VOL. 22 ISSUE 1 SPRING 2002 International Council of Shopping Centers, Inc. 1221 Avenue of the Americas, 41st floor New York, NY 10020-1099 Phone (646) 728-3800

In Depth Shopping Center Oops! Lease Renewals: When a Mistake Is Not a Mistake 2 Legal Update How an Amended Site Plan Gutted an Anchor Tenant’s Restrictive Covenants in Belk v. Warner Robins Zamias Limited Partnership 4 The legal journal of the shopping center industry Non-Employee Union Handbillers Barred from Access 6 Landlord Exculpation Clauses: Be Conspicuous or Be Sorry! 7 Let the Landlord Beware: Florida Case Demonstrates That Courts May Favor Disclosure to Tenants 9 Just How Badly Were You Damaged? 10 Antitrust Laws and Restrictive Covenants in Leases 11 Of Interest Articles 14 Cases 14 Arbitration 14 Assignment/Sublease 14 Bankruptcy 14 Contracts 15 Covenants/Clause 15 Fees 15 Landlord & Tenant 15 Leases 15 Lenders 15 Liens 15 Options/Renewals 16 Public Access 16 Taxation 16 Tort Liability 16

Legislation 16

From Canada In Depth Is Protecting a Major Retailer’s Exclusivity by Servitude Achievable in Quebec? 16 Judicial/Legislative Developments 18

Copyright © 2002 International Council of Shopping Centers, Inc.. All rights reserved. Protected under Universal Copyright Convention and other international conventions. This publication may not be reproduced in whole or in part, in any form, without written permission from the International Council of Shopping Centers. Printed in the U.S.A. In Depth however, recognize instances in which a tenant’s failure to give timely notice of renewal will be equitably excused. The issue of whether such a late renewal notice will be entitled to equitable relief frequently arises where the required notice is Oops! Lease Renewals: When a provided late because of the tenant’s mistake. Mistake Is Not a Mistake There are two main methods by which courts addressing the issue have found a basis for providing equitable relief to a Thomas C. Barbuti and Edward U. Lee III tenant who has failed to exercise the option strictly in compli- ance with the requirements of the lease. One method, adopted Whiteford, Taylor & Preston, LLP by the majority of courts, permits equity to intervene only Baltimore, Maryland when the tenant’s failure to comply strictly with the lease notice requirements is the result of fraud, misrepresentation, Introduction duress, undue influence, mistake or where the landlord If you ask any real estate business persons or lawyers whether waives its right to receive such notice. The second method, a late notice from a tenant exercising a renewal or extension adopted by a minority of state jurisdictions, including New option must be accepted by the landlord, a majority of them York, involves a simpler standard that, more often than not, will, in all likelihood, say, “Absolutely not! Time is of the benefits the tenant. Under the minority view, a late renewal essence whenever an option is involved, whether the lease notice arising from a justifiable mistake will be deemed effec- provides so or not. If the tenant misses by one day, the right to tive if (i) the tenant’s delay in renewing is slight, (ii) the delay exercise the renewal option has expired.” As in most areas of did not prejudice the landlord, and (iii) the failure to grant the law, however, the simple and clear answer is not always relief would cause unconscionable or substantial hardship to the correct one. the tenant. A common issue confronted by the courts in deter- Unfortunately for tenants, a few landlords will use a late mining whether an untimely notice will be deemed effective is notice of renewal from a tenant as a “gotcha,” providing the what types of mistakes qualify for equitable relief. Clearly, a landlord with an opening to renegotiate the renewal period lay person would consider negligence, forgetfulness or mere rents that the landlord foolishly, but knowingly, agreed to at inadvertence in providing a timely notice to be a “mistake.” the beginning of the lease. More often than not, however, the courts have developed an altogether different standard for a “mistake,” which the tenant Law v. Equity must satisfy in order to obtain equitable relief. Our system of jurisprudence has developed with two different sets of legal principles. Originally, at common law, there was a Majority Rule “Court of Law” and a “Court of Equity.” Courts of law were In Utah Coal and Lumber Restaurant, Inc. v. Outdoor Endeavors bound to follow precedent, and normally monetary damages Unlimited, 2001 UT 100, ___ P.3d ____ (2001), the Supreme were the only remedy that could be awarded. Equity courts, Court of Utah recently examined when a mistake may form on the other hand, could make judgments based upon what the basis for equitably excusing a tenant’s failure to renew a the judge believed was “fair” in each case and, among other lease timely. There, the tenant entered into a lease agreement things, could use the court’s powers to order injunctive relief granting it three options to renew for consecutive five-year or specific performance of certain obligations. Today, law and terms. In order to exercise each of the renewal options, the equity courts in most jurisdictions have been combined, pro- tenant was required to notify the landlord in writing not more viding a trial level judge with the latitude to treat a matter as than one hundred twenty (120) days nor less than sixty (60) an action at law, compensable by monetary damages, or in days before the expiration of the then-current lease term. The equity, requiring some form of non-monetary relief. window for giving notice of intent to exercise the first renewal The basic tenet regarding renewal options is well estab- option ran from May 13, 1998, to July 11, 1998. lished: Namely, a tenant must strictly comply with the notice Over the course of the first five months of the lease, the requirements of a lease’s renewal provisions. Most courts, tenant spent more than $105,000 on permanent improvements

Shopping Center Legal Update is published by the Legal Department of the International Council of Shopping Centers, Inc., 1221 Avenue of the Americas, 41st floor, New York, New York, 10020-1099; John M. Ingram, Chairman; Michael P. Kercheval, President; Melina Spadone, General Counsel. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional services. If legal advice or other expert assistance is required, the services of a competent professional should be sought. Editor-in-Chief: Stephanie McEvily, Esq. Spring Issue Editors: Daniel K. Wright II, Arter & Hadden LLP, Cleveland, OH; Keith Wilson, Hartman, Simons, Spielman & Wood, Atlanta, GA; Steve Snively, Holland & Knight, LLP, Orlando, FL; William Crowe, Mayo, Gilligan & Zito, Wethersfield, CT; Joshua Stein, Latham & Watkins, New York, NY; Doug Ulene, Willkie Farr & Gallagher, New York, NY; Thomas Barbuti, Whiteford, Taylor & Preston, LLP, Baltimore, MD. Summer Issue Editors: Russell Workman, Snell and Willmer, Salt Lake City, UT; Gary Goodman, Sonnenschein Nath & Rosenthal, New York, NY; Karen L. Stephenson, Katten Muchin Zavis, Los Angeles, CA; Elizabeth Belkin, Piper, Marbury, Rudnick & Wolfe, Chicago, IL; Gregory Pressman, Schulte Roth & Zabel, New York, NY; Eric Rapkin, Hughes Hubbard & Reed LLP, Miami, FL; Dana Sack, Miller and Rosendin, LLP, Oakland, CA. Fall/Winter Issue Editors: Marilyn Sticklor, Goulston & Storrs, Boston, MA; David Huprich, Huprich & Krasnove, LLP, Cincinnati, OH; Marty Denis, Barlow, Kobata & Denis, Chicago, IL; Mark De Pillis, Ballard, Spahr, Andrews & Ingersoll, LLP, Philadelphia, PA; Sean Ervin, Lewis, Rice & Fingersh, Kansas City, MO; Gary Click, Cox, Castle & Nicholson, LLP, Los Angeles, CA; Gary Kessler, Kessler Collins, Dallas, TX. Canadian Editors: Fredric L. Carsley, Mendelsohn Rosentzveig Shacter, Montreal, Quebec; Murray F. Tait, Properties, Alberta, Canada; Natalie Vukovich, Daoust, Vukovich, Baker-Sigal, Banka, Toronto, Ontario

2 to the premises. In order to recover these expenditures, the the notice; and the resulting hardship would be much greater tenant intended to exercise all three of the renewal options on the tenant than any hardship to the landlord. Overall, if the and had, in fact, discussed its intent with the landlord. As a notice had been deemed effective, the landlord would have result of the tenant’s inattention, however, the required renew- continued to receive the benefit of its original bargain. al notice was not given within the specified period. The land- Nonetheless, the Utah Supreme Court applied the majority lord subsequently notified the tenant that as a result of the rule and refused to grant the equitable relief requested in the tenant’s failure to renew, the lease would expire at the end of Utah Coal case described above. the current term. Shortly thereafter, the tenant provided writ- The Utah Supreme Court recently reiterated its interpreta- ten notice of renewal to the landlord. The actual notice of tion of the doctrine of equitable excuse in U.S. Realty 86 renewal was only eleven (11) days late. Associates v. Security Investment, Ltd., 2002 UT 14, ___ P.3d ____ After the parties were unable to come to a satisfactory (2002). There, a tenant failed to exercise options to renew two agreement as to renewing the lease term, the landlord filed an commercial leases in a timely fashion. Rather than reviewing action for possession, and the tenant counterclaimed, seeking the leases itself, the tenant relied upon certain lease abstracts a declaratory judgment that it was equitably excused from prepared by a former tenant’s property manager. The strict compliance with the notice and time provisions of the abstracts failed to reflect the fact that the lease renewal periods renewal clause. At trial, the lower court ruled in favor of the expired on March 3, 1998. After the renewal period had tenant, finding that the tenant’s forgetting to send the required expired, the tenant subsequently discovered that it had failed notice was an “honest and justifiable mistake” that qualified to provide the required notices. The notices were ultimately for equitable relief, especially in light of the substantial expen- provided to the landlord approximately 45 days late, on or ditures made by the tenant in rehabilitating the premises. about April 22, 1998. The landlord did not immediately On appeal, the Utah Supreme Court examined the circum- review the renewal notices and, between April 22, 1998, and stances under which a failure to comply precisely with the July 15, 1998, the parties continued to carry on business as terms of a lease renewal option may be equitably excused. The normal. On July 15, 1998, the landlord discovered that the appellate court first noted that Utah courts have broad author- renewal notices were untimely and informed the tenant that ity to grant equitable relief as needed and should invoke this the leases would expire at the end of the term on July 31, 1998. authority whenever appropriate and necessary to enforce The trial court granted equitable relief to the tenant. rights or to prevent oppression and injustice. Nevertheless, On appeal, the Utah Supreme Court reiterated its interpre- equitable relief could not be used to “assist one in extricating tation of the term “mistake” and rejected the tenant’s assertion himself from circumstances which he has created.” Moreover, that equitable relief should be granted on this basis. The court “as a predicate to equitable relief, a party must exercise rea- also addressed the issue of whether the landlord had waived sonable efforts to discharge his own obligations.” its right to strictly enforce the leases’ renewal terms. The court Adopting the standard recognized by a majority of the first noted that waiver requires the intentional relinquishment courts that have considered the issue, the Utah Supreme Court of a known right and that, to constitute waiver, there must be held that, in the context of lease renewals, the doctrine of equi- (i) an existing right, (ii) knowledge of its existence and (iii) an table excuse would only be available when the failure to com- intention to relinquish such right. In the context of options to ply with lease renewal provisions strictly is caused by fraud, renew, the court further stated that “courts should exhibit cau- misrepresentation, duress, undue influence, mistake or where tion in finding implied waiver on the part of a landlord unless the landlord waives its right to receive notice. In this case, the the totality of the circumstances demonstrates unambiguous tenant’s only hope was “mistake,” but the appellate court set intent to waive the strict compliance required to exercise an forth a strict definition of “mistake” and rejected the lower option.” Evidence of such unambiguous intent was not estab- court’s application of the doctrine of equitable excuse, stating lished by the landlord’s continuation of normal business oper- that: ations following the tenant’s failure to renew nor by the land- “[a] mistake within the meaning of equity is a non-neg- lord’s failure to insist on strict compliance until two weeks ligent but erroneous mental condition, conception, or prior to the leases’ expiration dates. As a result, the Utah conviction induced by ignorance, misapprehension, or Supreme Court concluded that the tenant was not entitled to misunderstanding, resulting in some act or omission equitable relief. done or suffered by one or both parties, without its erro- neous character being intended or known at the time.” Where the mistake arises from the tenant’s negligent or inad- Minority Rule vertent act or omission, relief will not be provided. Based on Under the minority approach, which was expressly rejected the foregoing, the Utah Supreme Court reversed the judgment by the Utah Supreme Court, a late renewal notice arising from of the lower court insofar as the tenant’s failure to renew due a justifiable mistake will be deemed effective if (1) the tenant’s to its inattention did not qualify as a “mistake” under princi- delay in renewing was slight, (2) the delay did not prejudice ples of equity. the landlord, and (3) failure to grant relief would cause the If the tenant’s failure to provide the required renewal tenant unconscionable or substantial hardship. Under the notice had been analyzed under the standards of the minority minority view, “mistake” includes the failure to provide the view, in all likelihood the tenant would have prevailed. The required notice as a result of inadvertence or confusion. This notice was not that late; the landlord did not suffer any dam- view was recently reaffirmed by the Appellate Division of the ages because it had not changed its position due to the lack of Supreme Court of New York in Beltrone v. Danker, 228 A.D.2d Shopping Center Legal Update Vol.Shopping Center Legal Update 22 Issue 1 Spring 2002 3 763, 643 N.Y.S.2d 720 (1996). There, a lease was scheduled to include restrictions on the expansion of the anchor tenants. expire on September 7, 1995, unless an option to renew was These instruments usually incorporate a site plan that is exercised on or before September 7, 1994. Notice of renewal expressly considered a part of the lease and is referenced in was provided three months late, on November 7, 1994. the lease’s restrictive covenants. While the lease terms may On appeal, the appellate division held that equity will per- remain static, site plans are frequently amended as the devel- mit the sending of a late renewal notice to be effective even opment grows and changes. Where lease provisions incorpo- where such failure resulted from an honest mistake or inad- rate or reference a site plan, a change in the site plan can liter- vertence. There, the tenant’s late filing was deemed to be an ally rewrite provisions of a lease. This is essentially what hap- honest mistake insofar as such failure to timely notify the pened in Belk, Inc. v. Warner Robins Zamias Limited Partnership, landlord resulted from inadvertence and confusion that exist- 251 Ga. App. 633, 555 S.E.2d 19 (2001). ed following the death of the tenant’s business manager. Warner Robins Zamias Limited Partnership (“Zamias”) The minority rule is expressly followed in a handful of developed a regional mall in Warner Robins, Georgia, and jurisdictions, including Connecticut, Maryland, New York, executed a lease (the “Lease”) in 1989 with Belk, Inc. (“Belk”) Virginia and the District of Columbia. Some jurisdictions fol- for Belk to become an anchor tenant of the new mall. Included lowing the minority view protect the tenant’s leasehold inter- in the Belk lease was Article 9(j), a provision that gave Belk a est even where the tenant was simply negligent in providing “veto” over certain kinds of new construction at the mall. The the landlord with a timely notice of its intent to renew. No provision stated: jurisdictions, however, provide equitable relief where the ten- No buildings nor other structures of any kind shall be ant was grossly negligent or found to have willfully disregard- constructed or otherwise built, erected or placed any- ed the renewal terms of the lease. where on the Shopping Center Site, except as shown on the Site Plan or otherwise permitted by this Lease, with- Conclusion out the prior written approval of Tenant (which While there always may be hope for the forlorn tenant who approval, with regard hereto, shall not be subject to the fails to pay attention to its express lease renewal requirements, ‘Rule of Reasonableness’ set forth in Article 56 thereof). it is extremely difficult to actually prove fraud, misrepresenta- The Lease also contained a provision, Article 1(k), which tion, duress, undue influence or mistake, especially under the according to Belk limited the construction of future depart- majority rule. Therefore, a tenant should negotiate with its ment stores at the mall to the areas within designated rectan- landlord at the time of the initial lease negotiations for a gular boxes depicted on the site plan. The provision stated “reminder notice” so that the landlord will be required to send that the term “‘Future Department Store(s)’ shall mean the a notice reminding the tenant that the window within which department store building(s), if any, constructed within the the tenant must exercise its renewal option is approaching. Permissible Building Areas in the Shopping Center designated Some landlords will agree to that, but many will not. If a ten- ‘Future Department Store’ on the Site Plan....” Permissible ant is unable to negotiate a reminder notice clause, then the Building Areas were defined in Article 1(g) as follows: “The tenant must establish an in-house tickler system that is infalli- term ‘Permissible Building Area(s)’ shall mean those portions ble (with very little human involvement) in order to avoid of the Shopping Center (including any Future Department being subject to a “gotcha.” Store(s) and any Free-Standing Building(s)) shown or desig- nated as such on the Site Plan.” Thomas C. Barbuti is a partner and chair of the Real Estate section at The parties executed a site plan and attached it to the Whiteford, Taylor & Preston, LLP, Baltimore, Maryland. His practice Lease. The site plan was amended three times, and at the time areas include real estate law, with a concentration in shopping center the controversy ensued, the third amended site plan (the “Site development, leasing and construction matters. Edward U. Lee is an Plan”) was operative and thus was part of the Lease. On the associate in the Real Estate section of Whiteford, Taylor & Preston, Site Plan, the rectangle depicting the remaining empty anchor LLP, and concentrates in general commercial real estate matters. pad contained a designation: “Future Store No. 5, 70,000 s.f.” Above that designation, in small type along the edge of the How an Amended Site Plan Gutted rectangle, the Site Plan contained a notation: “Actual Configuration And Size May Vary—A Minimum Of 5.5 an Anchor Tenant’s Restrictive Parking Ratio Will Be Maintained (the “Reservation”).” The Covenants in Belk v. Warner Robins Reservation did not appear on any of the previous site plans. The required parking ratio was 5.5 spaces per 1,000 square feet Zamias Limited Partnership of gross leasable area. Over the years, Zamias attempted to find a department David L. Pardue store to fill the anchor pad at Future Store No. 5. Eventually, Hartman, Simons, Spielman & Wood Zamias reached an agreement with Dillard’s Department Atlanta, Georgia Stores, Inc., to place a department store on anchor pad No. 5, with the store planned to be 101,289 square feet in size (the Anchor tenants usually negotiate fiercely to have clauses in a “Proposed Dillard’s”). Zamias sent a proposed Site Plan to lease or Reciprocal Easement Agreement (REA) that provide Belk depicting the Proposed Dillard’s and asked for Belk’s them with control over the size of other stores and the con- permission to add the Proposed Dillard’s to the mall. Belk stituency of a shopping center. Likewise, developers regularly refused to agree to the Proposed Dillard’s, and argued that its

4 written permission was necessary in order to build the the Reservation on the Site Plan. Furthermore, the court noted Proposed Dillard’s because of the “veto” provided by Article that the terms of the Lease applying to Free Standing 9(j). In refusing permission, Belk argued (1) that the Proposed Buildings expressly prohibited buildings that “exceed 10,000 Dillard’s was not “shown” on the Site Plan under Article 9(j), square feet of Floor Area.” Id. Thus, “when the parties intend- (2) that the rectangular area drawn to scale on the Site Plan ed to limit the maximum or minimum size of a proposed was the Permissible Building Area pursuant to Articles 1(k) store, they used clear language to do so.” Id. and 1(g), which scaled out to 72,000 square feet and that the Proposed Dillard’s was a Future Department Store that would Future Department Store Defined in the Lease, not fit within the rectangle on the Site Plan, and (3) that the But Not Written on the Site Plan notation 70,000 square feet showed the parties’ intent regard- Belk also argued that Article 1(k) of the Lease imposed the ing the size of Future Store No. 5. The record was undisputed maximum limit on Future Store No. 5 because it defined that Dillard’s would not build a store at the mall at any size Future Department Stores as department store buildings con- smaller than 100,000 square feet. Zamias announced to Belk structed “within the Permissible Building Areas” in the shop- that it was planning on going forward with the Proposed ping center. Dillard’s at 101,289 square feet in size. Belk sued Zamias, seek- However, as stated earlier, Future Department Stores in ing an interlocutory and permanent injunction. The trial court Article 1(k) of the Lease were defined as “areas designated denied Belk’s motion for interlocutory injunction, and Zamias Future Department Store on the Site Plan.” The Site Plan did and Belk both moved for summary judgment. The trial court not designate the empty anchor pads as Future Department granted Zamias’ motion for summary judgment and Belk Stores, as had earlier site plans. Instead, it simply indicated a appealed. “Future Store.” Thus, the omission of the word “Department” from the Site Plan proved fatal to Belk’s argument. Whatever The Court Finds That the Reservation “Actual Size kind of store was built at the anchor pad would not be a and Configuration May Vary” Overrides the Veto Future Department Store under the Site Plan because the defi- Power Contained in the Lease nition of Future Department Store was tied solely to the desig- On appeal, Belk argued, and the court agreed, that Article 9(j) nation of the building as such on the Site Plan. gave it a “veto” over any proposed store that was not “shown” on the Site Plan or “otherwise permitted” by the The Court Extends to Shopping Center Leases the Lease. 251 Ga. App. at 635, 555 S.E.2d at 20. According to Belk, Rule That Restrictive Covenants Are Strictly the Proposed Dillard’s was not shown on the Site Plan Construed in Favor of the Free Use of Land because its planned size was vastly larger than the figure In the final paragraph of the Belk opinion, the court invoked a drawn to scale on the Site Plan and was more than 30,000 principle of contract construction that has wide acceptance in square feet larger than the “70,000 s.f.” notation on the box American courts—the principle that courts should strictly con- representing the empty anchor pad. Zamias argued that the strue restrictive covenants to favor the free use of land. 251 plain language of the Reservation that “Actual Configuration Ga. App. at 636, 555 S.E.2d at 22. The Belk Court used this and Size May Vary” meant that the Proposed Dillard’s was principle to find that, even if the term “Future Department both “shown on the Site Plan,” and “otherwise permitted by Store” applied to the empty anchor pad on the Site Plan, it did the Lease,” because the Reservation expressly stated that the not expressly limit the size of the store. Id. In making this find- store might vary in size. ing, the court again noted that the Lease contained an express The court sided with Zamias, relying on the Reservation. restriction prohibiting the construction of freestanding build- As the court stated, because “the site plan expressly provides ings that “exceed 10,000 square feet of floor area,” as well as that the actual size and configuration of the future store may express minimums for the square footage of certain stores, vary, and places no limit on that variance, we will not insert including future department stores. Thus, the court held that words to limit the permitted variance.” 251 Ga. App. at 634, the Lease should be strictly construed in favor of the policy 555 S.E.2d at 21. In light of the Reservation, the court found that landowners have a right to use their property for any that “the dotted line simply shows the intended location of the lawful purpose. future store, and the 70,000-square-foot figure simply reflects The Belk Court cited Douglas v. Wages, 271 Ga. 616, 617, 523 an approximation that places no outside limit on the size of S.E.2d 330 (1999), as support for the position that restrictive the future store.” Id. covenants are strictly construed in favor of the free use of the The court found support for its position in the Reservation land; Douglas, however, involved a residential restrictive itself, noting that the Reservation included the language that a covenant. It is well settled in Georgia law that a restrictive “A Minimum of 5.5 Parking Ratio Will Be Maintained.” Id. covenant on residential property is strictly construed to allow The record was undisputed that the Site Plan depicted suffi- the free use of the land. Douglas v. Wages, supra; Bennett v. cient parking spaces to maintain the parking ratio for a Future Moody, 225 Ga. App. 95, 97, 483 S.E.2d 350, 352 (1997); Nazis v. Store No. 5 built as depicted on the Site Plan. Thus, the court Cross, 246 Ga. 658, 272 S.E.2d 312 (1980); Reid v. Standard Oil noted, “the only purpose for this language is the anticipation Co., 107 Ga. App. 497, 499, 130 S.E.2d 777 (1963). Georgia law, that the future store would exceed the size and thus would however, has not spoken so clearly about the rules of con- require additional parking spaces to maintain this ratio.” Id. struction regarding commercial leases. Therefore, the court held that the Proposed Dillard’s was “oth- Other jurisdictions have long held that restrictive erwise permitted by the Lease” under Article 9(j) by virtue of covenants in commercial real estate developments or shop- Shopping Center Legal Update Vol.Shopping Center Legal Update 22 Issue 1 Spring 2002 5 ping centers should be strictly construed based on either or employed in the lease is reflected in the site plan and that both of two separate common law policies against (1) restraint nothing in the site plan negates the strictures of the lease of trade and (2) restriction of the free use of land. First, many unless the parties intend to do so. If the terms of the lease ref- courts have held that restrictive covenants related to commer- erence the site plan, then it is incumbent on parties seeking cial leases or deeds must be strictly construed because they are enforcement of provisions to make sure that the site plan restraints on trade. Alma’s, Inc. v. Dorgan, 771 F. Supp. 506, 509 incorporates the terms necessary for enforcement of the lease. (D. R.I. 1991); Snyder’s Drug Stores, Inc. v. Shih Properties, Inc., As seen in Belk, a simple change of nomenclature from future 266 N.W.2d 882, 885 (1978); Nevada Food King, Inc. v. Reno Press department store to future store can change the entire course Brick Co., 81 Nev. 135, 138, 400 P.2d 140, 142 (1965); Leonard v. of a shopping center’s development. Laving, 153 So.2d 544, 546 (La. App. 1963); Norwood Shopping Second, under Belk, the line of cases in Georgia culminat- Center, Inc. v. MKR Corp., 135 So.2d 448, 449 (Fla. App. 1961). ing in Douglas v. Wages, which holds that restrictive covenants Georgia courts have adjudicated whether restrictive covenants should be strictly construed in favor of the free use of land, in shopping centers are restraints on trade, but have not clearly extends to commercial leases. This doctrine has popu- required strict construction of these types of restrictive lar support in many states that have developed case law covenants. See Webster v. Star Distributing Co., Inc., 244 Ga. 844, involving shopping center restrictive covenants. Therefore, a 262 S.E.2d 80 (1979); Park side Center, Ltd. v. Chicagoland restrictive covenant in a commercial lease may be subject to Vending, Inc., 250 Ga. App. 607, 552 S.E.2d 557 (2001). strict construction in favor of the proposed use of the land, Many courts have also required strict construction of com- depending on the law of the state where it is located. This mercial leases or deeds based on the policy, articulated clearly amounts to a presumption against enforcement of a restrictive for the first time under Georgia law in Belk, that restrictive covenant where it will prevent the free use of the land by the covenants in commercial instruments should be interpreted to occupant. Depending on the facts at issue, this rule can be promote the free use of land. Simon Property Group (Texas) L.P. either a pro-landlord or pro-tenant position. Therefore, any v. May Dept. Stores Co., 943 S.W.2d 64, 71 (Tex. App.—Corpus tenant or developer seeking to negotiate a restrictive covenant Christi, 1997, no writ); Dart Drug Corp. v. Nicholakos, 221 Va. must take extra care to ensure that the restrictive covenant is 989, 993, 277 S.E.2d 155, 157 (1981); Crest Commercial, Inc. v. clear, and must carefully review amendments to safeguard its Union-Hall, Inc., 104 Ill.App.2d 110, 117, 243 N.E.2d 652, 656 position. (1968); Maryland Trust Co. v. Tulip Realty Co. of Md., 220 Md. 399, 409, 153 A.2d 275, 282 (1959). Crest includes a discussion David Pardue is the leader of Hartman, Simons, Spielman & Wood’s of the rationale for extending this traditional doctrine of strict Litigation Team in Atlanta. construction to the modern phenomenon of shopping centers. It is important to note that the policy of strict construction in favor of the free use of land does not necessarily result in Non-Employee Union Handbillers outcomes favoring a developer or landlord. See Simon, supra, 943 S.W.2d at 71. Therefore, depending on the facts, tenants Barred from Access may also enjoy benefits from the policy favoring the free use Marty Denis of the land, especially where they have an REA. In summary, Belk follows the course of many courts that Barlow, Kobata & Denis have considered similar issues relating to restrictive covenants Chicago, Illinois in shopping centers by emphasizing a long-standing doctrine of property law and contract construction that favors the free Conflicts between union activities and the rights of shopping use of land. Both shopping center landlords and tenants center owners continue to arise. Union activities may range should be aware of the doctrine of strict construction when from organizing activities to area standards picketing. drafting instruments including restrictive covenants. Depending on whether the union activities involve employees or non-employees and depending on the location of the union Lessons for the Real Estate Industry in Belk activity, different rules may apply. A recent case involved non- No matter how hard one negotiates a lease provision at the employee leafletters seeking to leaflet as part of the union’s time of the signing of the lease, a subsequent amendment and organizational efforts. The court discussed the rights of a a stroke of the drafting pen in a site plan can eliminate the union to leaflet in a store’s parcel pickup area and adjacent power of a tenant or a developer to control the shopping cen- parking lot and the right of a store to exclude union leafletters ter. In this case, a small reservation on the anchor pad for the from its parcel pickup area and adjacent parking lot. Weis Site Plan eviscerated Belk’s control over the size of the other Markets, Inc. v. National Labor Relations Board, 2001 U.S. App. anchor tenants. Belk claimed that the language on the Site LEXIS 26295 (4th Cir. Sept. 11, 2001). Plan was in fine print, and was not intended to so dramatical- Weis operated a chain of Pennsylvania grocery stores ly change Belk’s rights of approval. The Belk court held that it known as Mr. Z’s Food Marts. Mr. Z’s employees received a was clear that the size of the anchor could vary depending on mailing from union organizers claiming enhanced job security available parking based on its interpretation of the Lease and in unionized stores and soliciting their support. In response, Site Plan. Weis implemented a no-solicitation policy in its Mr. Z’s stores. It is extremely important for tenants and developers to Weis posted cardboard and then metal signs, first inside the review amendments carefully—especially amendments to site stores and then in the parking lots, informing both patrons plans for shopping centers—to make sure that the language and potential solicitors of the policy. The policy prohibited

6 solicitation on the store premises, the pickup area and the Attorneys representing employers, at least in jurisdictions adjacent parking lot. governed by Pennsylvania law, may be heartened by this deci- Nonetheless, non-employee union organizers distributed sion. Where an employer grants some members of the public leaflets to employees outside of and adjacent to Mr. Z’s stores. the right to enter its property or common property on which it An unfair labor practice charge was filed with the National has an easement—e.g., those members of the public who Labor Relations Board (“Board”), which found that Weis had might benefit its enterprise—it does not forego the right to bar unlawfully barred solicitation of its employees by the union in the uninvited entry of other members of the public, including its parcel pickup area, sidewalks and adjacent parking lots. union organizers who have other means of communication Weis appealed, contending that the eviction of the organizers with its employees. from the sidewalk, parcel pickup and parking lot areas adja- cent to Weis’s stores was lawful. The Board found that the no- Marty Denis is a partner specializing in Labor law in the Chicago solicitation rule imposed by Weis was valid under NLRB v. firm of Barlow, Kobata & Denis. Babcock & Wilcox Co., 351 U.S. 105 (1956), but was enforceable only in those areas under which Weis had “exclusive control,” meaning “the stores themselves.” Although the lease had been Landlord Exculpation Clauses: modified to give Weis the explicit right to forbid organizers Be Conspicuous or Be Sorry! access to the premises, the organizers had been evicted before the lease changes giving Weis that right became effective. Stephen W. Snively, Esq. Consequently, the Board found that Weis had committed an Holland & Knight LLP unfair labor practice. The initial question for the court was whether Weis, as a Orlando, Florida matter of state law (Pennsylvania), had a right to control the premises. At the time the union organizers were prevented A shopping center owner may limit its liability to tenants by from distributing handbills, the Weis lease provided that Weis including an exculpation clause in its leases. Such a provision had the non-exclusive right to use the common areas, which typically provides that a tenant may collect a judgment included those areas outside the premises of the store proper entered against the owner only from its interest in the shop- for itself, its customers, agents and invitees. One of three leas- ping center. Such provisions are assumed generally to be es provided that Weis, its agents, servants, employees, invitees enforceable if drafted properly. A recent Georgia case turns and licensees were entitled to use the parking areas for park- that assumption upside down, and underscores the impor- ing, loading, ingress and egress, and all other lawful purposes, tance of form in addition to substance. and that such use was in common with the other tenants. A In Parkside Center, Ltd. v. Chicagoland Vending, Inc., 250 second lease provided that automobile parking areas, drive- Ga.App. 607, 552 S.E.2d 557(Ga.Ct.App. 2001), the Court of ways, entrances or exits, service drives, pedestrian sidewalks Appeals of Georgia held that a shopping center lease provi- and ramps were common areas for the general use in common sion which clearly exculpated the general partner of the land- with other tenants and agents, employees, customers and invi- lord from liability, nonetheless was unenforceable because it tees. Later, the leases were amended so that Weis was given did not appear conspicuously in the lease. the right to prevent trespassing, including handbilling, on the sidewalks, and in the parcel pickup and parking lot areas Form Controls, Not Just Substance adjacent to all of the stores involved in this case. It was admit- Parkside Center, Ltd. (“Parkside”) was a limited partnership ted that the union had other reasonable alternative means of communicating with Weis employees. which owned and operated a shopping center. Its general Fortunately for Weis, Pennsylvania law gave Weis broad partner was D. Kimbrough King (“King”). In 1989, property rights. Under Pennsylvania state law, Weis had the Chicagoland Vending, Inc. (“Chicagoland”) leased space at the right to exclude the union leafletters. As the court saw the sit- shopping center from Parkside for the operation of a game uation, Weis’s invitation to the public to come on its property room containing coin-operated video and redemption amuse- was limited to such of the public who might benefit Weis’s ment games. Both landlord and tenant were sophisticated par- enterprises, including potential customers as well as employ- ties, knowledgeable and with comparable bargaining power. ees of the shopping center concerns. Weis had taken special The lease contained an exclusive use clause whereby precautions against an indiscriminate use of its property. Parkside agreed not to lease any other space at the shopping Weis’s general invitation to certain classes of persons to use center for use as an amusement center or any other use sub- the premises and the exclusion of certain other classes of per- stantially similar to that of Chicagoland, unless with the prior sons from such use was, in the court’s view, fully consistent written approval of Chicagoland. The lease also contained an with the right of a property owner under Pennsylvania law to exculpatory provision which stated: the use and enjoyment of his property. Since the union organizers in this case were not members “…all claims, demands, or causes of action which of the public who might benefit Weis’s enterprise, including Tenant may at any time thereafter have against potential customers and employees, their uninvited intrusion Landlord because of Landlord’s failure to comply with on the private property was unlawful under Pennsylvania real any provisions hereof, shall be enforceable solely estate law. The court of appeals, therefore, refused to enforce against Landlord’s right, title and interest in Shopping the Board’s order, which required Weis to renounce its author- Center and no other property of Landlord shall be sub- ity to prevent handbilling by the union organizers. ject to any such claim, demand or cause of action.” Shopping Center Legal Update Vol.Shopping Center Legal Update 22 Issue 1 Spring 2002 7 Chicagoland operated about 60 coin-operated amusement rental nor the profits Chicagoland could have otherwise games in the space for a period of three years. In September of derived from its business operations at the shopping center 1993, Parkside leased other space in the shopping center to were deemed controlling. The general partner had relied upon Q-Lanta which operated about 25 games similar to those oper- the enforceability of the exculpatory clause in the lease to pro- ated by Chicagoland, along with a laser tag game. Parkside tect it from significant liabilities such as these. did not obtain the prior written consent of Chicagoland to the The court cited Dept. of Transp. v. Arapaho Const., 180 Ga. new lease. After Q-Lanta opened for business, Chicagoland App. 341, 349 S.E.2d 196 (Ga.Ct.App.1986), in support of the experienced a steady decline in attendance and profits. conclusion that exculpatory clauses must be explicit, promi- In November of 1993, Chicagoland sued Parkside, King nent, clear and unambiguous. That case involved a lawsuit by and Q-Lanta to enjoin violation of the exclusive use provision a bridge contractor against a state department of transporta- in its lease. Injunctive relief was denied because Q-Lanta had tion pursuant to a contract which granted the department of no knowledge of the exclusive use provision at the time its transportation certain rights to terminate the contract. This lease was signed. Chicagoland struggled to survive but con- case illustrates that what may be deemed an “exculpatory tinued to lose money. In February of 1997, the losses forced it clause” is not always obvious. to close at the shopping center. The appellate court in Dept. of Transp. held that because the Chicagoland then pursued a legal action against both termination clause would release the department of trans- Parkside and King to recover damages resulting from viola- portation for any breach of contract, with the result that the tion of the exclusive use provision in its lease. King was joined department of transportation would not be liable for the full in the lawsuit as general partner of Parkside, a limited part- scope of common law damages, it was deemed to constitute nership. The jury in the action awarded Chicagoland damages an exculpatory clause. The termination language was not of $787,400 relating to violation of the exclusive use provision deemed sufficiently unambiguous to be construed as an excul- plus attorney fees of $74,000. The judgment was entered patory clause which waived any rights to damages because it against Parkside and King, its general partner. failed to incorporate any language referencing explicitly its application to breach of contract claims and damages. Had the Explicit, Prominent, Clear and Unambiguous termination provision gone on to state that any termination King was named as a defendant in the lawsuit because he was would result in a waiver of damages in any breach of contract the general partner of the Parkside limited partnership. On action, the result might have been different. appeal, a variety or arguments were raised. Of particular This holding in Parkside underscores the importance of interest was King’s argument that the trial court committed assuring that any contract provision which results in a waiver reversible error by refusing to dismiss him from the lawsuit, of rights, directly or indirectly, be stated clearly and complete- based on the exculpatory provision in the lease which limited ly. This threshold must be attained before the prominence of any recovery to the interest of Parkside in the shopping center. the clause in the contract will be considered. The appellate court rejected this argument, and affirmed the In finding that the exculpatory clause was unenforceable judgment against King, on the basis that the exculpatory because it did not appear prominently in the lease, the appel- clause did not appear prominently in the lease. late court also cited Imaging Systems Intl. v. Magnetic Resonance The appellate court noted that a general partner is liable Plus, 227 Ga. App. 641, 490 S.E.2d 124,(Ga.Ct.App.1997). That for the obligations and debts of its limited partnership. It went case did not involve a shopping center lease, but a contract for on to say that because exculpatory clauses waive substantial the service and repair magnetic resonance imaging equipment. rights and could result in the accord and satisfaction of future The contract contained a clause whereby each party released claims, there is a special need for a meeting of the minds the other from liability for lost profits, incidental, special or which can be assured only if the exculpatory clause is “explic- consequential damages. This exculpatory clause was set off in it, prominent, clear and unambiguous.” In Parkside, the excul- a separate paragraph with the heading “LIMITATION OF patory language in the lease (a) had no separate paragraph LIABILITY” and all the key language was capitalized. When a heading, (b) had typeface the same size as that of the sur- breach of contract action was filed, the trial court declined to rounding paragraphs on the page, (c) appeared under the gen- enforce the exculpatory provision and entered a judgment for eral heading “Miscellaneous” on the last page of the form lost profits in favor of the plaintiff. After recognizing the gener- lease, (d) was not in a separate paragraph, and (e) lacked any al rule that, absent countervailing public policy considerations, other indicia of prominence within the document. parties to a contract may each waive legal rights against the The court found that the exclusive use clause expressed other, the appellate court vacated the award for lost profits, the clear and unambiguous intent of Parkside and noting that the limitation on liability clause was clear and Chicagoland to prohibit other businesses in the shopping cen- unambiguous and therefore enforceable as written. ter which operated amusement devices, did not unreasonably The appellate court also cited Grace v. Golden, 206 Ga. App. restrict competition and was a valid restraint on trade. 416, 425 S.E.2d 363, (Ga.Ct.App.1992), as authority for the Therefore, the problem with this exculpatory clause was not proposition that an exculpatory clause which lacks certain the substance of the language. indicia of prominence will not be enforced. In that case a pur- The measure of damages was deemed to be the difference chase money note and deed of trust provided that the holder in value of Chicagoland’s leasehold interest with the exclusive thereof would look solely to the security of the land, and not use provision as compared to the value of the leasehold inter- seek to obtain a judgment for any unpaid balance after exer- est without the exclusive use provision. Neither the stipulated cising its statutory power of sale. Under Georgia law, this con-

8 stituted the waiver of an important legal right that otherwise In Camena Investments and Property Management Corp. v. would be held by the holder of the deed of trust. Cross, 791 So. 2d 595 (Fla. 3d DCA 2001), the Florida Third The preprinted deed of trust in Grace was only two pages District Court of Appeal (which includes the Miami area in its long with typewritten additions. The exculpatory language jurisdiction) rejected a landlord’s argument that the tenant was located physically within the document after the legal could not claim it was defrauded because the restrictive description and used the same typeface as that for the legal covenant in question was a matter of public record. description, which was nonetheless larger and bolder than the In the Camena case, the parties entered into a shopping preprinted provisions. The court rejected the argument that center lease in August 1994 in which the tenant was to use the placement of the exculpatory language within the document space as a restaurant. Occupancy was to begin by October 1, was an attempt to camouflage the language and conceal it at 1994, and rent payments were to begin December 1, 1994. The closing. leasing agent told the tenant that she could open the restau- rant by October 1, but when the tenant went to the building Safeguards for Drafting Leases and zoning department, she was told that she could not use The Parkside holding is indicative of a general willingness on the space for restaurant purposes because there were not the part of courts not to enforce exculpation clauses which, enough parking spaces and that a restrictive covenant on the even though stated clearly and unambiguously, are not placed property would require the tenant to obtain a zoning variance conspicuously in the lease in a manner designed to draw if the restaurant was to be of the size originally planned. attention. Practitioners in all jurisdictions may learn from the Nonetheless, the restaurant ultimately opened for business, lesson of Parkside and avoid issues relating to the enforcement albeit well after December 1, 1994. of such provisions in the future. Eventually, the restaurant failed; the tenant stopped pay- ing rent; the landlord sued for damages; and the tenant filed a Conclusion and Recommendation counterclaim for damages, alleging fraud in the inducement. Exculpatory clauses must be specific, clear, unambiguous and One of the landlord’s arguments in the case was that the ten- conspicuous. Based on the decision rendered in Parkside, the ant could not claim that she was defrauded, because the ability of a shopping center owner to limit its liability to ten- restrictive covenant on the property was a matter of public ants by including an exculpation clause also depends upon record. The appellate court rejected this argument, holding whether such clause is set forth conspicuously in the lease. that Although this decision applies only in Georgia, all landlords while a buyer might be expected to search the public and their counsel should include safeguards in the leases they records before a real estate closing and a contractor are drafting now, in anticipation that courts in other jurisdic- might also be expected to search the public records for tions may reach similar conclusions in the future. flood zones prior to obtaining a building permit, these types of searches are not expected to be performed as Steve Snively practices Real Estate law in the Florida office of standard procedure by a party entering into a commer- Holland & Knight LLP. cial lease. 791 So. 2d at 598. This holding should cause shopping center owners and Let the Landlord Beware: developers to re-think how they market their properties to prospective tenants. In most shopping center leases, landlords Florida Case Demonstrates That do not make representations regarding the specific type of use Courts May Favor Disclosure to that the tenant wishes to engage in. In fact, commercial ten- ants are normally expected to perform their own due dili- Tenants gence when deciding whether to enter into a lease in a partic- ular location. In Camena, there was not a complete ban on the Eric D. Rapkin tenant’s proposed use of which the landlord had knowledge Hughes Hubbard & Reed LLP and failed to disclose to the tenant; in fact, the restaurant ulti- Miami, Florida mately opened. Despite that, the court stated that the land- lord’s failure to disclose the existence of a restrictive covenant Most shopping center landlords tend to rely on the doctrine of that was a matter of public record constituted grounds to “caveat emptor” (“let the buyer beware”) in their negotiations allow a claim for fraud. Moreover, it is worth mentioning with prospective tenants. Landlords typically do not make any again that it appears that there were no representations representations to a tenant unless the tenant specifically asks regarding this issue in the lease agreement in question (which the landlord to represent a particular issue and the landlord would have enabled the tenant to sue for breach of the lease feels comfortable in making that representation (often after agreement); the claim was for fraud. (Based on that scenario, detailed negotiations on the language of the representation(s) the “economic loss rule” is another issue in the Camena case, being made). In addition, most landlords’ form leases contain a but a discussion of the “economic loss rule” is beyond the clause stating something to the effect that the lease agreement scope of this article.) sets forth the entire agreement between the landlord and ten- In conclusion, based on the Camena decision, unless it is ant, and that there are no representations or warranties except reversed on appeal, a new principle for shopping center own- as expressly provided in the lease. A recent Florida appellate ers and developers might just be “Let the Landlord Beware.” court decision should make landlords re-think what they do and do not disclose to tenants during lease negotiations. Eric D. Rapkin is Real Estate counsel in the firm’s Miami office. Shopping Center Legal Update Vol.Shopping Center Legal Update 22 Issue 1 Spring 2002 9 Just How Badly Were You occupancy in the lease between BVT and Wal-Mart and that Wal-Mart had breached that covenant by relocating and Damaged? replacing its store with a Bud’s Discount City. Aside from cer- tain procedural issues, the supreme court then needed to Gary A. Goodman decide the proper measure of damages for Wal-Mart’s breach Sonnenschein Nath & Rosenthal, LLP of the implied covenant of continuous occupancy. New York, New York With respect to that issue, Wal-Mart argued that the court of appeals should have utilized the value of lost future rent In the facts leading up to a Tennessee Supreme Court decision, standard for measuring the damages in this case. The supreme J.R. Freeman and Kuhn Brothers Co., Inc., entered into a lease court disagreed with Wal-Mart’s argument and found that in 1968 under which Kuhn Brothers agreed to lease space in diminution in value was the correct standard. In its decision, The Center of Lebanon, a shopping center owned by Freeman. the supreme court dictated that an award based solely on the The original lease provided for a guaranteed minimum rent value of lost future rent fails to consider other economic losses and for additional rent calculated as a percentage of Kuhn Brothers’ gross receipts (percentage rent). In 1981, the lease suffered by a shopping center owner/lessor when its anchor was amended, conditioned in part upon the acquisition of tenant abandons occupancy. Further, the supreme court noted Kuhn Brothers by Wal-Mart Stores, Inc. (“Wal-Mart”). In 1985, that a shopping center’s loss of its anchor store affects not after the acquisition of The Center Lebanon by BVT Lebanon only the rental income, but also the stability of the center, the Shopping Center, Ltd. (“BVT”), the lease was amended again attraction of customers and other tenants, and the availability to accommodate Wal-Mart’s desire to expand its leased prem- of long-term financing. The supreme court found that calculat- ises from 50,000 square feet (sf) to 84,000 sf. In addition, BVT ing damages based upon diminution in value contemplates all agreed to pay for $1.5 million in expansion costs, including the of these factors and thereby promotes the general objective of purchase of additional real estate and the buyout of a lease placing injured parties “in as good a position as they would adjacent to the Wal-Mart leased premises. have been in if the contract had not been breached.” The In the procedural history leading up to the current action, supreme court remanded to the trial court, requiring it to con- on October 5, 1994, BVT filed suit for anticipatory breach of sider the weight and credibility of both parties’ experts, not the lease. In the lawsuit, BVT alleged that Wal-Mart intended just those of the landlord. to replace the Wal-Mart store with a Bud’s Discount City and After concluding that the appropriate measure of damages to open a new Wal-Mart Superstore in the area. By doing so, for Wal-Mart’s breach of the implied covenant of continuous BVT alleged that Wal-Mart breached an implied covenant of occupancy was diminution in value, the supreme court found continuous occupancy and breached the express “permitted that the court of appeals had overlooked the testimony of Wal- use” clause of the lease, claiming that Bud’s did not qualify as Mart’s expert regarding the total amount of money Wal-Mart’s a “discount department store.” abandonment had cost the shopping center. As a result, the The trial court found that Wal-Mart had breached both the supreme court remanded to the trial court in order to resolve express permitted use clause of the lease and an implied the conflicting evidence on the issue of diminution in value. In covenant of continuous occupancy. It does not appear that the addition, the supreme court also found that the trial court trial court spent much time addressing what are the standards never considered the weight and credibility of each party’s for determining whether an implied covenant of continuous evidence on the issue of diminution of value. Therefore, the operation exists. The trial court also found the proper measure court also remanded to the trial court for a proper assessment of damages to be the present value of the lost future percent- of the evidence related to the diminution in value to the shop- age rent for the duration of the lease term and awarded BVT ping center and for an appropriate award of damages. $2,507,674 in damages for Wal-Mart’s breach of contract. In most instances where a court is confronted with a simi- Considering how unlikely it was that neither J.R. Freeman lar fact pattern, regardless of jurisdiction, the smart money could have induced Wal-Mart to sign the 1981 lease amend- would bet that the court would find no implied covenant. It ment, nor that BVT could have induced Wal-Mart to sign the generally takes an egregious fact pattern, like that in Pequot 1985 lease amendment, with an explicit continuous operation Spring Water Co. v. Brunele, 698 A.2d 920 (Conn. App. 1997), clause, this was a superlative result for BVT. where there was absolutely no base rent, to find it obvious Wal-Mart was confronted with the difficult decision of that the landlord bargained for the tenant’s continuous opera- whether to pay the $2,507,674 against an unpublished opinion tion. Since both the 1981 and 1985 lease amendments of a Tennessee trial court with, hopefully, little or no preceden- increased Wal-Mart’s base rent by substantial amounts, one tial value or appeal and risk an adverse written opinion of an would have thought that the Tennessee courts needed more to appellate court. Wal-Mart chose to appeal the trial court’s read an implied covenant into the lease. decision and BVT filed a cross-appeal seeking compensatory Furthermore, even if a finding of implied covenant was damages based upon diminution in value. In its decision, the justified, utilizing the diminution of value standard assumes court of appeals adopted the diminution in market value of that the only determinant of value is this tenant’s lease and the entire shopping center as the proper measure of damages the percentage rent payable thereunder. Rather than so specu- and modified the trial court’s judgment by increasing BVT’s late, most courts prefer the value of lost future rent standard. compensatory damages to $4,695,000. After all, a landlord may argue that continuous operation is In its decision, the Tennessee Supreme Court quickly required because the base rent was set artificially low and, affirmed, without discussion, the court of appeals decision in therefore, the landlord needs the percentage rent generated by holding that there existed an implied covenant of continuous an operating store to achieve an economic rent. Accordingly,

10 the landlord would be made whole by receiving that for the activity must have a significant impact on competition in which he bargained: the lost percentage rent that otherwise commerce and, where commerce is affected, it must be sub- would have been earned from that store if it were still stantial in volume. The leading case in this area is Harold operating. Friedman, Inc. v. Thorofare Markets, Inc., 587 F.2d 127 (3rd Cir. As a result of this decision, counsel negotiating “anchor” 1978). The court held that a multi-state supermarket chain tenants’ leases should see the importance of inserting an lease in a local shopping center that excluded all competi- express disclaimer of the duty to operate continually in the tors, including a local supermarket operator, presented a suf- demised premises. ficient connection with interstate commerce and had sufficient volume to satisfy the jurisdictional requirements of Gary A. Goodman is a Real Estate partner in the New York office of the Sherman Act. Sonnenschein, Nath & Rosenthal, LLP, where he specializes in the Similarly, in Pay Less Drugstores Northwest, Inc. v. City leasing and financing of commercial properties. Products Corp., 1975-2 Trade Cas. (CCH) ¶¶60,385, at 66,678 (U.S.D.C. Oregon 1975), the district court found that an Antitrust Laws and Restrictive exclusivity clause in a variety store lease that excluded any other variety store from the shopping center was a restraint Covenants in Leases on trade. A contrary result was reached in Dalmo Sales Co. v. Tyson Raymond W. Goldfaden Corner Regional Shopping Center, 308 F. Supp. 988 (D.D.C. Phillips Nizer Benjamin Krim & Ballon LLP 1970), aff’d, 429 F.2d 206 (D.C. Cir. 1970), where a group of New York, New York department stores excluded a discounter from the shopping center. The court found no anti-competitive motive in a It is commonplace for retail tenants in shopping centers to group of retail department stores excluding a discounter demand exclusivity or restrictions on competing retail opera- from the shopping center. The court stated that any restraint tions from their landlords. Are such restrictive covenants a involved in the sharing by the shopping center developer of restraint of trade or a reasonable effort on the part of the the right to exclude discount retail establishments with retailer to protect its investment in the location? department store tenants whose prior commitments were Section 1 of the Sherman Antitrust Act declared “illegal” necessary to ensure the success of the enterprise may be every contract, combination or conspiracy in restraint of deemed to be a reasonable one under the antitrust laws. trade or commerce among the several states. Section 5 of the The FTC during the mid-1970s initiated investigations of Federal Trade Commission (“FTC”) Act prohibits (1) unfair exclusivity clauses in shopping center leases that resulted in methods of competition and (2) unfair and deceptive acts or several consent decree settlements with shopping center practices in or affecting commerce. The FTC Act was enacted developers and their commercial tenants. See, e.g., Tyson to supplement the Sherman Antitrust Act. In addition, the Corner Regional Shopping Center (City Store), 85 F.T.C. 970 majority of the states have enacted antitrust statutes mod- (1975); Federated Department Stores, 3 CCH Trade Reg. Rep. eled directly after Section 1 of the Sherman Antitrust Act ¶¶21,505, at 21,536 (1979); Rich’s Inc., 87 F.T.C. 1372, 3 CCH prohibiting contracts in restraint of trade, as well as attempts Trade Reg. Rep. ¶¶21,118, at 20,973 (1976); and Strawbridge & to monopolize and other unfair trade practices. Clothiers, 87 F.T.C. 593, 3 CCH Trade Reg. Rep. ¶¶21,082, at Suffice it to say that most retailers in entering into a lease 20,943 (1976). The consent decrees prohibited the respondent will seek some restrictions against competition in the center. department stores from the following: (1) excluding other It is quite common for a supermarket chain to limit the department stores, junior department stores, discount stores owner of the center from leasing to competing uses—for or catalog stores from shopping centers; (2) establishing quo- example, to an appetizing store or other retail food operators tas for how many tenants of a shopping center may be and even to certain take-out restaurants. On a more aggres- selected from a particular class of retailer; (3) limiting the sive basis, retailers have gone so far as to limit or exclude types or brands of merchandise that other occupants might entirely discount stores or catalog stores from shopping cen- sell or services they might render; (4) limiting the amount of ters, or have established quotas on how many tenants of the floor area that other occupants may utilize for the sale and center may be selected from a particular class of retailers; display of particular brands of merchandise; (5) imposing limiting the amount of floor space that other occupants may exclusivity or rights of first refusal restrictions on the right to utilize for the sale or display of particular brands of mer- sell a particular type of merchandise or to provide a particu- chandise; limiting the types and brands of merchandise that lar type of service; (6) specifying or prohibiting certain types other occupants might sell or services which they may ren- of advertising except advertising in the shopping center and, der; and imposing exclusivity or rights of first refusal restric- in particular, restricting “price advertising.” tions for the right to sell a particular type of merchandise or The FTC recognized the practical difficulties faced by prohibiting or specifying certain types of advertising in the some of the larger tenants that occupy neighborhood or com- center, and, in particular, restricting price advertising. munity shopping centers; therefore, it typically excluded In order for Section 1 of the Sherman Act to apply, the shopping centers smaller than 200,000 square feet (sf) from conduct must either (1) occur in interstate commerce or its consent decrees. See People’s Drug Store, Inc., 87 F.T.C. 1, 3 (2) substantially affect interstate commerce, even if it occurs CCH Trade Reg. Rep. ¶¶21,005, at 20,863 (1976). In People’s on an intrastate level. In order to have a substantial effect, Drug Store, the respondent sought to exclude other drug- Shopping Center Legal Update Vol.Shopping Center Legal Update 22 Issue 1 Spring 2002 11 stores from operating in regional centers. The consent decree would occur. The burden is on the plaintiff to make a showing prohibited the following types of agreements: of what the relevant market is, how competition or trade have 1. Agreements to give People’s the right to be the only been unreasonably affected within it, and how trade within drug store in a shopping center; the market has been unreasonably restrained by the lease pro- vision in question. 2. Agreements to give People’s the unconditional right to In the Pay Less Drug Stores case cited above, an exclusivity reject or accept the opportunity to operate an additional provision in a Franklin Variety Store lease that excluded any drug store in a shopping center where it already oper- other variety stores from the shopping center also applied to ated a drug store; any other property the landlord owned within a 3,000 sf 3. Agreements that prohibit or in any manner control the radius of the shopping center. The court did not define the rel- acceptance of store operators as tenants in a shopping evant market, but concluded that the relevant market was a center; and large area around the city in which the shopping center was 4. Agreements that control or restrict the business opera- located. The court found, because of the physical characteris- tions of other tenants of shopping centers. tics of the area, the dynamics of the market and the unavail- Most consent decrees do not apply to restrictive covenants ability of alternate sites in the vicinity, a location within the in shopping center leases unless the shopping center has the shopping center was the only location from which Pay Less following characteristics: could compete effectively for customers within the trading area served by the shopping center and that the exclusion of a. At least 200,000 sf of floor area in the shopping center; the plaintiff from this shopping center would have a serious b. At least 50,000 sf of floor area occupied by tenants other detrimental effect on competition in the relevant market. than the retail respondent; In a case decided in the Northern District of New York, c. The shopping center must contain at least two tenants Optivision v. Syracuse Shopping Center Associates, 2 CCH Trade other than the retail respondent; Reg. Rep. ¶¶62,874 (N.D.N.Y. 1979), the court, noting that the d. The shopping center must contain at least one major relevant market had to be determined from both the point of tenant other than the retail respondent; and view of relevant product market and relevant geographic e. There must be on-site parking. market, concluded that the relevant product market was the The effect of a consent decree is applicable only upon the retail sale of eyeglasses, contact lenses, and other optical respondent and does not have the same general broad prece- devices and consumer services pertaining to these products, dential effect as a court decision. and that the relevant geographic market was the northern part of the Greater Syracuse metropolitan area, which is an area larger than North Syracuse and smaller than the entire Rule of Reason vs. “Per Se” Violations Greater Syracuse metropolitan area. The court found that two The cases involving restrictive covenants in the antitrust field factors determined whether an exclusive area should be con- usually are determined on the basis of the rule of reason sidered a reasonable restraint: (1) the impact of the challenged analysis instead of a per se violation. The per se violations are activity on competitive conditions within the relevant market limited to those that are inherently evil, such as horizontal and (2) the relative weight of the effects on competition from price fixing, divisions of markets and concerted refusals to the clause contrasted with the competitive evils of the clause deal. The FTC approach in the consent decree cases treated in question. such practices as per se violations. In determining whether a The court’s analysis took into account various factors, restrictive covenant in a shopping center lease is an unreason- including the fact that there were numerous commercial prop- able restraint of trade, the courts have applied a “Rule of erties in the relevant geographic market which were suitable Reason” analysis and in determining whether a particular pro- as alternative locations for a retail optical store. It concluded vision is unreasonable, often the analysis turns upon the that the prevailing market conditions were such that the elimi- nature of the particular geographic and product market in nation of one retail outlet would not have a significant com- which the alleged restraint occurs. petitive impact. It also found that there were no indications that the defendant had the power to control the market for the retail sales of optical goods in the northern part of the Greater Relevant Market Syracuse metropolitan area, but, rather, that there appeared to The FTC applied its standards in regional shopping centers have been a vigorous competition among a number of differ- with sales of $50 to $100 million a year, which they believed to ent competitors that had stores within that area. constitute the relevant market. In Borman’s, Inc. v. Great Scott In J.C. Penney Company, Inc. v. Giant Eagle Markets, Inc., 813 Supermarkets, Inc., 433 F. Supp. 343 (E.D. Mich. 1975), a super- F. Supp. 360 (W.D. Pa. 1969), a federal court held that in market chain that sought to lease space in a shopping center Pennsylvania there is no public policy against enforcement of brought an action to invalidate an exclusivity clause in a shop- restrictive covenants in a shopping center lease and that par- ping center lease of another supermarket chain: Great Scott. ties are entitled to a degree of freedom in contracting to pro- The clause prohibited the landlord from leasing space in the tect their economic interest, and the controlled development shopping center to any other supermarket. The court stated of a shopping center may be desirable. Such conveyances are that in applying the Rule of Reason it must necessarily deter- valid if limited in scope, space and time, to the extent required mine the effects of the alleged restraint on competition, and, to to protect the party benefited by the exclusive. Under such an do so, it must define the relevant market in which the effects analysis, a tenant in a shopping center may be as important to

12 the lessor as the actual promised rental payments, because cer- attorney general alleged that the enforceability of an exclusivi- tain mixes in tenant uses will attract higher patronage of the ty clause in a Zayre lease violated the Ohio antitrust laws. The stores in the center. Thus, under this court’s analysis, the pro- lease prohibited a shopping center from leasing to “any store competitive effects of an exclusivity clause in a shopping cen- advertised as a so-called discount type operation, any apparel ter lease were viewed as outweighing any anticompetitive store, except a “so-called high priced store” as distinguished effects that may result from such a provision accompanying from a “popular priced store,” other than a store operated by such provisions. a national or regional chain store organization unless it sold In Leggett of Virginia, Inc. v. The Crown American Corp., No. goods at “conventional prices” with conventional retail 94-0040-D (W.D. Va. 1988), a landlord entered into a lease markups. The court held that the exclusivity clause was a agreement with Leggett of Virginia to lease a 90,000 sf depart- form of price fixing and, consequently, found that it was a per ment store at the Patrick Henry Mall in Newport News, se violation of the Ohio Antitrust Statute. Virginia. At the time of the lease, there were two other major Similarly, in State v. Palzes, Inc., 39 Ohio Misc. 155, 317 department stores in the shopping center: a Bradlees depart- N.E.2d 262 (1972), the attorney general sought to restrain ment store that occupied approximately 85,000 sf and a Hess Palzes from enforcing an exclusivity clause in a lease that pro- department store that occupied approximately 65,000 sf. After vided “except for department stores and variety stores (such the Leggett lease was entered into, the Hess store became a as S.S. Kresge, F.W. Woolworth, etc.). Lessee shall be the only Proffitt’s store. Litigation arose out of the landlord’s proposal women’s wear store in Lessor’s shopping center engaged in to construct a 140,000 sf Hecht’s store on the easterly side of the sale of so-called “high priced quality” women’s wear. This the mall. exclusive right guaranteed in this section shall not, however, Because of the nature of the site plan attached to the prohibit or prevent Lessor from leasing space to tenants Leggett lease, the landlord required the consent of Leggett to engaged in the sale of low priced women’s wear similar to the proposed construction of the Hecht’s store. Leggett operations of stores such as Red Robin, Wilber Rogers, etc.” responded that it wanted to retain its rough equivalency in The Court of Common Pleas of Cuyahoga County found that store size and thereby obtain an adequate return on its consid- the restriction which limited the price as to garments could be erable investment in the store. The landlord argued that sold constituted “price fixing” and was a per se violation. Leggett’s real motive was to prevent competition between In Michigan, in Bobenal Investment, Inc. v. Giants itself and the new Hecht’s store, which was an aggressive Supermarket, Inc., 79 Mich. App. 31, 260 N.W.2d 915 (1977), the national department store chain, and relied upon the FTC court interpreted a restrictive covenant contained in an agree- decisions in In re Strawbridge & Clothier, 87 F.T.C. 593 (1976), ment that terminated a lease of a supermarket chain as not and In re Tyson’s Corner Regional Shopping Center, 85 F.T.C. 970 being an unreasonable restraint of trade. There, the tenant sur- (1975), where the FTC had alleged that such exclusives were rendered its lease for a supermarket and built a new super- per se unreasonable. market in another location. The landlord attempted to negoti- The court in Leggett differentiated between the Tyson’s ate a lease for another supermarket chain but the original ten- Corner case, where the tenant had the right to withhold its ant had obtained a restriction against any competitor in the consent to a proposed tenant of over 30,000 sf in its sole and center as a result of its surrender of the premises. The court absolute discretion, and the Leggett lease, which provided refused to invalidate the restrictive covenant and held that the that it would not unreasonably withhold its consent. The court agreement caused no competitive harm and was a covenant found that the weight of authority is against the application of that was validly granted in exchange for the surrender of the a per se rule adopted in Tyson’s Corner as to exclusivity clauses lease. in shopping center leases, and urged by the plaintiff, and cited In conclusion, the courts generally will apply the rule of the holding in Harold Friedman, Inc. v. Thorofare Markets, Inc., reason approach in determining whether or not a restrictive supra, and concluded that the exclusivity clauses were not per covenant or exclusivity clause violates the antitrust laws. The se violations of the Sherman Antitrust Act. more recent cases in the federal courts seem to distance them- selves from the per se approach taken by the FTC in the con- State Antitrust Laws sent decree cases. The courts will generally find that a bargain Even if a shopping center were to conduct no business in for restriction in a lease between a retailer and the shopping interstate commerce whatsoever, its landlords and tenants center owner will not, in and of itself, violate any antitrust must consider the possibility that the restrictions will be chal- provisions unless the relevant market is so confining that there lenged under state antitrust laws. As stated above, many are no other viable alternative locations for the competitor to states have adopted antitrust laws of their own which offer open a store within the area. The courts will generally find the opportunities to invalidate exclusivity clauses in shopping restrictions valid if limited in scope, space and time, to the center leases involving smaller centers where there may be extent required to protect the party benefited by the exclusive. doubt about whether there is sufficient interstate commerce to However, it is advisable to review the decisions of the various justify the application of the Sherman Act. states in which the retailer intends to operate to ascertain the While most of the state courts have adopted the Federal opinion of the courts with respect to the enforceability of case law doctrines applicable to the reasonableness of restric- restrictive covenants and the possible antitrust implications in tive covenants in shopping center leases under the Sherman each jurisdiction. Act, there are some that do not apply the rule of reason. For example, in Ohio, in State v. Zayre of Ohio, Inc., 41 Ohio Misc. Raymond Goldfaden is a partner in New York City’s Phillips Nizer 117, 324 N.E.2d 186 (Comm. Pl. 1974), a complaint filed by the Benjamin Krim & Ballon, LLP. Shopping Center Legal Update Vol.Shopping Center Legal Update 22 Issue 1 Spring 2002 13 Of Interest broad enough to permit the award of attorney fees to the lessors as part of the cure amount that would have to be paid as the cost of assuming the lease. In re I-Mind Education Articles/Books Systems, Inc., 269 B.R. 47 (Bkrtcy. N.D.Cal. 2001). Carr, James S., “Understanding the Sophisticated Real Estate A lessor was not entitled to a superpriority claim for pay- Practice 2001: Lost, A Road Map to Help Landlords Survive ment of past-due rent. In addition, the Bankruptcy Rule pro- Retail Chain Bankruptcies,” 473 PLI/Real 309 (Fall 2001). viding for enforcement of court orders by writ of execution did not enable the lessor to levy on specific property of the Arbitration estate protected by an automatic stay after the entry of a bank- An order dismissing without prejudice a tenant’s claim for ruptcy court order directing the debtor to pay past-due rent breach of contract, with leave to renew after the tenant that was owing under the lease. In re LPM Corp., 269 B.R. 217 exhausted its remedies in arbitration, required the tenant to (9th Cir. BAP 2001). present proof that it had pursued arbitration before proceed- An automatic stay is effective from the specific moment ing with the claim in court. Ciao Europa v. Silver Autumn Hotel during the day on which the bankruptcy petition is filed, Corp., Ltd., 735 N.Y.S.2d 526 (A.D.1st Dept., 2002) rather than from the start of the day the petition is filed. Consequently, a debtor no longer had an interest in deed of trust property at the time she filed her petition, following the Assignment/Sublease foreclosure sale and execution of a deed of trust in favor of the A landlord was guilty of breach of lease when it refused to successful bidder at the sale, even though the deed had not consent to the tenant’s sublet of the premises at less than mar- yet been recorded. In re McLouth, 268 B.R. 244 (D.Mont. 2001). ket rent. National Union Fire Ins. Co. v. Rose, 53 Mass. App. Ct. A bankruptcy court had “core” jurisdiction over a debtor’s 910, 760 N.E.2d 791 (2002). motion for a TRO and preliminary injunction to prevent the A bankruptcy court had the authority to extend the time lessor from certifying that the debtor-lessee was in default and for assumption of the lease even though an earlier extension drawing on a letter of credit in reliance on an ipso facto clause had already expired before the court was able to rule on the in the debtor’s lease. The court granted preliminary injunctive trustee’s motion. In addition, adequate assurance of the relief. In re Metrobility Optical Systems, Inc., 268 B.R. 326 assignees’ future performance was provided, so that the (Bkrtcy.D.N.H. 2001). trustee would be allowed to assume and assign the lease. U.S. The damages provision in an equipment lease obligated ex rel Rahman v. Oncology Assoc., PC, 269 B.R. 139 (D.Md. 2001). the debtor-lessee, in the event of its default, to pay not only all the rent that remained owing under the lease, but also an Bankruptcy additional amount based on the “casualty value” of the equip- An assignment of rents in a deed of trust that a debtor had ment at the time of the breach. The district court held that the executed pre-petition was not intended as an absolute assign- clause was an unenforceable penalty, rather than a reasonable ment of the debtor’s interest in revenues from the debtor’s liquidated damages provision, and could not be the basis of a hotel. The assignment was made for purposes of security, such rejection claim by the lessor. In re Montgomery Ward Holding that the hotel’s revenues were included in “the property of the Corp., 269 B.R. 1 (D. Del. 2001). estate” and were in the nature of “cash collateral.” A deed of A bankruptcy trustee was required to discharge the obliga- trust lender was not entitled to relief from an automatic stay to tions imposed by a corporate debtor’s lease in full, not in part, exercise its rights in the hotel property securing its claim, at the time the duty to perform arose under the lease. based on the debtor’s alleged lack of equity in the property, Accordingly, the debtor’s lease obligation to reimburse the and the lender was not entitled to relief from the stay based on landlord for tax payments arose post-order and prior to rejec- an alleged lack of adequate protection for its interest. In re tion. Under Section 365(d) (3) of the Bankruptcy Code, the 5877 Poplar, LP, 268 B.R. 140 (Bkrtcy. W.D. Tenn. 2001). lessee’s obligation had to be fulfilled not by a prorated portion For purposes of assumption and cure, after demolition of a of the taxes attributable to the period subsequent to the substantial portion of a parking facility, the parties to the lease lessee’s petition for bankruptcy relief, but for the full amount for the facility had entered a new lease, rather than an oral of taxes owed. In re Montgomery Ward Holding Corp., 268 F.3d modification of the original lease. There were two fundamen- 205 (3rd Cir. 2001). tal changes: the rate charged for parking and the way in which A lessor was not entitled to relief from a stay because the the cars were parked. In re Cincinnati Entertainment Assoc., 270 debtor-lessee’s lease had not expired, even though a state trial B.R. 853 (Bkrtcy. S.D. Ohio 2001). court had purported to terminate the lease based on the An error in a sales order, as to the amount that would have debtor’s allegedly unjustified withholding of rent. Moreover, to be paid from the proceeds of a sale in order to cure the the landlord was entitled to adequate protection of its inter- debtor’s default under the lease, was only a “clerical error” ests, not in an amount equal to the rent owing under the lease, that could be corrected on a motion filed under the federal but in an amount equal to its lost opportunity costs. In re P.J. rules of civil procedure. In re Computer Learning Centers, Inc., Clarke’s Restaurant Corp., 265 B.R. 392 (S.D.N.Y. 2001). 268 B.R. 468 (Bktcy.E.D.Va. 2001). A commercial lessor was entitled to an administrative The attorney fee provision in the debtor’s lease, which expense claim for the number of days the debtor remained on authorized the award of attorney fees to the prevailing party the leased premises after it had rejected the lease. In re Roberds, in any lawsuit for breach of the terms of the lease, was not Inc., 270 B.R. 702 (Bkrtcy. S.D. Ohio 2001).

14 Contracts A court cannot enjoin the presentment of a letter of credit A preliminary injunction was properly granted to a shopping by a landlord when the landlord fulfills the terms of the letter center developer to prevent its removal as the manager of a by certifying the tenant is in default under the lease. Synergy jointly developed shopping center under an operating agree- Center, Ltd. v. Lone Star Franchising, Inc., 63 S.W.3d 561 ment between the developer and the real estate company that (Tex.Ct.App., 3rd Dist., 2001). was the majority member of the limited liability company formed to develop the shopping center. Apple Glen Crossing, Leases LLC v. Trademark Retail, Inc., 760 N.E.2d 1109 (Ind.Ct.App., 5th In an action by a tenant for damages arising from an alleged Dist., 2001). partial actual eviction and constructive eviction from a loft Where title to the property on which the leased premises used as a factory, the landlord appealed from the supreme were to be built was defective, a contract to construct the court’s grant of a judgment to the tenant in the amount of premises was excused due to impossibility. Bonfare Markets, $24,000. The appellate division reversed and dismissed the Inc. v. Penterra Marina Bay LLC, A095308, Cal.Ct.App., 1st App. complaint, holding that exculpatory provisions in the lease Dist., Div. Five, Dec. 10, 2001. precluded findings of partial actual eviction and constructive eviction. Cut-Outs Inc. v. Man Yun Real Estate Corp., 286 A.D.2d Covenants/Clauses 258, 729 N.Y.S.2d 107, (App.Div., 1st Dept 2001). A covenant prohibiting the use of a leased premises as a A tenant-sublessor’s cross-claim against the landlord for “pharmacy or drug store or for the sale or offer for sale of any contribution and indemnity for damages caused to the subles- pharmaceutical products requiring the services of a registered see failed because there was no indemnification clause in the pharmacist” prohibits use of the premises for a parking lot for lease. The sublessor could not sue on behalf of the sublessee a pharmacy on adjoining land. Eckerd Corp. v. Corners Group, because the sublessee had no privity and, therefore, no claim Inc., 786 So. 2d 588 (Fla.Dist.Ct.App.2000). against the landlord. Franklin Mercantile III, Inc. v. Glaser, No. An anchor tenant that breached its operating covenant is 2001-C-2101, La.Ct.App., 4th Cir., Jan. 9, 2002. liable to the shopping center owner for damages arising from Although a tenant had a right to audit its landlord’s calcu- that breach. Rouse-Randhurst Shopping Center, Inc. v. J.C. Penney lations of additional rent, reserved the right to audit and paid Co., Inc., 171 F. Supp. 2d 824, (D.C.N.D. Ill., Eastern Dist., 2001) several years’ escalation payments under protest, it was estopped from contesting the payments by the doctrine of Fees account stated because it waited too long to challenge the A landlord who did not prevail on the most significant issue charges. In re Rockefeller Center Properties, 00 Civ. 647 (LAP), at trial was not entitled to attorney fees under the fee shifting S.D.N.Y., Jan. 8, 2002. provision in the lease, even though he prevailed on other, less A free-standing tenant was responsible for its pro rata important, issues. Powers v. Rockford Stop-N-Go, Inc., No. 2-00- share of CAM charges attributable to the shopping center’s 1127, Ill.Ct.App., 2nd Dist., Nov. 28, 2001. commonly used parking areas and not the CAM charges attributable to the shopping center buildings. Kimco Realty v. Landlord & Tenant United States, 51 Fed. Cl. 257 (2001). A landlord served its tenant with a 15-day notice to cure, A tenant’s breach of the lease by using the premises in a which contained adequate notice of the alleged breaches. The way that created a nuisance and was offensive to the other tenant failed to cure or vacate and moved for a Yellowstone tenants was grounds for forcible entry and detainer. Injunction 18 days after the cure period expired. The trial Marous/Church, LLC v. Stanich, Accelerated Case No. 2000- court granted the injunction but the appellate court reversed, L-188, Ohio Ct.App., 11 App.Dist., Lake County, Dec. 7, 2001. finding there was no basis for a Yellowstone Injunction that The non-waiver provision in a lease satisfied the statutory was sought after expiration of the cure period or after service requirements for notification that acceptance of partial rent of the notice of termination. The purpose of a Yellowstone does not constitute waiver of any rights, including the land- Injunction is to determine the merits of a dispute over an lord’s right to recover possession of the property. Woodman alleged breach, and that relief is no longer available once the Partners v. Sofa U Love, 94 Cal. App. 4th 766, 114 Cal. Rptr. 2d cure period has expired. King Party Center of Pitkin Ave., Inc. v. 566, (Cal.Ct. App., 2nd App.Dist., 2001). Minco Realty, LLC., 286 A.D.2d 373; 729 N.Y.S.2d 183 (App.Div., 2nd Dept. 2001). Lenders A landlord was not entitled to escrowed funds absent Under Texas law, a lender does not have the requisite special proof regarding the claim of rent owed during the pendency relationship with a borrower to imply a duty of good faith of the suit. Marinakis v. R.E. Dietz & Co., Case No. C-00486, and fair dealing. D/FW Wheatland Investors, LP v. Lehman Ohio Ct.App., 1st App.Dist., Nov. 30, 2001. Brothers Holdings, Inc., No. 3-00-CV-2120-BD, N.D.Tex., Nov. The trial court dismissed a tenant’s action against the land- 13, 2001. lord for its alleged wrongful refusal to permit the tenant to re- enter the leased premises after the assignee’s default. The appellate court affirmed, holding that the statute of frauds Liens barred the tenant’s claim that the landlord had promised the A mechanic’s lien on fixtures attached only to the leasehold tenant it could re-enter if the assignee defaulted. Nelson Bagel fee and not to the landlord’s fee interest in the premises. Bakery Co, Inc. v. Moshcorn Realty Corp., 734 N.Y.S.2d 134 General Electric Capital Corp. v. BCI Mechanical, Inc., No. 05-98- (App.Div., 1st Dept.2001). 01832-CV, Tex.Ct.App., Dallas, Jan. 17, 2002. Shopping Center Legal Update Vol.Shopping Center Legal Update 22 Issue 1 Spring 2002 15 Notice of a materialman’s lien that had been filed more the reuse of such structures for commercial, residential or than 90 days after it had completed performance by delivering manufacturing enterprises. carpets to a hotel but before completion of the entire hotel Texas—2001 New Laws, S.B. No. 382. The Texas Economic project, was ineffective and did not perfect the lien. The hotel Development Act authorizes ad valorem tax incentives for owner’s filing of a Chapter 11 petition did not toll the 90-day economic development, including authorizing school districts period during which the materialman should have perfected to provide tax relief for certain companies that make large its lien. Furthermore, the lien was not perfected by the mate- investments that create jobs. The act authorizes imposition of rialman’s commencement of an enforcement action in state impact fees. court. In re Premier Hotel Development Group, 270 B.R. 234 (Bkrtcy.E.D. Tenn. 2001).

Options/Renewals From Canada An amended lease incorporating all “conditions” from the original lease except those pertaining to the term and rental Is Protecting a Major Retailer’s rate also incorporated the renewal options contained in the Exclusivity by Servitude Achievable original lease. Sonoma Management Co., Inc. v. Boessen, WD 59457, Mo.Ct.App., Western Dist., Jan. 2, 2002. in Quebec? Fredric L. Carsley Public Access Mendelsohn Rosentzveig Shacter A private entity, which leased an area that was considered a public forum and performed a public function, was consid- Montreal, Quebec, Canada ered a state actor subject to federal civil rights liability. Lee v. Katz, 276 F.3d 550(9th Cir., 2002). Introduction—Quebec Power Centers and Quebec Civil Law Taxation The Province of Quebec, like many other North American Work on a shopping center roof must be capitalized if it jurisdictions, has witnessed a continuing growth of what the involves a substantial portion of the roof, prolongs the life of shopping center industry has coined the “power center,” the roof and adds to the value of the property. Tsakopoulos v. agglomerating big-box type retailers—usually of the category- Commissioner of Internal Revenue, 83 T.C.M. (CCH) 1064 (U.S. killer type—that mutually synergize. A typical power center Tax Court, 2002). might find Wal-Mart and Home Depot types on the large sur- face end, Best Buy and Staples types in the middle, and ware- Tort Liability house-type fashion and home accessories in smaller stores. Many major U.S. retailers find Quebec, despite its French/ A landlord was entitled to indemnification for damages recov- English language issues, a buoyant retail market that is well ered by a laborer who was injured while working on the ten- worth exploiting. ant’s premises. Correa v. 100 West 32nd St. Realty Corp., 5882, Legally, Quebec is the only jurisdiction in Canada that fol- 736 N.Y.S.2d 334 (N.Y. App. Div., 1st Dept., 2002). lows the Civil Law, as opposed to the Common Law, princi- An out-of-possession landlord was not liable for an injury ples of property and other private law matters. Much like to a pedestrian who tripped over a cable laying across the other jurisdictions, the larger surface stores in Quebec often sidewalk in front of the leased premises. Popovskaya v. Kings choose to purchase the land required for their operations, Delights, Inc., 733 N.Y.S.2d 209, (N.Y.App.Div., 2nd Dept., rather than leasing as tenants under long-term leases. These 2001). stores are legally connected to the remainder of the develop- ment by a reciprocal servitude, which is the Civil Law equiva- Legislation lent to the Common Law easement. The reciprocal servitude Louisiana—2001 New Laws, H.B., No. 1308. The Community addresses issues typical to congruous development by con- Development District Act establishes procedures for the cre- tiguous owners, such as access, egress, parking and building ation of independent districts to manage and finance basic restrictions. The servitude often addresses use restrictions community development services. such as prohibited activities and the same type of exclusivity- type protections the retailer would insist upon if it was a ten- New York—2001 New Laws, A.B. No. 125. In cities with pop- ant with a long-term lease. ulations of one million or less, commercial and industrial The reason for the servitude is simple: The Civil Law dis- structures with truss-type construction, employing a series of tinguishes between real rights, which bind property, and per- wooden or steel members connected at their ends to form a sonal rights, which only affect those agreeing to be bound. series of triangles to span a distance greater than would be Both parties to the reciprocal servitude are seeking permanen- possible with any of the members on their own, must be cy in the arrangements. The servitude, which is a real right marked with signs or symbols to warn fire control and other that binds the land, is unaffected by ownership changes. A emergency workers of the existence of the truss construction. personal right, on the other hand, will not bind subsequent Rhode Island—2001 New Laws, H. B. No. 5547. A tax credit acquirers that do not commit to be bound to the correspon- for rehabilitation of historic structures is created to encourage ding obligation.

16 The Metro Judgment Regarding received offers to lease the former Metro premises as a food Restrictive Covenants store from Metro competitors, but none of them materialized A March 21, 2001, judgment of the Quebec Court of Appeal in because of the servitude prohibiting the food supermarket. the case of Épiciers Unis Méétro-Richelieu Inc. v. The Standard Life Assurance Company, 500-09-007731-995, has placed serious Standard Life’s Arguments Against doubt as to whether or not exclusivity-type protection can be the Validity of the Restriction validly created by means of a real servitude, or at the very Standard Life challenged the validity of the servitude, raising least a personal servitude, which will still run with the land the following arguments: and bind subsequent acquirers. This decision is troublesome • The servitude is inapplicable to Standard Life, as it was to all players involved in the power center process and has done by its borrower in fraud of the creditor’s rights; raised the seminal question: Will this cause some of the so- • The servitude was illegal, as it constituted a deterioration called “category killers” to re-examine their expansion plans of the mortgage security; in Quebec? • The servitude is contrary to public order, as it creates an unreasonable restraint in freedom of commerce; The Facts—Hard Cases Make Bad Law • The servitude is not a real servitude as contemplated by Quebec Civil Law. It is a personal obligation that is bind- The case arose from a complex fact pattern, which in the ing only upon the original party to the contract and those writer’s view supports the adage that “hard cases make bad successors in title that specifically agree to respect its law.” Metro -Richelieu (“Metro”), a Quebec-based supermar- terms. ket chain, leased a store in a shopping mall. Requiring a larger store and a new format to be more competitive in the market- The Reasoning of the Court of Appeals place, Metro advised the developer that it would not renew its The trial judge focused in on this last argument and declared existing lease any further. Metro and the developer negotiated the servitude to be illegal for those purposes. On appeal, the for a larger store in space elsewhere in the center previously Court of Appeal discussed at length the difference between a leased to Woolco, which had since vacated. Metro would take real right, which attaches to property and does not require a substantial portion of the Woolco space and the developer passing through any individual or person, and a personal would create new mall space in the remainder of the old right, which attaches to persons but does not follow the prop- Woolco store. An essential condition of Metro’s new lease was erty once it is alienated. The court concluded that the arrange- a supermarket exclusivity, to apply for as long as the super- ment did not constitute a real right that binds the land, despite market was being operated from at least 60% of the space. the fact that the documents were framed as a real servitude. Canadian Tire, an automotive hardware chain, owned and The Court of Appeal focused on the fact that the structure cre- operated a store on an outparcel adjacent to the mall. Looking ated was keyed into a Metro lease and Metro’s continuous to expand its operations, Canadian Tire made a deal with the operation as a supermarket in at least 60% of its space. It developer to relocate into the entire former Woolco space. noted that the restriction must be narrowly interpreted against Economically, this proved more attractive to the developer. the owner of the dominant land and that, despite framing the The mall was already weakened by a newer, more competitive arrangements as a real servitude, this was no more than a per- shopping center in the same trade area. With Canadian Tire sonal obligation. absorbing all of the Woolco space, the developer would nei- ther have to build nor run the leasing risk on more satellite Is the Court of Appeal Legally Correct? retail space. Critics of the judgment argue that given the unique fact pat- Consequently, the developer refused to complete its deal tern, the courts could have just as easily invalidated the servi- with Metro and signed with Canadian Tire. However, tude for at least two of the reasons discussed. Standard Life’s Canadian Tire’s deal obligated the developer to purchase the mortgage was no secret to anyone, but Standard’s consent to existing Canadian Tire property. Metro, which was squeezed the servitude was not obtained. The fact that the developer, out of the Woolco space, agreed to lease a supermarket in the acting through another entity, sought to solve its problems old Canadian Tire property, provided that the developer with Metro (and Metro settled for the consolation prize) by ensured the same exclusivity-type protection that Metro blocking another supermarket in the center may be viewed as would have enjoyed, had it remained as a tenant in the mall. a devaluation of the security, and possibly even fraud of the Metro and the developer (this time, the developer acted creditor’s rights. In fact, Standard only raised the real versus through an entity with common shareholders) agreed that the personal right argument one month before trial, seemingly owner of the center would create a real servitude burdening almost as an afterthought. Yet both the trial judge and the the center as the servient land and benefiting this former appellate court ignored all other arguments and decided sole- Canadian Tire property as the dominant land. The servitude ly on the real versus personal right issue. addressed several issues, including the exclusivity-type pro- The judges reasoned that a real right involves the land and tection. not individual activity or inactivity, a concept supported by In the meantime, Standard Life Assurance Company, the some doctrinal writers. However, if this is a correct assessment mortgagee of the center that was registered in priority to of the law, could it not be applied to other restrictions typical- everyone and everything (including this new servitude), was ly addressed by the reciprocal servitude? A no-build zone, a asked to re-negotiate the terms of its mortgage. Standard Life height restriction, a no-barriers clause—the list is endless—all refused and took possession of the center. Standard Life require human activity or inactivity. Shopping Center Legal Update Vol.Shopping Center Legal Update 22 Issue 1 Spring 2002 17 The judges reasoned that the restriction is conditional parking stalls were reserved for the exclusive use of the other upon continuous operation of the supermarket in at least 60% tenant. Flamingo Bingo Corporation v. 933351 N.W.T. Ltd. [2001] of the new Metro store, which makes this a personal as A.J. No. 1236 (Court of Queen’s Bench, Sept. 25, 2001, Lee J.), opposed to a “real” right. The circumstances were such that 2001 ABQB 795. the parties were seeking to achieve the identical protection available to Metro, had it leased a part of the former Woolco A lease permitted the tenant to operate a lounge and, as such, space. For a true power center, the irony is that the tenant- the tenant could operate video lottery terminals on the prem- major with a registered lease would be better protected than ises, as it was indisputable that video lottery terminals were the owner-major with the servitude. Surely, this cannot be commonly found in lounges. 754478 Alberta Ltd. v. 726751 what the law intends. Alberta Ltd. [2001] A.J. No. 549 (Court of Queen’s Bench, Apr. 27, 2001, Master Funduk), 2001 ABQB 342. Personal Servitude Even if this would not qualify as a real servitude, the court of The parties signed a lease proposal but failed to execute a for- appeal refused to recognize the arrangement as constituting a mal lease as was contemplated in the proposal. A binding personal servitude that would run equally with the land. It agreement had not been reached because the parties had not reasoned that personal servitudes are passive in nature on the reached agreement on all material terms: The formal lease part of the servient landowner, but that here the owner of the included additional substantial matters that were not merely center would have to exercise a role, which was not to permit incidental to the relationship of landlord and tenant. Barque a supermarket. This disqualified the arrangement as a person- Investments Ltd. v. DKT Computer Learning Centre Inc. [2001] al servitude. While the Quebec authorities are divided on the A.J. No. 1190 (Alberta Court of Queen’s Bench, Sept. 10, 2001, topic, French law, which inspires much of Quebec law, accepts Girgulis J.), 2001 ABQB 768. these restrictive covenants as being valid as personal servi- tudes. A contractor who performed work on behalf of a tenant did not have the right to register a builders’ lien against title to the What Options Are Available? landlord’s fee simple interest because the landlord was not an Metro requested and was denied leave to appeal to the “owner” under the Builders’ Lien Act. There was no evidence Supreme Court of Canada. Had leave been granted, the indicating that the contractor’s work had been performed at International Council of Shopping Centers was planning to the request of the landlord and it did not matter that most of apply for intervener status to argue the business implications the contractor’s work related to the construction of a demising of such a ruling upon the shopping center industry, evidenc- wall. Cunningham Drywall Contracting Ltd. v. Broadbase ing the importance and the degree of concern raised by this Development Corporation [2001] A.J. No. 1529 (Court of Queen’s decision. Bench, Nov. 28, 2001, Master Funduk), 2001 ABQB 1029. It is legally possible to secure the obligation of non-com- pete by way of a collateral mortgage on the developer’s prop- A letter agreement provided the tenant with two options to erty. However, this technique would likely render the devel- renew but did not state how the rent payable for each renewal oper’s property incapable of being financed and should not be term was to be determined. The only reasonable interpretation seriously considered. of the letter agreement was that it required the parties to nego- The remaining alternative would be to make an industry tiate the rent payable for each renewal. As there had been no request to the Quebec Provincial Legislature to amend the negotiations to date, the parties were directed to begin negoti- Quebec Civil Code to correct the matter. Easier said than Grosvenor Canada Limited Julie Mailly and Agora Books done, but given the problem at hand and the stakes involved, ations. v. this would be well worth the attempt. The big-box retailers [2001] A.J. No. 1195 (Court of Queen’s Bench, Sept. 13, 2001, and the developers are being contacted to determine their Bensler J.), 2001 ABQB 775. interest and comfort levels in supporting such an endeavor, and the results will be known soon. BRITISH COLUMBIA An insolvent tenant was permitted to disclaim 23 leases pur- Fredric Carsley is an active member of the ICSC Canadian suant to the Bankruptcy and Insolvency Act. The tenant could Committee, and a partner who specializes in Real Estate in the not make a viable proposal without closing all 23 stores. It was Montreal firm of Mendelsohn Rosentzveig Shacter. not necessary for the tenant to file a proposal prior to dis- claiming the leases. Re: Superstar Group of Companies [2001] Judicial/LegislativeDevelopments B.C.J. No. 611 (British Columbia Supreme Court, Mar. 28, 2001, Sigurdson J.), 2001 BCSC 447, 88 BCLR (3d) 196. Cases The purchaser of a shopping centre was denied damages after ALBERTA the vendor inadvertently failed to provide the purchaser with A tenant was granted non-exclusive use of 130 parking stalls. the back page of a lease. The page in question contained an The landlord’s only obligation was to ensure that the tenant’s amendment that reduced the number of years to which a per- patrons had the opportunity to park in 130 stalls. The landlord sonal covenant applied. The vendor was not liable, as the was free to grant exclusive parking to another tenant of the omission was inadvertent and, in any event, the pages made shopping centre and could post signs indicating that certain available to the purchaser made clear reference to the missing

18 back page such that the purchaser could have requested a NOVA SCOTIA copy. 411498 B.C. Ltd. v. Richmond Savings Credit Unit [2001] A lease included an arbitration clause which provided that the B.C.J. No. 598 (British Columbia Supreme Court, Mar. 27, arbitrator’s decision was final and binding. The arbitrator was 2001, Harvey J.), 2001 BCSC 451, 13 B.L.R. (3d) 210. not immune from judicial review if the means by which the arbitrator reached its decision were patently unreasonable. In The purchaser of two adjoining condominium units had this instance, the means were not unreasonable, but the arbi- requested that the developer not erect a dividing wall between trator had exceeded his jurisdiction by awarding damages and the two units. The developer complied with the request but applying the equitable principle of estoppel. Bolands Limited, constructed a ventilation duct where the dividing wall would Loblaws Properties Limited and the Oshawa Group Limited v. Ivan have stood. The purchaser was not entitled to rescind the Smith Holdings Limited, N.S.J. No. 469 (Nova Scotia Supreme agreement of purchase and sale because the agreement per- Court, Nov. 26, 2001, Hood J.), 2001 N.S.S.C. 171. mitted the developer to run duct work where necessary and the developer had made no misrepresentation to the contrary. ONTARIO The duct work also did not prevent the purchaser from using An agreement to lease provided the tenant with the right to the units for their intended purpose. Lam v. Ernest & Twins terminate if the landlord failed to complete its work. The Ventures (PP) Ltd. [2001] B.C.J. No. 995 (British Columbia agreement also obliged the parties to “proceed in good faith Supreme Court, May 14 2001, Lowry J.), 2001 BCSC 710, 42 and use best efforts” to satisfy the terms of the agreement. The R.P.R. (3d) 173. tenant purported to terminate the agreement, alleging several deficiencies in the landlord’s work. The tenant did not have MANITOBA the absolute right to terminate the agreement where the defi- A landlord undertook to rectify a situation where mold was ciencies in the landlord’s work were easily remediable. In found to be growing in the interior of the tenant’s premises. order to discharge its obligation to “proceed in good faith and During the repair period, a portion of the space that was use best efforts,” the tenant was required, at the very least, to leased by the tenant was unusable. The lease entitled the ten- consider its other options. 1072154 Ontario Ltd. v. Cara ant to claim (as a separate action but not by way of setoff) Operations Ltd. [2001] O.J. No. 3344 (Ontario Superior Court of both a rent abatement and its additional costs for relocation Justice, Aug. 17, 2001, Hoilett J.). and independent testing for mold, provided the tenant could show that such additional costs fell within certain landlord lia- The three principals of a corporate tenant were found liable bility exemptions set out under the lease. Marvin Investments under Section 50 of the Commercial Tenancies Act after they Ltd. v. Manitoba [2001] M.J. No. 369 (Manitoba Court of removed most of the tenant’s goods from the premises in an Appeal, Sept. 5, 2001, Scott C.J.M., Monnin and Steel JJ.A.). effort to deprive the landlord of its right to distrain. The cor- porate veil of the tenant was also pierced and the three princi- pals held personally liable for certain tenant repair costs. NEW BRUNSWICK 1072154 Ontario Ltd. v. Cara Operations Ltd. [2001] O.J. No. 3344 A tenant had no legal or equitable entitlement to renew the (Ontario Superior Court of Justice, Aug. 17, 2001, Hoilett J.). tenancy after it failed to exercise its option to renew within the time period stipulated under the lease. G.W.R. Realty Ltd. v. Fit A binding offer to lease had been entered into prior to the reg- Deck Inc. [2001] N.B.J. No. 321 (New Brunswick Court of istration of the mortgage and, as such, it had not been termi- Queen’s Bench, Sept. 17, 2001, P.S. J.). nated after the mortgagee of the property took possession and subsequently sold it by way of power of sale. 1420111 Ontario A landlord was denied an injunction restraining Bi-Way’s new Ltd. v. Paramount Pictures (Canada) Inc. [2001] O.J. No. 4461 owners from converting the business in question to a Bi-Way (Ontario Superior Court of Justice, Nov. 15, 2001, Mesbur J.). Dollar Zone store, or otherwise to a single price point, general merchandise, variety retailer. The use clause permitted Bi-Way The subtenants attempted to elect, under Section 39(2) of the to operate a dollar store because Bi-Way could sell “such other Commercial Tenancies Act, to become the direct tenant of the items as are sold from time to time in Bi-Way stores in head landlord, thereby trumping the bankruptcy trustee’s Ontario.” The use of the words “from time to time” indicated election to assign the lease. For a subtenant to make this elec- that the parties contemplated a change in marketing strategy tion, the sublease must have been originally “approved or on the part of the tenant. Tidan Inc. v. Dylex (c.o.b. Bi-Way) consented to in writing by the landlord.” The approval of the [2001] N.B.J. No. 303 (Court of Queen’s Bench, Aug. 1, 2001, head landlord did not have to be in writing but, rather, could Glennie J.). be evidenced by conduct, as it was in this case. Amir Majdpour v. M&B Acquisition Corp. [2001] O.J. No. 4932 (Ontario Court of A landlord was entitled to terminate the lease on the basis that Appeal, Nov. 26, 2001, Charron, Goudge and MacPherson the tenant’s gross sales were insufficient to pay percentage JJ.A.). rent. The lease permitted the landlord to do so, provided the tenant had not paid percentage rent for two consecutive years. A notice of renewal had been properly delivered by the ten- We 2 Inc. (c.o.b. World of Treats) v. Darlin Investments Ltd. [2001] ant, notwithstanding the fact that the tenant failed to deliver N.B.J. No. 318 (New Brunswick Court of Queen’s Bench, Aug. the notice to a “responsible employee” of the landlord as was 21, 2001, Russell J.). required under the lease. The notice was delivered to a securi- Shopping Center Legal Update Vol.Shopping Center Legal Update 22 Issue 1 Spring 2002 19 ty person who was not a direct employee of the landlord but, O.J. No. 4250 (Ontario Superior Court of Justice, Oct. 30 2001, rather, to an employee of the security firm that had been Ratushny J.). retained by the landlord. DW Squared Limited Partnership v. Oxford Properties Canada Ltd. [2001] O.J. No. 3919 (Ontario The Ontario Court of Appeal overturned the portion of a Superior Court of Justice, Oct. 9, 2001, Nordheimer J.). lower court decision, which had held that a sub-sublandlord failed to mitigate its damages properly by failing to accept the The Trustee in Bankruptcy of Dylex Limited was denied an efforts of the sub-subtenant to renegotiate the rentals during order under Section 38(2) of the Commercial Tenancies Act per- declining market conditions. The trial judge should not have mitting the assignment of several Bi-Way leases to Dollarama penalized the sub-sublandlord for its failure to re-negotiate A.M.A. Dollarama’s intended use was different from that of a with the sub-subtenant. The court of appeal affirmed the por- typical Bi-Way store. The change in use would prevent tion of the lower court’s decision, which had held that the Dollarama from abiding by the terms of the Bi-Way leases. In principal of the sub-subtenant was not liable for the tort of the Matter of the Bankruptcy of Dylex Limited, Between Richter & intentional interference with contractual relations. Unisys Partners Inc., Trustee in Bankruptcy of Dylex Limited and Canada Inc. v. York Three Associates Inc. [2001] O.J. No. 3777 Westwood Mall (Mississauga) Limited and other Parties (Ontario (Ontario Court of Appeal, Sept. 25, 2001, Osborne A.C.J.O., Superior Court of Justice, Dec. 19, 2001, Spence J.). Finlayson and Weiler JJ.A.).

The guarantor of a lease was not responsible for rent that QUEBEC remained unpaid while the tenant had been overholding. The A restriction that had been registered on title in favour of an guarantee expired at the end of the initial term because there owner of adjacent lands in respect of the use of the subject was no language in the guarantee which dealt with overhold- lands was a personal right and, therefore, not binding on a ing periods. Kar v. Chung [2001] O.J. No. 3817 (Ontario Court subsequent owner of the lands. Leave to appeal was dis- missed by the Supreme Court of Canada. Épiciers Unis Métro- of Appeal, Sept. 28, 2001, Mc Murtry C.J.O., Finlayson and Richelieu Inc. v. The Standard Life Insurance Company and Al., CA Austin JJ.A.). 500-09-007731-995. The landlord had improperly drawn upon a letter of credit in The City of Trois-Rivières was permitted to keep the purchase respect of a lease that had been disclaimed by a trustee in amount and security deposit paid by a developer in respect of bankruptcy appointed on behalf of the tenant. The disclaimer an agreement involving the purchase and development of of the lease terminated the lease and all obligations newly land. The developer had abandoned the project for economic arising under it. As such, the landlord had no right to recover reasons and not because the City had failed to perform the future rent or damages for lost rent for the balance of the term. infrastructure work stipulated under the agreement. 2429-8952 The landlord’s only claim was its entitlement to three months’ Québec Inc. v. Trois-Rivières (Ville de), 200-09-002237-987 arrears of rent and three months’ accelerated rent as set out (JE 2001-1761). under the Bankruptcy and Insolvency Act. Lava Systems Inc. (Receiver and Manager of) v. Clarica Life Insurance Co. [2001] O.J. A municipality may prohibit a particular use in its zoning by- No. 3365 (Ontario Superior Court of Justice, Aug. 21, 2001, laws provided the prohibition is based on the development Cameron J.). plan of the regional county municipality. The development plan in question did not prohibit the particular use. Entreprises A document entitled “tentative deal” was found to be a lease Louis Roy de Beauce Inc. v. St-Joseph-des-Érables (Municipalité de), for a fixed term. The statement “1st option to buy farm in 350-05-000124-006 (JE 2001-1423). total,” which was contained in the document, served to grant the tenant an option to purchase. Leroux v. McDonald [2001] A nude dancing establishment benefited from acquired rights O.J. No. 3616 (Ontario Superior Court of Justice, Sept. 6, 2001, and, as such, the operation did not contravene local zoning Cunningham J.). by-laws. St-Romuald (Ville de) v. Olivier, 2001 CSC 57 (JE 2001- 1811- SCC). The date by which the tenant was required to vacate the premises was extended because the notice of termination A tenant operated a banking branch at all times and, as such, delivered by the landlord was invalid, and the landlord acted it did not breach the continuous operating covenant in its precipitously in issuing the notice at a time when the parties lease. The tenant did, however, breach its covenant to operate were in the course of negotiations to extend the term of the the branch during the hours that had been agreed upon. lease. Nasri v. Hui [2001] O.J. No. 3292 (Ontario Superior Court Banque Nationale du Canada v. Place Bonaventure Inc., 500-09- of Justice, July 6, 2001, Eberhard J.). 006569-982 (JE 2001-1865).

A landlord successfully recovered arrears of rent for gas A landlord was not entitled to terminate the lease because the charges separately metered in respect of the tenant’s premises tenant had not abandoned or vacated the premises. Despite but in respect of which the bills had been mistakenly directed the fact that the tenant ceased its operations, the premises had by the supplier to the landlord, who paid the charges. Richcraft not been vacated because there was always an employee or Homes Ltd. v. Bases Baseball/Softball Training Facility Inc. [2001] guard present. Further, even if the premises had been vacated,

20 the landlord failed to provide the tenant with proper notice of (Saskatchewan Court of Queen’s Bench, Nov. 8 2001, Baynton the default. Complexe Futur Inc. v. M.D.S. Pharmaceutical J.), 2001 SKQB 510. Services Inc., 500-05-0655303-016 (JE 2001-1866). A lease agreement contained options for renewal as well as a provision for arbitration in the event that the rent payable for SASKATCHEWAN each renewal could not be agreed upon. The tenant exercised The Board of Revision acted within its jurisdiction when it one of its options and when rent negotiations continued past refused to list an assessment appeal for hearing due to the fact the arbitration deadline, the landlord took the position that the that the appeal notice lacked specificity. The matter was not lease was at an end. The court held that the lease was not at dismissed, however, because there were several hundred an end and the rental rate was to be submitted for arbitration. other property owners who would have also lost their right to The landlord had never intended to adhere to the strict time- appeal on the same basis. As such, the deadline for the perfec- lines set out under the lease and the landlord’s conduct indi- tion of assessment appeals was extended. Canadian Tire Corp. cated that it had acted in bad faith. The Bank of Nova Scotia v. Ltd. v. Regina (City) Board of Revision [2001] S.J. No. 666 (Court Span West Farms Ltd. [2001] S.J. No. 589 (Court of Queen’s of Queen’s Bench, Nov. 5, 2001, Kyle J.), 2001 SKQB 496. Bench, Sept. 27, 2001, D.H. Wright J.), 2001 SKQB 438.

A proposed development did not contravene the City’s The parties entered into an offer to lease, which included an Development Plan and, as such, the municipal council for the express stipulation that a formal lease agreement was to be City of Saskatoon had not exceeded its jurisdiction in enacting entered into. The offer to lease contained all the terms an amendment to the City’s zoning by-law in order to accom- required to constitute a valid lease and, as such, it was a bind- modate a proposed development. A significant amount of dis- ing contractual obligation, notwithstanding that the parties cretion had to be afforded to the council, as the City’s failed to sign a formal lease. The incomplete negotiations con- Development Plan was elastic and uncertain in scope. cerning the formal lease did not involve essential terms. 89804 MacNeill v. Saskatoon (City) [2001] S.J. No. 618 (Court of Canada Ltd. v. Schroeder (c.o.b. Shapes Body Toning and Tanning Queen’s Bench, Oct. 19, 2001, Cameron, Sherstobitoff and Salon) [2001] S.J. No. 531 (Court of Queen’s Bench, Sept. 4, Lane JJ.A.), 2001 SKCA 108. 2001, McIntyre J.), 2001 SKQB 406.

The City of Saskatoon’s council passed a resolution approving A landlord sought to relocate the tenant in order to accommo- a retail complex that was to be constructed in three phases. date a prospective anchor tenant. When the tenant declined to The City’s Development Plan stipulated that all developments move, the landlord sought to terminate the lease on the basis in the area had to comply with certain ratios governing types that the tenant’s premises were needed in connection with an of use. The council’s resolution was allowed to stand because alteration of the shopping centre. The court held that the ter- it was not patently unreasonable and there was no require- mination was improper because the landlord’s right to make ment for the use ratios to be achieved during the first phase of alterations to the shopping centre did not permit the landlord development. Further, the council had not taken into account to terminate the lease if the landlord’s sole intention was to extraneous and improper matters in passing the resolution. make alterations in order to secure a prospective tenant. Rack Eighth Street Business Association v. Saskatoon (City) [2001] S.J. Pack Investments Ltd. v. Golden Mile Shopping Centre Ltd. [2001] S.J. No. 662 (Court of Queen’s Bench, Oct. 25, 2001, Kraus J.), No. 650 (Court of Queen’s Bench, Oct. 25, 2001, Maher J.), 2001 2001 SKQB 478. SKQB 479. Legislation A grocery store operator was held not to be liable after a cus- tomer slipped and fell in a puddle of water in one of its stores. The overall policies and practices of the grocery store in MANITOBA respect of floor maintenance established that it had met the City of Winnipeg’s Smoking Regulation—By-law #7870/2001— legal standard of care imposed upon it. Stonechild v. Westfair Effective Jan. 1, 2002, it is no longer permissible to smoke in Foods Ltd. [2001] S.J. No. 679 (Court of Queen’s Bench, Oct. 18, enclosed public areas in the City of Winnipeg where individu- 2001, Ball J.), 2001 SKQB 466. als under 18 years of age are allowed to attend.

A tenant vacated its premises prior to the expiry of the term, ONTARIO and the landlord immediately leased the premises to another Bill 138—Arthur Wishart Amendment Act (Franchise Disclosure), tenant of the shopping centre. In calculating its claim for dam- 2001 (Private Member’s Bill)—The Bill expands the scope of the ages, the landlord did not deduct the rent it received from the Arthur Wishart Act (Franchise Disclosure), 2000. The Bill, replacement tenant, but, instead, included as damages the rent amongst other things, seeks to protect franchisees against non- that the replacement tenant would have paid had it remained renewal and unilateral termination of franchise agreements as in its former location. The landlord’s calculation was incorrect, well as refusals to consent to transfers of franchise agreements. as the replacement tenant had no obligation to pay the land- The Bill also includes mediation provisions and expands the lord rent with respect to its former premises given that the fair dealing requirements provided for under the Act. The pro- replacement tenant had been overholding in its former prem- posed legislation would also permit franchisees to terminate ises on a month-to-month basis. 615636 Saskatchewan Ltd. v. or rescind their franchise agreements where the disclosure Keith Pierce Insurance Financial Ltd. [2001] S.J. No. 716 documentation included misrepresentations. Shopping Center Legal Update Vol.Shopping Center Legal Update 22 Issue 1 Spring 2002 21 Bill 124—Building Code State Law Amendment Act, 2001—The 2001. The Bill provides justices of the peace and provincial Bill amends the Building Code Act, 1992 and the Planning Act. judges with the authority to issue a warrant allowing occupa- The new legislation, amongst other things, allows the building tional health and safety inspectors to use any investigative code to be enforced by new entities called “registered code technique or procedure if there are reasonable grounds to agencies” and also consolidates certain provisions relating to believe that the technique or procedure will adduce evidence the enforcement of plumbing and sewage system require- that an offence under the Occupational Health and Safety Act has ments. The proposed legislation also enables property owners been or is being committed. and municipalities to apply to the Ontario Municipal Board to resolve issues concerning whether a matter is subject to site Ontarians with Disabilities Act, 2001, S.O. 2001, c. 32 (Bill 125)— plan control. The Bill, which received Royal Assent on Dec. 14, 2001, increas- es the penalty for various offences related to the use of disabled Bill 31—Labour Relations Amendment Act, 2001 (Private parking spaces and it also replaces references to “handicap” Member’s Bill)—The Bill amends the Labour Relations Act so as with “disability” in the Human Rights Code. The Bill also to prohibit employers from replacing striking or locked-out amends the Municipal Act to allow municipalities to require, as employees with replacement workers in non-emergency situa- a condition of issuing a business license, that the business tions. premises be accessible to disabled persons.

Municipal Act, 2001, S.O. 2001, c. 25 (Bill 111)—The Bill This update was prepared by Natalie Vukovich and Joseph Grignano received Royal Assent on Dec. 12, 2001, and is to take effect on (Daoust Vukovich Baker-Sigal Banka LLP, Ontario) with the assis- Jan. 1, 2003. The Bill revises and replaces the existing tance of David E. Gillanders (Stikeman Elliott, British Columbia), Municipal Act. The new legislation gives municipalities broad- Blair C. Yorke-Slader (Bennett Jones LLP, Alberta), Murray F. Tait er authority to deliver services. The new legislation also adds (T&T Properties, Alberta), Douglas J. Mathews (Stewart McKelvey several new measures to better ensure the accountability of Stirling Scales, Nova Scotia), Stephen J. Messinger (Goodman and municipalities. Carr LLP, Ontario),Glen R. Peters (Fillmore Riley, Manitoba), Fredric L. Carsley (Mendelsohn, Rosentzveig, Shacter, Quebec), and Occupational Health and Safety Amendment Act, 2001, S.O. 2001, R. Neil MacKay (MacPherson Leslie & Tyerman, Saskatchewan). c. 26 (Bill 145)—The Bill received Royal Assent on Dec. 12,

A Tribute to E.J. (“John”) Caldecott

On March 1, 2002, E.J. “John” Caldecott, a very good friend and mentor of mine and an excellent friend and supporter of the shop- ping center industry, passed away at age 79. I had the honor of addressing the congregation at his memorial service. I first met John over 30 years ago while working for a prominent developer, James J. Cordaras, Sr., during the day and going to law school at night. John not only encouraged me in my quest, but inspired me also. I was soon to learn that even though I referred to him as my “Uncle John,” I was only one of many to whom he offered assistance, inspiration and encouragement. John graduated from UCLA in May of 1943, and was a U.S. Army Captain overseas during World War II. Upon his return, he attended the University of Southern California Law School, graduating with honors in 1948. After being admitted to the California State Bar in 1949, he began his career with Macfarlane, Schaefer & Haun; he was a partner in the firm from 1955 to 1973. John then went to work for Carter Hawley Hale Stores until July 1988 where he was Vice President, Real Estate, Legal. He again entered pri- vate practice in 1988 and became associated with Reed & Brown continuing to specialize in shopping centers and as a consultant for various developers. He also served as a board member and Chairman of the Board for Stewart Title Company. John met his wife Rosemary in 1948; within eight months thereafter they were married. They had four daughters in three years—Darcie, Laurie and twins, Connie and Kathie. John was extremely proud of his family, which now extends to sons-in-law, grandchildren and great-grandchildren. Since 1974, John was active with the Salvation Army in Los Angeles, not only as a member of many of their Advisory Councils but also as a host of Monday morning prayer groups which he held at 6:00 a.m. in his home for years. John was also proud to be a Santa Claus for children during the Christmas holidays. He was an avid golfer and a Dodger fan. John became a member of the International Council of Shopping Centers in 1963; he was a past trustee. He was a founding member and past chair of the U.S. Law Conference, where he was a frequent speaker. He chaired the Law Committee and was an active member of the Government Relations/Economic Committee and Bankruptcy Task Force. He was a founder and active board member of the California Business Properties Association. He received many honors and awards from both organizations, includ- ing the ICSC Distinguished Service Award in 1992 and the CBPA Ernest Hahn Memorial Achievement Award in 1998. John was fondly referred to as the “King of the REAs” because he was credited with creating them at a time when people really couldn’t imagine the extent of their future worth in the shopping center industry. JoAnn M. Bernhard, Sacramento, California

22 IMPORTANT NOTICE!

To: Legal Update Subscribers

From: Stephanie McEvily – Editor

Subject: Legal Update – PDF Format

Currently, a printed version of Legal Update is available to ICSC members who request delivery of the journal. Commencing with the Summer issue, Legal Update will change its delivery for- mat and be sent electronically via a PDF file.

In order to continue uninterrupted delivery of Legal Update, please provide the information requested below. If you do not have an e-mail address, please so indicate.

Member ID# (REQUIRED): Please refer to your mailing address on the following page for your Member ID#

Company Name:

Name: Fax:

Address: E-Mail:

Phone:

Please fax your responses to 212/589-5589. Shopping Center Legal Update Vol.Shopping Center Legal Update 22 Issue 1 Spring 2002 Presorted Standard Shopping Center US Postage PAID Legal Update Waldorf, MD Permit No. 144 International Council of Shopping Centers, Inc. 1221 Avenue of the Americas, 41st Floor New York, NY 10020-1099 Phone (646) 728-3800