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. e du/thir dc ir c uit_1996/183UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

_______________

No. 95-3054

_______________

J. C. PENNEY COMPANY, INC.,

Appel lee

v.

GIANT EAGLE, INC.; GIANT EAGLE MARKE TS, INC., and STANLEY R. GUMBERG, indivi dually

and as Trustee under those certain Irrevocable Deeds of Trust dated May 9, 1969,

GIANT EAGLE, INC., Appel lant

___________________________________________ ______

On Appeal From the United States District Court For The Western District Of Pennsylvan ia (D.C. Civil No. 92-cv-01769)

___________________________________________ ______

Argued: October 27, 1995

Before: STAPLETON, McKEE, Circuit Judges , and JOHN R. GIBSON, Senior Circuit Judge

(Filed May 24, 1996)

RALPH A. FINIZIO, E SQ. (argued) Houston Harbaugh

Two Chatham Center

12th Floor Pittsburgh, PA 1521 9

Attorney for Appell ee

BERNARD D. MARCUS, ESQ. DAVID B. RODES, ESQ

.(argued)

Marcus & Shapira

One Oxford Centre

35th Floor Pittsburgh, PA 1521 9 Attorney for Appell ant

_____________________________

OPINION OF THE COURT

_____________________________

JOHN R. GIBSON, Senior Circuit Judge:

Giant Eagle, Inc. appeals from an order o f the district court enjoining it from operating a pharmacy in its Quaker Village shopping center store for the duration of J. C. Pen ney Company's 1978 lease, including renewals. Giant Eagle argues that Penney's exclusive right to operate a pharmacy in Quaker Vil lage ended when Penney's 1962 lease ended, and that Penney's exclus ive right is unenforceable against it because it did not have no tice of Penney's exclusive right. We affirm. In 1962 the Thrift Drug Company leased a store in the Quaker Village shopping center to operate a retail drugstore. The lease required that Thrift Drug use the premises on ly for operation of a retail drugstore, and gave it the right to dis play "such articles as are displayed and sold by it in its oth er retail drug stores." The lease further provided that the owner of Quaker Village, as lessor, would not permit another tenant to operate a pharmacy or fill or sell prescriptions. The lease covenanted that other tenants would be Thorofare Markets, Inc., whi ch would operate a supermarket, and Triple "A", a national chain var iety store.

These tenants were allowed to sell merchandise cust omarily sold in drugstores, provided that they did not compound or sell prescriptions, or sell merchandise limited by state law to licensed pharmacies. The lease was for a term of fifteen ye ars, and Thrift Drug was given the right to renew and extend the le ase for three additional five-year terms. Thrift Drug recorded a memorandum of the lease which set forth a description of the prem ises, the term of the lease, and Thrift Drug's right to renew, but made no mention of Thrift Drug's obligation to operate only a retai l drugstore, nor of the shopping center's agreement prohibiting othe r tenants from operating a drugstore. In 1969 Penney acquired Thr ift Drug and all of its rights, including the 1962 lease. In 1977 Giant Eagle entered into a lease at Quaker Village, which provided that it was to operate a fo od and grocery supermarket for items "customarily sold in the mark ets which it operates in the Greater Pittsburgh area." Giant Ea gle's lease also gave Giant Eagle the exclusive right to operate a g rocery store in Quaker Village with the exception of the existing T horofare store.Stanley R. Gumberg, the owner of the Quak er Village

shopping center, negotiated the lease with Giant Ea gle, and stated that there was no reference to a pharmacy or drugst ore in the lease provision describing Giant Eagle's use of the premi ses. He also stated that at the time the lease was negotiated th ere was no thought or discussion of a pharmacy in Giant Eagle' s store. In 1975 Penney began discussing with Gumb erg the possibility of relocating its drugstore within Quak er Village. Throughout these discussions, Penney insisted on ke eping its exclusive right to operate a pharmacy. In 1978 Pen ney and Gumberg agreed that Penney would relocate its drugstore wit hin the shopping center and continue to have the exclusive right to operate a pharmacy. The 1978 lease gave Penney the exclusive right to operate a pharmacy in Quaker Village, and provided that the 1962 lease was to terminate one day after the new lease term started, thus providing an overlap between the 1962 and 1978 leases. The 1978 lease also covenanted that Giant Eagle was to operate a supermarket in the shopping center, which was a con dition for Penney operating its new drugstore. In 1990 Giant Eagle began to make plans t o expand its supermarket in Quaker Village to include a pharmacy . To accommodate Giant Eagle's plans, Gumberg asked Penn ey several times to waive its exclusive right to operate a pharmacy in the shopping center. Penney consistently refused to waive its e xclusive right. Gumberg told Giant Eagle that Penney had the exclus ive right to operate a pharmacy in Quaker Village and that Penne y refused to waive that right. Despite this information, Giant Eagle began its construction of a pharmacy at its Quaker Village st ore. Shortly thereafter Penney told Giant Eagle and Gumberg that it intended to enforce its exclusive right. On August 13, 1992 Gi ant Eagle opened its pharmacy in Quaker Village, and Penney sued Gia nt Eagle to enjoin Giant Eagle's operation of the pharmacy. The district court granted Penney a preli minary injunction. J. C. Penney Co. v. Giant Eagle, Inc., 813 F. Supp. 360 (W.D. Pa. 1992). Giant Eagle appealed the prel iminary injunction to this court, and we affirmed the injun ction in an unpublished opinion. J. C. Penney Co. v. Giant Eag le, Inc., 995 F.2d 217 (3d Cir. 1993). The district court later granted Penney a permanent injunction against Giant Eagle for the duration of Penney's 1978 lease, including renewals. In granti ng the permanent injunction, the district court stated that under Pe nney's 1962 and 1978 leases Penney continuously held the exclusive right to operate a pharmacy in Quaker Village. The court also state d that Penney could enforce its exclusive right against Giant Eag le because the memorandum of the 1962 lease, which was filed for r ecord, gave Giant Eagle constructive notice of Penney's exclusi ve right when Giant Eagle entered into its Quaker Village lease. Giant Eagle appeals from the district court's grant of the perm anent injunction.

I. Giant Eagle argues that Penney cannot enf orce its exclusive right against Giant Eagle because Giant E agle obtainedits lease in Quaker Village before Penney obtained its 1978 lease

containing the exclusive right. Giant Eagle argues that the 1978 lease did not preserve Penney's 1962 exclusive righ t for two reasons. First, Giant Eagle argues that Penney can celled its 1962 lease and filed for record a lease cancellation agr eement stating that the 1962 lease was null and void. Therefore, Giant Eagle argues, Penney cannot rely on an exclusive right co ntained in a lease which is null and void. Second, Giant Eagle argues that Penney's exclusive right is a form of restrictive c ovenant or negative easement which cannot be transferred from one location within Quaker Village to another. Giant Eagle conc ludes that because Penney moved in 1978, it could not take its exclusive right

with it.

A.

In this diversity case, we must determine and apply Pennsylvania law, and when the issues have not been authoritatively determined by the Pennsylvania Supreme Court, we mu st predict how

it would decide those issues. Adams v. Madison Rea lty & Dev., Inc., 853 F.2d 163, 168 (3d Cir. 1988). Our review is de novo without deference to the district court. Salve Reg ina College v. Russell, 499 U.S. 225 (1991). For many years the Pennsylvania Supreme C ourt used principles of real estate law in interpreting restr ictions in shopping center leases. In Siciliano v. Misler, 16 0 A.2d 422 (Pa. 1960), the court stated, "In restricting real estat e a scrivener acts at his peril: if his creation is not self-sus taining it is nothing." Id. at 425. The court rejected the argu ment that the intent of the parties should govern. Instead, it l ooked at the plain language of the restriction, gleaning the int ent of the parties from the language alone. Id. See also Foo d Fair Stores, Inc. v. Kline, 152 A.2d 661, 663 (Pa. 1959). There were early rumblings of change in G reat Atlantic & Pacific Tea Co. v. Bailey, 220 A.2d 1 (Pa. 1966), w hich did not produce a majority opinion. See Mt. Lebanon v. Cou nty Bd. of Elections, 368 A.2d 648, 650-51 (Pa. 1977) (non-maj ority opinions of the Pennsylvania Supreme Court are non-decisiona l); Vargus v. Pitman Mfg. Co., 675 F.2d 73, 74-75 (3d Cir. 1982) (a majority of the justices on the Pennsylvania Supreme Court must join an opinion in its entirety or it is not binding precedent). I n Great Atlantic & Pacific Tea Co., the Baileys, owners of a shoppin g center, granted A & P the exclusive right to operate a groc ery store in their shopping center. 220 A.2d at 1-2. Later, th e Baileys purchased land next to their shopping center and re nted it to another grocery store operator. Id. at 2. A & P, relying on its exclusive right, sued to prevent the operation of t he competing grocery store. Justice Eagen, with two justices jo ining his opinion and another only concurring in the result, wrote that courts must strictly construe exclusive rights gran ted in shopping center leases, because they restrict the use of lan d and such restrictions are traditionally not favored. Id. at 2-3. Following this reasoning, Justice Eagen concluded that A & P could not enforce its exclusive right against land acquired a fter its lease because A & P's exclusive right did not state expli citly that itapplied to after-acquired land. Id. at 3.

Justice Roberts, joined by two other just ices, dissented

in Great Atlantic & Pacific Tea Co. Id. at 4. Jus tice Roberts stated that exclusive rights are important for the development of modern shopping centers and that the modern approac h was to realistically interpret the exclusive right so as t o give effect to the intent of the parties. Id. at 5-6 (citing Crag mere Holding Corp. v. Socony-Mobil Oil Co., 167 A.2d 825, 827 (N .J. Super. Ct. App. Div. 1961) and other cases). Justice Roberts rejected the uncritical application of the doctrine of strict co nstruction to defeat the obvious purpose for which a covenant was included in a lease agreement. In ascertaining the intention of the parties, he wrote, the restriction should be interpreted in lig ht of the apparent purpose of the covenant and the conditions existing at the time the lease agreement was executed. Id. at 6. After considering the circumstances surrounding execution of the lease, Justice Roberts concluded that the parties intended for A & P to be the only grocery store in the shopping center and t hat A & P could enforce its exclusive right against land added to t he shopping

center after A & P's lease. Id. at 6-7. In essenc e, Justice Roberts was arguing for the use of contract law, ra ther than the real estate law governing land use restrictions. Shortly after Great Atlantic & Pacific Te a Co., the Pennsylvania Supreme Court, with one justice not pa rticipating, evenly split over the interpretation of exclusive r ights in shopping center leases. Sun Drug Co. v. West Penn Realty Co., 268 A.2d 781 (Pa. 1970). Again, three justices argued that exclusive rights should be strictly interpreted because they restricted the

use of land. Id. at 783. Justice Roberts continue d to state that exclusive rights contained in shopping center lease s should be realistically interpreted so as to give effect to t he intent of the parties to the lease. Id. at 785-86. Exclusive rights in the shopping center l ease context were again considered by the Pennsylvania Supreme C ourt in Teodori v. Werner, 415 A.2d 31 (Pa. 1980). The issue in Te odori was whether a tenant had an independent continuing obli gation to pay

rent when the landlord violated the tenant's exclus ive right to sell jewelry. Justice Roberts wrote the court's un animous opinion. He recognized that the old common law of landlord a nd tenant relations based on real estate principles would rec ognize the independent obligation of the tenant to continue pa ying rent even though the landlord had violated the tenant's exclu sive right. Teodori, 415 A.2d at 33. Justice Roberts began his discussion by stating: "It is now clear, however, that this view of landlordtenant relations, incorrectly resting more on notio ns of property law than on principles of contracts, has no place i n modern jurisprudence." Id. The court continued that the independent obligation approach must be rejected where the land lord breaks a promise in the lease which "is a significant induce ment to the making of the lease by the tenant." Id. at 34 (quo ting Restatement (Second) of Property, Introductory Note to Chapter 7 (1977)). The opinion continues:

It is obvious that a landlord's non- competition promise is critical to acommercial lease agreement like the one h ere.

"The mere presence in a lease of a noncompetition promise by the landlord justifies the conclusion that it is essen tial that the promise be observed if the tenan t is to conduct his business on the leased pro perty profitably."

Id. (quoting Restatement (Second) of Property  7.2 cmt. b (1977)). In a lengthy footnote the court reiterated the impo rtance of exclusive rights in shopping center leases in assur ing the mix of quality businesses essential to a shopping center's financial success. Id. at 34 n.5 (citing Cragmere Holding Co rp. v. SoconyMobil Oil Co., 167 A.2d 825 (N.J. Super. Ct. App. D iv. 1961)). Teodori represents a substantial change i n the Pennsylvania Supreme Court's approach to shopping c enter leases with exclusive rights. Although the court's holdin g is limited to the independent obligation for the tenant's payment of rent, the court applied contract-law principles for determini ng the intent of the parties and rejected the strict approach of rea l estate law, which had been the law of Pennsylvania. See also C imina v. Bronich, 537 A.2d 1355, 1358 (Pa. 1988) ("[A] lease is in the nature of a contract and is controlled by principle s of contract law.") (citing Amoco Oil Co. v. Snyder, 478 A.2d 79 5 (Pa. 1984), and Ezy Parks v. Larson, 454 A.2d 928 (Pa. 1982)); Pugh v. Holmes, 405 A.2d 897, 903 (Pa. 1979) (same). Teodori compl eted what Justice Roberts had argued for in Great Atlantic & Pacific Tea Co., and Justice Eagen's joining in Justice Roberts's Te odori opinion demonstrates the abandonment of the strict approach to exclusive rights which Justice Eagen adhered to in his Great Atlantic & Pacific Tea Co. plurality opinion. Accordingly, we must analyze the relation ships in this

case under the rules announced in Teodori.

B.

Penney is attempting to enforce against G iant Eagle its exclusive right to operate a pharmacy in Quaker Vil lage contained in its 1978 lease, and thus, we must examine the te rms of the lease and the circumstances surrounding the lease. Sun D rug Co., 268 A.2d at 785-87 (Roberts, J., opinion in support of orders); Great Atl. & Pac. Tea Co., 220 A.2d at 5-6 (Roberts, J., dissenting). In so doing, we begin with Giant Eagle's 1977 lease, because Gumberg negotiated this lease at the same t ime he negotiated Penney's 1978 lease. Giant Eagle's leas e stated that Giant Eagle "shall use the [rented] premises as a f ood and grocery supermarket for the sale of items customarily sold" in other Giant Eagle supermarkets in the greater Pittsburgh area. Giant Eagle's lease also gave Giant Eagle, with one exception, th e exclusive right to operate a grocery store in the Quaker Vill age shopping center. Gumberg testified that he did not in any w ay contemplate giving Giant Eagle the right to operate a pharmacy. Joseph Faccenda, Giant Eagle's Vice President, also testif ied that there were no pharmacies in any of Giant Eagle's stores i n 1977. Thistestimony, coupled with the clear language of Giant Eagle's lease,

shows that Gumberg intended to give Giant Eagle the exclusive right to operate only a supermarket in Quaker Village. The negotiations behind the 1978 lease be tween Gumberg and Penney, on the other hand, show that Gumberg in tended to grant Penney an exclusive right to operate a pharmacy. T hroughout the negotiations concerning the move of its drugstore w ithin Quaker Village, which began in the fall of 1975, Penney in sisted on preserving its exclusive right from the 1962 lease, and insisted

that the transaction be structured so as to maintai n continuity with the 1962 lease. When Gumberg submitted one dr aft of a lease to Penney that did not contain the exclusive right, Penney's representatives promptly insisted that the exclusiv e right be included in the lease. Penney agreed to move on th e condition that its exclusive right remain in full force. As a res ult, the lease not only contained the exclusive right Penney wante d, it also provided that the 1962 lease would terminate one da y after the start of the 1978 lease. This overlap ensured the continuity in Penney's tenancy and exclusive pharmacy right. Gum berg testified that Penney's 1978 lease gave Penney the exclusive right to operate a pharmacy in the Quaker Village shopping center. The terms of the 1978 lease are entirely consistent with the parties' intent to grant Penney an exclusive ph armacy right. The lease stated that during the term of the lease Gumberg would "not use or occupy, or permit the use or occupancy of, any space" other than Penney's for "the operation of a drug st ore, or a drug department, in which a registered pharmacist is in attendance or required by law to be in attendance for any period of time," nor would Gumberg enter into any lease which would perm it another tenant or sub-tenant to use space in Quaker Village for such purposes. The exclusive right provision concluded by stating that Gumberg "covenants and agrees that rights similar t o the rights herein granted by [Gumberg] to [Penney] are not hel d by any other tenant or occupant of space within" Quaker Village. In addition, Penney's 1978 lease acknowle dged that Gumberg had entered into a new lease with Giant Eag le to operate a food supermarket. Penney's lease provided that Pen ney "shall be under no duty or obligation to open [its] store for business . . . unless and until the Giant Eagle food supermarket h as opened or is about to open its store for business." The circumstances surrounding the negotia tion of the 1978 lease and the language of the lease itself show tha t Gumberg and Penney intended to preserve and continue, in essent ially the same terms, the exclusive right to operate a pharmacy wh ich Penney acquired through the 1962 Thrift Drug lease. The intention of the parties surrounding both leases is thus plainly expressed. As Giant Eagle's 1977 leas e shows, Giant Eagle obtained the exclusive right to operate a sup ermarket, and received Gumberg's promise that, with the exception of the Thorofare store, such rights would not be granted t o any other tenant. Gumberg granted Penney the existing pharma cy right in Penney's 1978 lease in the context of Giant Eagle's supermarket lease. Penney's intent that it have an exclusive r ight to operate a pharmacy is clearly expressed. While Faccenda, o n behalf ofGiant Eagle, denied knowledge of Penney's exclusive right when

Giant Eagle executed its lease, he also stated that exclusive-right provisions were common in shopping center leases at that time, and that there were no pharmacies in Giant Eagle's stor es in 1977. In addition, Giant Eagle's counsel conceded that Giant Eagle knew that there was a 1978 lease with Penney containing exclu sive-right language. These expressions of intent amply demons trate that Gumberg and Penney intended to preserve Penney's ex clusive right from the 1962 lease when they entered into the 1978 lease, and that the 1978 lease preserves and continues that preexis ting exclusive right. Because Penney's 1978 lease preserves its 1 962 exclusive right, we hold that Penney's exclusive right predat es Giant Eagle's

1977 lease. Both of Giant Eagle's arguments against e xtension of Penney's 1962 exclusive right ignore Pennsylvania l aw which requires us to realistically interpret shopping cen ter leases in light of the intent of the parties under contract p rinciples.

While the 1978 lease declared the 1962 lease null a nd void, this provision must be read with the other provisions in the 1978 lease and the circumstances surrounding the execution of the 1978 lease. The overlap of the two leases shows that although t he 1978 lease cancelled the 1962 lease, the parties expressly int ended to continue the exclusive pharmacy right from the 1962 lease. Giant Eagle's second argument is the type of traditional property-law argument which the Pennsylvania Suprem e Court rejected

in Teodori. 415 A.2d at 33-34. The court in Teodo ri decided that courts should realistically interpret shopping cent er leases under contract-law principles, rather than traditional pr operty law, to give effect to the economic realities at work in sh opping centers. Id. After Teodori, the intent of the parties gover ns the interpretation of shopping center leases and the tr aditional property-law restrictions on restrictive covenants and negative easements do not apply. Thus, we conclude that the district court 's finding that the exclusive provisions in the 1962 and 1978 lease s "have expressly, unambiguously, and continuously since 19 62" prohibited the landlord from using or permitting "the operatio n of any other drugstore or drug department with a registered phar macist in attendance" was a fact not clearly erroneous, and a conclusion well drawn from the intent of the parties as expressed i n the language of the leases, and in the negotiations with respect to the

execution of the leases. The district court did no t err in its holding that Penney had the exclusive right to oper ate a pharmacy at the shopping center.

II. Giant Eagle argues that even if Penney ha d an exclusive right to operate a pharmacy, it only had notice of the right by way of the 1962 lease which, by its terms, would end no later than 1993. Therefore Giant Eagle contends that to allow Penney to extend the exclusive right beyond 1993 violates the rights it acquired under its 1977 lease. As long as Giant Eagle had notice of Penn ey's exclusive right when it entered into its Quaker Village lease , it is bound bythe proper interpretation of that right even though that is not the

interpretation it placed on that right. 3 Milton R . Friedman,

Friedman on Leases  28.601 (3d ed. 1990). Accordingly, to decide whether Penney could extend its exclusive right bey ond 1993, we must again look to the parties' intent. See Sun Dr ug Co., 268 A.2d at 785-87 (Roberts, J., opinion in support of order s); Great Atl. & Pac. Tea Co., 220 A.2d at 5-6 (Roberts, J., disse nting). Looking at all the leases, it is evident that Gumberg intended to grant exclusive rights to tenants opera ting different

kinds of retail establishments. The 1962 lease wit h Penney's predecessor specifically warranted that Thorofare M arkets, Inc. would operate a supermarket and that Triple "A" wou ld operate a variety store. Giant Eagle's 1977 lease granted Gi ant Eagle the exclusive right to operate a supermarket subject to the exception recognized for the existing Thorofare store, and sp ecifically provided that Giant Eagle's exclusive right would n ot cover restaurants or delicatessens. Penney's 1978 lease provided that Gumberg had entered into a lease with Giant Eagle, and provided that Penney was under no duty or obligation to open , unless and until the Giant Eagle store was about to open. It is apparent that in each lease, the tenant undertook obligations con cerning its business, but also received from the lessor assuran ces about the other tenants within the shopping center. Such an interrelationship is recognized, particularly in th e footnotes, in Justice Robert's opinion in Teodori, 415 A.2d at 34 n.5, as well as in his dissent in Great Atlantic & Pacific Tea Co., 220 A.2d at 5-6

nn.2-3. There was just such an interrelationship between Gumberg, Penney, and Giant Eagle. Both the 1962 lease and t he 1977 Giant Eagle lease provided for fixed terms, and gave the tenant the option to renew or extend for a stated number of fi ve-year terms. Such renewals and extensions would, of course, incl ude the exclusive rights granted to each tenant. There is no language in any of the leases, nor any testimony about the leas e negotiations, indicating that any of the parties intended to rest rict the parties' ability to negotiate a new lease, whether it be referred to as a renewal or extension, at the end of the lea se term. Indeed, the fact that Gumberg and Penney negotiated the 1978 lease over a three-year period demonstrates that there wa s no such

restriction. Similarly, there is no indication in the record of any intent to restrict the landlord's ability to grant exclusive rights to tenants, as he had granted in all the earlier le ases, or to strip the landlord of the ability to control the mi x of the shopping center, and to grant the exclusive rights to operate specific businesses as he chose. Indeed, the evide nce about the interrelationship between the landlord and the seve ral tenants demonstrates that the parties intended to allow the landlord to negotiate continuations of existing leases, preserv ing their exclusive rights. If there is any difficulty in re aching this conclusion, there is nothing in the 1962 lease, the 1977 Giant Eagle lease, or the 1978 Penney lease that permits a conclusion that the parties intended to allow Giant Eagle to o perate a pharmacy, a right that Gumberg had previously grant ed to Penney.Giant Eagle has failed to explain why the owner of Quaker

Village would limit his ability to extend or renew an exclusive right within his shopping center. Likewise, there is no reason to suspect that Thrift Drug agreed to limit its abilit y to extend or renew its exclusive right in the future. The 1962 lease does not state that the exclusive right cannot be extended o r renewed. On the contrary, the language in the lease states that the exclusive right shall continue through any extension or renew al of the lease.

When the several leases in this case are considered , it is evident

that the landlord demonstrated a clear intent to co ntrol the mix of establishments in the shopping center, and that eac h of the tenants in entering into leases benefitted from this intent . The interrelationship between the tenants, as we have d iscussed, was part of the parties' underlying intent. We see not hing in any of the leases that would permit any tenant to presume that after the expiration of another tenant's lease, it would gain the right to enter into a competing business or a completely unr elated business. In light of these circumstances, we hold that the p arties to the

1962 lease intended to allow extension of the exclu sive right as they might see fit in the future, and that the prop er interpretation of the 1962 exclusive right permits its extension. Gumberg and Penney intended Penney's 1978 lease to extend and renew Penney's 1962 exclusive right. Therefore, we also hold that Penney successfully extended its exclusive right fo r the duration of its 1978 lease, including any renewals. Our int erpretation allowing the extension of Penney's exclusive right beyond 1993 is binding on Giant Eagle.

III. Finally, Giant Eagle argues that it did n ot have notice of Penney's exclusive right when it entered into it s Quaker Village lease in 1977 and, therefore, Penney cannot enforce that right against it. Thrift Drug did not file for record the e ntire 1962 lease. Instead, it filed a memorandum of the lease as allowed by section 405 of title 21 of the Pennsylvania statute s. Section 407 of title 21 defines the effect of recording a lease memorandum. Section 407, which is titled "Effect of recording l ease, sublease, agreement or memorandum," provides: The recording of any such lease, sublease, agreement or memorandum in accordance with the provisions of this ac t
shall constitute constructive notice to subsequent purchasers, mortgagees and jud gment creditors of the lessor of the making and of the provisions of such lease, sublease or agreement, including any purchase or refu sal provisions set forth in the lease, sublea se or agreement. Pa. Stat. Ann. tit. 21,  407 (Supp. 1995) (emphasis added). Giant Eagle argues that under section 407 the recording

of a lease memorandum results in constructive notic e only to "subsequent purchasers, mortgagees and judgment cre ditors of the lessor." Giant Eagle contends that it is a lessee, not asubsequent purchaser, mortgagee or judgment credito r, and,

therefore, it received no constructive notice from the recorded lease memorandum. Penney responds that Giant Eagle is a "purchaser" within the meaning of section 407 becau se a lease is really a sale of land for a term of years.

A close examination of section 407 shows that the legislature intended the recording of a lease memor andum to give constructive notice of the entire lease to subseque nt lessees. Section 407 not only defines the effect of recordin g a lease memorandum, but also the effect of filing a lease, sublease or lease agreement. This is plainly reflected in the terms of section 407. If we were to accept Giant Eagle's interpreta tion of section 407, not even the recording of the entire lease wou ld constitute constructive notice to a subsequent lessee. Under Giant Eagle's interpretation, there would be no way to give const ructive notice of the terms of a lease to a subsequent lessee. A more reasonable interpretation of section 407 leads to the conclusi on that the legislature intended the term "purchasers," as used in section 407, to include lessees. Indeed, the Supreme Court of P ennsylvania has so held. Commonwealth v. Monumental Properties, In c., 329 A.2d 812 (Pa. 1974) (holding that a lease of real property i s a sale under the Pennsylvania Consumer Protection Law). Consequ ently, the district court did not err in holding that Giant Ea gle was at least constructively, if not actually, aware of the exclu sive provision in Penney's lease. The record before us supports this conclu sion. Giant Eagle's Vice President, Faccenda, stated that while he was not involved with exclusive rights in 1977, Giant Eagle had a staff of real estate and legal people who were expected to h andle these functions and to ensure that everything that Giant Eagle was doing was proper and legal. He would expect them to find a recorded document which restricted the use of the premises G iant Eagle was about to lease. He was aware when Giant Eagle move d into Quaker Village in 1977 that there was a Thrift Drug store there and that it was logical for Thrift to have a lease, but he w ould not have paid attention to details like exclusive rights in other leases. This testimony is sufficient to raise an inference that when Giant Eagle signed the lease in 1977 it knew of Penney's exclusive right in the 1962 lease. Also, Faccenda's knowledge that exclusive rights were common in 1977, as well as the exclusiv e right contained in Giant Eagle's lease, support the infer ence that this is a subject about which Giant Eagle and its repres entatives would

have been interested. The record makes clear that both Penney and Giant Eagle were sophisticated lessees, and indeed were involved in some three other disputes in which Giant Eagle was seeking to enforce exclusive rights to operate pharmacies in o ther leases. While Giant Eagle argues that a single lessee would have no right

to obtain information from a landlord about other l essees, the record is to the contrary. In Penney's letter to G umberg's attorney on January 12, 1978, Penney requested copi es of the use and exclusive-right provisions from the leases of o ther tenants within the shopping center. There was strong evide nce in the record to support the district court's finding that Giant Eagle was constructively, if not actually, aware of the exclu sive-rightprovisions in Penney's leases.

We think it also follows that when Giant Eagle decided to open a pharmacy in 1990 it was bound by the exclusi ve rights granted to other tenants. Giant Eagle conceded tha t in 1977 it was not operating a pharmacy in any of its stores and i ts lease certainly did not give them a right to operate a ph armacy. In 1977 Giant Eagle knew of Penney's rights under the 1962 lease. From 1978, well before Giant Eagle operated pharmacies i n its supermarkets and in 1990 when it decided to open a pharmacy, it had constructive notice of Penney's exclusive right as granted both in

the 1978 and 1962 leases. Accordingly, we affirm the order of the d istrict court granting the permanent injunction.

J.C. PENNEY COMPANY, INC. V. GIANT EAGLE, INC., ET AL.
No. 95-3054

STAPLETON, J., dissenting: I respectfully dissent. I start with the proposition that restric tive covenants in prior conveyances are binding only against futur e lessees with

actual or constructive notice before the lease is s igned. See Finley v. Glenn, 154 A. 299, 301 (Pa. 1931); see ge nerally3 M. Friedman,

Friedman on Leases  28.601 (3d ed. 1990). J.C. Penney's lease agreement thus will not support the district court's injunction in the absence of actual or constructive notice to Giant Eagle.

I believe the record contains insufficien t evidence to permit a finding that Giant Eagle had actual notice of J.C. Penney's exclusive when Giant Eagle signed its leas e in 1977. In any event, as the court acknowledges, the district court made no finding that Giant Eagle had actual notice at that time. Based on the particular facts of this case, however, we may assume, arguendo, that Giant Eagle had actual notice of the exclusive in 1977. We may also assume, without deciding, that 2 1 Pa. Stat. Ann.

 407 applies here and that Giant Eagle had construc tive notice in 1977 of the existence and provisions of J.C. Penney 's 1962 lease, including the restrictive covenant. Finally, we ma y also assume without deciding that J.C. Penney's 1978 lease effe ctively continued the 1962 pharmacy exclusive in the new lo cation within the shopping center--that is, that the restrictive covenant runs with the restricted land retained by the landlord ( the entire shopping center), not with the premises originally leased by J.C. Penney in 1962. Thus, had J.C. Penney merely moved to a new storefront within the shopping center in 1978 but o therwise retained all the provisions of the 1962 lease, incl uding the original term and renewal rights provisions, we may assume that Giant Eagle could have been bound by the restrictiv e covenant for the maximum 30-year term of the 1962 lease. While the 1978 lease alone, independently of the 1962 lease, may bind co-tenants who signed leases after 1978, it cannot bind a pre-existing tenant such as Giant Eagle. Th e critical issue, then, is whether J.C. Penney's 1978 lease co uld operate asan extension of the restrictive covenant in the 196 2 lease beyond

its original maximum term of 30 years. In 1977, Giant Eagle had notice that J.C. Penney's 1962 lease would expire, at the latest, 30 years from it s effective date, or August 31, 1993. Giant Eagle cannot be bo und by any extension of the restrictive covenant beyond that d ate because J.C. Penney's lease did not include any such extens ion right at the time Giant Eagle signed its lease. Pennsylvania's lease recording statute ex plicitly requires that a memorandum of lease must contain th e expiration date of the final period for any right of extension or renewal. 21

Pa. Stat. Ann.  405. Notice of the maximum term of a lease is important because the term partly defines or circum scribes the rights of a purchaser, mortgagee, or judgment credi tor--or, as I have assumed, a tenant to be bound by a co-tenant's restrictive covenant. A purchaser with notice of a recorded le ase takes the property subject to that lease only for the maximum term; that is, the purchaser has bought the right to hold the prop erty free of the leasehold interest after the final expiration date indicated in the recorded lease agreement. Similarly, a tenant who enters into a shopping center lease agreement, with at least cons tructive notice of a co-tenant's lease containing a restrictive cov enant, has bought the right to be free from the restrictive co venant at the expiration of the co-tenant's lease as recorded. Allowing a tenant to extend a binding res trictive covenant by merely extending the term of its lease beyond the original, maximum term would operate to bind a co-t enant to a restrictive covenant for a period of time during wh ich the cotenant had no notice it could be bound. There is n o principled difference between binding a co-tenant to such an e xtension and binding a co-tenant to a restrictive covenant of wh ich it had no notice at all in the first instance: either way, a co-tenant's property rights are more restricted than they were disclosed to be at the time the co-tenant entered into its lease ag reement. Giant Eagle signed its lease in 1977, hal f-way through the maximum 30-year term of J.C. Penney's 1962 leas e, with notice that J.C. Penney's pharmacy exclusive would prohibi t Giant Eagle from operating a pharmacy until 1993 at the latest. The district court's holding necessarily implies that Giant Eagl e had no right to expect, in 1977, that it could operate a pharmac y department after 1993 for the remaining 24 years of its lease. In other words, the district court's rule would have given J .C. Penney and the landlord the right at any time prior to 1993 to decide between themselves to bind Giant Eagle to an extension of t he restrictive covenant without obtaining Giant Eagle's consent. Such a rule cannot be correct because it operates retroactively to restrict a tenant's property rights under its lease agreement. I would accordingly decide that, at least with respect to pre-existing tenants such as Giant Eagle, J.C. Penn ey's 1978 lease did not extend the pharmacy exclusive beyond the ex piration of the maximum term of the 1962 lease on August 31, 1993. We may assume that Giant Eagle was thus in violation of the restr ictive covenant when it opened its pharmacy department in August 19 92, and when the district court granted J.C. Penney's motion for a p reliminaryinjunction the following month. However, by the ti me the district

court ordered permanent injunctive relief in Januar y 1995, J.C. Penney's exclusive was no longer binding again st Giant Eagle. J.C. Penney's exclusive, therefore, cannot be a bas is for affirming the permanent injunction. I would reverse the judg ment of the district court, thereby vacating the permanent inju nction.