Daily Development for Friday, February 2, 2000

Thanks to DIRTer Peggy Israel in Arizona for the tip on this one:

LANDLORD/TENANT; COMMERCIAL LEASES; RADIUS CLAUSES; ENFORCEMENT: Where a landlord transfers property subject to a radius clause to a transferee who has no knowledge of the clause, the transferee may take as a bona fide purchaser free of the restrictions, but the landlord may remain liable in damages to the party protected by the clause if such party can show that there has been diminution in the value of the premises as a result of the violation.

Mabros v. DonutsRUs, Inc., 536 S.E.2d 215 (Ga. App. 2000) (dicta)

The landlord agreed to "hold any land now or hereafter owned or controlled by LESSOR within a radius of one mile of the PREMISES subject to the following restriction for the benefit of the LESSEE AND THE PREMISES and to include such restriction in all leases or sales of the land: . . . no part of such land shall be . . . used for the manufacture or sale . . . of [baked goods] except that the sale of [baked goods at retail] if not manufactured on the premises, may be made in connection with the operation of supermarkets, convenience stores, restaurants, diners, luncheonettes and soda fountains."

Landlord later sold property within one mile of the leased premises to a WalMart and (suprise!!) did not restrict the use of the property upon sale.

Later, WalMart opened an inhouse bakery on the land acquired from landlord and sold donuts baked in another part of the store that was not located on that land. The tenant discovered that WalMart was a BFP, and so sued the landlord for damages for breach of the covenant.

The court first found that the exception dealing with baked goods "not manufactured on the premises" did not apply where some of the premises was on the controlled land. The intent of the parties was to bar the sale of fresh baked donuts in competition with the benefitted party, Donuts RUs, and obviously if the donuts were made on WalMart's same premises, this violated the intent of the covenant.

The court went on to find, however, that tenant was unable to establish a basis for a damages claim. Prior Georgia authority had indicated that the measure of damages is the diminution in the value of the leased premises. The tenants had attempted to show this diminution through a showing of lost profits. The court noted first that lost profits may be some indication of reduced value of the leasehold, but lost profits alone are not sufficient to prove such reduction. Moreover, in this case, the court noted that the standard for acceptance of proof of lost profits is high: "the trier of fact must be provided with some means of ascertaining the value of those lost profits with some degree of certainty."

Comment 1: Several easy lessons here: First, where courts will be conservative in accepting lost profits evidence, and you are serious about getting damages when a covenant is breached, consider establishing some liquidated damages standard, or possibly even a liquidated damages formula based upon existing, provable data. Second, a covenant against competition binding third parties is only useful when it is recorded. Get that puppy in the record!!!

Comment 2: This seems an opportune time to revisit a case that the editor loves to hate: J.C. Penney Company, Inc. v. Giant Eagle, Inc., 85 F.3d 120 (3rd Cir. 1996), where there was an exclusive use clause in a drugstore lease that expired in 1992. Another tenant leased property prior to the end of that lease, but its lease contained no language restricting drugstore activities. Nevertheless, it did not open a drugstore prior to 1992.

Soon after the second tenant leased its property, however, and long before the end of the earlier lease, the landlord and the first tenant agreed to revise and extend that lease. The new lease added an additional term, changed the space allocated to the tenant, and provided for an exclusive right for drugstore lease.

Around the 1992 termination date of the original lease containing the exclusive use protection, the second tenant prepared to open a pharmacy. The first tenant was able to enjoin the pharmacy for the life of the first tenant's revised lease term both before and after the original 1992 expiration date. The court held that the second tenant not only had inquiry notice of the exclusive use clause in the first tenant's lease (although the clause was not of record), it was also on constructive notice that the first lease could be renewed and moved to additional premises, and the court concluded that the second tenant was subject to such extension.

Just to rub it in a bit more, the court held that the landlord had no liability to the second tenant, even though the landlord created the problem by extending the protected lease of the first tenant immediately after leasing to the second tenant under an unrestricted lease.

In short, one takes with constructive notice not only of the contents of leases on the landlord's premises, but also of the fact that any of those leases can be extended, and any exclusive uses continued. Wow!!

Comment 3: For another interesting twist, with which the editor agrees, see Renee Cleaners, Inc. v. Good Deal Super Markets of N.J., Inc., 214 A.2d 437 (N.J. App. 1965), where the landlord's radius promise was held to include an implicit promise that if the landlord later sold any of the property within the radius it would restrict the use of the property for the benefit of the protected lease. Note that in the principle case, this promise was explicit. Always a good idea.

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