Daily Development for Tuesday, November 2, 1999

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

LANDLORD/TENANT; COMMERCIAL; EXCLUSIVE USE CLAUSES: Exclusive clause protecting "Primary Permitted Uses" protects grocery store business only as a full service grocery store, and does not preclude landlord from leasing to others who carry product lines that compete with some products sold by grocery tenant, even when lease enumerates sale of specific items in the "Permitted Uses" clause..

J. Thomas Clark & Associates, Inc. v. Trueman Apsen Co., No. 98CA0126 (Colo. App. 8/5/99)

The lease in question stated that "Tenant shall occupy and use the Premises only as a modern, competitive grocer store or supermarket, as defined in more detail below . . . " The lease went on to define the term "modern, competitive grocery store or supermarket" as follows: "As used herein, use as a modern, competitive grocery store or supermarket ('Permitted Uses') shall mean use for the purpose of making retail sales and baking, cutting, packaging and/or otherwise cooking or preparing such items for sale) of groceries, meats, fish, bakery goods, fruits, vegetables, food products and food supplies of all kins (none of which shall be intended for consumption upon the Premises), household cleaning supplies and materials, food preparation and food consumption related housewares, paper products and non prescription health and beauty aids." The lease went on to identify "Special Items" that could be sold by tenant if no other exclusive granted by Landlord prohibited such sale. These included any other items commonly sold in grocery stores.

The lease also included an exclusive use clause protecting the grocery store:

After the grocery store had operated about ten years, the landlord brought in a delicatessen in the space next door. The delicatessen not only sold prepared food for consumption on premises but also sold condiments and other foodstuffs (sauces, pasta and oils). The grocery store sued to enforce its exclusive. After quite a bit of skirmishing, the tenant agreed with withdraw its sale of the offending items, and the case went forward on a relatively minor tenant's damages claim and a $168,000 claim for attorneys' fees and costs under the remedies portion of the lease.

The trial court found that the lease clause was ambiguous, and apparently turned to extraneous evidence, including evidence of conduct of the parties during the ten years of the grocery store lease, to reach the conclusion that the exclusive clause protected the sale of food items, rather than just the operation of a general "competitive grocery store." Consequently, the trial court found that the landlord had breached the grocery store lease.

On appeal: Held: Reversed. The Colorado Court of Appeals held that the question of whether the lease's exclusive use clause was ambiguous was a question of law, and the appeals court concluded that the clause was not ambiguous and prohibited only competing grocery stores, not the sale of individual food items.

The court acknowledged that an exclusive use clause could be worded to protect the sale of specific items, but concluded that it would make no sense to do that with respect to a grocery store because of the wide array of food items that such a store carries. To protect all the items that are part of a grocery store's inventory would be to prevent any other retail tenant from doing business in the center.

Comment 1: Of course the clause was ambiguous and poorly drawn. The lawyers tried to be "too cute" and to define exclusive use in terms of permitted use. These concepts are related, but not necessarily coextensive. In fact, the drafters of the lease acknowledged that fact when they set up a separate category of items that could be sold that arguably were not protected by the exclusive use clause (the "Special Items.") Unfortunately, the drafters of the exclusive use clause compounded their error when they identified the protected uses as the "Primary Permitted Uses" and failed to define that term.

Comment 2: But although the lease was poorly drawn, wasn't the court's interpretation of it equally poorly done? When the parties use the term "permitted use" in several different points, referring to several different situations, and later establish an exclusive use clause protecting a special category of "Primary Exclusive Use," and fail to define that term at all, then the term Primary Permitted Use is ambiguous. It could have referred to any of three different concepts of "permitted use," and choice of any of the three would be grammatically defensible. The exclusive use clause was ambiguous. The trial court properly admitted extrinsic evidence. When it did, its interpretation was a question of fact that the Court of Appeals should have upheld.

The problem with the appeals court's argument that to permit everything identified under the Permitted Use clause as a protected commodity limits the landlord's ability to operate the center is that the landlord identified two different types of "permitted uses." The more narrow definition of permitted uses was sufficiently narrow as to leave plenty of room for other tenants - just not other food tenants that were not restaurants.

Comment 3: There's a drafting lesson in here, of course. Think about each clause separately first. What are the parties trying to accomplish? Then see how well they fit with the other clauses - have you said it correctly? That's a lesson for the tenant's lawyer if the parties really did intend to restrict the sale of foodstuffs (as the editor suspects). It's a lesson for the landlord's lawyer if the parties intended instead only to exclude other full service groceries. The landlord got lucky here, but might not be so lucky again. The clause was ambiguous.

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

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