Drawing the Line: Crafting Clear, Enforceable Exclusives in Commercial Leases

Last month, in KRG Bayonne Urban Renewal, LLC v. Wal-Mart Stores East, LP, the Superior Court of New Jersey, Appellate Division, reminded commercial landlords and tenants that when it comes to restrictive covenants, “plain meaning” reigns supreme.

Background:

In October of 2009, Walmart executed a lease for approximately 90,000 square feet at Cameron Bayonne Urban Renewal’s Bayonne Crossing Shopping Center. Included in the lease was an Exclusive Covenant that prohibited the landlord from leasing other space in the center to any tenant whose principal use was a “supermarket (selling food in more than 10,000 square feet of Floor Area)…” which, on first reading, seems pretty clear.

Over a decade later, Walmart’s new landlord, KRG Bayonne Urban Renewal, LLC, who acquired ownership of Walmart’s previous landlord, leased roughly 19,591 square feet of space in the shopping center to a new supermarket, Aldi. To circumvent the Walmart exclusive covenant, the Aldi lease attempted to partition the space, arguing the “total food sales area” was only 9,999 square feet (one foot less than what was prohibited), with the rest of the space, which was comprised of the center aisle with all displays on both sides facing it, designated as “Aldi Finds non-food” area.

Disposition:

After Walmart objected to the Aldi lease, and months before same was amended, KRG filed a Chancery Division complaint seeking declaratory judgment that the exclusivity provision’s restriction on other tenants was “to be measured based on the square footage of the area in which food products are made available for purchase.” While the trial court agreed with KRG, the Appellate Division reversed, holding that “Floor Area” as defined in the lease and governing declaration for the shopping center includes storerooms and other areas of the premises not accessible to customers. As Aldi’s total footprint exceeded the limit, their lease violated Walmart’s exclusivity rights.

Why This Matters:

This case highlights several reasons why drafting detailed limitations is vital for commercial leases.

• Without a specific definition of how a restricted area is measured, parties may try to find creative workarounds. In this case, landlord tried to exclude “non-food” areas like center aisles or storage areas to fit a large-scale supermarket within a small-format restriction. To solve this issue, parties should clearly define whether a square footage limitation applies to the entire leasehold premises, a selling area, or even specific product displays.
• Courts continue to be unwilling to rewrite contracts. In this case, the Appellate Division refused to look at extrinsic evidence (like the intent of the parties during negotiations) because the contract unambiguously defined “Floor Area”. If you want to exclude certain items from a restriction or other such mechanism in a lease, you should explicitly list those exclusions where the term is defined in the lease.
• Exclusivity provisions are “reasonable protections” for a given tenant’s business. If limitations are vague, a landlord might devalue a tenant’s lease by bringing in a direct competitor. To prevent confusion over exclusivity provisions or principal use clauses, one should use industry standard definitions.

Here To Help:

To protect your interests, it is important to ensure that your lease defines not just what is restricted but also exactly where and how that restriction is measured. If you are a landlord or tenant and need help negotiating your commercial lease, Stark & Stark’s Commercial Real Estate Transactions group can assist you.