Daily Development for
Wednesday, April 8, 1998

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

LANDLORD/TENANT; COMMERCIAL; CONTINUOUS OPERATION: Even where there is no express or implied continuous operation duty, Tenant may be liable for waste if Tenant ceases to occupy premises but renews lease to hold it off market and suppress competitors, causing loss to landlord in value of leased premises.

Serfecz v. Jewel Food Stores, 12997 WL 543116 (N.D. Ill. 9/2/97) (unreported opinion) (Serfecz III); Serfecz v. Jewel Food Stores, 1997 WL 158322 (N.D. Ill 3/31/97) (unreported opinion) (Servecz II); Serfecz v. Jewel Food Stores, 67 F.3d 591 (7th Cir. 1995) (Servecz I).

Although the lone Seventh Circuit opinion in this case has gone against the tenant, recent developments suggest a switch in momentum, and, at least at the Federal District Court level, some new theories of liability that may be used by landlords in other cases involving a tenant who “goes dark aggressively.”

Tenant had a long term grocery store lease in a shopping center. The facts are unclear as to whether there was a percentage lease, but the fact is not relevant to the outcome here. Tenant moved across the street to a new shopping center, boarding up its old space, but continuing to pay the rent. Tenant exercised renewal options to continue to control the space for as long as ten additional years. Landlord offered to terminate the lease or to guarantee the rent of a proferred sublessee grocery store. Tenant refused. Tenant did propose to sublet to a skating rink, but Landlord refused, pursuant to its admitted power to do so under the lease.

In Servecz I, the Seventh Circuit ruled that there was no implied duty of continuous operation in this case. The use clause stated that tenant shall use the space only for a grocery store, but the usual interpretation of such clauses is that they do not prohibit a tenant from doing nothing with the space, if the tenant chooses. The Serfecz I case dealt primarily with a second claim of landlord, that the tenant was guilty of antitrust violations because it had conspired with the owner of the new center to suppress competition. The court held that the landlord had not sufferred a cognizable “antitrust injury” because it was not in the class of persons protected from such anticompetitive behavior. In what then might have seem an afterthought, the Court of Appeals permitted the case to proceed on the theory that the tenant’s use of the premises to suppress competition was a breach of some other section of the contract, either the waste clause or the “unlawful use” clause. It indicated that if the tenant was found guilty of an antitrust violation in a suit brought by a proper plaintiff, then this might be viewed as a breach of the unlawful use clause under the lease.

In Servecz II, the critical new development in the case, the trial court’s focus turned to the waste provisions in the lease. The court held that the landlord would make out a case of actionable waste if it showed that tenant’s conduct on the leased premises either (1) prejudiced LL’s interests in the property in some way or (2) diminished the value of the property. It stressed that the harmful impact must be on the actual property leased, and not on other property in the mall. The fact that the landlord loses money because other tenants pay less percentage rent or even vacate due to the dark grocery store space is not actionable as waste. But if the impact of other tenants vacating is that ultimately the rental value of the space leased to the grocery store tenant is depreciated, then this constitutes actionable waste.

Servecz III, following this victory, could easily be predicted. The landlord sought and obtained leave to amend its complaint to allege tortious waste, rather than a breach of the contractual prohibition of waste. And then, dropping the next shoe, the landlord also sought leave to plead punitive damages, available for tortious conduct but not for breach of contract. The court granted leave to amend on both counts.

Comment 1: In a recent article published in the ABA RPPT Section magazine, Probate & Property, entitled “Going Dark Aggressively,” the editor detailed all cases to date of publication that had addressed factual situations where a tenant competed with space it had vacated while still under lease. Few of the cases involved actual “freezing” of the space through exercise of renewal options, but the editor concluded that the drift of the case law tended to favor the tenants.

But this case appears to involve the “pig” theory - often stated as follows: “Courts will permit business parties to be a bull or a bear, but never a pig.” Where the tenant not only goes dark and moves across the street but futher renews the lease on the dark space, some courts are bound to find such behavior outside the pale of normal business ethics. If such courts are inclined to use their powers in dispute resolution to impose business morality on the parties, this is an ideal opportunity to do so.

Comment 2: For another recent case involving similar facts, where the court also lowered the boom on the tenant, see Lagrew v. Hooks-SupeRx, 905 F. Supp. 401 (E.D. Ky. 1995), where the court found an implied duty of continuous operation notwithstanding the tenant’s right to assign and change uses and permitted the landlord to terminate the lease for breach of this duty following the tenant’s renewal of a lease on dark space. The court further required the tenant to pay “reasonable rent” rather than simply the base rent, for the periods of darkness when no percentage rents were being generated. This was a summary judgment decision for the landlord.

The Lagrew case, however, does have one hopeful bit of dicta for the tenant - finding that a tenant operating under an implied operating covenant will not be found liable for terminating its use when continued operation is demonstrably uneconomic.

Comment 3: For a recent case favoring tenant’s position, see Rothe v. Revco D.S., Inc., 976 F.S. 784 (S.D. Ind. 1997), where the landlord alleged, at least, that the tenant already had plans to vacate when it renewed for an additional five years. The tenant went dark a year later, with four years left to run. The court ruled for the tenant on summary judgment.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 16, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Stacy Woodward at the ABA. (312) 988 5260 or woodwars@staff.abanet.org

Items reported here and in the ABA publications are for general information purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters. The same is true of all commentary provided by contributors to the DIRT list. Accuracy of data and opinions expressed are the sole responsibility of the DIRT editor and are in no sense the publication of the ABA.