Exclusivity Provision in Lease Permits Landlord to Rent to ‘McD’s’ In NJ Shopping Mall (Much to ‘Sbux’s’ Chagrin)

Exclusivity provisions are staples of some commercial leases, particularly in the shopping mall setting.

The purpose of these so-called “exclusives” is to protect a tenant from a competing business renting in the same shopping center and potentially undercutting the tenant’s pricing. The larger the tenant (think “anchor” tenant) in terms of resources, the more leverage it has in insisting on an exclusivity term.

Delco, LLC v. Starbucks (see https://casetext.com/case/delco-llc-v-starbucks-corp) pits a New Jersey commercial landlord suing the coffee giant for a court declaration that the landlord’s renting to McDonald’s in the same shopping center did not violate an exclusive in Starbucks’ lease that prohibited plaintiff from leasing space to any tenant (other than Starbucks) who would sell “coffee, espresso and tea drinks.”  The one qualification to the exclusive was that the landlord could rent to “any tenant [who occupies] twenty thousand contiguous square feet or more…and operating under a single trade name.”

The appeals court affirmed the trial court’s finding that the landlord could lease 40,000 square feet to McDonald’s (which sells coffee) without violating the Starbucks lease exclusive.

Applying the plain language of the exclusivity term under basic New Jersey contract interpretation rules, the court found that McDonald’s easily qualified as a tenant who is “operating under a single trade name.”  And since the McDonald’s lease encompassed over 20,000 square feet, the McDonald’s lease qualified for the exclusivity exception.

Afterwords:

It’s not clear from the short opinion why Starbucks put up such a fight on what seems like an obvious exception to the exclusivity term. So vigorous were Starbucks litigation efforts here, that the plaintiff was awarded over $113K in lawyer fees litigating whether the McDonald’s lease ran afoul of the exclusive term in the Starbucks’ lease.

The appeals court reversed the fee award though since the trial judge didn’t delineate its specific findings that support its fee award. The case will now go back to the NJ trial court for further litigation of the plaintiff-landlord’s attorneys’ fees.

Breach of Lease Doesn’t Negate Earlier Exercise of Option to Purchase Property – Illinois Court

A dispute over the purchase price of a veterinary practice boiled over into multi-year litigation after the plaintiff in Ruffolo v. Jordan, 2015 IL App (1st) 140969 leased the defendant’s practice under a multi-year lease with an option to buy.

The plaintiff exercised the purchase option in August 2005 and paid rent for 18 months until finally stopping in March 2007 when it became clear the parties wouldn’t resolve the purchase price issue.

The plaintiff sued for specific performance and the trial court granted summary judgment for her, ordering defendant to sell the property for $525,000 – a figure midway between the parties’ respective appraisals. Defendant appealed.

Affirming summary judgment, the First District examined the interplay between parties rights and duties under a lease that contains an option to purchase the property.

The lease gave plaintiff an option to buy the property at a price to be determined by the parties’ handpicked appraiser. Eventually, the parties’ appraisers selected a third party to appraise the property.  When the defendant refused to sell at the third-party appraiser’s $525,000 figure, plaintiff sued to enforce the purchase option.

In Illinois, the goal of contract interpretation is the intent of the parties and a contract must be interpreted as a whole and ascribed its terms’ plain and ordinary meaning. ¶ 10

A party is entitled to specific performance of a contract for real estate where it establishes that it was ready, willing and able to perform under a contract but was prevented from doing so by the other party.

When a lease contains an option to purchase, it becomes a present contract for the sale of the property. Once the option holder exercise the option, the relationship of landlord-tenant morphs into one of vendor-vendee (seller-buyer).  A contract for the sale of land cannot be enforced until all essential terms are established, including sale price. (¶ 14).

Here, the parties’ landlord-tenant relationship didn’t end until the sale price was mutually agreed upon. As a result, the parties’ had a concurrent landlord-tenant relationship vis a vis the lease and a vendor-vendee one concerning the purchase option.

In finding for the plaintiff, the court rejected seller defendant’s argument that plaintiff breached the lease by not paying rent for several months. Defendant claimed that the plaintiffs’ failure to pay rent from March – October 2007 nullified the purchase option exercised by plaintiffs in August 2005.

The court held that since the plaintiff was in compliance with the lease when she exercised the option (August 2005), she could enforce the purchase contract.  The court explained that once the plaintiffs’ right to purchase the property vested, her corresponding right to buy the property no longer depended on her adhering to the lease terms. The lease became severable (separate) from the purchase option once plaintiff exercised the option. (¶¶ 19-20).

The one consolation for the defendant was that the court found it was entitled to a credit of seven months of unpaid rent towards the purchase price.  This figure will be calculated on remand.

Take-aways:

1/ A lease with an option to buy creates two distinct agreements once the option is exercised;

2/ The timely exercise of an option can’t be negated by a later lease breach;

3/ A definite price term in a real estate contract is a necessary precondition for a successful specific performance suit.

 

Commercial Landlord’s Suit for Rent Damages Accruing After Possession Order Survives Tenant’s Res Judicata Defense

18th Street Property, LLC v. A-1 Citywide Towing & Recovery, Inc., 2015 IL App (1st) 142444-U examines the res judicata and collateral estoppel doctrines in a commercial lease dispute.

The plaintiff landlord obtained a possession order and judgment in late 2012 on a towing shop lease that expired March 31, 2013. 

About six months after the possession order, the lessor sued to recover rental damages through the lease’s March 2013 end date.  The defendant moved to dismiss on the basis of res judicata and collateral estoppel arguing that the landlord’s damage claim could have and should have been brought in the earlier eviction suit.  The trial court agreed, dismissed the suit and the lessor plaintiff appealed.

Held: Reversed.

Q: Why?

A:  Res judicata (claim preclusion) and collateral estoppel (issue preclusion) seek to foster finality and closure by requiring all claims to be brought in the same proceeding instead of filing scattered claims at different times.

Res judicata applies where there is a final judgment on the merits, the same parties are involved in the first and second case, and the same causes of action are involved in the cases.  

Res judicata bars the (later) litigation of claims that could have brought in an earlier case while collateral estoppel prevents a party from relitigating an issue of law or fact that was actually decided in an earlier case.  (¶¶ 20-21, 30)

In Illinois, a commercial landlord’s claim for past-due rent and for future rent on an abandoned lease are different claims under the res judicata test.

This is because the payment of future rent is not a present tenant obligation and a tenant’s breach of lease usually will not accelerate rent (i.e. require the tenant to immediately pay the remaining payments under the lease) unless the lease has a clear acceleration clause.  Each month of unpaid rent gives rise to fresh claims for purposes of res judicata.

The landlord’s remedy where a tenant breaches a lease is to (a) sue for rents as they become due, (b) sue for several accrued monthly installments in one suit, or (c) sue for the entire amount at the end of the lease.

The commercial lease here gave the landlord a wide range of remedies for the tenant’s breach including acceleration of rental payments. 

The tenant defendant argued that since the lessor failed to try to recover future rent payments in the earlier eviction case, it was barred from doing so in the second lawsuit.  The landlord claimed the opposite: that its claims for damages accruing after the possession order were separate and not barred by res judicata or collateral estoppel.

The court held that res judicata did not bar the lessor’s post-possession order damage suit.  It noted that while the lease contained an optional acceleration clause, it was one of many remedies the landlord had if the tenant breached.  The lease did not require the landlord to accelerate rents upon the tenant’s breach. 

The court also noted that the lease required the landlord to notify the tenant in writing if it (the landlord) was going to terminate the lease.  Since terminating the lease was a prerequisite to acceleration, the Court needed more evidence as to whether the lessor terminated the lease.  Without any termination proof, the trial court should not have dismissed the landlord’s suit.

Afterwords:

1/ If a lease does not contain an acceleration clause, a landlord can likely file a damages action after an earlier eviction case without risking a res judicata or collateral estoppel defense.

2/ If a lease contains mandatory acceleration language, the landlord likely must sue for all future damages coming due under the lease or else risk having its damages cut off on the possession order date.