Wednesday, January 7, 2015

Did You Say What You Mean? Did You Mean What You Said? (Part One)

Jeff Carpenter owned a 15-acre parcel of raw land in Charlotte, North Carolina. In 2006 Jeff transferred two acres to an entity he controlled, Pavilion, and Pavilion leased the two acres to CVS Pharmacy. Jeff agreed to place a restriction in the CVS Lease on the future use of Jeff’s remaining tract, to entice CVS to sign the Lease by granting CVS an exclusive pharmacy use.

Pavilion sold the CVS tract in 2008 to Sonny Boy. At that time Jeff implemented the exclusive restriction on the remainder of the 15-acre tract with a restrictive covenant, as Jeff and CVS previously agreed two years prior. The balance of Jeff’s larger tract had not yet been developed.

The recorded covenant essentially stated that during the term of the CVS Lease, no portion of the balance of the 15-acre parcel could be leased or used as a drug store or pharmacy.

In 2012 Jeff contracted to sell the restricted remainder parcel to Charlotte Pavilion Road Retail Investment, LLC and WLA Enterprises, Inc. Charlotte Pavilion and WLA simultaneously contracted to purchase an adjacent, unrestricted tract of land from Charter Properties. The developers planned to lease the Charter parcel to Wal-Mart for construction of a retail store that would sell, among other items, drugs and pharmaceuticals. The developers intended to use Jeff’s 13-acre tract for parking and access for customers to the Wal-Mart and other retail stores.

So, although Wal-Mart would share the parking lot with other retail businesses, Wal-Mart customers would be expected to park on Jeff’s parcel to access the Wal-Mart store. In which, again, the customers could purchase items in direct competition with CVS.

When CVS learned that the developers intended to construct a parking lot on the restricted tract for use by Wal-Mart, CVS informed the developers that such use would violate the restrictive covenant. So the developers sued CVS and Sonny Boy, asking the Court for an Order to the effect that their proposed parking lot development plans did not violate the restriction.

In January 2014 the trial court granted the developers’ request, and entered Judgment holding that the proposed construction of a parking lot and use for Wal-Mart customers would not violate the terms of the restrictive covenant.

CVS and Sonny Boy appealed.

CVS  and Sonny Boy likely knew they were in trouble when the Appellate Court immediately took the position that North Carolina courts use a strict construction rule to interpret restrictive covenants, and that such covenants are not favored in North Carolina law. It was of no help to CVS that the Court stated that covenants are not enforceable unless clear and unambiguous.

Then, it was time to closely examine the language of the restriction. The restrictive covenant prohibited the construction of a building that is used for the sale of drugs, vitamins, health and beauty aids, or as a pharmacy. The covenant banned various business activities, but not incidental purposes (such as parking for a restricted use).

The North Carolina Appellate Court concluded that construction of a parking lot and access easement on Jeff’s parcel, to serve Wal-Mart’s customers on an adjacent and non-restricted tract, was not violative of Jeff’s restriction although such customers would be purchasing from Wal-Mart at least some items that were directly described in the CVS restriction.

The Appellate Court agreed with the developers Charlotte Pavilion Road and WLA Enterprises. The developers won and CVS lost. See Charlotte Pavilion Road Retail Investment vs. North Carolina CVS; No. COA14-658; North Carolina Court of Appeals; December 16, 2014.

Lessons learned:

1.      Commercial leasing is one of the most difficult things I do, and most of my colleagues feel the same. It is incredibly difficult to forecast issues and draft provisions for every possible contingency over the life of a 10 or 25 year lease. And, some leases have terms that are 99 years. If we could cover every possible issue that might arise, the Lease would be three inches thick, no one would read it and no one would sign it.

2.      Restrictive covenants are inherently tricky because courts don’t like them and uses change over time. Did any of us imagine the advent of lottery sales in 1991 or e-cigarettes in 2003? How many older retail leases prohibit “gambling” and how many office leases prohibit “smoking”? Do you think those provisions preclude lottery sales and e-cigs?

3.      Practice Point: Stay tuned for Part Two. In that installment I will evaluate how Texas deals with this issue. There may be some surprises.

Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.