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Conflicts Between Permitted Uses and Exclusivity Rights Landlords May Have to Seek Injunctions
November, 2007
By Celia Hitch
Practically speaking, problems arising from badly drafted exclusive clauses can be one of a landlord's worst nightmares. It almost always creates tension in the landlord and tenant relationship and can sometimes create tension between the affected tenants.
There are really two ways that a breach like this can happen. Either a tenant can start selling things that are not permitted by its permitted use clause and thus violate another tenant's exclusive rights covenant; or a landlord can permit a tenant to sell items or offer services that the landlord has already agreed it will not permit other tenants to sell or perform.
The first is a difficult situation for a landlord to navigate but at least a landlord can try to negotiate an agreement that will bring the tenant with the offending use into line. What makes this difficult is that the offending tenant may not care whether it is causing its landlord to breach an exclusive rights covenant and may not be willing to cooperate.
The second is also difficult because it is most likely to arise because a landlord has inadvertently given one tenant a right that violates another tenant's rights. In either case, though, the answer to the question: who owns this problem? is: the landlord.
In the first case, the landlord - not the aggrieved tenant - is the party that has a binding agreement with the offending tenant. Usually only the landlord can enforce its rights under the contract and require the offending tenant to adhere to its permitted use clause (registration of its exclusivity right may give the tenant with such right an ability to seek an injunction directly but it will usually want the landlord to pursue the matter). In the second case, the landlord created the problem and cannot shirk it, regardless of whether it intended to create this problem.
KID GLOVES FOR MINOR BREACHES
Often, a landlord does not want to annoy a tenant over use clause breaches that it considers to be minor in nature, especially if it is a successful retailer or a national retailer with whom the landlord has multiple locations. On the other hand, the landlord also does not want to further annoy the tenant with the exclusive. This is particularly sensitive when the breaches are not major.
Consider this example: A landlord enters into a lease with a toy store and gives it the exclusive right to sell toys. That landlord then enters into a lease with a coffee vendor. The coffee vendor's use clause says that it can sell coffee or tea by the cup or in bulk for consumption on or off the premises. As ancillary to such use, the coffee vendor can sell directly related products.
Few landlords would look at these two tenants' rights together and presumptively see a problem. What if the coffee tenant starts to sell mugs? Most would agree that they are ancillary to the use of selling coffee and tea so that is not a problem.
What if the tenant starts to sell mugs and packages of coffee cello-wrapped together for Christmastime? Again, there is no perceived problem. What if the coffee vendor adds little stuffed Santas and reindeer in the cello-wrapped gift packages? Once again, most of us would agree that it is probably within the meaning of the ancillary use provision.
There might not appear to be a problem until the manager of the toy store walks in to get a coffee and sees that there is a box of those stuffed Santas and reindeer right beside the cash register and anyone can just come in, buy some and leave without buying a coffee. Suddenly, there is a violation of an exclusive rights clause that was likely unforeseeable at the time the lease was signed.
SOLUTIONS
The Courts are pretty clear that, if there is an injury, damages are adequate compensation. If the landlord gives an exclusive rights covenant and there is a breach of it, then a Court will likely look to assess what the tenant's damages are and assess damages that take into consideration that amount. If the tenant can establish that it has lost $10,000 per year since the breach occurred, then a Court will give serious consideration to this amount.
More difficult is a breach that happens when the tenant is new and not fully established. However, even in a case like that, the Court has admitted evidence of what the tenant's projected profits were likely to be.
To avoid being found liable for damages, if the offending tenant refuses to cooperate a landlord may find itself in the unfortunate position of having to seek an injunction to stop the tenant from selling the offending product(s). Alternatively, it may have to consider commencing default proceedings and, if necessary, termination of the lease. In either case, litigation is likely and it is important to ensure that the landlord's efforts are coordinated with its choice of litigator so that the case is as strong as possible when the court date comes around.
Although these types of court decisions are interesting to read, there really are not as many of them as one might expect. This could be because a solution is created and implemented before the parties make it to court. Realistically, if a Court is likely to award damages anyway, there is no point in going to court, since the case should be capable of settling outside of court. The same applies to injunctive relief.
The hardest cases to assess, however, are the ones where there are no apparent damages. In the example of the coffee vendor, what are the real damages to the toy store? Likely, there are none.
Here, some creativity may need to be brought to the table - perhaps a sign location within the property, gratis for the duration of the breach; perhaps something else. In any event, a real and tangible recognition that there is a right and it has been violated is often what the tenant with no damages most desires.
MONITOR RETAIL OFFERINGS
In the end, situations like this can be avoided by ensuring that property staff in a retail environment is aware of the contents of the tenants' use clauses and trained to monitor regularly what the stores are selling. The best way to stop the incremental approach of adding new uses outside of a permitted use clause is at the beginning, not after several years of turning a blind eye.
Even though it may feel awkward to property management staff to raise this with the offending tenant, even the offending tenant can rest assured that the landlord is taking seriously its obligations to each tenant to ensure that the others abide by their leases in order to ensure that the property runs as harmoniously as possible.
Celia Hitch is counsel in the Real Estate Group with Lang Michener LLP in Toronto. Contact her directly at 416-307-4029 or chitch@langmichener.ca. This article appeared in Lang Michener's Real Estate Brief Spring 2007.
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