The Shops at Legacy is a successful mixed-use commercial development in Plano, Texas. Del Frisco’s Grille of Texas LLC entered into a Lease Agreement with Shops in October 2014. The Lease contains a provision prohibiting Del Frisco from owning, operating, or managing a business with the same or similar trade name or similar concept within five miles.
If Del Frisco breaches the covenant, then base rent is increased 10%, and percentage rents are increased 25%, or 75% if the other store is within a two-mile radius.
The Lease further defines the tenant’s trade name as Del Frisco’s Grille, “. . . or other trade name used by Tenant . . . operating the same restaurant concept in a majority of its and their locations . . .”
In November 2015 Del Frisco signed a lease to open “DF Steakhouse” in Legacy West, a newly developing retail complex less than two miles from The Shops at Legacy. In January 2016 Shops notified Del Frisco that it was aware of the new lease and it would consider the opening of DF Steakhouse at Legacy West to be a competing business.
Del Frisco responded that DF Steakhouse was not a competing business primarily because Del Frisco was prohibited under the terms of the Shops Lease from having steak sales exceed 20% of gross sales. This accommodation was included in the Shops Lease so that Del Frisco would not compete with Bob’s Steak & Chop House, a pre-existing tenant at Shops at Legacy.
Shops replied that a competing business under the Shops Lease was not limited to the same restaurant concept, but also covered businesses with a similar trade name.
In May 2017 Shops advised Del Frisco that, in anticipation of the opening of DF Steakhouse in Legacy West, rent was increasing due to the violation of the radius restriction clause. Del Frisco refused to pay over $350,000 in excess rents. Shops filed a lawsuit.
Shops argued to the trial court that Del Frisco opened a competing business within two miles from The Shops at Legacy, and that both businesses had similar trade names. Del Frisco responded that DF Steakhouse did not compete, and in any event, the rent increase was an unenforceable liquidated damages penalty.
The trial court granted judgment in favor of Del Frisco. Shops appealed.
The Court of Appeals elected to focus solely on the liquidated damages issue. Shops argued that it is merely an agreed rent adjustment mechanism, which did not constitute a breach of the Lease. Instead, close-quarters competition was an action permitted by Del Frisco. But, an action with consequences.
The Appellate Court stated that there is no meaningful difference between a provision expressly prohibiting competition and a clause that imposes damages for engaging in competition. And as such, the provision must stand the test of a liquidated damages evaluation.
From there, the Court evaluated the “universal rule” that damages must be limited to “just compensation for the loss or damage actually sustained.”
As written, the Lease provides Shops with the same measure of damages regardless of whether the competing business diverts customers from the property owned by Shops, or whether there is no connection or similarity between the trade names and businesses. The Court used the example of Del Frisco opening Del Frisco’s Grill Supplies, selling BBQ grills and grilling accessories. The names might be similar, but the business concepts are not. And in that situation, Del Frisco should not be deemed to have violated its radius restriction clause, incurring a significant financial penalty.
The radius restriction imposes an impermissible penalty. Judgment for Del Frisco is affirmed. See Shops at Legacy v. Del Frisco’s Grille of Texas: Case No. 05-19-01274-CV; Texas 5th District Court of Appeals; August 17, 2020: https://scholar.google.com/scholar_case?case=11554703078941256642&q=the+shops+at+legacy+v.+del+frisco&hl=en&as_sdt=6,44&as_vis=1.
Lessons / Questions / Issues:
- Question: Your retail Lease has a radius restriction clause, right? Might want to rethink it next time you sign a new Lease or amend an existing one.
- Issue: What does your Lease say about direct competition vs. merely a similarity in trade name?
- Issue: How does your Lease compute damages if tenant defaults or triggers a situation where tenant owes additional money? Is there a relation to a reasonable forecast of future damages, or is it just an artificial tabulation intended to act as a deterrent?
Stuart A. Lautin, Esq.
* Board Certified, Commercial (1989) and Residential (1988) Real Estate Law, Texas Board of Legal Specialization
Licensed in the States of Texas and New York
Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.