Use of the Premises – Part 1

PART 1

 

“This excerpt is reproduced from Shopping Centre Leases, Second Edition,

Editor-in-Chief Harvey M. Haber, Q.C. (978-0-88804-447-8),

with the permission of Canada Law Book, a division of

Thomson Reuters Canada Limited.”

Use of the Premises[*]

Harvey M. Haber, Q.C. LSM****

I cannot stress enough how important the use of the premises is to both the landlord and the tenant. The tenant wants to sell the broadest possible scope of merchandise which is now or will (in the tenant's opinion) in the future be in vogue, in order to carry on its business. The landlord, however, wants the use clause specifically limited, not only to avoid any overlap of uses among the tenants in its shopping centre, but also to avoid breaching any restrictive covenant (i.e., a covenant in a lease given by a landlord to a tenant whereby that tenant, and no other tenant, has the exclusive right to sell a specific item or items in the shopping centre) given to any other tenant, and, as well, because the use clause will also govern the use of the premises in the event of an assignment of the lease or a sublease of the premises (unless both the landlord and the tenant mutually agree to a change in the use clause), which, of course, is important in the event the tenant wishes to sell the business.

In today's changing times, there is difficulty first in determining what the store is and, second, attempting to define what it sells. For example, today's drug stores, in many instances, are becoming large variety stores with a pharmacy; variety stores are becoming junior department stores; junior department stores are becoming department stores; and supermarkets are becoming combination food and general merchandise stores. As well, the concept of "hybrid retailing" has emerged, where a tenant sells in its premises goods that are entirely unrelated to one another (such as food and clothing) which make it that much more difficult for a landlord to preserve its "tenant-mix" in the centre. Then, of course, there is the "warehouse outlet" which sells everything imaginable at very competitive prices through large volume purchasing. The tough economic times we have been in have also created a niche for inexpensive items that are super discounted, often referred to as "dollar stores", and many landlords are now eager to take them into their shopping centres.

What immediately follows are a number of different types of use clauses with a view to indicating some of the problems inherent in drafting them. Of course, each use clause should be dealt with on its own specific merits. The headings have been set out in alphabetical order for ease of reference.

Clothing

Specify the items to be sold, distinguishing between men's, women's, boys', girls', infants' and unisex apparel. Be aware that the word "clothing" is a more specific term than "apparel". Will the clothing be ready-to-wear, tailored to measure or both? If accessories are to be sold, specify them where possible and determine whether certain accessories which might be included by way of implication, such as hats or footwear, are intended to be included. If they are not, exclude them.

Let's take as an example a use clause which provides that the premises are to be used only for "the sale of women's wearing apparel and accessories". The tenant starts to sell women's shoes and the landlord objects. It has enough women's shoe stores in the centre. The tenant says women's shores are an "accessory", which may lead to a lawsuit in which the tenant may be successful, as the term "accessory" is not defined in the lease. If the landlord has specified that the tenant could not sell women's shoes, that would have settled the matter.

What happens if that same store selling women's wearing apparel starts selling men's clothing? Is that a breach of the lease? Interestingly enough, one U.S. court held that the term "ladies apparel" is subject to two interpretations, namely: (a) clothing manufactured exclusively for women; and (b) clothing that may be worn by women, although not expressly manufactured for them. The court picked the second wider interpretation which meant the women's wear tenant could sell men's clothing for wear by women (such as pants, jackets and shirts).1

What a landlord should do in such a situation is restrict the use clause to the "sale of clothing manufactured exclusively for women" and specifically prohibit the sale of unisex and men's clothing. A tenant, on the other hand, should attempt to leave the wording as "women's apparel", or "feminine apparel", or as indicated above, "ladies apparel", thereby giving it as broad a scope as possible.

Sometimes the area for ancillary items is limited by the landlord, such as in the following example:

. . . the sale, at retail, of the following men's items --- shirts, ties, sweaters, ready-to-wear jackets and trousers, and, as ancillary to such principal use, the sale, at retail, of men's cufflinks, tie tacks and tie bars in not more than    square feet of the Premises [or, as an alternative, in not more than ten percent (10%) (by square foot area, cubic foot volume, number and prominence of displays in the Premises)].

The tenant should ensure that the limitation is not so confining that it cannot operate its business efficiently. If the store intends to sell unisex clothing, that is, garments that may be worn by both sexes, a tenant should also look for a clause which permits it to sell clothing to either sex, not necessarily both. A landlord, however, will probably insist on a clause that the store appear at all times in the eyes of the public to be that of a unisex store, that is, for both men and women.

Department Store

What is a "department store"? One definition is a "large retail establishment offering a wide variety of merchandise and services, and organized into departments according to the kind of goods sold".

Most department store leases simply assume this definition and the only alternative appears to be to designate whether it is a "conventional first class, first line department store in the manner in which the tenant's other department stores are now operated" or whether it is a "low margin self-service convenience department store".

It will be appreciated that the difficulty with such a use clause is that there is no limitation whatsoever on the items which may be sold by such a tenant from time-to-time. A prudent landlord will ensure that, if it gives a restrictive covenant to any other tenant in the centre, the covenant should expressly exclude its application to the department store. The same problem arises for a landlord with respect to what the industry calls "warehouse outlets" or "big box stores", which, in essence, sell everything they can. See also my comment under the heading "Junior Department Store".

Dollar Store

What is a "dollar store"? Does it really sell all its items for $1 or less? Not really. That used to be the case, but, generally, items in a dollar store today range from less than $1 to $5 to $10, or even more. There is a great difficulty for a landlord in defining the items intended to be sold in a dollar store, as they could vary from day-to-day. With such a variety, the landlord should ensure that, if it has given a restrictive covenant to any other tenant in the development, the covenant should exclude any application to the dollar store. A landlord may also want to limit the items sold by the tenant in the store. A tenant, however, will want to sell as broad a scope of items as possible.

Drug Store

Consider:

. . . the sale, at retail, of drugs (through a dispensary utilizing a fully qualified pharmacist or pharmacists), and, as ancillary thereto, the sale, at retail, of such other items as are sold in the majority of Tenant's other drug stores carrying on business as of the date of this Lease, and such "further items" as are sold in a majority of Tenant's other drug stores from time-to-time, as long as the sale of such "further items" does not result in a breach of any covenant by which Landlord is or may in the future be bound from time-to-time to other tenants or others in the Centre.

A tenant will want to negotiate the words "as long as the sale of such `further items' does not result in a breach of any covenant or covenants by which Landlord is or may in the future be bound from time-to-time to other tenants or others in the Centre", in light of the fact that the landlord may give a restrictive covenant some time in the future on an item which the tenant is now selling. Accordingly, the tenant may request that the following provision be added:

. . . provided that no restrictive covenant granted by Landlord in the future to other tenants or occupants in the Centre shall prevent Tenant from selling any of such "further items" to the extent that they are being sold by Tenant at the time of the granting of such restrictive covenant.

A prudent landlord will ensure that, if it gives a restrictive covenant to any other tenant in the centre, then the covenant should expressly exclude its application to the drug store.

Financial Institution

A landlord should avoid the phrase "financial institution" as it is too broad. The parties should set out the kind of institution that is intended to be operated on the premises. Is it to be a branch of a chartered bank, a trust company, a savings office, a credit union, a caisse populaire, a mutual fund, real estate, investment, trust or life insurance company? Specify whether it is intended to accept funds on deposit from the public.

Some tenants insist on a restrictive covenant prohibiting the landlord from permitting another financial institution in the centre which accepts deposits from the public. A landlord should attempt to avoid such a clause. If it cannot, the clause should be revised so as to set out the party's actual intent. Does it really mean that there will be no other bank, or no other trust company, or one of the other examples indicated above? Or does it intend to catch all the examples (which is extremely unlikely)? Does it consider that some of the examples might be office tenants, not on the mall but on the second or lower level? Does it intend to catch a real estate department of an organization (such as a bank or trust company), which in its normal course of business accepts deposits (on offers) from the public? What about a potential conflict with automated teller machines in supermarkets or convenience stores?

Snack Bar

In so far as snack bars are concerned, consider the following example:

. . . as a stand-up fast food service, with no stools or other seating facilities, limited to the sale, at retail, of [here insert the type and style of food to be sold, such as Hungarian, Italian, French --- in this example I will use "Hungarian"] Hungarian and Hungarian-style food, and, as ancillary to such principal use, the sale, at retail, or fried chicken, fresh fish, french fried potatoes and individually dispensed drinks of tea, coffee, milk and soft drinks. All of the foregoing items are to be prepared and sold for immediate consumption off the Premises. The business to be conducted on the Premises shall at all times be and appear to be specializing in and serving exclusively or primarily Hungarian and Hungarian-style food. [The landlord must ensure that the following wording appears in order to avoid any breach of a restrictive covenant given by the landlord to any other tenant in the centre]. Tenant covenants and agrees that it will not cause, suffer or permit within any part of the Premises, the sale of [list all items which should not be sold in order to avoid any ambiguity].

Gift Shop

Use clauses are frequently found permitting the sale of "giftware". What does the term "giftware" mean? If a landlord has given any restrictive covenants to other tenants in the centre, is the landlord aware of the potential breach of any restrictive covenants by giving such a use clause?

Some tenants request the sale of "gifts such as are sold by Tenant in the majority of its stores in the Province of Ontario". If the landlord agrees to such a clause, it should be limited to those items sold by the tenant in such stores as at the date of the Offer to Lease or the date of the lease or even the date of the commencement of the term.

Consider the following clause:

. . . as a gift shop of the sale, at retail, of [list the items], and a variety of such items commonly known as giftware; provided that the sale of such giftware does not result in a breach of any covenant or covenants by which Landlord is or may in the future be bound from time-to-time to other tenants or others in the Centre. Tenant covenants that at all times throughout the Term the business to be operated on the Premises shall be and appear to be that of a store specializing in the sale of a wide variety of giftware. Tenant covenants and agrees that it will not permit within any part of the Premises the sale of [list any specific items to be excluded].

Note that the second sentence specifies that, at all times throughout the term, the business to be operated on the premises shall appear to be that of a store specializing in the sale of a wide variety of giftware. The purpose of such a sentence is that in the event the types of items are ever litigated, a judge can at least consider that the intent of the parties was that this was not to be a store specializing in specific gift items.

The tenant should also consider the addition of the proviso with regard to restrictive covenants set out under "Drug Store".

Junior Department Store

The difficulty with the phrase "junior department store" is to define it. Some have said that such a store sells all the items sold by a department store except for hard goods such as stoves, refrigerators and such other large items. If a landlord is obliged to give such a use clause, then it should be aware that if any restrictive covenant is given to any other tenant in the centre, the covenant should expressly exclude any application to a junior department store.

[*] Adapted and revised from The Commercial Lease ö A Practical Guide, 4th ed. (Aurora, Canada Law Book Inc., 2004).

** Of Goldman Sloan Nash & Haber LLP.

See Convert-A-Bed Inc. v. Salem, 360 So.2d 605 (La.App. 1978).