Exclusives: Drafting to Avoid Ambiguity
At a recent continuing legal education class, a discussion regarding “drafting to avoid being sued” resulted with the conclusion that to draft to avoid being sued, we should aspire to “draft to avoid ambiguity”. If (a) parties understand and agree to the terms of a deal, and (b) the deal is documented to accurately reflect the parties’ agreement, the chances of litigation decrease.
When negotiating a lease, it is very common for a potential tenant to request that it be granted an “exclusive use” provision in the lease. The Landlord wants a good tenant mix with a variety of tenants to attract a diverse spectrum of shoppers, and agrees to provide the tenant an exclusive use.
So, there is an agreement…or it there? This is when drafting to accurately and specifically define the exclusive right is essential to avoid ambiguity, which could result in a lawsuit.
Fundamentally, the exclusive use provision sets forth that a Landlord will not lease other space in a shopping center for a use which would directly compete with the with tenant’s use.
Permitted v. Primary Use:
The tenant may think its exclusive right includes all facets of its Permitted Use and landlord intends to grant the exclusive only as to the tenant’s Primary Use.
Ex: Permitted Use: An upscale hair salon for men and women, including the sale of hair care products, and providing manicure/pedicure/nail services.
Tenant anticipates the exclusive will result in his premises being the only hair salon, nail salon or hair product store in the Shopping Center, and that landlord will not lease space to another hair salon, nail salon or store selling hair products.
But the landlord believes it has agreed to not lease to another “upscale full service hair salon” (the tenant’s primary use), and does not believe it is restricted with regard to leasing to a barbershop, a low priced walk-in hair salon, a nail salon, or a beauty supply store.
TIP: Watch for “primary” use v. “permitted” use, and make sure the parties understand the difference, and that the exclusive may extend only to the primary use and not to all aspects of the Permitted Use.
Defining Primary Use:
To be clear in your document, it is important to both a) differentiate between the “primary use”, and the “permitted use” (which will include both the primary use and incidental uses), and b) provide a mechanism or definition which can be applied to ascertain if there is a violation of the exclusive.
There are several ways parties have tried to accurately define a primary use to avoid ambiguity.
a) Percentage of Gross sales: Depending upon the type of use, in defining primary use the parties may use a percentage of gross sales to determine if a primary use is being violated.
In the case of White City Shopping Center, LP v. PR Restaurants, LLC, 2006 WL32C264 (Mass. Super. Oct. 31, 2006) a lease provided:
“Landlord agrees not to enter into a Lease, occupancy agreement or license affecting space in the Shopping Center…permitting use (primarily) for a bakery or restaurant reasonably expected to have annual sales of sandwiches greater than ten percent (10%) of its total sales…
Accordingly, landlord and tenant agreed that a primary use of selling sandwiches would be defined as being a use reasonably expected to have annual sales greater than ten percent (10%) of total sales. Seems clear…however:
i) The exclusive did not consider how the proof as to percentage of gross sales was to be ascertained. Even if gross sales reports are required under leases, a breakdown of percentage of “sandwiches” most likely is not, unless intentionally inserted, and even if a tenant is capable of providing such a break down, absent a court order resulting from litigation, a tenant would have no duty to provide such information (additionally, such information could be confidential sales information).
Tip: Any type of % sales exclusive should be specifically set forth in the list of restrictions with a duty upon tenant to provide numbers in the event of an alleged violation.
ii) In this case, landlord and tenant thought they had agreed primary use being restricted was the “sale of sandwiches”. However, no definition of “sandwich” was offered. In an abundance of caution in the White City case, the landlord was concerned that a gyro, though not a traditional American sandwich was still meat on a type of bread and accordingly perhaps a sandwich, added “The foregoing restriction…shall not apply to (a) use of existing free standing building in the Shopping Center partially occupied by Strawberries and recently expanded for a business serving near eastern food and related products”.
Rights under existing leases outside the control of Landlord should be reasonably excluded from all exclusives, as a landlord may not have a discretionary right to prohibit a change of use or an exercise of a previously permitted use even if such may be a violation of an exclusive. However, in this case by excluding the business selling mid eastern food, the tenant was able to argue that since landlord must have believed the term “sandwich” was broad enough to include gyros, then the term “sandwich” could be broad enough to include other types of food involving meat on a baked product, example: burritos.
Tip: Although the court did hold that a burrito is not a sandwich (by looking in a dictionary) even the definitions of the most common terms change over time and should be considered. Traditional American Deli sandwiches, or made to order Deli sandwiches, would have avoided the gyro, burrito issues. Listing commonly known stores whose use would currently violate an exclusive ( Ex: Blimpies would reasonably violate a Panera’s exclusive) is another exclusive, but see below for a concern regarding laundry list interpretation issues.
In the Winn-Dixie Stores case identified below, the term “staple of fancy groceries” was used in the lease and at the time of the signing of the lease, both landlord and tenant believe they understood what a grocery store sold. In the trial, Winn-Dixie presented a broad definition set forth by the magazine “Progressive Grocer”.
b) Square Footage of Display Area. As opposed to defining a primary use by a percentage of gross sales, Landlord and tenant may agree to define a primary use by the square footage of display or storage space allocated for said products. In the case of Winn-Dixie Stores, Inc. v. Big Lot Stores, Inc. 886 F. Supp. 2d 1326 (S.D. Fla. 2012)
the lease provided:
Landlord further covenants and agrees not to permit or suffer any property located within the shopping center to be used for or occupied by any business dealing in or which shall keep in stock or sell for off-premises consumption any staple or fancy groceries, meats, fish, vegetables, fruits, bakery goods, dairy products of frozen food…
[E]xcept the sale of such items is not to exceed the lesser of 500 square feet of sales area or 10% of the square foot area of any storeroom within the shopping center, as [an] incidental only to the conduct of another business…shall not be deemed a violation hereof.
The parties have agreed by this to a square footage definition as to primary use. However, the definition failed to provide how the square footage was to be calculated. Accordingly, in this case, a Dollar Store opened up in the Shopping Center and when calculating the floor area which would result in a violation of the Winn Dixie exclusive, Winn Dixie alleged that the relevant area should include one half of the adjacent aisle space. The tenant (Dollar Stores) contended that the relevant area should include only the area of the display units. The Court decided that only the display areas needed to be used in the calculation, however, this greatly increased the amount of area available for use by the tenant for sales of such items.
Tip: Specify how areas for display are to be measured
c) Laundry List In the above referenced Winn Dixie case the term “staple of fancy groceries” was used in the lease, and at the time of the signing of the lease, both landlord and tenant believed they understood what a grocery store sold. In the trial, Winn-Dixie presented a broad definition set forth by the magazine “Progressive Grocer”. In the Winn-Dixie Stores case, in addition to using the term “staple of fancy groceries” the lease included a list of items: “meats, fish, vegetables, fruits, bakery goods, dairy products of frozen food…”. Accordingly Dollar Stores argued that since a list of items had been provided, those items which had not been laundry listed (drinks or other dry goods) were not included in the “staple of fancy groceries” and accordingly, not subject to the exclusive. After costs and litigation, the Court decided in this case that the term “staple or fancy groceries” does not include non-food items and does include drinks (excluding alcoholic beverages). In this case the laundry list may have limited the breadth of the exclusive.
However, absent a laundry list, a grocery lease twenty years ago with the right to be the only tenant selling groceries items typically sold in grocery stores is indeed problematic as terminology has changed. Pet foods, beauty supplies, medical supplies, prescriptions and even flowers are now all typically sold in grocery stores.
Tip: It is inherently important that landlord and tenant agree on the definition of and the extent of the restriction and the primary use, and draft to avoid confusion as meanings change over time.
d) List of known competitors. Another method for defining a primary use which will be subject to the exclusive restriction is a “laundry list”, which would include some of the most prominent widely known potential tenants who would directly conflict with the tenant. In 2000 Clements Bridge, LLC v. Office-Max North America, Inc., No. 11-57(JEI/KMW), 2012 WL 3600285 (D.N.J. Aug. 21, 2012), Office Max alleged that an HH Gregg appliance store would violate its exclusive set forth in the lease. The lease provided:
Landlord…shall not enter into a lease or sale of any portion of the Shopping Center…for the following:
(a) For the purpose of, or which is permitted to be, the sale of office, home office, school or business products, computers and computer products, office, home office, school or business supplies or equipment; office furniture; or electronics (including by way of example those businesses operated by Office Depot, Staples, Office Shop Warehouse, Mardel Christian Office and Education Supply Store, Mail Boxes etc., and Workplace); or for use as a business support center…
One would assume that the intent was to set forth examples of direct competitors. Interesting, because the laundry list in this matter did not specify that these were examples only and not limiting in nature, the Court held that an HH Gregg did not violate this exclusive as it was not listed.
Tip: If the laundry list is to be non-exclusive, that needs to be stated as the specific intent. “Including but not limited to…” or “By way of example only and without limitation”.
So we will draft the exclusive to define the primary use which will be the subject of the exclusive but: what if a problem arises:
a) How does the tenant notify Landlord
b) What are the Landlord’s options
c) What are the tenant’s options
d) How are damages calculated
e) How are damages avoided
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