Avoiding Liability When One Tenant Violates Another's Exclusive

Q: Two tenants at the shopping center I own are currently in a dispute about who has the right to sell a certain product. A toy store tenant signed a lease with an exclusive use clause that gives it the right to be the only tenant in the center that sells toys. A variety store signed a lease that allows it to sell various items for entertainment. It was made aware at the time of the lease signing that the toy store had an exclusive right to sell toys, and it signed the lease nonetheless. However, several months later the variety store wanted to sell toys. It approached me about asking the toy store tenant to waive its exclusive, allowing both stores to carry toys. The toy store informed me that it would not waive its right and it renewed its lease with the same exclusive use clause. The variety store subsequently began selling toys. Now the toy store is asking a court for an injunction—that is, a court order prohibiting the variety store from selling toys. Which tenant is likely to prevail, and will I be on the hook for the dispute because I asked the toy store to waive its right?

A: You probably won't be blamed for the variety store’s decision to violate the exclusive for two reasons: (1) you made the variety store aware of the fact that the exclusive existed prior to signing its lease; and (2) it was a unilateral decision for the variety store to sell toys even after you informed it that the right wouldn’t be waived. Merely asking the toy store to waive its right doesn’t put you in jeopardy. 

A case decided in Pennsylvania dealt with this issue—and involved a waiver request from the landlord—sheds some light on the likelihood of such a tenant being granted an injunction. There, a pharmacy sought an injunction to prevent a grocery store from opening a pharmacy department in the shopping center in which both parties leased storefronts.

The pharmacy signed a lease with exclusive rights to operate a pharmacy in the shopping center. The grocery store was made aware of the restrictive covenant when it signed a lease. Upon its expiration, the pharmacy signed a new lease with substantially the same terms. At the request of the grocery store, the landlord’s agent requested that the pharmacy waive its exclusive rights, and it refused. It appeared that the grocery store’s decision to open a pharmacy department was a unilateral one.

The court examined the restrictive use covenants in the commercial leases and determined that the exclusive business clauses used by both parties were clearly expressed, explicit, and not overly broad. The court granted a “preliminary” injunction because it found that: (1) there was a strong likelihood of success on the pharmacy’s request for a final injunction; (2) the pharmacy was being irreparably harmed by the grocery store’s disregard of its exclusive rights; (3) the grocery store would suffer relatively minor and self-inflicted harm from an injunction; and (4) public interest would not be harmed by the cessation of the grocery store’s pharmacy department business. The court directed the grocery store to cease operations of its pharmacy department at the shopping center.

The court noted that when a tenant of the landlord at a shopping center knowingly violates an exclusive use provision in another tenant’s lease, and knows that the holder of the exclusive refuses to relinquish its rights voluntarily, the subsequent tenant’s wounds “are self-inflicted, and will not garner much judicial sympathy.”

It continued that, “any harm that might accrue to [the grocery store] by the granting of the preliminary injunction, being self-inflicted and in disregard of the [pharmacy’s] persistent refusal to waive its exclusive pharmacy rights, does not approach the harm that would befall the [pharmacy] if the preliminary injunction is withheld [J.C. Penney Co. v. Giant Eagle, Inc., February 2018].