Do ‘Hand in Hand’ Business Services Violate Permitted Use?

May 12, 2016
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Q: The permitted-use provision in my lease for space at a strip mall allows me to operate a spa. My business provides beauty services, and recently it started offering manicures. A nail salon in the same strip mall is claiming that this violates its rights. The owner says that I have to stop offering nail services, but it’s routine for those types of services to be part of a spa’s offerings to its customers. Now, the owner is claiming that I’m violating the permitted-use provision in my lease and is threatening to sue me. Could the owner prevail?

A: Unfortunately, the owner might win this one, even though the nail services you’re offering are part of a larger package of offerings to your customers, instead of the only service you’re offering, which would make your business a competing nail salon in the center. An Arkansas gym owner found this out the hard way, when a court ruled in favor of the owner after it disagreed with the gym owner’s argument that certain sports training classes and equipment went hand in hand with its other offerings, and were not meant to compete with another gym in the area.

There, the shopping center owner sued its tenant for violating the permitted-use provision of its lease, which allowed it to operate a batting cage and hold agility classes for team sports. Specifically, the tenant had been offering strength-and-conditioning classes, fitness-training classes, dance classes, and rowing machines on the premises. (Another tenant in the mall operated a gym and its lease limited the activities of other tenants offering sports and exercise services.)

The owner sent two notices to the tenant, informing it of the violations and asking it to comply with the lease. The owner served the tenant with a termination notice, but the tenant refused to move out of the space. A trial court ruled in favor of the owner. The tenant appealed. An Arkansas appeals court upheld the trial court’s decision.

The tenant had generally denied that the activities violated the permitted-use provision of the lease. It argued that the rowing machines, fitness classes, and dance classes were necessary for “strength training,” and that speed-and-agility training “go hand in hand with strength-and-conditioning training.” Since the lease permitted speed-and-agility training, the tenant said it was within its permitted use.

The tenant also argued that it hadn’t breached the lease because the phrases “speed or agility training” and “exercise machines” were ambiguous and that any ambiguity should be construed against the owner. But the appeals court pointed out that the lease specifically barred the use of rowing machines and dance classes—two of the main services that the tenant used for strength conditioning.

It also pointed out that the tenant had had the opportunity to cure—that is, fix—the violation if it terminated the unauthorized use within five days after receipt of the notices from the owner. But the tenant didn’t remove the rowing machines from the space or cancel its classes. Thus, said the appeals court, the owner had the right to recapture the space [Wheatley v. Dixie Mall 2003, LLC, January 2016].