Daily Development for Friday, November 30, 2001

 

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

 

LANDLORD TENANT; COMMERCIAL; CONTINUOUS OPERATION; INJUNCTION:  Pennsylvania court grants injunctive relief to enforce continous operation clause in lease for minor tenant.

 

Summit Town Centre, Inc. v. The Show Show of Rocky Mount, Inc., 2001 WL 1298870 (Pa.Super. 10/26/01)

 

Tenant operated a 5400 square foot shoe store in a 550,000 square foot "regional super center."  It had a ten year lease, ending in August 2002. There was a specific continuous operation clause in the lease.  On January 30, 2000, after fruitless negotiations to end the lease, and after dire warnings from landlord, tenant went dark.

 

A trial court refused to issue a preliminary injunction, persuaded by tenant's testimony that it had sustained losses of $98,000 in 1998 and $109,000 in 1999, and that it would sustain $121,000 in 2001 were it required to remain open.  Further, it noted that there would be a significant cost in re-outfitting its store.

 

The landlord put forth no estimate of actual money damages, but argued that the tenant's failure to operate and its defiance of the continuous operation clause made it difficult to maintain performance by the other tenants on the premises and to attract new tenants because  it undercut the landlord's "credibility" on the question of whether it really was committed to maintain an "appropriate tenant mix."    "While the harms occasioned by [Tenant's] departure may be difficult or nearly impossible to measure," the court stated, "they are not speculative. . ."

 

The landlord noted that it already had a group of "soft goods" and "women's ready to wear" stores, into which the tenant's business fit quite nicely, and argued that "the interdependence of these stores is very important to the shopping center's success.

 

One thing that might have tipped the scales for the landlord was the high degree of specificity in the description of the business that the tenant was to undertake, thus precluding uncertainty in the standards that a court should enforce.  Here was the use clause:

 

"Tenant agrees that the Demised Premises shall be . . . used for the sole purpose of the operation of a first-class modified rack family shoe store specializing in retail sale of brand name dress, casual, sport and work shoes, as well as handbags, hosiery and other related accessories.  Tenant recognizes that the specific limited use prescribed herein is a material consideration to Landlord in order that the Shopping Center will remain an appropriate tenant mix."

 

Later, in the continuous operation clause, the parties agreed upon the opening schedule as the other stores, with a minimum schedule as well, and that the tenant would "maintain . . . a substantial stock of merchandise and a sufficient number of employees for the purposes of selling said merchandise. . ."

 

The lease had a liquidated damages clause, but the court here does not tell us what it said.  The court concluded, however, that the existence of a liquidated damages clause does not preclude equitable relief in the form of specific performance.

 

Note, particularly, that this opinion was given in October of 2001, and is not yet implemented, as there is a rehearing request pending.  The tenant's lease expires in August of 2002, so the "continuous operation" that the tenant will have to start up and undertake will last only about eight months.  The court had little patience with tenant's complaints about the cost of restarting, since the landlord had warned repeatedly that it would take the continuous operation clause seriously and that if it closed it might be in court.

 

Comment 1:  There have been scant few appellate opinions that have approved injunctive relief for continuous operation clauses.  One of the few is also a Pennsylvania case, Slater v. Pearl Vision Center, Inc., 546 A.2d 676 (Pa. Super 1988).  Ironically, both Slater and this case have the apparent benefit that the operations of the tenant are relatively small and therefore easy to manage through a judicial injunction.  This seems important despite the fact that the correlative argument is that the closure of a small store has little real impact on the landlord.

 

The landlord here countered the latter argument by stating that it was all a matter of "credibility."  In other words, with the court as enforcer, the landlord would be able to keep the other tenants in line.  Does this sound like there's some "ganging up" going on here? ?  Is "credibility" really a basis for granting an injunction that will lead to significant economic loss?   Other courts have been reluctant to order a tenant to continuously operate at a significant loss, which certainly is going to be the case here.

(Wanna buy a shoe?)

 

Comment 2:   The most common reason  given for refusing to enforce these clauses is that the court will be drawn into a morass of enforcement uncertainty.  What is "continuous?"  What is "operation?"  See Price v. Herman, 81 N.Y.S. 2d 361 (Sup. Ct. 1948); Grossman v. Wegman's Food Mkts., Inc., 350 N.Y.S. 2d 484 (N.Y. App. 1973).  But see Dover Shopping Center, Inc. v. Cushman's Sons, Inc., 164 A.2d 785 (1960) (One of the rare cases granting an injunction.  In the instant case, as suggested, the lease minimized these problems more than might be the case if we were talking about a major department store.  See  New Park Forest Assoc., II v. Rogers Enters., Inc., 552 N.E. 2d 1215 (Ill. App. 1990).  (Even with specificity in the covenant, the court refused enforcement with a major department store tenant because of the expressed concern that the court didn't want to be running a shopping center.)

 

 

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