Daily Development for
Wednesday, September 11, 1996

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

LANDLORD/TENANT; COMMERCIAL; "RADIUS CLAUSE:" Radius clause in 30 year lease ending in 1992 may be extended by parties to the lease so as to bind third parties leasing other property in landlord's center even where lease is silent as to such extention right.

J.C. Penney Company, Inc. v. Giant Eagle, Inc. et al.,85 F.3d 120 (3rd Cir. 1996)

Pharmacy had a thirty year lease (including exercised extensions) with a radius clause prohibiting other pharmacy uses in the center. This lease expired (including all extensions) in 1992. Tenant recorded a memorandum of the lease that did not mention the restriction. In 1977, Landlord leased space in the center to Grocery. In 1978, Landlord renegotiated the lease with Pharmacy. Under the new arrangement, Pharmacy relocated within the center, The court doesn't give us the term of the new Pharmacy lease, but it apparently included the periods in question here.

Near the time that the original 1962 Pharmacy lease, would have expired, Grocery determined to install a prescription drug dispensing operation in its grocery store. Its lease did not prohibit this activity. Pharmacy, now operating under its 1978 lease, sued to enjoin the drug dispensary in Grocery's store, arguing that the 1962 lease rights implicitly could be extennded indefinitely by agreement of the landlord and tenant, and that Grocery took its 1977 lease with constructive knowledge of that implicit provision, and therefore was bound by the radius clause for as long as Pharmacy continued operations at the center. This was true (1) despite the fact that the space protected by the clause was different than the one covered by the original 1962 lease and (2) despite the fact that the memorandum of lease recorded in 1962 said nothing about a radius clause at all and the lease itself said nothing about renewal.

Preliminarily, the court determined that Pennsylvania law had evoloved and that the traditional concern about radius clauses being restraints on alienation was no longer relevant to their interpretation. Consequently, courts should construe shopping center lease restrictions in light of the overall intent of the parties, not the strict construction of the words of the scrivener. The court cites Teodori v. Werner, 490 Pa. 58, 415 A.2d 31 (Pa. 1980) in support of its interpretation of Pennsylvania law.

The majority then proceeded to find for Pharmacy, concluding that the nature of the modern shopping center is one of interdpendent uses, that every party to the business arrangement is aware of that, and that consequently Grocery should have anticipated that Pharmacy had a legitimate expectation that its radius clause protection could be extended indefinitely. Because of this anticipation, Grocery should have assumed that its lease contained a limitation requiring it to conform to renewals of the radius clauses contained in other leases in the center.

A strong dissent argued that it was inappropriate for the court to stick Grocery with a a radius clause that did not exist at the time of its 1977 lease. The only Pharmacy lease in effect in 1977 expired in 1992, and the radius clause expired with it.

Comment 1: The dissent is absolutely right and the majority here is absolutely wrong. There is no "standard practice" or "standard expectation" in shopping center leasing. The parties bargain hard for everything they can get, and if the lease doesn't say it, then it wasn't part of the bargain.

This is not to say that lease contracts, like any other contract, ought to be construed in accordance with the overall business purposes of the parties. But it's one thing to construe ambiguous or uncertain language in accordance with the parties probable intent. It's quite another to make up provisions to suit the court's view of what's fair. What's fair is to give the landlord and the tenant that which they paid for, and nothing more or less.

Comment 2: Note that the court's opinion completely absolves the landlord of responsibility, since it holds that Grocery should have known that the Pharmacy lease contained an unwritten provision permitting unlimited extension.

Comment 3: The court holds that Grocery was bound by the extended rights under the radius clause. But was Landlord? Couldn't landlord have refused to relet to Pharmacy if Pharmacy demanded the same radius clause as before? If this is the case, then why can't we conclude that by entering into the 1977 lease with Grocery the Landlord, by failing to completely restrict Grocery, left open to Grocery the right to operate a pharmacy and thus could not extend the radius clause?

The court would answer that Landlord and Grocery never intended in 1977 that Grocery would operate a pharmacy. But if the lease didn't restrict the Grocery to a single, unambiguous use, then why should we conclude that the parties did not intend broader use rights for Grocery? Under this analysis, Landlord's entry into a radius clause binding on Grocery in 1978, although it might have conferred an injunction right on Pharmacy, was a breach of Landlord's duty of quiet enjoyment toward Grocery.

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