Protecting Your Leasehold: Keeping Competitors at Bay

In general, exclusive clauses are enforceable if they are deemed to be sufficiently clear and reasonable. However, they 'are not favored in the law, are strictly construed, and nothing will be deemed a violation of such a restriction that is not in plain disregard of its express words. … ' Great Atlantic and Pacific Tea Co., Inc. v. Bailey, 421 Pa. 540, 544, 220 A.2d 1, 2-3 (1966) (citations omitted). That being said, however, more and more courts are recognizing exclusives and giving them broad scope. See, e.g. J.C. Penney Co., Inc. v. Giant Eagle, Inc., 85 F.3d 120 (3rd Cir. 1996)('realistically interpret[ting] shopping center leases in light of the intent of the parties under contract principles;' upholding a pharmacy exclusive).

Indeed, several courts have recognized that the use of restricted property to support a prohibited use, such as when property within one shopping center is utilized as parking to support a competing store on an adjoining parcel, may violate an exclusive. In Eckerd Corp. v. Corners Group, Inc., 786 So. 2d 588 (Fla.App. 2000), a Florida Court of Appeal held that a restriction that prohibited the use of certain property as a drug store or pharmacy prevented a competing pharmacy from using the property as a parking lot for its own store. As the court reasoned, 'the manifest purpose of the restriction was to prohibit the restricted parcel from being used as any necessary part of a competing pharmacy. The proposed pharmacy cannot be built without the use of the restricted area, thus making the restricted parcel an integral part of the proposed pharmacy.' Id. at 593. Courts in other states have held similarly. See, e.g., H.E. Butt Grocery Co. v. Justice, 485 S.W.2d 628 (Tx.Civ.App. 1972)(grocery); Sawdey v. Kopas Corp., 30 Colo. App. 534 (1972)(restaurant); but see Siciliano v. Misler, 399 Pa. 406 (1960)(prohibition on the operation of a market did not extend to use of property as parking lot for supermarket); Nevada Food King, Inc. v. Reno Press Brick Co., 81 Nev. 135 (1965)(prohibition on operation of a grocery; access to and parking for adjacent market permitted).

Site Descriptions and Plot Plans

If the lease does not include an exclusive clause, another source of protection might be found in that portion of the lease that describes the shopping center or makes reference to the plot plan as a definitive description of the center. Often, and particularly with anchor stores, the new lease is predicated on structural changes to the tenant space, such as an expansion or reconfiguration. But many leases, and particularly older leases or leases entered into during development of the center, may preclude such alterations. A typical provision in such a lease might read as follows: 'The size and location of all buildings in the Center shall be located in accordance with the Site Development Plan and shall be erected as shown and in uniformity with the building set-back lines marked on said Plan, and without the express written approval of Lessee, no structures of any kind shall be located and erected other than as shown on said Plan.'

Where a lease contains specific provisions requiring the shopping center to be constructed and maintained in a certain physical manner and layout, material changes to that structure may result in harm to the existing tenants. Many courts now recognize the interdependence of commercial tenants in shopping centers and hold that real and immeasurable harms are suffered when a tenant ' even a non-anchor store ' no longer does business. See Summit Towne Centre, Inc. v. The Shoe Show of Rocky Mount, Inc., 2001 Pa. Super. 305, 786 A.2d 240, 245 (2001). Thus, the razing of an anchor store to build parking facilities, as discussed above, also deprives the center of an anchor store upon which the other tenants rely for patron draw. Even without a cotenancy provision, a clause that constrains the landlord from altering the physical arrangement may preclude an anticipated releasing of an anchor store to a competitor.

Parking Ratios and Zoning Restrictions

Most leases for nonenclosed shopping centers have provisions that ensure there is sufficient parking within the center to service all the tenants. Usually, such provisions require a minimum number of parking spaces per square foot of Gross Leasable Area (GLA). If the new use involves adding GLA or removing parking spaces, it will be important to determine whether these minimums will continue to be met. If they are not, and the lease provisions are clear and unequivocal, equitable relief may be available. But see Goldberg v. Press, 5 Pa.D&C3d 402 (Bucks Cty 1977)(no specific performance where lease required that there be 'reasonable parking spaces').

Similarly, local zoning ordinances may require that certain parking minimums be met. When city ordinances set forth specific penalties for violations, they are, in general, not enforceable by third parties. DeBlasiis v. Bartell and Oliveto, 143 Pa. Supp. 485 (1940). However, '[w]here deliberate violations of a zoning ordinance have the effect of wrongfully infringing on the property rights of a neighbor, that neighbor is entitled to prompt vindication in a court of equity without regard to alternate administrative remedies that may be available. Frye Construction, Inc. v. City of Monogahela, 526 Pa. 115, 176 (1991). The court will have jurisdiction over the case, then, when administrative remedies are either unavailable or inadequate, or if the administrative process is incapable of providing the relief sought by the complaining party. Id.

Easement and Other Third-Party Agreements

A party is a third-party beneficiary of a contract if circumstances indicate that the party was intended to get the benefit of the promised performance. See, e.g., Restatement (Second) of Contracts, '302(b). Thus, it is always worthwhile to do a title search to determine if there are any easement or right-of-way agreements that might be affected by the proposed lease, and pursuant to which the tenant may have third-party beneficiary rights. Shopping centers, in particular, are often subject to agreements entered into with redevelopment authorities or adjoining landowners that govern, for example, the location of center entrances and exits, driveways, and ring roads.

Whether a tenant is a third-party beneficiary to any given agreement will depend upon the nature of the tenant's interest and the intent of the agreement. In order to enforce rights as a third-party beneficiary, the tenant cannot be a mere 'incidental' beneficiary. Rather, the tenant must establish that the agreement was made for its benefit. Thus, for example, tenants could not enforce a construction contract between a city and a contractor, even though the work of the contractor would have resulted in increased access to the businesses. See Lewis v. Globe Construction Co., Inc., 6 Kan. App. 2d 478, 484-86, 630 P.2d 179, 184-86 (1981). However, a landowner was entitled to recover against a developer who had violated an easement agreement by blocking a ring road, even though the landowner was not a party to the easement agreement. See Westerra Reston, LLC v. Walker, 54 Va. Cir. 58 (2000).

In conclusion, when tenants are faced with the possibility of a competitor moving into their center, it is important to look beyond the obvious for protection. Several standard lease provisions, as well as ancillary documents and local zoning regulations, may provide sufficient support for objecting to the landlord's lease of space to a commercial rival.

Suzanne I. Schiller is a partner at Spector Gadon & Rosen, P.C. Seven Penn Center, 1635 Market Street, 7th Floor Philadelphia, PA 19103. Telephone: 215-241-8888 Fax: 215-241-8844.

It is happening more and more ' anchor stores going dark and landlords scrambling to fill the void. Unfortunately, in their zeal to relet, often landlords offer their empty spaces to prospective tenants who will change the structure of the center and compete with existing tenants. This article will discuss several bases upon which tenants may be able to rely to prevent a competitor from moving in, quite literally, next door.

Exclusive Clauses

By far the most obvious and oft-cited protective device for tenants is an exclusive clause. An 'exclusive' generally provides that the tenant, and only the tenant, may sell specified items or services. How broad or restrictive the clause is will depend on the relative negotiating power of the landlord and the tenant, and range from the very strong to the very weak. The most potent clause will preclude the landlord from allowing any other tenant in the center from selling one or more general categories of items; a more limited clause will allow another tenant to use only a percentage of floor space to sell competing items.

In general, exclusive clauses are enforceable if they are deemed to be sufficiently clear and reasonable. However, they 'are not favored in the law, are strictly construed, and nothing will be deemed a violation of such a restriction that is not in plain disregard of its express words. … ' Great Atlantic and Pacific Tea Co., Inc. v. Bailey , 421 Pa. 540, 544, 220 A.2d 1, 2-3 (1966) (citations omitted). That being said, however, more and more courts are recognizing exclusives and giving them broad scope. See, e.g. J.C. Penney Co., Inc. v. Giant Eagle, Inc. , 85 F.3d 120 (3rd Cir. 1996)('realistically interpret[ting] shopping center leases in light of the intent of the parties under contract principles;' upholding a pharmacy exclusive).

Indeed, several courts have recognized that the use of restricted property to support a prohibited use, such as when property within one shopping center is utilized as parking to support a competing store on an adjoining parcel, may violate an exclusive. In Eckerd Corp. v. Corners Group, Inc. , 786 So. 2d 588 (Fla.App. 2000), a Florida Court of Appeal held that a restriction that prohibited the use of certain property as a drug store or pharmacy prevented a competing pharmacy from using the property as a parking lot for its own store. As the court reasoned, 'the manifest purpose of the restriction was to prohibit the restricted parcel from being used as any necessary part of a competing pharmacy. The proposed pharmacy cannot be built without the use of the restricted area, thus making the restricted parcel an integral part of the proposed pharmacy.' Id. at 593. Courts in other states have held similarly. See, e.g., H.E. Butt Grocery Co. v. Justice , 485 S.W.2d 628 (Tx.Civ.App. 1972)(grocery); Sawdey v. Kopas Corp. , 30 Colo. App. 534 (1972)(restaurant); but see Siciliano v. Misler , 399 Pa. 406 (1960)(prohibition on the operation of a market did not extend to use of property as parking lot for supermarket); Nevada Food King, Inc. v. Reno Press Brick Co. , 81 Nev. 135 (1965)(prohibition on operation of a grocery; access to and parking for adjacent market permitted).

Site Descriptions and Plot Plans

If the lease does not include an exclusive clause, another source of protection might be found in that portion of the lease that describes the shopping center or makes reference to the plot plan as a definitive description of the center. Often, and particularly with anchor stores, the new lease is predicated on structural changes to the tenant space, such as an expansion or reconfiguration. But many leases, and particularly older leases or leases entered into during development of the center, may preclude such alterations. A typical provision in such a lease might read as follows: 'The size and location of all buildings in the Center shall be located in accordance with the Site Development Plan and shall be erected as shown and in uniformity with the building set-back lines marked on said Plan, and without the express written approval of Lessee, no structures of any kind shall be located and erected other than as shown on said Plan.'

Where a lease contains specific provisions requiring the shopping center to be constructed and maintained in a certain physical manner and layout, material changes to that structure may result in harm to the existing tenants. Many courts now recognize the interdependence of commercial tenants in shopping centers and hold that real and immeasurable harms are suffered when a tenant ' even a non-anchor store ' no longer does business. See Summit Towne Centre, Inc. v. The Shoe Show of Rocky Mount, Inc. , 2001 Pa. Super. 305, 786 A.2d 240, 245 (2001). Thus, the razing of an anchor store to build parking facilities, as discussed above, also deprives the center of an anchor store upon which the other tenants rely for patron draw. Even without a cotenancy provision, a clause that constrains the landlord from altering the physical arrangement may preclude an anticipated releasing of an anchor store to a competitor.

Parking Ratios and Zoning Restrictions

Most leases for nonenclosed shopping centers have provisions that ensure there is sufficient parking within the center to service all the tenants. Usually, such provisions require a minimum number of parking spaces per square foot of Gross Leasable Area (GLA). If the new use involves adding GLA or removing parking spaces, it will be important to determine whether these minimums will continue to be met. If they are not, and the lease provisions are clear and unequivocal, equitable relief may be available. But see Goldberg v. Press , 5 Pa.D&C3d 402 (Bucks Cty 1977)(no specific performance where lease required that there be 'reasonable parking spaces').

Similarly, local zoning ordinances may require that certain parking minimums be met. When city ordinances set forth specific penalties for violations, they are, in general, not enforceable by third parties. DeBlasiis v. Bartell and Oliveto , 143 Pa. Supp. 485 (1940). However, '[w]here deliberate violations of a zoning ordinance have the effect of wrongfully infringing on the property rights of a neighbor, that neighbor is entitled to prompt vindication in a court of equity without regard to alternate administrative remedies that may be available. Frye Construction, Inc. v. City of Monogahela , 526 Pa. 115, 176 (1991). The court will have jurisdiction over the case, then, when administrative remedies are either unavailable or inadequate, or if the administrative process is incapable of providing the relief sought by the complaining party. Id.

Easement and Other Third-Party Agreements

A party is a third-party beneficiary of a contract if circumstances indicate that the party was intended to get the benefit of the promised performance. See, e.g., Restatement (Second) of Contracts, '302(b). Thus, it is always worthwhile to do a title search to determine if there are any easement or right-of-way agreements that might be affected by the proposed lease, and pursuant to which the tenant may have third-party beneficiary rights. Shopping centers, in particular, are often subject to agreements entered into with redevelopment authorities or adjoining landowners that govern, for example, the location of center entrances and exits, driveways, and ring roads.

Whether a tenant is a third-party beneficiary to any given agreement will depend upon the nature of the tenant's interest and the intent of the agreement. In order to enforce rights as a third-party beneficiary, the tenant cannot be a mere 'incidental' beneficiary. Rather, the tenant must establish that the agreement was made for its benefit. Thus, for example, tenants could not enforce a construction contract between a city and a contractor, even though the work of the contractor would have resulted in increased access to the businesses. See Lewis v. Globe Construction Co., Inc. , 6 Kan. App. 2d 478, 484-86, 630 P.2d 179, 184-86 (1981). However, a landowner was entitled to recover against a developer who had violated an easement agreement by blocking a ring road, even though the landowner was not a party to the easement agreement. See Westerra Reston, LLC v. Walker , 54 Va. Cir. 58 (2000).

In conclusion, when tenants are faced with the possibility of a competitor moving into their center, it is important to look beyond the obvious for protection. Several standard lease provisions, as well as ancillary documents and local zoning regulations, may provide sufficient support for objecting to the landlord's lease of space to a commercial rival.

Suzanne I. Schiller is a partner at Spector Gadon & Rosen, P.C. Seven Penn Center, 1635 Market Street, 7th Floor Philadelphia, PA 19103. Telephone: 215-241-8888 Fax: 215-241-8844.