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Interstate Realty Co., L.L.C. v. Sears, Roebuck & Co.

2009 WL 1286209 (U.S. Dist. Ct. D. N.J. 2009) (Unpublished)

LEASES; EXCLUSIVE USE RIGHTS — When an exclusive use right grants a tenant protection for items normally sold in its brand of stores, and the tenant, as it is permitted to do, changes the name of its store and the products it sells, the protection does not extend to products sold at the new store other than to those products normally sold at the old type of store.

A shopping center owner negotiated a lease with a major retail chain. The lease had a modified version of the standard exclusive use clause that typically appeared in the retailer’s hardware store leases. With exceptions not relevant to this case, the clause prohibited other tenants from selling items normally sold in this particular retailer’s hardware stores. The examples given listed only typical hardware. Several years later, as part of a new program, the retailer converted its hardware store to an appliance and hardware store. It then began to sell appliances, including washers, dryers, refrigerators, dishwashers, ranges, ovens, sinks, and outdoor grills. Another large retailer began to negotiate a lease with the landlord. During negotiations, it was given copies of the exclusive use rights that the landlord had granted to other tenants within the shopping center, including those for the major retail chain. The landlord also wrote to the hardware/appliance retailer advising it that it was contemplating leasing space to the other retailer and that the other retailer intended to sell many of the same appliances that its existing tenant was selling.

The landlord wanted the major retailer to acknowledge that the sale of those items did not violate the lease. The property manager for the major retailer told its national vice president of hardware stores: (a) that such appliances were now “typically” sold in its hardware stores; and (b) asked if the major retailer “needed anything from this Landlord” such as an early termination or the addition of a termination right to its existing lease. She also wrote to her company’s manager of operations asking if a majority of hardware stores in New Jersey sold appliances. The manager of operations replied “yes.” Based on this information, the property manager wrote to the landlord advising it that the major retailer would treat the potential lease to the other retailer as a violation of the exclusive use clause in its own lease. Counsel for the major retailer told counsel for the landlord that the major retailer would consider the matter resolved if the second retailer would agree to limit the conflicting display of appliances to a 1,000 square foot area. The discussion of what appliances were in conflict with the exclusive use clause centered around price points rather than specific appliances since the major retailer did not consider high-end appliances to be in competition with the products that it sold.

The landlord’s attorney did not relay this information to the other retailer, nor did he relay to the major retailer the suggestion made by the other retailer that it would limit its restriction on the sale of “ancillary items” that might overlap with those items normally sold in the major retailer’s “hardware store” to no more than 1,000 square feet of floor area. Instead, the landlord’s attorney responded to the major retailer’s letter by stating that it viewed the exclusive use clause in the major retailer’s lease as being limited to items normally sold in the major retailer’s hardware store at the time it signed the lease and that the tenant was no longer operating a hardware store and could not alter or expand the exclusive use provision. He also reported that the other retailer refused to enter into a lease with the landlord solely because the major retailer failed to acknowledge that its exclusive use clause did not apply to the other retailer’s appliances and because of the major retailer’s threats of bringing legal action if such a lease was executed.

The other retailer attempted to convince the landlord to sign an “addendum” to its proposed lease which would shift all of the risk and cost of any threatened action by the major retailer to the landlord. When the landlord refused to agree to such an addendum, the other retailer withdrew from negotiations and signed a lease elsewhere. The landlord sued the major retailer in federal court alleging breach of contract, tortious interference with prospective economic advantage, and tortious interference with contractual rights. It also sought a declaratory ruling in its favor with respect to the exclusive rights clause.

The United States District Court held that neither party was correct in its interpretation of the exclusive use clause. It held that the plain meaning of the provision was inbetween the two extremes advocated by the parties. The Court noted, as the major retailer contended, the term “normally sold in (the major retailer’s) ‘Hardware Stores’” could not be read to be limited only to items sold at the shopping center location but was intended to include all of the retailer’s stores. The Court believed that if the parties intended to limit the term’s definition to include only the items sold at that particular location, they would have added such a limitation. It also ruled that the major retailer was correct in that the exclusive use clause did not identify a specific time-period during which the “products normally sold in its hardware store” were to be sold. Again, the Court believed that if the parties intended to provide for such a limitation they would have done so. On the other hand, the Court held that the major retailer was incorrect to contend that the exclusive use clause could be expanded to encompass whatever the major retailer was selling at that particular location. It found that the lease granted exclusivity to sell what was normally sold, company-wide, at the major retailer’s hardware stores, not just to what was normally sold in the hardware store at that particular location. It opined that the parties intended to limit the exclusive rights afforded to the major retailer to those products normally sold in all of the major retailer’s “hardware stores.” It noted that the major retailer could not unilaterally change the exclusive rights provision contained in the lease by changing the name of its store or the products that it sold at the shopping center. Therefore, the Court granted the landlord’s request for a declaratory judgment that the major retailer did not have the exclusive right to sell appliances at the shopping center.

Nevertheless, the Court held that while the major retailer’s interpretation of its rights under the lease may have been incorrect, it was not so unreasonable as to be malicious and “violate the rules of the game.” Holding that a malicious act is one of the elements of tortious interference of economic advantage, the Court dismissed this claim against the major retailer. In this regard, the Court added that the lease did not state how the exclusive use clause would be affected if the major retailer changed the name of its hardware store to something else. Further, the Court held that the major retailer’s actions upon receiving the landlord’s letter requesting consent to the other retailer’s transaction did not indicate malice. The Court took note of the major retailer’s willingness to discuss the matter with the landlord as further evidence that the major retailer was not acting with malice. As to the claim that the major retailer tortiously interfered with contractual rights, the Court held that the only difference between this type of claim and a claim for tortious interference with prospective economic advantage is that a claim for the former involves an actual contract while a claim for the latter involves a prospective contract. It found that it was essential to both claims that there be a finding of malicious conduct, which was not the case here. Therefore, it dismissed the landlord’s claim of tortious interference of contract.

Similarly, the Court held that proof of bad motive or intention is essential to a cause of action for breach of the covenant of good faith and fair dealing. In the instant case, the Court believed that just as the major retailer did not act with the required “malice” for tortious interference with prospective economic advantage, there was no evidence that the major retailer had the bad motive or intention required for a breach of the covenant of good faith and fair dealing.

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