Commercial leases, particularly leases in retail shopping centers, often contain provisions (known as "use exclusives") that prevent the landlord from leasing space in the same mall, center, or area to a business that sells products or services similar to those sold by an existing tenant. Counsel for landlords need to be aware of drafting considerations for use exclusives, strategies for avoiding litigation, and the procedural and substantive aspects of enforcement proceedings.
Maryland courts consistently uphold and enforce use exclusives. See, e.g., Patuxent Dev. Co., Inc. v. Ades of Lexington, Inc., 257 Md. 398 (1970) (enforcing a covenant against leasing to a competing five and ten cent store within five miles of the original store); Ruben v. Leosatis, 165 Md. 36 (1933) (covenant not to lease to a competing restaurant was breached when another tenant's deli business expanded its operation to become a restaurant); Snavely v. Berman, 143 Md. 75 (1923) (landlord violated a covenant not to rent to a store that would compete with a "Ladies and Gents" furnishing store when it allowed a preexisting tenant to operate a store in the same line of business). Moreover, although use exclusives inherently restrain trade, no Maryland court has held that an exclusive implicated either antitrust laws or common law prohibitions against unreasonable restraints of trade. Cf. Savon Gas Station Number Six, Inc. v. Shell Oil Co., 309 F.2d 306 (4th Cir. 1962) (apply both Maryland and federal law, covenant giving lessee an exclusive right to operate the service station did not violate antitrust laws or unreasonably restrain trade); Waldorf Shopping Mall, Inc. v. Great Atl. & Pac. Co., Inc., 1984-1 Trade Cas. (CCH) 65,976, Cir. Ct. for Charles Cty., Feb. 16, 1984 (holding that enforcement of provision prohibiting expansion of a competing supermarket had little effect on competition and would not be enjoined, where markets were highly competitive).
Drafting issues and Strategies to Avoid Litigation
Although use exclusives generally favor tenants, they are commonplace in leases because they can further the interests of both the landlord and the tenant. A retail tenant will not be interested in investing the capital (committing to the lease, installing fixtures, contributing to or paying for tenant improvements, and the like) if it believes that the landlord will permit a competing store to operate in close proximity. From the landlord's perspective, such concessions to tenants are often necessary. A&P, for instance, probably would not lease space in a shopping center without assurances that the landlord would not lease to Safeway in the same center. Cf. Waldorf Shopping Mall (holding agreement in A&P's lease that landlord would not permit Safeway to expand a competing operation to be enforceable). Moreover, it is in the landlord's interest to have a diverse mix of tenants in its premises. The more variety offered to shoppers, the more traffic the shopping center will attract, which benefits not only all of the tenants, but also, of course, the landlord.
Tenants usually take an expansive view of their use exclusive rights, and will challenge any activity that could even remotely be considered a breach of its use exclusive. Counsel thus must be aware of all existing exclusives that could affect lease negotiations when representing landlords in those negotiations. Generally, landlords are well advised to evaluate new tenants and set up new leases in ways that tend to avoid conflicts with existing use exclusives. One solution is to consult existing tenants, and to obtain written confirmation acknowledging that the new tenant's proposed activities will not be deemed a breach. Landlords can also insist, as an extra measure of protection, on language in any new tenant's lease barring sales by the new tenant of any products or services that could be deemed to violate existing use exclusives.
A well-drafted lease can avoid disputes regarding the scope of the exclusive grant. The lease should define, as clearly as possible, what activity is protected, as well as the geographical scope of the protection. The following language from a lease for a home improvement center is typical of language protecting a tenant from competition:
As a material part of the consideration inducing Tenant to execute this Lease and make the necessary expenditures to perform its obligations hereunder, Landlord hereby covenants and agrees that, throughout the Term of this Lease if and as long as either the Demised Premises shall be open and principally operating for a principal use as a home improvement center store, or the Demised Premises is vacant, Landlord shall not permit (i) any of the Other Stores or any contiguous or adjacent property that is directly or indirectly, now or in the future, under Landlord's control or in which Landlord has a legal or beneficial interest, to be principally used for, or operated as, a home improvement center store, lumberyard or hardware store. As used herein, the term "home improvement center store" shall mean any store that sells as its primary business all or a majority of the following terms: building materials, lumber, plumbing fixtures, garden and nursery products, hardware and/or electrical supplies or equipment, paint, and floor and wall coverings.
This language clearly defines both the protected activity (by describing both the type of activity and specific products covered) and the defined geography (contiguous property controlled by the landlord). It is unlikely that the landlord could be confused about the nature of the exclusive it gave to this tenant and, therefore, unlikely that a dispute will arise as new tenants sign leases.
As Maryland cases reveal, however, even seemingly well-drafted leases--using what appear to be unambiguous common terms or fully-understood trade terms to define the restriction--can be the subject of disputes leading to litigation. In North Ave. Mkt., Inc. v. Keys, 164 Md. 185 (1932), a case involving a limitation on the tenant's use of its space rather than on what other tenants could sell, the lease required the tenant's stall in a market to be used exclusively for the sale of "delicatessen" and certain specified meats. The tenant started selling uncooked meat, and the landlord claimed that the tenant was no longer selling "delicatessen." The court relied on dictionary definitions and "common knowledge" to conclude that "delicatessen" meant "prepared foods" and not uncooked meat. Accordingly, the court held that the use was improper, and enjoined the tenant from selling the offending products. In Bishins v. St. Barnabas Corp., 221 Md. 459 (1960), the tenant had an exclusive to operate certain types of women's apparel stores, but other tenants could conduct an "Adeline and/or Darling type operation"--both being terms used in the trade. When the landlord leased to a tenant operating a "Terry" shop, the court concluded that "Terry" was the same as "Adeline" and that the first tenant's exclusive had not been breached. In Belvedere Hotel Corp. v. Williams, 137 Md. 665 (1921), a tenant was given a concession to operate a barbershop and manicuring business in a hotel. When the landlord leased space to a competitor, the issue became whether the restriction applied to the entire hotel or just a portion of it. The court concluded that the parties intended that the lease applied to the entire hotel and, therefore, the landlord had violated the first tenant's covenant.
In preparing for or anticipating litigation on use exclusive issues, counsel must review the lease not only to understand the nature of the restriction itself, but also to determine whether the parties agreed on the remedies that would be available in the event of a breach. Some leases provide remedies specific to the breach by the landlord of a use exclusive. Many leases provide for a rent reduction, or other monetary penalties (essentially liquidated damages) upon a breach. For instance, a lease that was the subject of an unreported Court of Special Appeals opinion, Cato Corp. v. State of Maryland for the Use of the Board of Trustees of the Maryland State Retirement & Pension Funds, No. 35, Slip Op. (Md. App. June 6, 1996), the landlord agreed in its lease with Cato, a "popular priced" ladies' apparel chain, that it would not enter into a lease with "any [other] national or regional woman's apparel chain [store] classified as popular priced and carrying competitive merchandise." The lease provided that, upon a breach of the covenant, the rent otherwise due would be immediately reduced by one-half until the violation ceased.
Absent an express remedy applicable to a breach of a use exclusive, landlord's counsel should review the lease to determine what general remedies are available to the tenant upon a landlord's breach. Commercial leases usually have expansive provisions protecting landlords upon default by the tenant, but often not vice versa. Depending on the negotiating strength of the tenant, however, a lease may give the tenant the right to terminate the lease upon a landlord's breach, frequently after a cure period. The stakes in litigation can be raised significantly when that right exists. While a landlord may view the possibility of paying some damages as an acceptable risk, the loss of a strong tenant may be an unacceptable risk and a reason to settle.
Aside from remedies that may be found expressly in the applicable lease, a tenant whose use exclusive has been breached by a landlord is entitled to remedies under Maryland law, unless those remedies have been waived in the lease. First, the tenant can bring an action against the landlord for damages occasioned by a breach of a use exclusive. The measure of those damages was addressed in Freedman v. Seidler, 233 Md. 39 (1963) where the original tenant, Seidler, operated a woman's specialty shop. Her lease prohibited the landlord from leasing adjacent properties to any other person conducting business "in direct competition" with her woman's shop. Freedman, the tenant next door to Seidler, operated a shoe store. Freedman's lease prohibited him from selling certain items in competition with Seidler. When Freedman began a promotion that included giving away women's handbags and nylon hose as a part of a shoe promotion, Seidler sued the landlord who, in turn, impleaded Freedman as a third-party defendant. Seidler then amended her complaint adding claims against Freedman, including damage claims, apparently based on a third-party beneficiary theory. The trial court awarded damages in favor of Seidler and against Freedman. On appeal, Freedman argued that Seidler's damage claim was problematic and speculative. The Court of Appeals held that money damages were appropriate remedies for a violation of a use exclusive. Apparently recognizing that damages could be difficult to prove, the court observed that nominal damages would always be available, and that plaintiffs could prove actual damages in one of two ways: either by determining the diminished value of the leasehold interest as a result of the broken covenant, or by proving lost profits. The court also noted that lost profits would be the practical basis of either calculation. The court upheld the damage award to Seidler, which had been supported by unrefuted evidence from an accountant.
In addition to money damages, a tenant whose exclusive use covenant has been breached by the landlord generally will be entitled to injunctive relief. An injunction against the landlord may not be very helpful, however, if a lease with a competing tenant has already been executed--then the landlord may be unable (even if ordered by a court) to stop the offending activity. Perhaps for that reason Maryland law also permits the existing tenant to enjoin the offending tenant, at least when the offending tenant had notice of the right granted to the original tenant when the offending lease was signed. Freedman is again instructive. When Seidler sued her landlord for injunctive relief (and damages), the landlord impleaded Freedman, the offending tenant. The court concluded that Seidler was entitled to an injunction against both of them.
It is well settled in this State that a covenant in a lease to the effect that the tenant shall have the exclusive right of conducting a specified business on the leased premises may be enforced by injunction against both the landlord, Snavely, 143 Md. at 75, 121 Atl. 842 (1923), and a subsequent tenant of another part of the landlord's premises, who, at the time he entered into the lease, had notice of the right granted to the original tenant, Schmidt, 154 Md. at 302, 140 Atl.363 (1928).
Freedman, 233 Md. at 45. See also Snavely v. Berman, 143 Md. 75, 121 A. 842 (1923) (enjoining landlord from continuing to rent to new offending tenant); Schmidt v. Hershey, 154 Md. 302 (1928) (enjoining new tenant from selling tobacco in violation of original tenant's use exclusive).
Claims by existing tenants with a use exclusive that a new tenant is violating the clause are not uncommon. Landlords generally can avoid litigation if the claimed violation is minor and easily remedied. Quick action by the landlord to assure that the offending activity ceases usually placates an existing tenant. If, for instance, the new tenant is selling a product as to which the existing tenant claims an exclusive, then the landlord can persuade the new tenant to stop selling the product. A letter from the landlord or its attorney to the new tenant may be enough; a threat by the existing tenant to include the offending tenant in any litigation may convince the new tenant to stop the competing activity. Furthermore, if the allegedly violative activity stops, then the first tenant's damages will be cut off, making litigation unlikely.
If, on the other hand, the existing tenants claims that the new tenant's entire operation violates the use exclusive, which would require the new tenant either to cease operations altogether or to change its business significantly, then litigation may be unavoidable. Litigation also may be inevitable when, as is often the case, the landlord disagrees with the existing tenant's interpretation of its lease and disputes that the new tenant's activities are prohibited by the existing tenant's lease.
Procedural and Substantive Issues in Enforcement
When a dispute regarding the breach of a use exclusive reaches the litigation stage, there a number of procedural issues. The first is which court will hear the claim. If the tenant initiates the action, it generally will do so in circuit court, because a careful tenant will seek injunctive relief, a declaratory judgment, and damages in excess of $25,000 (assuming they exist), and also will have prayed a jury trial. Any one of those choices would place the litigation outside of the jurisdiction of the district court. See Md. Code Ann., Cts. & Jud. Proc. § 4-402(c) (1998) (providing that district courts have no jurisdiction to render a declaratory judgment); id. § 4-402(a) (providing that district courts have no equity jurisdiction, except as specifically provided by statute, such that it could not issue the sort of injunctive relief that a tenant claiming under a use exclusive would seek); id. § 4-401(1) (providing that the district court has exclusive original jurisdiction of actions in contract if the damages claimed do not exceed $25,000); id. § 4-402(e)(1)-(2) (1999 Supp.) (providing that in cases where the amount in controversy exceeds $10,000, a party may demand a jury trial); Md. Code Ann., Real Prop. § 8-604 (1999) (providing for transfer of claim to circuit court following jury trial demand and opportunity to challenge the demand).
The jurisdictional grant to district courts provides that they have exclusive original jurisdiction over actions "involving landlords and tenants . . . regardless of the amount involved." Md. Code Ann., Cts. & Jud. Proc. § 4-401(4) (1995). While that may suggest at first glance that a claim based on a use exclusive (a dispute necessarily involving a landlord and a tenant) properly belongs in district court, that conclusion would be wrong. The Court of Appeals has held that the type of "landlord and tenant actions" referred to in the statute are only those claims that historically landlords brought at common law to assert possessory in rem and quasi in rem interests, by which landlords could quickly and inexpensively obtain repossession of leased premises upon a tenant default. See Shum v. Gaudreau, 317 Md. 49, 59 (1989); Greenbelt Consumer Servs., Inc. v. Acme Mkts., Inc., 272 Md. 222, 229 (1974). A tenant's suit for a landlord's breach of a use exclusive obviously is not such an action.
There is a likely scenario, however, under which the use exclusive issue would necessarily be resolved by a district court judge. The most common "possessory" claim, where district court jurisdiction is mandatory, is an action for summary ejectment under section 8-401 of the Real Property Article. Summary ejectment is a landlord's remedy, and is available when the tenant has not paid rent due and owing under the lease. Accordingly, if the use exclusive issue arises because the tenant unilaterally asserts a right to reduce or stop paying its rent as a result of a claimed breach by the landlord of the use exclusive, then the landlord would be the party initiating the action. When a landlord initiates a rent action, the claim will most often be for a summary ejectment and back rent under section 8-401. Because section 8-401 actions are among those "involving landlords and tenants," the landlord must file it in the district court. The whole use exclusive issue, then, would arise when the tenant asserts a defense or counterclaim to the summary ejectment claim, based on the alleged breach of the use exclusive, and the tenant's right, in such case, to reduce or avoid paying rent.
Summary ejectment proceedings are by their nature quick and relatively inexpensive. Shum, 317 Md. at 59. Most district courts around Maryland set aside one day a week to hear nothing but section 8-401 actions. Cases are generally heard within two weeks of their filing. Typical dockets may have scores of cases scheduled. If landlord's counsel believes that the tenant will defend based on a claim that the landlord breached a use exclusive, counsel legitimately should be concerned that the use exclusive issue may not receive sufficient deliberation by the court, given the expeditious nature of a section 8-401 action and the crowded docket. While a lack of deliberation can cut both ways, landlord's counsel facing a unilateral rent reduction by an aggrieved tenant may wish to forego the possessory claims and sue in circuit court for breach of contract or declaratory judgment, thereby assuring a more deliberative process. If, on the other hand, the relative speed of the district court is important, counsel should file a section 8-401 action, and immediately request that the matter be set in specially so that the court can give the matter the time and attention required to understand the parties' positions.
Procedural Issues when Claiming against the New Tenant
When a tenant files a suit claiming a breach of a use exclusive, the landlord is the usual target. It is, after all, the landlord who has contracted with the claiming tenant and who has the contractual duty to protect that tenant from competition. As noted above, the tenant may also bring a claim against the offending tenant, notwithstanding the lack of privity between the two tenants. Maryland law is clear that the new tenant may be enjoined from competing with the old tenant if, at the time that the new tenant entered into its lease, it was aware of the right granted to the original tenant. Freedman, 233 Md. at 45. Moreover, if the new tenant agreed in its lease not to compete with the old tenant, then the old tenant may sue the new tenant for damages and injunctive relief as a third-party beneficiary of the lease between the new tenant and the landlord. Id.
If the claiming (old) tenant does not sue the offending (new) tenant, then the landlord should consider bringing the offending tenant into the case as a third-party defendant. While the claim may be problematic absent a provision in the new tenants' lease prohibiting competition with the old tenant, having the new tenant in the action may be the only practical way to ensure that the landlord will be able to comply with any injunction entered against it. If the court enjoins the landlord to stop the new tenant's competing activity, that order may be futile unless the new tenant is a party to the action. If the new tenant's lease expressly prohibits the activity that is being challenged by the old tenant, then the landlord would have a contractual claim against the new tenant, and it would be particularly important that the new tenant be a party to the litigation. If the new tenant is not a party, then there is a risk of inconsistent verdicts. The landlord may be found liable to the old tenant in one action, based on a finding that the offending tenant was competing with the old tenant in violation of the old tenant's lease. But, in a second action brought by the landlord against the new tenant, the trier of fact may find that the new tenant was not competing in violation of its lease. The landlord would be stuck in the middle--it would be liable to the old tenant, but unable to pass on its damages to the new tenant.
A decision by the landlord to bring the second tenant into the case, assuming that the first tenant has not already done that, can be an expensive one. It can up the ante considerably, and increase the costs and complexity of the case. The first tenant, having decided initially not to sue the second, may take the opportunity to file claims directly against the offending tenant. The claims can be rather ordinary, such as the third-party beneficiary theory used by Seidler in Freedman. But a creative tenant may add claims that the new tenant tortiously interfered with the old tenant's lease by inducing the landlord to breach it, that the landlord and the new tenant conspired to injure the old tenant, and the like. In short, a straightforward contract case can blossom into a multi-count, multi-party circus. Thus, the landlord should reflect carefully on the consequences of the decision to add the new tenant before doing so. Because the new tenant will certainly be supportive of the landlord's position in litigation brought by the old tenant, it may make more sense to seek the informal cooperation of the new tenant with an agreement that the new tenant will be bound by the court's determination whether its activities are a violation of the first tenant's use exclusive.
Jury Trial Waivers
Another dimension of the typical use exclusive case is the fact that commercial leases very often contain waivers of the right to a jury trial. There is no question that these waivers are enforceable in Maryland. Md. Code Ann., Real Prop. § 8-603(b) (1999) (waiver of jury trial in commercial leases "shall be valid and enforceable.") See also Ruddy v. First Nat'l Bank, 48 Md. App. 681, aff'd, 291 Md. 275 (1981) (showing that law was to the same effect prior to 1999 codification). Ironically, the jury trial waiver also has the potential to increase the complexity of the litigation. Notwithstanding a contractual jury trial waiver as between the landlord and the original tenant, the litigation could evolve in a way where the jury waiver applied to some, but not all, of the claims. This is particularly likely if the new tenant is brought into the case. A waiver of jury trial as to the claims against the landlord will not operate to waive a jury trial right in a claim by the first tenant against the new tenant. Thus, counsel may be faced with a suit that has some jury claims and some non-jury claims. While this is not uncommon (any suit for both an injunction and damages, for instance, involves both jury and non-jury issues), the landlord-tenant context presents a unique problem. Suppose, for instance, that a tenant who has contractually waived its right to a jury trial stops paying rent, allegedly because of a violation of a use exclusive, and the landlord then sues the tenant for summary ejectment and back rent in the district court, which has exclusive jurisdiction over that claim. Suppose further that either the landlord or the claiming tenant then brings in the offending tenant as a party to the district court action. Finally, suppose that the claiming tenant sues the new tenant and demands a jury trial on those claims. Counsel and the court are faced with a complex problem--claims involving the same set of facts, with attendant res judicata and collateral estoppel ramifications, will be heard in two different courts at two different times. In an unreported opinion, the Court of Special Appeals recently addressed these issues. See Cato Corp., No. 35, Slip Op. It held that the landlord-tenant matter had to proceed in the district court, while the other jury claims could proceed separately in circuit court. In that opinion, the court "provided guidance" to the lower courts by suggesting that the district court proceeding be conducted before any claims that had to be tried in the circuit court.
Proof at Trial
As is true with any contract case, the focus before and during any trial involving a lease provision will be on the language in the governing document. If the lease is clear and unambiguous as to the use exclusive given to the tenant, then there is no room for construction of the contract, the court will presume that the parties meant what they said, and the language will be enforced in accordance with its clear meaning. See, e.g., General Motors Acceptance Corp. v. Daniels, 303 Md. 254, 261 (1985); Kasten Constr. Co. v. Rod Enters., Inc., 268 Md. 318, 327-28 (1973). Of course, if the lease truly were clear and unambiguous, it is unlikely that the parties would find themselves in court. Because leases often contain terms that have meaning in a particular trade, or have meaning between the parties that may be different from meanings ascribed by common usage, the litigation often boils down to a battle of experts over trade meanings, extrinsic evidence regarding the negotiations that led up to the adoption of the provision, and a variety of rules of construction that one party or the other will try to impose.
If a court has reached the point where it needs to construe the contract, judges often apply the well-known rule that ambiguities in the contract should be construed most strongly against the drafter. See, e.g., Truck Ins. Exch. v. Marks Rentals, Inc., 288 Md. 428, 435 (1980); Kelley Constr. Co., Inc. v. Washington Suburban Sanitary Comm'n, 247 Md. 241, 250 (1967). Tenants will claim, sometimes correctly, that the landlord has insisted on a form lease, is the "drafter" of the document and, therefore, is the one against whom the agreement should be construed. The tenant may also argue that, under Maryland law, leases should be construed against the landlord and in favor of tenants. See, e.g., Adloo v. H.T. Brown Real Estate, Inc., 344 Md. 254, 262-63 (1966); Standard Garments Co., Inc. v. Hoffman, 199 Md. 42, 47 (1951). Those cases, however, may be simply applying the general rule that ambiguities should be construed against the drafter, with the added sub rosa assumption that the landlord was the drafter of the lease. In any event, the reality of use exclusives in commercial leases is that the tenant generally is the party who insisted on the exclusive and, more often than not, is the one who proposed the language that is at issue. Accordingly, if there is to be construction against a party in these cases, there is usually a good argument that the tenant should shoulder the burden of ambiguous language. Counsel needs to understand how the language in the lease evolved, so that the drafting presumptions can be effectively argued to the court.
Of course, if the parties both are represented by counsel during the course of negotiation, then the "against the drafter" rule of construction becomes less of a factor. In Rossi v. Douglas, 203 Md. 190, 198 (1953), the Court of Appeals observed that the rule that ambiguities should be construed against the drafter "perhaps should have but slight force . . . where both parties are represented by counsel."
Another rule of construction to be applied in cases involving restraints on competition, such as use exclusives, has even more importance and is generally favorable to the landlord. Maryland courts frequently hold that ambiguous language in property use covenants should be construed in favor of competition and against restricted use of the property. Maryland Trust Co. v. Tulip Realty Co., 220 Md. 399, 409 (1959) (holding that restrictive covenant was expressly limited to a designated area); But see Martin v. Weinberg, 205 Md. 519, 526-27 (1954) (noting that the rule of strict construction in favor of unrestricted use does not mean that the language at issue must be so narrowly construed that its general purpose is defeated); Quinn Homes, Inc. v. Bay City Improvement Ass'n, Inc., 45 Md. App. 479, 481 (1980) (rejecting developer's argument that covenant proscribing the use of a lot for building and selling speculative houses should be construed in favor of unrestricted use).
But all of these rules of construction are inapplicable if the ambiguity in the contract can be and is explained through the use of extrinsic evidence. See St. Paul Fire & Marine Ins. Co. v. Pryseski, 292 Md. 187, 198 (1981) (rules of construction come into play only if extrinsic evidence does not clarify the meaning of ambiguous terms). Accordingly, rather than getting bogged down in presumptions regarding drafting of the agreement, it is incumbent on counsel to present a case that explains the meaning of the language, either as a trade term or in the context of the parties' particular negotiation. Sometimes the parties may agree on the meaning of the essential restrictive language leaving other issues to be resolved by the court. See, e.g., Bishins, 221 Md. at 462-63 (noting that the parties agreed that "Darling" shops and "Terry" shops had the same meaning in the industry). Most often, however, the battle is fought based on extrinsic evidence and expert testimony. In Abuc Trading & Sales Corp. v. Jennings, 151 Md. 392 (1926), for instance, the plaintiff was entitled to a certain commission rate from the sale of "scrap copper," and the debate was whether scrap copper meant pure copper, or all metals in which copper appeared as a basic element. The court concluded, based on the evidence, that "scrap copper" was a trade term, and meant all compounded metals which depended on copper for their base. The fact that the words may have had a common or normal meaning that was different was not determinative. See also Shuman v. Gordon Investment Corp., 247 Md. 265 (1967) (extrinsic evidence was admissible where the lease did not reveal the intention of the parties with respect to whether the landlord or the tenant had the right to use the exterior of a building for advertising purposes).
Counsel for landlords need to be careful in drafting leases that give tenants protection from competition in the landlord's premises. Language that is imprecise, or subject to various interpretation, may hamper the landlord's ability to sign up new tenants because of questions about the scope of the exclusive, and will invite litigation. Although not foolproof, a good safeguard is to assure that the new tenant's lease prohibits the activity that the first tenant is permitted exclusively to conduct. Although no landlord wants to give a tenant veto power over later leases, a prudent landlord may consult with the first tenant if there is any question at all, thereby avoiding surprises and reducing the risk of litigation.
Once the dispute begins, however, the landlord will need to gear up for a major battle. Landlords will need to consider bringing the new tenant into the suit, taking the initiative by bringing suit in the district court, and finding experts that support the landlord's view of the lease and the competition being protected. Assuming that the landlord has made good business decisions along the way, and has selected the new tenant carefully, good preparation and presentation by counsel should result in a vindication of the landlord's position.
Bill Sammons is a partner at Tydings. He regularly represents landlords and lenders in real estate related disputes, including those involving use exclusives. For more information regarding this article and the issues it raises, contact him at 410.752.9706 or via email.
This article first appeared in the Summer, 1998 issue of The Defense Line, a publication of the DRI-The Voice of the Defense Bar and is reprinted with permission.
This information has been prepared by Tydings for informational purposes only and does not constitute legal advice.