LANDLORD/TENANT; COMMERCIAL EXCLUSIVE USE: Anticompetition benefits of exclusive use clause can benefit tenant’s assignee even as to other properties assignee owns outside of center.

Tippecanoe Assoc’s II LLC v. Kimco Lafayette 671, 811 N.E.2d 438 (Ind. Appp. 2004)

Kroger leased a grocery store location in a shopping center in 1974, for twenty years with four five year extension options.

The lease contained a particularly tough exclusive use/radius clause, which we set forth here in full:
“Landlord covenants and agrees, from and after the decree (?sic) hereof and for so long as this lease shall be in effect, not to lease, rent, occupy, or suffer or permit to be occupied, any part of the Shopping Center premises or any other premises owned or controlled directly or indirectly either by Landlord, its successors, heirs or assigns, or Landlord's principal owners, stockholders, directors, or officers, or their assignees (hereinafter called owners) which are within 2 miles of the Shopping Center premises for the purpose of conducting therein or for the use as a food store or a food department or for the storage or sale for off-premises consumption of groceries, meats, produce, dairy products, or bakery products, or any of them; and further, that if Landlord or owners own any land, or hereinafter during the term of this lease Landlord or Owners acquire any land within such distance of the Shopping Center, neither will convey the same without imposing thereon a rest!
n to secure compliance with the terms of this lease.... This covenant shall run with the land. Landlord acknowledges that in the event of any breach hereof Tenant's remedies at law would be inadequate and therefore, in such event, Tenant shall be entitled to cancel this lease or to relief by injunction, or otherwise, at Tenant's option, and Tenant's remedies shall be cumulative rather than exclusive.”

To make things doubly tough, the lease permitted the tenant to assign for any purpose that did not then conflict with any exclusives granted by the landlord elsewhere in the center.

Tenant assigned to another grocery, but that grocery company a year later sublet the space to an appliance store, which remained in the space at the time of this dispute. Later, the assignee sold its interest in the master lease and the appliance store sublessor rights to Tippecanoe. Although the court doesn’t say so, it appears that the lease had been extended several times pursuant to the options. Ultimately, in 1997, the landlord sold its interest to Kimco.

More than a third of the Kimco’s center was occupied by a Target store, which vacated in 2000. In its efforts to find another occupant for the space, Kimco tentatively contracted with a grocery chain. The parties agreed that the covenant ran with the land to Kimco as to burden and Tippecanoe as to benefit and that the leasing to the proposed new grocery store would violate the terms of the covenant. The trial court found that, although covenants that restrict the use of land are disfavored in Indiana, they will be upheld if they are unambiguous “unless equity compels a contrary conclusion.” It found such contrary force in equity here, and refused to issue an injunction prohibiting the lease to the new proposed grocery. It noted that changed circumstances supported refusing to support the covenant where the major tenant had departed, leaving the landlord in dire straights, and where the benefitted parcel was no longer being used for a purpose that would benefit from enfo!
On appeal, the appeals court acknowledged that Indiana follows the “changed circumstances doctrine,” which, interestingly, it characterized as a question of the public policy of the covenant itself, stating that “. . . a covenant that did not originally violate public policy can begin to violate public policy if the surrounding area changes in ways that ‘are so radical in nature that the original purpose of the covenant has been defeated.’" (citation omitted)

The appeals court, however, reversed the trial court and found the covenant enforceable in favor of Tippecanoe. Although it acknowledged that the space that Tippecanoe leased in the center would not be adversely affected by the lease to of other space to a grocery store, the Tippecanoe had other properties in the vicinity that were being leased to other parties and these properties would be injured by competition from the new store in the landlord’s center.
“One of the main purposes of restrictive covenants is to "maintain or enhance the value of land 'by controlling the nature and use of lands subject to a covenant's provisions.' [citations omitted[ It seems apparent to us that the value to Tippecanoe of the lease for the Kroger space at the shopping center was based not only on the fact that Tippecanoe could sublease that space to another company, but also on the fact that, by enforcing the restrictive covenant, Tippecanoe could avoid grocery store competition in that neighborhood. Thereby, the restrictive covenant enhanced the value of the land for Tippecanoe.”

As Kimco had purchased with full knowledge of the covenant, the court did not regard the economic burden on Kimco of enforcement of the covenant to be relevant to the equities of the case.

Comment 1: Wow!! Here’s a case where the appeals court actually overrules the judgment of the court below on the equities and overturns a finding of changed circumstances where there seems to be abundant evidence to support it. Further, the only basis on which the covenant can be supported has to do with factors arising after the covenant was entered into and outside the area covered by the lease. How can it be right?

There is no indication in the covenant that the benefit is to run beyond the property that was the subject of the lease. In essence, this would be a finding that the benefit is “in gross.” To the contrary, the lease covenant states that the covenant will “run with the land.” To say that there was land outside the shopping center benefitted by the assignee/sublandlord, and that the covenant attaches to that land, strikes the editor as dramatic overreading of the intent of the parties here. Basically, the courts holding makes an anticompetition covenant completely merchantable. Here, for instance, the court virtually admits that the assignee’s purpose in obtaining the apartment store sublessor’s rights was to obtain the enforcement rights of the anticompetition covenant.

Whether this represents good or bad economic theory (the editor is still puzzling that one out), the case is a startling expansion of the traditional notion of the purpose of covenants that run with the land and totally inconsistent with the traditional province of equity in refusing to enforce covenants on the basis of “changed circumstances.”

An acceptable interpretation for the editor would have been if the court had acknowledged that the covenant existed and was enforceable if and when the tenant would benefit from its enforcement, because the premises had been converted back to grocery use, but no sooner. Note that in this was there were only ten years left of the 40 years originally controlled by the Kroger lease. The appliance store tenant apparently had leased those years. This covenant should not have been enforced.

Comment 2: Note also that this case involved a very clear statement of the landlord’s duties, and no statement at all of the benefitted parcel or the benefitted parties. It would appear that wise landlords ought to be drafting around this result by attempting to articulate in their exclusive use clauses the target beneficiary, both as to use and as to party.

Comment 3: If the court is willing to go this far, what point is there in requiring the benefitted party to buy the assignment/sublessor rights in order to enforce the covenant. Can the benefit be separated from the leasehold estate and sold separately? Sounds pretty far fetched, but isn’t that precisely what happened here from an economic standpoint?

Readers are encouraged to respond to or criticize this posting.

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