Commercial leases, particularly leases in retail shopping centers, often contain provisions (known as "use exclusives") that prevent the landlord from leasing space in the same mall, center, or area to a business that sells products or services similar to those sold by an existing tenant. Counsel for landlords need to be aware of drafting considerations for use exclusives, strategies for avoiding litigation, and the procedural and substantive aspects of enforcement proceedings.
Background
Maryland courts consistently uphold and enforce use exclusives. See, e.g., Patuxent Dev. Co., Inc. v. Ades of Lexington, Inc., 257 Md. 398 (1970) (enforcing a covenant against leasing to a competing five and ten cent store within five miles of the original store); Ruben v. Leosatis, 165 Md. 36 (1933) (covenant not to lease to a competing restaurant was breached when another tenant's deli business expanded its operation to become a restaurant); Snavely v. Berman, 143 Md. 75 (1923) (landlord violated a covenant not to rent to a store that would compete with a "Ladies and Gents" furnishing store when it allowed a preexisting tenant to operate a store in the same line of business). Moreover, although use exclusives inherently restrain trade, no Maryland court has held that an exclusive implicated either antitrust laws or common law prohibitions against unreasonable restraints of trade. Cf. Savon Gas Station Number Six, Inc. v. Shell Oil Co., 309 F.2d 306 (4th Cir. 1962) (apply both Maryland and federal law, covenant giving lessee an exclusive right to operate the service station did not violate antitrust laws or unreasonably restrain trade); Waldorf Shopping Mall, Inc. v. Great Atl. & Pac. Co., Inc., 1984-1 Trade Cas. (CCH) 65,976, Cir. Ct. for Charles Cty., Feb. 16, 1984 (holding that enforcement of provision prohibiting expansion of a competing supermarket had little effect on competition and would not be enjoined, where markets were highly competitive).
Drafting issues and Strategies to Avoid Litigation
Although use exclusives generally favor tenants, they are commonplace in leases because they can further the interests of both the landlord and the tenant. A retail tenant will not be interested in investing the capital (committing to the lease, installing fixtures, contributing to or paying for tenant improvements, and the like) if it believes that the landlord will permit a competing store to operate in close proximity. From the landlord's perspective, such concessions to tenants are often necessary. A&P, for instance, probably would not lease space in a shopping center without assurances that the landlord would not lease to Safeway in the same center. Cf. Waldorf Shopping Mall (holding agreement in A&P's lease that landlord would not permit Safeway to expand a competing operation to be enforceable). Moreover, it is in the landlord's interest to have a diverse mix of tenants in its premises. The more variety offered to shoppers, the more traffic the shopping center will attract, which benefits not only all of the tenants, but also, of course, the landlord.
Tenants usually take an expansive view of their use exclusive rights, and will challenge any activity that could even remotely be considered a breach of its use exclusive. Counsel thus must be aware of all existing exclusives that could affect lease negotiations when representing landlords in those negotiations. Generally, landlords are well advised to evaluate new tenants and set up new leases in ways that tend to avoid conflicts with existing use exclusives. One solution is to consult existing tenants, and to obtain written confirmation acknowledging that the new tenant's proposed activities will not be deemed a breach. Landlords can also insist, as an extra measure of protection, on language in any new tenant's lease barring sales by the new tenant of any products or services that could be deemed to violate existing use exclusives.
A well-drafted lease can avoid disputes regarding the scope of the exclusive grant. The lease should define, as clearly as possible, what activity is protected, as well as the geographical scope of the protection. The following language from a lease for a home improvement center is typical of language protecting a tenant from competition:
As a material part of the consideration inducing Tenant to execute this Lease and make the necessary expenditures to perform its obligations hereunder, Landlord hereby covenants and agrees that, throughout the Term of this Lease if and as long as either the Demised Premises shall be open and principally operating for a principal use as a home improvement center store, or the Demised Premises is vacant, Landlord shall not permit (i) any of the Other Stores or any contiguous or adjacent property that is directly or indirectly, now or in the future, under Landlord's control or in which Landlord has a legal or beneficial interest, to be principally used for, or operated as, a home improvement center store, lumberyard or hardware store. As used herein, the term "home improvement center store" shall mean any store that sells as its primary business all or a majority of the following terms: building materials, lumber, plumbing fixtures, garden and nursery products, hardware and/or electrical supplies or equipment, paint, and floor and wall coverings.
This language clearly defines both the protected activity (by describing both the type of activity and specific products covered) and the defined geography (contiguous property controlled by the landlord). It is unlikely that the landlord could be confused about the nature of the exclusive it gave to this tenant and, therefore, unlikely that a dispute will arise as new tenants sign leases.
As Maryland cases reveal, however, even seemingly well-drafted leases--using what appear to be unambiguous common terms or fully-understood trade terms to define the restriction--can be the subject of disputes leading to litigation. In North Ave. Mkt., Inc. v. Keys, 164 Md. 185 (1932), a case involving a limitation on the tenant's use of its space rather than on what other tenants could sell, the lease required the tenant's stall in a market to be used exclusively for the sale of "delicatessen" and certain specified meats. The tenant started selling uncooked meat, and the landlord claimed that the tenant was no longer selling "delicatessen." The court relied on dictionary definitions and "common knowledge" to conclude that "delicatessen" meant "prepared foods" and not uncooked meat. Accordingly, the court held that the use was improper, and enjoined the tenant from selling the offending products. In Bishins v. St. Barnabas Corp., 221 Md. 459 (1960), the tenant had an exclusive to operate certain types of women's apparel stores, but other tenants could conduct an "Adeline and/or Darling type operation"--both being terms used in the trade. When the landlord leased to a tenant operating a "Terry" shop, the court concluded that "Terry" was the same as "Adeline" and that the first tenant's exclusive had not been breached. In Belvedere Hotel Corp. v. Williams, 137 Md. 665 (1921), a tenant was given a concession to operate a barbershop and manicuring business in a hotel. When the landlord leased space to a competitor, the issue became whether the restriction applied to the entire hotel or just a portion of it. The court concluded that the parties intended that the lease applied to the entire hotel and, therefore, the landlord had violated the first tenant's covenant.
In preparing for or anticipating litigation on use exclusive issues, counsel must review the lease not only to understand the nature of the restriction itself, but also to determine whether the parties agreed on the remedies that would be available in the event of a breach. Some leases provide remedies specific to the breach by the landlord of a use exclusive. Many leases provide for a rent reduction, or other monetary penalties (essentially liquidated damages) upon a breach. For instance, a lease that was the subject of an unreported Court of Special Appeals opinion, Cato Corp. v. State of Maryland for the Use of the Board of Trustees of the Maryland State Retirement & Pension Funds, No. 35, Slip Op. (Md. App. June 6, 1996), the landlord agreed in its lease with Cato, a "popular priced" ladies' apparel chain, that it would not enter into a lease with "any [other] national or regional woman's apparel chain [store] classified as popular priced and carrying competitive merchandise." The lease provided that, upon a breach of the covenant, the rent otherwise due would be immediately reduced by one-half until the violation ceased.
Absent an express remedy applicable to a breach of a use exclusive, landlord's counsel should review the lease to determine what general remedies are available to the tenant upon a landlord's breach. Commercial leases usually have expansive provisions protecting landlords upon default by the tenant, but often not vice versa. Depending on the negotiating strength of the tenant, however, a lease may give the tenant the right to terminate the lease upon a landlord's breach, frequently after a cure period. The stakes in litigation can be raised significantly when that right exists. While a landlord may view the possibility of paying some damages as an acceptable risk, the loss of a strong tenant may be an unacceptable risk and a reason to settle.