Daily Development for Wednesday, December 4, 2002

By: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

LANDLORD/TENANT; LANDLORD'S DUTIES; EXCLUSIVE USE PROTECTION: Without the protection of an exclusive use right provision in its lease, a tenant may rightfully be exposed to a competition from another, newer shopping center tenant in the same business.

34 Partners, L.L.C. v. Danabe Corporation, A-0052-01T2 (N.J. Super. App. Div. 2002).

A video store leased space at a shopping center. Its lease did not grant the tenant exclusive use rights. Subsequently, the landlord leased other space at the shopping center to a national chain video store retailer.

In the lease with the national chain, the landlord gave the new tenant "exclusive rights to operate a video store in the mall" and the landlord agreed to "use good faith efforts to cause [the existing video store] to cease operating" before the chain store was scheduled to open its store. The landlord was unsuccessful in doing so and the chain store opened.

In the words of the court: "Perhaps, but not necessarily, because of the competition" the original video store went out of business. Its lease required it to pay rent until the landlord found a replacement tenant for the space. When the landlord sued for the unpaid rent, the lower court denied relief to the landlord because it felt to do so "would reward [the landlord] for obtaining 'exactly the result [the landlord], in contracting with [the chain store], sought . . . , 'that is' [the small store's] vacation of the premises.'" That left the landlord with a rather small award, and the landlord only received about one-third of the counsel fees that it had expended in the matter.

On appeal: Held: Reversed.

The Appellate Division panel said, "[w]e do not fault the trial court for its appropriate sensitivity to the centrality in our jurisprudential universe of fairness and of the need to be vigilant against overreaching, which is represented by such doctrines as the covenant of good faith and fair dealing." On the other hand, the Court would not allow such principles to "obscure their inapplicability to the facts of this case as a matter of law."

The Court saw this as a straightforward lease arrangement where the tenant would be liable for ordinary damages. There was no suggestion that the landlord failed to deliver what the lease required. "Significantly, [the original video store] had no expectation of protection against competition because . . . they never secured an exclusive right to operate a video store at this mall." Consequently, the original video store was subject to the forces of competition at the time that they vacated the premises just as it had been when it originally signed their lease. As to the landlord's right to lease to a second video store, the Court said, "[i]n our constellation of cherished legal principles and policies, competition is not a mere dim star."

Comment 1: And this from New Jersey!!! Not necessarily the jurisdiction that treats market concepts with the greatest reverence. The case is another demonstration that the pendulum is swinging back on the judicial application of good faith and fair dealing concepts in commercial relationships. Increasingly, courts are narrowing the doctrine to be a simple statement of the probable expectations of the parties in carrying out the contractual language to which they committed themselves. Courts are becoming less enthusiastic about adding new terms to contracts or to look past the fact that parties reached express understandings on certain points.

Comment 2: Although the court doesn't say so, the fact of the matter is that, in the commercial leasing marketplace, when the parties expect that there will be an "exclusive use" protection, they typically insert that language into the lease, following long and expensive bargaining. It would have been inappropriate for the court to give the tenant a "free ride" here.

Comment 3: In Eastern Shores Market, Inc. v. J.D. Associates, Ltd., No. 99-1554, (4th Cir. May 22, 2000, the Fourth Circuit found that a landlord in a shopping center context, although it did not expressly owe a duty to provide an exclusive use protection to a tenant when the lease was silent on the point, might have the duty to avoid "ruinous competition." The case arose on the pleadings and the exact contours of this duty were not spelled out. The landlord allegedly did more than simply lease to a competitor - tenant claimed that landlord redesigned common parking areas to facilitate the competitor's advantage.

Maryland state courts have split on this issue, so it is not clear that the Fourth Circuit ruling in fact reflects Maryland law. Also see Tabet v. Sprouse-Reitz Co., 409 P. 2d 497 (N.M. 1996) - perhaps the only reported case squarely recognizing a general duty on the part of the landlord not to compete lease in competition with a shopping center tenant. (As the editor indicates above - the pendulum appears to be swinging back from this extreme reading of the "good faith and fair dealing" duty.

Comment 4: For a "reverse twist," where a landlord was implicitly held to be required to lease to competitors, see Herman Miller, Inc. v. Thom Rock Realty Co., L.P., 46 F.3d 183 (1995), the DD for 6/11/95 (Landlord who advertised and promoted "furniture mart" concept and leased to one tenant, imposing use restrictions on it consistent with this concept, implicitly promised to lease other space in facility exclusively for the same use