[BROKERDIRT] DD 10/4/06 What, in fact, does a radius clause protect?

Daily Development for Wednesday, October 4, 2006
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 CLAUSE: Radius clause requiring that tenant not “during the term of the lease, own, operate, manage or have any financial interest in, any store or business located within a radius of seven miles . . . that is similar to that then being conducted upon the demised premises” is ambiguous when applied to tenant’s operation of branch of its store after it had gone dark in the shopping center subject to the restriction, and trial court may take additional evidence to ascertain whether parties intended to lock out competing activities even when the protected space was dark.

Wells Fargo v. Diamond Point Plaza, L.L.P.   2006 Westlaw 2788385 (Md. App. 9/29/06) 

This case makes fascinating reading for anyone involved in shopping center finance or operations.  There is interesting discussion of many issues commonly in dispute.

The one selected for the editor here has to do with the interpretation of the clause set forth in the caption.  This clause appeared in a lease to Sam’s Club.  Sam’s Club, like all Wal Mart operations, negotiated a tough “go dark” clause in its favor.  The clause indicated that Sam’s Club made not representation that it would conduct any business at the location and reserved the right to go dark.  (In fact, as reported in the second item on this case, Sam’s Club assigned the lease to the production company of the hot Showtime series “The Wire,” about gangs and drugs in urban Baltimore.  But that’s another story.)

As it was shutting down the operations at the Diamond Point location protected by the radius clause, Sam’s was stocking and preparing to open a store at another location within seven miles, and ultimately did open that location just as it closed at Diamond Point. 

The shopping center’s lender claimed that it suffered significant damages as a consequence of Sam’s Club’s violation of the radius clause covenant.  Although the trial court found against Sam’s Club on many counts, on this issue it granted summary judgment to Sam’s Club, on the notion that the clause was not intended to protect dark space from competition.  As Sam’s Club had the right to go dark, it also had the right to open another location after it had done so.

The appeals court did not agree that this language was so clear.  It concluded that summary judgment was inappropriate here.  The lender argued that “then being conducted” unambiguously referred to “the term of the lease,” and that the radius clause protected the space from competing operations within seven miles whether or not the space was dark.  The lender claimed that the court’s interpretation rendered the clause “illusory” and couldn’t possibly have been the expectation of the parties.   It noted that, elsewhere in the lease, the tenant reserved the right to operate other stores “which are in competition with such store” subject to what else might appear in the lease (such as the radius clause).  It argued that this permissive language to the tenant somehow bolstered its argument that the radius clause went beyond merely protected against competing store operations, but rather was intended to protect the space itself from competition.  Apparently counsel for the lender did a

 very impressive dance around the word “then” in the above caption that impressed the appeals court, which found that there was sufficient ambiguity in the clause to warrant a trial on the merits.

Sam’s Club argued that to protect the operating store from competition was a perfectly valid purpose of the radius clause, and was not “nonsensical.”  The lease was a percentage lease, and the landlord clearly had an interest in protecting the store from competition while it had the possibility of generating percentage rents.  When the store was dark, however, that interest went away.

Comment: The editor agrees with the trial court and Sam’s Club here, and is interested in hearing from other interested commentators.  He has seen plenty of radius clauses, and knows that those drafting such clauses know how to say it when they are in fact trying to prevent additional branches of the store from springing up so as to draw business away from the shopping center.  Here, in the editor’s view, the purpose of the clause was to protect the Sam’s Club operations from diminution in percentage rent. 

As an example - what if Sam’s Club, as it might have, had turned the entire store into a greeting card outlet, liquor store, or Halloween and Christmas decoration specialty store?  Could it have opened another branch of the Sam’s Club within the radius, while excluding only the competing lines.  It is hard to see how the court could read the clause as prohibiting such operation.  Sam’s Club was free to do anything it wanted with its space.  If the landlord really wanted to protect against other Sam’s Clubs, it should have said so, rather than to try to protect operations that were subject to constant change at the whim of the tenant. 

LANDLORD/TENANT; COMMERCIAL; USE CLAUSE: Tenant may be subjected to extensive damages claims for leasing to non-retail tenant when lease requires that premises be restricted to “lawful retail and shopping center purposes.”

Wells Fargo v. Diamond Point Plaza, L.L.P.   2006 Westlaw 2788385 (Md. App. 9/29/06)

Tenant, as it was permitted to do under the lease, went dark and continued to pay base rent.  Then, without landlord’s prior knowledge or consent, Tenant assigned the lease to a production company for various production activities relating to the hit Showtime TV series “The Wire,” which concerns gang activities and drug trafficking in urban Baltimore. 

Landlord’s lender, claiming significant damages, was able to bring in witnesses to show that the presence of a non-retail activity in the space was far worse than a dark store, even a dark anchor, such as a Sam’s Club.  Consequently, the tenant was able to prove damages, upheld here by the trial court, in the order of $1.25 million for the 2 and a half years the arrangement went on.

Comment: There’s virtually no law here, but the fact that plaintiffs were able to show so much loss due to a production company in the space, rather than a dark space, struck the editor as noteworthy enough to insert a report item. 

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