Is “Display” A Verb Or A Noun; More About Exclusives

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If exclusive use rights are so important to some tenants and if landlords almost always resist granting such rights, why is it that, when agreement (compromise) is reached, the parties keep making the same mistakes? We’ve written before about the generality of “exclusives” and also about some specific approaches. For the benefit of new readers and to remind others, Ruminations holds that the presence or absence of an exclusive use right (and the scope of that right) is purely a function of bargaining power. Basically, how much does each party want the lease? That having been said, here are more of our thoughts.

To the extent that an exclusive use right is justifiable, tenants should be entitled to protection for their primary business, not for items of tertiary importance. A pizzeria sells pizza. If a pizzeria couldn’t sell pizza, then it isn’t one. Selling pizza is its “primary” use. So, to the extent that the presence of a second pizzeria at a particular property would seriously cannibalize sales at the first one, it is entirely appropriate for a landlord to be barred from allowing that second one. But, a tenant that holds itself out to be a pizzeria shouldn’t be entitled to keep others (such as a health food store) from selling frozen pizzas or to keep others from selling “Italian-style” sandwiches. If a pizzeria can’t co-exist with a sandwich shop, then it is a sandwich shop, not a pizzeria. Of course, defining a tenant’s primary business may not be as easy as looking at the tenant’s name, but we all get the idea (provided we are willing to step out of our uniforms – landlord or tenant – and look at the entire picture).

The scope of an exclusive use right is not the subject of today’s blog posting. Instead, we revisit one approach to protecting a “primary” use once that primary use has been defined. Once again, we’ve seen it (i.e., the “primary” use approach) in a recent court decision where: a lease prohibited the landlord from leasing other premises in its mall for the operation of a store whose primary use was the sale of athletic footwear or athletic apparel. “Primary use” was defined to mean that the store “displays athletic footwear or athletic apparel in more than fifteen percent (15%) of the floor area of such premises.”

There could have been a disagreement about the meaning of “athletic,” but in that recent California appellate court decision we just reviewed, this was not the issue. The issue, as almost all readers must have already realized, was how the parties intended to measure “floor area.” The “protected” tenant claimed that the landlord had leased to a family shoe store that was using 36% of its floor area store for the display of athletic shoes. That would seem to be pretty open and shut. 36% is clearly a lot more than the 15% threshold. If the protected tenant was correct, the family shoe store was far more than incidentally in the business of selling (displaying) athletic shoes. So, what was the landlord’s defense? Basically, it measured the total floor area of the offending displays in the family shoe store and that came to only 5%. In fact, that’s what the number turned out to be. The family shoe store’s individual displays of athletic shoes only occupied 5% of the store’s floor area (even after deducting its non-public storage room).

Astute readers, and that would be almost all readers of Ruminations, will recognize that the dispute was over whether aisle and other space associated with the physical footprint occupied by shoes should be included within the area used to “display” athletic shoes. [For an extensive discussion of this topic, click HERE to take a look at this November 2013 Ruminations blog. We urge you to do so] Instead of repeating what we wrote in 2013, we offer the following excerpt from the California court decision:

There was evidence that the purpose of protected use clause[] is to protect the tenant; that the amount of floor space under fixtures in shoe stores typically ranged from below 15 percent to 20 percent; that it would be almost impossible to design a shoe store with fixtures taking more than 20 or 25 percent of the floor space. … The extrinsic evidence likewise indicates that the 15 percent included not only the fixtures upon which athletic shoes and apparel were placed but also the surrounding floor space dedicated to the sale of such items. There is evidence that fixtures in full-priced shoe stores typically take up less than 15 percent of a store’s floor space, and that even in the case of retailers such as [the family shoe store] that keep all of their stock in the public area of the store, the fixtures rarely take up more than 20 percent of the floor space. Moreover, because of building code requirements and the need for cash registers and stock rooms, it would be “almost impossible” to design a store that contains fixtures covering more than 20 or 25 percent of the floor space.

Think about that! Really, how much of any retailer’s space is taken up by the footprint occupied by displayed merchandise? If this particular landlord’s measurement of 5% were controlling, the family shoe store could triple the space devoted to the display of athletic shoes and still not violate the exclusive use tight. That could make the entire store or, at worst, 75% of the family shoe store’s displays devoted to athletic shoes. Would anyone argue that the intent of the exclusive use right was to preclude such a competitor? Would a landlord be justified in arguing the 15% limit meant merchandise footprint? Would it be credible for a landlord’s expert at trial to testify that display area was the equivalent of “footprint,” as one did?

And, there’s more. The lease’s definition for “primary use” relied on the word: “displays” as a verb not as a noun. The landlord argued that the “displays” did not exceed 15% of the store’s floor area. In essence, the landlord argued that:

“[D]isplay” refers to something definite and tangible, that can be measured; that aisles, walkways, and other viewing areas may be necessary for “the displays” to be effective, but they are not floor area that displays.

Under the landlord’s interpretation, “one need only measure . . . the area of the store’s athletic footwear or apparel displays.” But, as the court pointed out, “the protected use clause does not refer to the floor area on which ‘the displays’ are placed, it refers to the area in which athletic footwear and apparel are ‘display[ed].’”

More subtly (the word used by the court):

[T]he use of the preposition “in,” rather than “on,” suggests that the focus is not on the footprint of the fixtures upon which athletic shoes and apparel are displayed, but upon the total floor area devoted to such products. As a matter of common parlance, someone who heard that cookware, for instance, was displayed in half of a store’s floor area and bedding was displayed in half the store’s floor area would assume that those two product lines took up the entire store. Similarly, one who heard that cookware was displayed in a quarter of the area of a store and bedding in another quarter would almost certainly expect to find other product lines in the remainder of the store.

The landlord lost. We think it should have known it would lose and it should never have leased to a family shoe store that would use one-third of its display footprint to display athletic shoes. The advice it got from the attorney who negotiated the lease was uninformed and defective. Had the landlord (and its attorney) focused on what was sought to be achieved (i.e., to keep a second athletic shoe retailer out of the mall), rather than think it could hide behind a self-serving narrow interpretation (or, in this case, misinterpretation) of the words, “display” and “in,” it would still be getting full rent from the original tenant instead of a lower “in-lieu” rent.

Over and over, Ruminations has written: “Say what you mean, and mean what you say.” In today’s blog posting, we don’t acquit the protected tenant. It should have bargained for a provision that defined how the measurement was to be made. There are many formulations available. And, as a shoe retailer, it clearly understood that a shoe store includes seating areas not commonly found within other types of stores. Had it applied what it should have known about general “floor area” disputes and also applied what it knew about how shoe stores are configured, it could have avoided the dispute. More importantly, the landlord would not have deceived itself into thinking it could later lease to a shoe store that would devote one-third of its own store to the sale of prohibited items.

But, above and beyond any of those technical niceties, we again see a situation where one party or the other (and sometimes both) are too smart by half. We need to get to the point where we spend more time honoring the spirit of our agreements instead of trying to parse the chosen words to circumvent what we all know to be those agreements.

[To see the court decision that generated today’s thoughts, click: HERE.]

 

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