May 17, 2004

Use Restriction Unenforceable Beyond Shopping Center?

Holland & Knight Newsletter

A restriction in a recorded memorandum of lease prohibiting a landlord from allowing another supermarket within five miles of the shopping center may be unenforceable by the tenant against successors of the landlord.

In Wal-Mart Stores, Inc. vs. Ingles Markets, Inc., 158 N.C. App. 414, 581 S.E.2d 111 (N.C. App. Jun. 17, 2003) (No. COA02-896), the Court of Appeals of North Carolina held such a restriction to be only a “personal covenant” of the landlord, rather than a covenant running with the land. Accordingly, a successor of the landlord acquiring a part of the shopping center was not bound by the restriction to the extent it related to land located outside the shopping center.

In 1987, Ingles leased space for operation of a grocery store from Horne Properties at the Stanley County Shopping Center in Albemarle, North Carolina. The parties recorded a memorandum of lease which stated that the landlord would not rent any property within five miles of the shopping center for a supermarket.

In 1991, Wal-Mart purchased a portion of the shopping center from the landlord. Ten years passed, and then Wal-Mart decided to build a new “supercenter” on land which was not part of the shopping center, but was within five miles of the shopping center. Wal-Mart asked Ingles to acknowledge that the restrictive covenant did not apply to the new supercenter. When it failed to do so, Wal-Mart filed an action for declaratory relief. The trial court entered summary judgment in favor of Wal-Mart and Ingles appealed.

The issue on appeal was whether the memorandum of lease prohibited Wal-Mart from operating a supercenter on land within five miles of the shopping center. The court acknowledged that radius restrictions protecting tenants are an accepted commercial practice that serve a legitimate business purpose. Restrictive covenants against unwanted competition may be consistent with public interests and, to be meaningful, must prevent a landlord from evading its provisions.

It then examined the nature of the landlord’s covenants in the memorandum of lease. A critical distinction was drawn between real and personal covenants. Real covenants create servitudes on the land that are enforceable against successor owners of the land. Personal covenants create rights and obligations that are enforceable by, and obligate only, the original parties.

The court concluded that the supermarket restriction in the memorandum of lease created only “personal covenants of the landlord,” including the covenant not to allow a grocery store on any land acquired by the original landlord within five miles of the shopping center. Since it was not considered a covenant running with the land, it was not enforceable against successors of the original landlord as to property located outside the shopping center.

This holding applies only in North Carolina, but may be adopted in the future by courts in other states. The reported opinion for this case does not indicate that there was an effective remedy available to Ingles to enforce compliance with the prohibition on supermarkets within five miles of the shopping center. Tenants may protect themselves by including special remedies in their leases. Per diem liquidated damages – with the unilateral right on the part of a tenant to offset against base rent, percentage rent and other sums becoming due under the lease – could discourage violations of such restrictive covenants and provide the tenant a self-help remedy of economic value, even if the violation cannot be prevented.

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