Opinion ID: 852785
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Heading: Restrictive Covenants in Shopping Centers

Text: Indiana law permits restrictive covenants but finds them disfavored and justified only to the extent they are unambiguous and enforcement is not adverse to public policy. One Dupont Ctr., LLC v. Dupont Auburn, LLC, 819 N.E.2d 507, 516 (Ind.Ct.App.2004). Doubts should be resolved in favor of the free use of property and against restrictions. Id. However, courts have been quite willing to enforce restrictive covenants written in shopping center lease contracts even though they prevent competition within the center. See, e.g., Almacs, Inc. v. Drogin, 771 F.Supp. 506, 513 (D.R.I.1991); Whitinsville Plaza, Inc. v. Kotseas, 378 Mass. 85, 390 N.E.2d 243, 252-53 (1979); Kingpin, Inc. v. Hillcrest Dev., 267 Minn. 256, 126 N.W.2d 435, 439 (1964); Keith Hardware v. White, 956 S.W.2d 500, 501 (Tenn.Ct.App.1997) ([R]ather than restricting competition, such covenants serve to facilitate trade and induce tenants to rent in a particular shopping center.... It is reasonable for the plaintiff to want to avoid competition within this center.); 49 Am.Jur.2d Landlord and Tenant § 70 (1995). Restrictive covenants in shopping center leases have, for the most part, been found not to restrain competition unreasonably and have been generally found to be consistent with the public interest. The rationales for this result focus on the need to encourage the investment in new development by both the shopping center developer and its tenants. See, e.g., Vt. Nat'l Bank v. Chittenden Trust Co., 143 Vt. 257, 465 A.2d 284, 287 (1983). Courts have recognized that landlords and tenants of shopping centers invest considerable sums of money to make the center attractive to customers. Parker v. Lewis Grocer Co., 246 Miss. 873, 153 So.2d 261, 272 (1963) (Tremendous outlays of venture capital and risk are required and entailed from the supermarket tenant as well as the developer-landlord. Restrictive covenants in the nature of ancillary and reasonable restraints are absolutely required to induce investors to place a new venture in such untried area.); Wal-Mart Stores, Inc. v. Ingles Mkts., Inc., 158 N.C.App. 414, 581 S.E.2d 111, 116 (2003) (The development of new shopping centers requires tremendous outlays of venture capital and risk by prospective tenants as well as by landlords; restrictive covenants against unwanted competition are consistent with the public interest in such development.). Thus, restrictive covenants have allowed shopping centers to offer noncompetitive and diversified, but interrelated, businesses designed not to serve just one need but as many needs of the consumer as is feasible within the economic framework of the shopping center. Annotation, 97 A.L.R.2d 4, 11 (1964). Accord Valley Prop., Inc. v. King's Dep't Stores of Tewksbury, Inc., 505 F.Supp. 92, 95 (D.Mass.1981) (restrictive covenants are necessary inducements to shopping center tenants which facilitate the orderly and harmonious development for commercial use of real property). All of these cited reasons support limiting the covenant to protection of current tenants of the center. Both the trial court and the Court of Appeals agreed that the initial covenant to Kroger was enforceable. In evaluating Kimco's claim that the covenant created in 1982 was no longer enforceable, the trial court and Court of Appeals focused on whether there have been significant changes in the circumstances. We think there is only one factor that is central and dispositive here. Because the Kroger site in the Sagamore Center is no longer being used as a grocery store location, there is no interest within the center for the restrictive covenant to protect. Pay Less is attempting to use the covenant to restrict competition for its grocery stores located at other locations. Kroger was within its rights to assign the lease to Pay Less, and if Pay Less had chosen to continue grocery operations at the center, its interest in the lease would support enforcement of the covenant. However, Pay Less voluntarily abandoned grocery operations in the center and thereby severed the restrictive covenant from the occupancy. The shopping center obviously receives no benefit from permitting a transfer of the covenant. And it seems unlikely that a prospective new tenant would be significantly motivated by the prospect of recouping its investment by selling a restrictive covenant to a nearby competitor if the tenant's business fails. In any event, the effect of permitting a covenant to be sold separately from the operation it is designed to protect is perhaps to add some minimal value to the original lessee, but at considerable cost to the lessor and the public. None of these rationales suggests a powerful reason to permit a secondary market in restrictive covenants divorced from the real estate they are designated to protect. It is one thing to conclude that restrictive covenants in leases of shopping center tenants should be enforceable to protect the interests of the center and those tenants who have a current protectible interest within the center. It is quite another to permit enforcement of an anti-competitive covenant by someone foreign to the center who simply acquires the right to exclude competition without making any investment in the center. And the interest of the original lessee, Kroger in this case, may well be fully served by permitting enforcement of the covenant as long as it or a successor operates a grocery store in the center. Finally, the issue is not whether the covenant violates federal or state antitrust law. We assume Judge Posner was correct in his passing observation deeming implausible a claim that federal antitrust law prevented a drug store from invoking a shopping center covenant to exclude a competitor. [5] But the issue here is not whether the antitrust laws prevent enforcement of such a covenant. It is whether state law permits its enforcement not by a tenant of the center, but in the hands of one who has never occupied the center and merely attempts to purchase the right to exclude competition from a remote site. As the comment to the Restatement (Second) of Contracts explains: [T]he restraint may be unreasonable in either of two situations. The first occurs when the restraint is greater than necessary to protect the legitimate interests of the promisee. The second occurs when, even though the restraint is not greater than necessary to protect those interests, the promisee's need for protection is outweighed by the hardship to the promisor and the likely injury to the public. Restatement (Second) of Contracts § 188 cmt. a (1981). This restraint is an example of a restriction that proscribes types of activity more extensive than necessary to protect those engaged in by the promisee. Id. § 188 cmt. d. Usually if a restriction is unenforceable it is because it prohibits an overbroad type of activity by the promisor. In this case it is the protected activity of the promisee that needs to be narrowed to bring the justification and the existence of the restriction into harmony. It is true that this concern usually comes up in the context of an agreement not to compete, but the rationale is equally applicable where the agreement prevents the owner of a shopping center from leasing to a specified type of store that is no longer present in the center. The restriction also runs afoul of the second concern: it is excessively burdensome to the public and the promisor compared to a remote promisee's need for protection. There is little doubt that a competitor in the same center may be harmful to a given store, even if overall competition is unharmed. The fact that tenants demand and seek to enforce these covenants demonstrates that. Indeed, the justification for the restriction is incentive for the tenant to invest  assuming the tenant expects to be benefited from the restriction. Similarly, Tippecanoe's effort to enforce the covenant demonstrates its belief that sales will flow to a new store if one is placed in the center. It follows that the convenience of the public and certainly the interest of the landlord are served by having a grocery store in the center. The issue under the Sherman Act is whether there is an adverse effect on competition, i.e. whether overall competition suffers if a second drugstore is precluded from operating in a single shopping center. United States v. Visa USA, Inc., 344 F.3d 229, 242 (2d Cir.2003) (in a Sherman Act action, the proper inquiry is whether there has been an ` actual adverse effect on competition as a whole in the relevant market.' (emphasis in original)). A typical shopping center covenant has no such effect because customers in the center are served by the one seeking to enforce the covenant, and other locations for competitors are plentiful. See, e.g., Keith Hardware, 956 S.W.2d at 501. The issue here, however, is whether it is reasonable to deny the public access to any grocery store in the center and to deny the center the benefit of a grocery store and perhaps of any tenant at all for one of its largest spaces. Enforcement of the covenant in the hands of a non-tenant runs afoul of the policy against restrictive covenants unless justified by legitimate concerns of the promisee balanced against the interests of the public and the detriment to the promisor. As explained above, the policy usually justifying covenants in shopping centers  protection and encouragement of investment  is inapplicable here. The only policy the dissent identifies is naked enforcement of contracts. That is not a sufficient policy reason. If it were, all restrictive covenants would be enforceable. But the law recognizes that public interest may under some circumstances limit the ability of private parties to arrange their affairs. This is such a case. In sum, because Pay Less voluntarily relinquished the Kroger site as a grocery store location, it cannot enforce the restrictive covenant to prevent the shopping center from leasing to a grocery tenant. We hold that the restrictive covenant is not enforceable and cannot be used to stop competition and protect the holder's interests at some other site.