Daily Development for Thursday, September 17, 2009
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Husch Blackwell Sanders
Kansas City, Missouri

LANDLORD/TENANT; COMMERCIAL; EXCLUSIVE USE CLAUSES: Exclusive use clause that does not contain express limitations as to time or product line can provide “open ended” protection for any changes tenant or tenant’s affiliate stores may undertake in their product line during the life of the lease. 

Interstate Realty v. Sears, Roebuck & Co., Civ. No. 06-5997 - DRD, 2009 Westlaw 1286209 (D. N.J. 4/27/09) (not approved for publication)

In 1996, Sears negotiated for a long term lease of 42,000 square feet in Owner’s shopping center.  The original (non binding) memorandum of understanding contained the following provision relating to exclusive use:  "[f]or so long as Sears operates a Sears Hardware store, Landlord shall not lease to another tenant whose principal business is paint, hardware and/or lawn and garden supplies."

When the final lease was signed, however, the language concerning exclusive use was pretty much the standard language Sears used in its leases (if it could get away with it):

The Demised Premises may be used by Tenant for the sale, servicing and storing of merchandise, all other items or services normally sold in Sears Hardware Stores, and all other lawful retail uses.

Landlord represents and warrants to Tenant that Landlord shall not lease any portion of the Entire Tract to any tenant who intends to use more than three hundred (300) square feet of its leased premises, in the aggregate, for the sale of certain items or services which would normally be sold in a "Sears Hardware Store," [an exception expanded the permitted competing space for very large leases] Landlord represents and warrants that Landlord shall include a restrictive covenant in all future leases or amendments to leases relating to the Entire Tract which [sic] restricts all other tenants in the Entire Tract from using more than three hundred (300) square feet of leased premises, in the aggregate, [1000 square feet for larger leases] for the sale of items normally sold in "Sears Hardware Stores," including, without limitation, the sale of hardware materials, tools and supplies, paint, plants, and power and non-power lawn and garden equipment, tools and supplies. In the event that

any tenant at the Entire Tract shall engage in such sales in violation of the aforesaid exclusive use provision, then Landlord shall take all matters which are necessary in order to enforce for the benefit of Tenant such exclusive use provision, including, without limitation, the filing of any lawsuit at Landlord's sole expense. . . . .

In 1995, Sears Hardware Stores nationwide did not sell appliances such as stoves and refrigerators, but did sell outdoor grills.  When the Sears store opened at Owner’s center, it also sold a range of hardware products and outdoor grills, but no appliances.

In 2004, Sears changed the name of its store in Owner’s center to Sears Hardware and Appliance store and commenced selling home appliances.  This was consistent with a nationwide strategy relating to a number of Sears Hardware Store locations.

In 2006, pursuant to negotiations it was conducting with Karls, an appliance retailer, Owner asked Sears to sign a letter confirming that the sale of washers, dryers, refrigerators, stoves, etc. did not conflict with Sears’ exclusive rights clause.  Owner had already asked Karls to agree to sign a covenant that it would not violate the terms of any exclusive rights clause in the center, and Karls obviously had questions about Sears’ position. 

Sears promptly processed the request, and apparently concluded that the sale of appliances did violate its exclusive.  In fact 80% of the Sears Hardware stores in New Jersey had been converted to Sears Hardware and Appliance Stores.  Although Karls primarily sold “high end” appliances, Sears elected to invoke what it felt were its rights under the clause, and refused to consent to the leasing to Karls.  There was some discussion about limiting the “exclusive” prohibition to appliances that were not “high end” and more directly competed with the Sears line, but this did not appear to go anywhere.

Owner took the position that Sears no longer operated a Sears Hardware Store and had not exclusive rights, but if it did have such rights, they were limited to the product line at the original store as it existed in 2006.  Karls reached agreement with Sears that Sears would seek declaratory relief and indemnify Karls if the court did not vindicate the Karls lease.

Sears argued the opposite extreme, contending that the Exclusive Use Clause gives it the exclusive right to sell whatever is normally sold in Sears stores, or even what is normally sold just at Owner’s location, at the time in question - no matter whether the Sears stores are Sears Hardware Stores or have been changed to Sears Women's Shoe Stores.

While it was suing anyway, Owner elected to include counts for breach of the duty of good faith and fair dealing (an important issue in New Jersey), tortious interference with prospective economic advantage, and tortious interference with contract. 

The court ruled that neither side was correct in its interpretation.  It found that Sears was entitled to protection for any product line sold in Sears Hardware stores anywhere such stores might be located, and was not limited to protection of items sold on the Owner’s premises.  Further, the court ruled that there was no time restriction on the exclusive rights protection, so that Sears was free to change its product line and enjoy protection for the new product line throughout the life of the lease. 

But, contrary to Sears somewhat strained argument, the court ruled that Sears could not change the name of its store location and continue to enjoy protection for whatever products it decided to sell under the new name: “Sears is correct that nothing in the Sears Lease prevents it from changing the name of its store and the products it sells at Cedar Knolls, but it does not follow that the Exclusive Use Clause will expand to cover the products sold at its new store, unless those products are normally sold at Sears Hardware Stores generally . . . [Sears] does not have the exclusive right to sell appliances because it changed its store to a Sears Appliance and Hardware Store. Rather, the Sears location at [Owner’s Center] still has exclusive rights to sell products normally sold at "Sears Hardware Stores" all over the country, even though it is now a Sears Appliance and Hardware Store.

As to the tort claims, the court found that Sear’s interpretation of its rights, although incorrect, “were not so unreasonable as to be malicious.”

Comment 1: In the editor’s mind, Sear’s interpretation of the lease, held through a court proceeding, is pretty close to malicious.  It had deliberately changed the name of its stores because no one would come to a hardware store looking for a broad line of appliances.  And it seems beyond argument that the only protection it got from the exclusive rights clause was for a “Sears Hardware Store.” 

Comment 2: The primary reason the editor included this trial court decision, however, is to give fair warning to landlords as to how courts are likely to interpret exclusive rights clause that are open ended as to when the exclusive rights are identified, and open ended as to the product line protected.  Although Sears didn’t get away with blocking the Karl’s lease, there are any number of other potential tenants who might be intimidated by signing a covenant stating what they would have to abandon an important product line any time a Sears Hardware Store somewhere in America picked up that line. 

Comment 3: Many exclusive use clauses are negotiated primarily by property managers and are not seen as legal issues.  Indeed, disputes in most cases are renegotiated and compromised.  Sometimes, however, parties will dig in, and generally they would have been better served if the exclusive use clause had been reviewed by counsel at the time of leasing. 

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