Daily Development for Wednesday, August 18, 2004
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin Kansas City, Missouri dirt@umkc.edu

LANDLORD/TENANT; COMMERCIAL; EXCLUSIVE USE CLAUSES; RADIUS CLAUSES: Although tenant benefitted by an exclusive use clause no longer operates the protected us (a supermarket) on the leased premises, a restrictive covenant preventing the landlord from allowing any other entity to operate a supermarket within a certain vicinity was enforceable.

Deer Cross v. Stop & Shop Supermarket, 773 N.Y.S.2d 211 (Sup. 2003).

A tenant leased commercial space pursuant to a lease containing a landlord's covenant not to allow any other supermarket to operate within two miles of the tenant's supermarket. The lease contained a tenant's covenant to open, but no continuous operation covenant. The term was twenty five years with three ten year options. The landlord later transferred the land subject to the lease to Deer Cross. The tenant assigned its lease to Stop & Shop.

Stop & Shop opened another market operation within two miles of the subject shopping center, but did not terminate the lease. Deer Cross wanted to lease other premises within the two mile radius of the originally leased premises to another grocery store, and Stop & Shop objected. It noted that it had an economic interest in protecting its new store and that the lease stated specifically that restrictive covenants were intended to be in effect throughout the intitial and ten year option terms. Deer Cross brought suit for declaratory relief that the clause was not effective.

The court held that even though the tenant no longer operated the leased space as a supermarket, the landlord's restrictive covenant was still enforceable; thus, the landlord was not allowed to lease space to another supermarket within two miles of the tenant's leasehold. It held that the landlord had the burden to demonstrate that the parties did not intend that the clause remained in effect notwithstanding tenant's cessation of the protected use, and that it failed to do so.

Comment 1: The part of the decision interpreting the lease language is not unprecedented, but there are a few cases going the other way. The court's interpretation is a creditable example of the "hardball" approach that New York courts frequently take toward commercial lease interpretation. These courts recognize that the active leasing market in New York consists of sophisticated parties on both sides, and that the interests of the market are best served by clear rules and a minimum of judicial second guessing of the lease language.

Note that there are some cases (certainly not in New York) that conclude that where a tenant renews a lease on dark space specifically in order to preserve a radius clause protection, there is a breach of some implied duty of continuous operation or some other good faith and fair dealing breach. The editor has collected some of these cases in his article: "Going Dark Aggressively, "Probate & Property" Fall 1996 issue (published as a book chapter in The Commercial Lease II (1996)). Of course, the editor has dealt at length with the issue in his newly published revision of Friedman on Leases.

Here, however, there is little question that the parties expressed their view that the tenant had no continuous operation duty. The covenant to open expressly disclaimed any operating duty. Further, there is no indication in the case that the tenant in fact was dark. It just wasn't operating a super market.

Comment 2: The editor can't agree that the language stating that the restrictive covenants were intended to be effective throughout the initial and option terms in fact has anything to do with the expression of the parties' intent on the issue at hand. It likely was designed to deal with the question of whether the covenants ran to the option periods. Nevertheless, the editor concurs in the final outcome. The lease is clear enough, and the landlord should have pushed for greater clarity if it had some other outcome in mind.

Comment 3: There is no mention by either side of the "touch and concern" issue here, although clearly the property has passed into new hands both on the landlord and the tenant side. If the court were to invoke the rule in all its glory, requiring touch and concern both as to benefit and burden, it would have to find that both the benefitted and burdened property were later parcels "to be identified" as time went on. Not impossible, but interesting. The new Restatement of Servitudes would do away with the "touch and concern requirement" entirely. The editor may not go that far, but he notes that many jurisdictions require far less than the original rule requires, and often have no requirement for the benefit to run.

There is some authority concluding that a radius clause ought not to apply to successors in interest to the landlord unless the lease is very clear on that specific point. See Wal-Mart Stores, Inc. v. Ingles Markets, Inc., 581 So. 2d 111 (N.Car. App. 2003) (the DIRT DD for 12/1/03), but that case had weaker language than the case at hand.

Comment 4: You may wonder why the landlord decided to seek declaratory relief here, thus undertaking the burden of proof and spending money on a very tough case. The fact is that it thought it had a

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