Daily Development for Tuesday, June 19, 2001

By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

LANDLORD/TENANT; COMMERCIAL; TENANT'S RADIUS CLAUSE: Court will carefully scrutinize radius clause binding tenant where clause is entered into without separate consideration, and landlord has burden to demonstrate that covenant in duration, area and scope, taking into account landlord's legitimate business interests.

Herndon v. Waller, 525 S.E.2d 159 (Ga. App. 1999)

Tenant, a veterinarian, leased property owned by another veterinarian who had ceased the veterinary practice and in fact left the country to pursue a medical degree. The lease was for one year, but was, in the words of the court "renewable" (whatever that means). The landlord had not practiced veterinary medicine at this location for six years, but had leased the premises to another veterinarian, who had defaulted. The lease included certain equipment, but the premises itself was in a state of disrepair due to the conduct of the prior tenant.

The lease included a covenant by the tenant to refrain from opening a veterinary practice "for a distance of fifteen miles" for a period of two years following tenant's "severance of ties” with landlord. Apparently, after the end of a lease period, tenant elected to relocate the practice and sought declaratory relief that the radius clause was vague and unreasonable.

The trial court found that the geographical restriction it was vague and therefore the covenant was unenforceable. The court of appeals decided to go anther way, finding the covenant unenforceable because it was not reasonable.

Central to the court's ruling was its determination that it should "strictly scrutinize" this covenant, apply the same standards applied to "non compete" agreements in employment contracts. Although the court acknowledged that a covenant in a commercial lease does not necessarily involved the same kind of unequal bargaining power that has motivated Georgia courts to be cautious in enforcing non compete agreements in employment contracts, it held that where there is no evidence of separate consideration for the non compete promise in the lease, and the tenant, rather than the landlord, is bound, the court will investigate closely whether to covenant is justified.

Here, the court found that the covenant could not be justified because the landlord had not practiced veterinary medicine himself for quite some period of time and because the tenant's practice consisted primarily of clients whom the tenant had not "inherited" from the veterinary business that had been on the premises. (The court does not indicate whether the bulk of the clients were obtained while the tenant operated at the landlord's premises, but presumably this was the case.)

Comment 1: Although courts in some other jurisdictions routinely scrutinize the reasonableness of non compete clauses in leases whenever they arise, here the court purports to justify its "special scrutiny" here because of special factors that might not be present in most cases. It notes that the provision bound the tenant, not the landlord, and that it was without consideration. It suggested that when the premises are sold, typically the seller makes a non-compete covenant to protect the buyer's investment, and that the seller receives separate consideration.

Whatever the merits of the court's assumption regarding the "typical" sale transaction, it is completely out to lunch about radius clauses in leases. Where they appear, they might bind either the landlord or the tenant or both. Further, it would be surprising for any special consideration to appear rather the lease itself provides the consideration, as it constitutes a leasing of more than just a premises, but of a business opportunity.

Comment 2: The emphasis that the court placed upon the fact that the tenant had developed its own clientele misses the point. The landlord had a location that had been, for some time, a veterinary office. For someone to come in and exploit that location and then relocated nearby is to deprive the landlord of valuable good will that had developed for the landlord's premises. Whether that goodwill has been generated by the premises itself or by the tenants in it seem to the editor to be beside the point. The purpose of the lease was to lease a veterinary office, and the landlord had every right to protect the veterinary office by the express terms of the lease.

Comment 3: The editor might have concluded, however, that the landlord had some burden to demonstrate that the premises indeed did have good will built up and that it was likely that the premises had special value as a veterinary clinic. Further, the fifteen-mile radius seems to be a bit of an overreach. In sum, the editor doesn't quibble with the outcome, but with the reasoning, which will stand as a difficult precedent in future cases in which landlords are attempting to protect their legitimate interests with a radius clause.

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

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