Restrictive Covenant Contained In Lease Is Enforced

Landlord Incentives in Retail Leasing

There are many incentives that a commercial landlord may provide to convince a potential retail tenant to lease space in its shopping center. Sometimes, the landlord will budget a certain amount of money for the benefit of the tenant to use to “fit out” the space. Other times, the tenant will be provided free rent for a period of time during the term of the lease. And, in some situations, the landlord will agree to include a restrictive covenant in the lease that will prevent the landlord from leasing other space in the shopping center to any of the tenant’s competitors.

The Dispute at Mayfair Shopping Center

In Dollar Tree Stores v. Holiday Supermarkets, 2013 Phila. Ct. Com. Pl. LEXIS 457 (Dec. 31, 2013), Philadelphia Court of Common Pleas Judge Patricia McInerney issued a memorandum opinion explaining why such a restrictive covenant precluded a landlord from continuing to lease space to another tenant in a shopping center.

In the early 1990s, the landlord of the Mayfair Shopping Center in Philadelphia entered into a written lease with a supermarket tenant. That lease was subsequently assigned to an entity that owned and operated a Shop n Bag Supermarket at the shopping center.

Under the lease, the landlord promised the tenant that it would “not permit any person other than [the tenant] to operate a retail supermarket of any nature in the shopping center,” according to the opinion.

A decade after that lease had been executed by the parties, Dollar Tree Stores Inc. entered into a written lease with the landlord at the time that contained the same prohibitory language, which restricted Dollar Tree from operating as a “retail supermarket of any nature” in the shopping center, the opinion said.

Under Dollar Tree’s lease, while Dollar Tree was permitted to engage in the “retail sale of general merchandise, including … kitchen accessories, household supplies … [and] novelty candy and snacks and other incidental food items,” it could “not use the premises [as a] retail supermarket of any nature,” the opinion said.

Litigation and Summary Judgment

Several years later, the supermarket tenant filed a lawsuit against Dollar Tree, the landlord at the time, and others for, among other things, breach of contract, based upon the restrictive covenant contained in the supermarket tenant’s lease.

Dollar Tree also filed a separate declaratory judgment action against the supermarket tenant and the landlord at the time, seeking a declaration that it had not operated as a retail supermarket of any nature at the shopping center.

The late Judge Albert Sheppard, the trial court judge at the time presiding over the consolidated cases, denied the supermarket tenant’s summary judgment motion and granted the summary judgment motions of Dollar Tree and the landlord at the time, declaring that Dollar Tree had not been operating as a supermarket and had not violated the supermarket restriction in the lease between Dollar Tree and the landlord.

Sheppard “relied on dictionary and statutory definitions of ‘supermarket'” and concluded “the term ‘supermarket,’ as used by the contracting parties meant a ‘retail store selling especially foods, or primarily groceries, fresh produce, meat, bakery and dairy products, in a variety of volume.'”

Superior Court Review and Jury Trial

On appeal, the Superior Court of Pennsylvania noted that, while restrictive covenants in leases are to be strictly construed, they also “must be construed in light of their language, their subject matter, the intent or purpose of the parties, and the conditions surrounding their execution,” and “where an ambiguity exists [a fact-finder] may consider extrinsic evidence of the parties’ intent.”

The Superior Court stated Sheppard’s singular focus on the word “supermarket” rendered the language “of any nature” superfluous or meaningless, but that nothing in the lease readily defined the scope of the qualifying language. As such, the Superior Court concluded “resolution of the ambiguity require[d] the finder of fact to determine the parties’ actual intent...”

A jury trial eventually took place, and the jury found in favor of the supermarket tenant. A declaratory judgment was also entered against Dollar Tree.

Trial Court’s Memorandum Opinion

McInerney issued a memorandum opinion as part of the appellate proceedings, primarily explaining why the restrictive covenant contained in the supermarket lease should be enforced.

She emphasized that the Superior Court’s prior ruling already determined the phrase “supermarket of any nature” was ambiguous, necessitating the use of extrinsic evidence, and that the jury’s conclusion based on such evidence was valid.

Lessons Learned

The recent rulings made by the Superior Court as well as McInerney in Dollar Tree Stores illustrate the potential impact of this type of lease provision. Presumably, at the time of lease execution, the landlord at the time wanted to secure a supermarket tenant that would serve as an anchor to the shopping center. What has happened, however, is that the restrictive covenant language contained in the leases has served as an anchor that has sunken the chances of the landlord’s successor-in-interest to potentially attract certain tenants to the shopping center.

Reprinted with permission from the April 15, 2014 edition of The Legal Intelligencer © 2014 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382, reprints@alm.com or visit www.almreprints.com.