Problems occasionally arise from badly drafted exclusive rights clauses in commercial leases. And when they do, these can be one of a landlord’s worst nightmares, as it almost always creates tension in the landlord and tenant relationship and often between affected tenants.
There are really two ways that a breach like this can happen:
- a tenant starts selling things which are not permitted by its permitted use clause (and thus violates another tenant’s exclusive rights covenant); or
- a landlord permits a tenant to sell items or offer services which the landlord has already agreed it will not permit other tenants to sell or perform.
The first is a difficult situation for a landlord to navigate but, at least, a landlord can try to negotiate an agreement which will bring the tenant with the offending use into line. What makes this difficult is that the offending tenant may not care whether or not it is causing its landlord to breach an exclusive rights covenant and may not be willing to co-operate. The second is also difficult because it most likely arose when a landlord inadvertently gave one tenant a right which violates another tenant’s rights.
In either case, the answer to the question, “Who owns this problem?” is “the landlord!”
What’s a Landlord to Do?
In the first case, the landlord – and not the aggrieved tenant – is the party which has a binding agreement with the offending tenant. Usually only the landlord can enforce its rights under the contract and require the offending tenant to adhere to its permitted use clause. (Registration of its exclusivity right may give the tenant with such right an ability to seek an injunction directly, but it will usually want the landlord to pursue the matter). In the second case, the landlord created the problem and cannot shirk it, whether or not it intended to create the problem.
Often, a landlord does not want to annoy a tenant over use clause breaches which it considers to be minor in nature – especially if it is a successful retailer or a national retailer with whom the landlord has multiple locations. On the other hand, the landlord also does not want to further annoy the tenant with the exclusive right. This is particularly sensitive when the breaches are not major.
The Legal Solution
The courts have been pretty clear in holding that, if there is an injury, damages are adequate compensation. If the landlord gives an exclusive rights covenant and there is a breach of it, then a court will likely look to assess what the tenant’s damages are and assess damages which take into consideration that amount. If, for example, the tenant can establish that it has lost $10,000 a year since the breach occurred, then a court will give serious consideration to this amount. More difficult is a breach which happens when the tenant is new and not fully established. Even in a case like that, courts have admitted evidence of what the tenant’s projected profits were likely to be.
To avoid being found liable for damages, if the offending tenant refuses to co-operate a landlord may find itself in the unfortunate position of having to seek an injunction to stop the tenant from selling the offending product(s). Alternatively, it may have to consider commencing default proceedings and, if necessary, termination of the lease. In either case, litigation is likely and it is important to ensure that the landlord’s efforts are co-ordinated with its choice of litigator so that the case is as strong as possible when the court date comes around.
The Practical Solution
Although court decisions in this area of law are interesting to read, there are not as many of them as one might expect. And this may well be because a solution is often created and implemented before the parties make it to court. Realistically, if a court is likely to award damages anyway, there is no point in going to court, since the case should be capable of settling outside of court. The same applies to injunctive relief.
The hardest cases to assess, however, are the ones where there are no apparent damages. Here, some creativity may need to be brought to the table. Perhaps a sign location within the property, gratis for the duration of the breach; perhaps something else. In any event, a real and tangible recognition that there is a right and it has been violated is often what the tenant with no damages most desires.
Avoidance – and its Importance
In the end, many difficult situations can be avoided by ensuring that property staff in a retail environment are aware of the contents of the tenants’ use clauses and trained to monitor regularly what the stores are selling. The best way to stop the incremental approach of adding new uses outside of a permitted use clause is at the beginning, not after several years of turning a blind eye. Even though it may feel awkward to property management staff to raise this with the offending tenant, in the end, even the offending tenant can rest assured that the landlord is taking seriously its obligations to each tenant to ensure that the others abide by their leases in order to ensure that the property runs as harmoniously as possible.