Daily Development for
Wednesday, June 14, 1995

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

LANDLORD/TENANT; "EXCLUSIVE USE" CLAUSE; LANDLORD'S OBLIGATION: Landlord's covenant that "that the Project shall be constructed as a first class commercial building intended to be used for showrooms and other related uses, " coupled with exclusive use obligations imposed on tenant, establish a restrictive use duty upon landlord that landlord lease balance of space in building exclusively for contract furniture showrooms. Herman Miller, Inc. v. Thom Rock Realty Co., L.P., 46 F.3d 183 (1995). This case, as noted by the court, results from still another sad story of 80's entreprenurial enthusiasm on the rocks. It involves the "International Design Center" of New York - an attempt to create a central showplace for interior design. The project was designed by I.M. Pei (and we all know what that costs). The first two phases - over one million square feet, were to be devoted to contract furniture manufacturers' showrooms (contract furniture manufacturers sell in large lots to hotels, office developers, and similar institutional buyers). Tenant's lease was for ten years at $20.43/sq. ft. (In Queens!!). It required that tenant devote its space to showroom display and sale of contract furniture to the trade and contained a continuous operation clause (with a biting liquidated damages provision) and a duty of tenant to cooperate in promoting the "showroom" concept. Only the exclusive use clause mentioned "contract furniture" showrooms.

Central to the concept was that virtually all of the space in the project would be furniture showrooms. Most of the early leases included "kick out" clauses if less than 10% of the space on their floor was leased to non-showroom tenants. Tenant's lease did not include that provision, but did include the provision cited in the caption that required landlord to build a "first class commercial building intended to be used for showrooms and other related spaces."

When numerous outside factors combined to trash the developer's dream, many of the original tenants bailed out. Unable to substitute showroom tenants, the landlord leased substantial portions of the premises for non-showroom tenants. Changes made to accomodate these tenants destroyed much of the benefit of the "showroom synergy" for the remaining showroom tenants, as customers were unable to move easily from one showroom area to another. Tenant argued that the landlord had violated a covenant in the lease requiring the landlord to devote the premises to contract furniture showroom purposes, and sought rescission.

Upholding the district court, the Second Circuit here rules that the lease did obligate the landlord to devote the premises exclusively to contract furniture showrooms. It denied rescission, however, and remanded the case for a damages interpretation.

The case purportedly is based upon an interpretation of New York Law. The court reads New York law as providing that use restrictions exist only when intent is found unmistakably expressed in the lease. Such intent, however, may be discerned from an examination of the whole lease and need not be drawn solely from the particular provision under scrutiny. The court views the contract provision as requiring that the landlord would develop the premises for showroom purposes as a restrictive use clause on the landlord, and not merely a clause of description, limiting the landlord from leasing space to any tenants outside the contract furniture business.

As the specific language of the covenant contained not only an exclusive use promise nor any reference to contract furniture showroom purposes (as opposed to "showroom purposes in general), the court obviously had to look elsewhere in the lease for support of its interpretation. The primary source was the exclusive use clause imposed on the tenant - which did, of course, refer to contract furniture showroom purposes. Denying that it was building a reciprocal use restriction out of the tenant's exclusive use clause, the court concludes that all of the provisions of the contract read together - continuous operation, cooperation in concept and promotions, and exclusive use - lead to the court's intepretation.

Comment: It is difficult to credit the court's claim that it is not making the exclusive use clause reciprocal. Remember that under controlling law, the court was restricted to the language of the lease. It could not look to bargaining history or the promotional activities or verbal representations of the developer. The only reference to contract furniture purposes is in the exclusive use clause. The court mind have found some basis for imposing an "all showroom" use restriction (which the developer probably violated) but to impose an "all contract furniture showroom" purpose is to find meaning only in the exclusive use clause. The distinction as to how narrow the restriction is to be may be very important in the damages phase of the trial.

If we were to look outside of the "four corners," we would also have to look at the fact that most of the earlier leases included an express "kick out" if the premises were not leased primarily for showroom uses. The fact that this clause existed in the other leases suggests that other tenants were not "sold" on the developer's concept and were thinking that the concept might not be carried out. It also suggests that this tenant should have been aware of this possibility and bargained harder itself for a "kick out" or a clearer use commitment from the landlord.

The court's ruling that rescission is an inappropriate remedy here also considerably weakens the strength of its conclusion on the covenant. If, indeed, the tenant was investing in a comprehensive marketing enterprise that the landlord promised to undertake, why is the tenant now stuck occupying (under continuous operation duties) a significant space in a building that no longer embodies that marketing scheme? Isn't the original purpose wholly frustrated for the tenant? If the landord is off the hook for carrying out the scheme, why isn't the tenant out as well?

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