or easement.

You can probably find other examples of an Innocent Violator.

Now, what remedies should a “protected” tenant have against its landlord or the other tenant if a Innocent Violator violates the protected tenant’s exclusive use right. Answer: wait for another time, I’ve gone on overtime already in this Blog posting.

Does anyone know of any other kind of violator other than a “Rogue Tenant” or an “Innocent Violator” and is willing to describe the “case” in a comment to this blog entry?

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  1. Even if there is no current alleged violation, I have seen shopping centers not get a loan and another where the purchase price dropped because the owner or developer either didn’t understand or decided to take the risk that no tenant with a “any other general retail use” clause would change its use or frankly, agreed to many long laundry lists of exclusive, prohibited and allowed uses that just didn’t work but required thinking through more than the obvious main uses. Or resubdivided years later for financing reasons and left a mess with regard to what was intended to be bound in old leases vs. post-division leases. Going back to tenants to get this corrected may be easier when the economy is booming and the shopping center is a great location. But going back to tenants to get these things corrected for a buyer or lender can get more costly (if they exact, say, a rent reduction in this economy in return) than ever intended.

  2. Ira, you stated that” “…I’ve seen a case that said the “protected tenant” should have had no expectation that “any other tenant” would encompass pre-existing tenants, but that kind of case, to me, was wrongly decided.” I’m curious why you feel that the case was wrongly decided.
    Without knowing the facts of that case, to me, if the landlord did not expressly carve out pre-existing tenants (and renewals of those leases) from an exclusive granted to an incoming tenant and the incoming tenant with the exclusive did not insist on (i) a disclosure of all then existing use and exclusive provisions, or (ii) a warranty from the landlord that no pre-existing tenant can engage in the protected use, or (iii) a covenant that a preexisting tenant’s lease would not be amended to permit or expand the ability to engage in the protected use, then as between the various egregious omissions on both sides, the risk should fall upon the incoming tenant. The existing tenant, who is prior in time should have a prior vested right, assuming it is operating within the confines of its use clause. The incoming tenant should not simply rely on what it sees at the center. An existing tenant may have a use clause that permits any lawful use. Or, an pre-existing tenant with a restricted use may also have the right to expand into ancillary lines carried in its other stores – a common provision in use clauses – that encroaches upon the protected use. With respect to your question, offhand I can’t think of other innocent circumstances which did not involve a lack of due diligence upon somebody’s part. And in Crystal’s examples, I cannot fault either a lender or buyer would refused to take the risk by taking sides.

    • Where a Landlord promises an incoming tenant that no other tenant will sell widgets, pre-existing tenants, acting within the limits of their own use clause, are not proscribed from selling widgets, but I think the Landlord should be bound by its promise to the incoming tenant. The case I recall was one where there was no active infringing use at the property, but there were broad use clauses. When a prior, existing tenant started to sell widgets, the court told the incoming tenant that it, the incoming tenant, shouldn’t have expected that the landlord meant that no prior, existing tenant wouldn’t begin to sell widgets. I think the court was wrong because the landlord promised “it would protect the incoming tenant” and should have been held to pay for the consequences of it’s failure to do so.

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