Daily Development for Monday, December 1, 2003 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; RADIUS CLAUSES: Radius clause controlling shopping center landlord's future leasing to competition of tenant is personal to landlord and does not run with land to transferees of landlord's other shopping center property. Wal-Mart Stores, Inc. v. Ingles Markets, Inc., 581 S.Car. 2d 111 (N.Car. App. 2003) The lease provided that "landlord covenants . . . not to lease, rent, occupy or suffer or permit to be occupied any part of the shopping Center or any other area owned or controlled by Landlord, its successors, heirs or assigns, or Landlord's principal owners, stockholders, directors or officers, or their assignees, which is within five miles of the shopping Center for the purpose of conducting therein or for us as [a]supermarket, [or] food store. . . " The provision went on to require that any of the bound parties would not convey any land that is part of the shopping center within the next following twenty years without requiring compliance with this the recorded Memorandum of the lease. At the time Wal-Mart was already arranging to occupy the Center, and the lease contained a specific exception for "the portion of the Shopping Center to be purchased by Wal-Mart Properties, Inc." Later, Wal-Mart apparently wished to expand its parking facilities, and bought additional land that was part of the shopping center but not part of the land that the parties had contemplated excluding from the restrictions set forth above. The grantors dutifully included in the deed to Wal-Mart a provision stating that the grantee would "comply with the terms, covenants and restrictions" of the memorandum of lease. Twelve years after that, Wal-Mart announced plans to open a SuperCenter about five miles from the shopping center for which the radius clause had been written. The land for the SuperCenter had not ever been owned by the owners of the center and was not land expressly covered by the lease provisions. But, of course, the tenants protected by the language argued that Wal-Mart, as a successor in interest to the parking lot segment, was bound by the radius clause. In fact, it argued, Wal-Mart's deed expressly so provided. (The court notes that Wal-Mart didn't sign the deed, but doesn't say whether that would have mattered in South Carolina - usually acceptance of a deed is acceptance of the covenants it contains.) The trial court found that Wal-Mart was bound by the radius clause On appeal: Held: Reversed. The appeals court concluded that the radius clause meant that the original landlords would not sell, lease or occupy any property for grocery store use within the radius and would impose a similar restriction on any property that they sold or leased. But the court ruled that the restriction did not apply to parties who acquired shopping center property from the original landlords, even though, of course, they were literally "assigns" of the landlords and within the technical language identifying parties bound by the restriction. The court began its analysis by demonstrating the absurdity of reading the deed or lease provisions literally. Since both provisions required that the landlord or its successor or assigns would comply with all provisions set forth in the Memorandum of Lease, the court concluded that the provision literally required that Wal-Mart, by a close reading of the terms of the instruments, would be bound to perform all the landlord's covenants, including maintenance of the shopping center common areas, purchase fire insurance, ets. In addition, the court said, Wal-Mart would be bound by all the tenant's covenants as well, so it would be bound to pay the rent for the grocery store, since the rent obligations were "terms of the lease." As noted, the court performed this analysis simply to note that a literal reading of the documents in question was inappropriate. The court further noted that South Carolina has joined the majority of jurisdictions that willingly enforce radius restrictions as appropriate and understandable commercial agreements in the shopping center context. Nevertheless, the court concluded, not all radius clauses run with the land, and this one definitely did not. The radius restriction created a right that was personal only to the original landlord, and did not run to its successors. The court simply ignored the language indicating that the memorandum of lease was binding all the landlord's successors and assigns. Comment: This was certainly a practical and probably correct ruling. But does it prove to much? What if the landlord sold the actual shopping center property and assigned the lease? If the transferee assumed and agreed to perform the covenants of the lease, of course, it would be bound. But normally we say that assignees of a leasehold estate are bound by covenants that run with the land by virtue of privity of estate, even if they don't assume. Did the court really mean to say that assignees of the lease were not in privity as to radius clause? This question really is a complex one. Many would argue that a successor landlord should not be bound automatically by such a clause. What if, for instance, a lender should foreclose on the landlord's interest, but kept the lease to tenant alive. The lender might be a local bank with extensive landholdings in the area. Should it be bound by the radius clause originally drafted between the first landlord and the tenant? Seems like the answer should be no. But, for that reason, it is common to insert a "mortgagee exception clause" in these things. The tenant would argue that the presence of a "Wal-Mart exception clause" in the original lease (applying to other property being acquired by Wal-Mart) indicated in fact that the parties thought about making exceptions relating to successors to the landlord and made the exceptions where they thought it appropriate. The tenant would further argue that if it is paying rent to a landlord and operating (presumably) under a continuous operation covenant, it should be protected from outside competition by the party to whom it is paying that rent and owing the continuous operation obligation - i.e. the landlord of the moment. Comment 2: These are ordinary old commercial parties operating with lawyers and clearly negotiating on a level playing field. Why not leave things where they lie? Problem is that it is pretty clear they didn't mean to bind Wal-Mart here. But finding that the lease provision as a whole is "merely personal" may be overstating the conclusion. Readers are encouraged to respond to or criticize this posting. Items reported on DIRT and in the ABA publications related to it are for general information purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters. 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