Daily Development for Tuesday, August 7, 2007
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

LANDLORD/TENANT; COMMERCIAL; RADIUS CLAUSE: Maryland high court reverses Diamond Point radius clause decision - where clause provides that tenant will not open or invest in a store within the identified radius that competes with business then being operated on target premises, there is no violation where tenant first goes dark on target premises, even though it otherwise remains liable on lease.

Diamond Point Plaza Limited Partnership v. Wells Fargo Bank, 2007 Westlaw 2128169.  (July 27, 2007)

The lower appeals court decision in this case was reported as the DD for 10/4/06.  Other DD’s dealt with other aspects of this decision. 

Wal Mart “inherited” a lease that contained a radius clause requiring that tenant not "during the term of the lease, own, operate, manage or have any financial interest in, any store or business located within a radius of seven miles . . . that is similar to that then being conducted upon the demised premises."  Wal Mart (operating a Sam’s Club) had managed to negotiate a clause in the lease, when it took the lease over, that it made no representation of continuous operation.  Thus, it clearly had a right to “go dark” and it did so. 

Wal Mart developed another store well within the seven mile radius and commenced operations there the day after closing at the Diamond Point location.  Later, the Diamond Point shopping center collapsed, and the lenders sued Wal Mart for operating in breach of the radius clause, to the detriment of the center.  The Diamond Point center had plenty of other problems, but the lower appeals court, reversing the trial court,  found Wal Mart in breach of the radius clause and remanded for a damages determination.  The lower appeals court found the radius clause ambiguous on the point of whether it covered operations when the target store was dark, and turned to other information to interpret the ambiguity.

The editor, in critiquing the case, quacked that there was no ambiguity at all.  That the phrase ‘then being operated” was crystal clear in stating that there was no breach when the target store was not operating.  The obvious purpose of the clause was to protect the Sam’s Club in Diamond Point from dilution in percentage rents while it was operating.  And the language clearly expressed that idea.

The Court of Appeals, likely totally unaware of the editor’s quacks, nonetheless reached the same conclusion:

“[W]e agree with the conclusion of the Circuit Court that there is no ambiguity in the language of Article 4(H) and that its plain intent and meaning is to prohibit Sam's Club, while operating a store in the leased premises at Diamond Point Plaza, from simultaneously owning, managing, or operating another similar store within seven miles from that shopping center. A reasonably prudent person could reasonably find the language susceptible of the meaning ascribed to it by Wells Fargo only if the ending phrase were not part of it-if it simply prohibited Sam's Club, during the term of the lease, from owning, managing, or having a financial interest in a store or business located within a radius of seven miles from the Diamond Point Plaza shopping center. Then, the prohibition would be broad, clear, and absolute: any store or business would be precluded for the entire duration of the lease, regardless of whether a Sam's Club store at Diamond Point Plaza was operational.

That is not what the contract says, however. The prohibition is clearly limited. What is precluded is owning, managing, operating, or having a financial interest in a store or business, during the term of the lease, that is "similar to that then being conducted upon the demised premises." (Emphasis added). That necessarily requires that there be a store or business presently being conducted at Diamond Point Plaza and that the second store or business within the seven mile radius be similar to it. For the language to be reasonably susceptible to Wells Fargo's construction, that ending phrase, adding the requirement of similarity between the second store and that "then being conducted upon the demised premises," would have to be virtually ignored, which our jurisprudence does not allow.  The Court of Special Appeals was wrong in declaring Article 4(H) ambiguous and in effectively vacating the partial summary judgment entered by the Circuit Court.”

Comment 1: Has the Maryland Court of Appeals concluded that, at least in part, the Maryland Court of Special Appeals is not “reasonably prudent?”  Maybe we can say that the conclusion is “ambiguous.”

Comment 2: In general, both as to continuous operations clauses and radius protections, courts are becoming increasingly cautious in “reading in” more than the parties provide.  And well they should be.  These are concepts arising in complex economic relationship between sophisticated parties.  It is up to the parties to say what they intend, and if they can’t get it right, the courts need not bail them out.  It’s only money, after all.

Comment 3: What about the rest of that complicated dispute, which in general was a huge payday for the lenders and their counsel (assuming there is money to pay the judgments)?  Some aspects, such as the claim relating to Sam’s Club letting the premises to a movie production company, were not appealed.  The judgment for diversion of rents and fraud was affirmed, on the basis that the rents were diverted after the borrower had in fact failed to pay the debt.  Rents included already earned rents still in the rents fund.  The court did not reach the issue of whether there was a default at the inception of the loan due to the fraud leading to the making of the loan. 

As to the fraud claim, the court reached the obvious. But interesting, conclusion that fraud is the proximate cause of a loss from a failed loan if the lender would not have made the loan had the fraud not occurred, even if the fraudulent representations did not address the real causes of the later collapse of the deal.

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