Use Detailed Definitions in Lease's Restrictive Covenant

March 12, 2015
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If you've negotiated a restrictive covenant with the owner of space you'll be leasing, don't assume that prohibiting it from leasing to other tenants with businesses similar to yours is enough protection. If you refer to your business too broadly in your restrictive covenant, also known as a noncompete clause, it could create a loophole that would make it easy for the owner to lease to a competing business without breaching your lease.

That was the situation in a recent New York case. There, the restrictive covenant in a restaurant’s lease with a shopping center owner prohibited the owner from leasing to other “diner type” restaurants. When the owner began building out a portion of the center for a national specialty-hamburger restaurant and began negotiations with a restaurant serving soup and sandwiches, the tenant sued the owner for breaching its lease. The owner argued that the two new prospective tenants aren’t diners. Rather, they are so-called “fast casual” restaurants. The tenant asked for a judgment in its favor without a trial.

A trial court ruled in favor of the owner, noting that because the restrictive covenant failed to define “diner type” restaurant and required the parties to consult extrinsic evidence—namely, the tenant’s menu and the menus of the proposed new restaurant tenants—to determine its meaning, the lease was ambiguous on this point.

The court commented that, significantly, the word “diner” has traditionally been defined as “a small, informal, and inexpensive restaurant that looks like a railroad car.” Although the lease doesn’t explicitly define the word, it “evinces the parties’ expectation that a ‘diner type’ restaurant would be limited to a small ‘eat-in' sit-down restaurant in the diner format of both counter and table service, featuring a typical diner menu of burgers, salads, sandwiches, soups, eggs, other breakfast items, pastries, pies and non-alcoholic beverages,” the court determined.

In contrast, the menus of the prospective tenants are more “formulaic, purport to offer signature items unique to their respective chain restaurants, and are more formatted to invoke food items associated either with a 'bakery' or a 'fast casual' style restaurant,” the court concluded. This did not directly compete with the tenant’s business. The court decided that the owner hadn’t breached the lease [Spiro & Niketas Food Corp. v. MLO Great S. Bay LLC, June 2014].