Topic:
CONTRACTS; RETAIL TRADE;
Location:
RETAIL TRADE;

OLR Research Report


July 2, 2004

 

2004-R-0516

RESTRICTIVE COVENANTS IN SHOPPING CENTER LEASE

By: Janet L. Kaminski, Associate Legislative Attorney

You asked if there is Connecticut case law regarding restrictive covenants in shopping center leases that limit the types of goods and services a tenant may sell at the shopping center.

SUMMARY

Yes, there is Connecticut case law specific to restrictive covenants in shopping center leases. The Supreme Court of Connecticut held that a restrictive covenant in a shopping center lease is not illegal “per se” under the state antitrust act, but its legality must be reviewed in terms of its reasonableness (Elida, Inc. v. Harmor Realty Corporation, 177 Conn. 218, 413 A.2d 1226 (1979)). The United States Court of Appeals, Second Circuit, in deciding whether to grant an injunction because of the existence of a restrictive covenant in a shopping center lease, stated that “those who look to benefit from [restrictive covenants] must expect that their terms and effectiveness will be strictly construed” (Genovese Drug Stores, Inc. v. Connecticut Packing Company, Inc., 732 F.2d 286 (1984)). These cases are discussed below and copies are enclosed.

According to an American Law Reports (ALR) publication, shopping center owners try to present an array of noncompetitive and complementary shops within one development. A common way of doing this is by adding a provision in a tenant's lease regarding the use of the owner's other shopping center property or the tenant's use of the particular space leased (i.e., a restrictive covenant). (For a comprehensive ALR annotation on this topic, including a review of federal and state cases, see Validity, Construction, and Effect of Lessor's Covenant Against Use of his other Property in Competition with the Lessee-Covenantee, 97 A.L.R.2d 4.)

ELIDA, INC. V. HARMOR REALTY CORPORATION

Harmor Realty Corporation (Harmor/defendant) had leased space in its shopping center in 1970 to a family-owned corporation doing business as Westville Home Bakery (Elida/plaintiff). The lease was extended in November 1976 for four years and an addendum was executed that (1) granted Elida “the exclusive right to sell products normally sold by a bakery shop” and (2) prohibited Harmor from “rent[ing] any other space in the shopping center for the purpose of baking on the premises.” Elida's exclusive right was subject to certain conditions (e.g., it did not apply to chain stores, such as a food market or drug store).

In December 1976, Harmor leased other space in the shopping center to The Gourmet Shoppe, Inc. (Gourmet), which sells products normally sold by a bakery shop. No action was taken to prohibit Gourmet's sale of bakery shop items. Elida brought action in Superior Court seeking (1) an injunction to stop Gourmet from selling bakery products, (2) an injunction to stop Harmor from breaching its contract with Elida, and (3) damages and attorney fees and costs. The trial court granted temporary injunctions pending a final hearing.

Harmor and Gourmet argued that the restrictive covenant in the Harmor-Elida lease was an unlawful restraint of trade in violation of antitrust laws and was therefore unenforceable. The Superior Court agreed and entered judgment in favor of Harmor and Gourmet. It said that the restrictive covenant was “per se” unreasonable and contrary to the state's antitrust act. Elida appealed the trial court's decision.

Elida asked the Supreme Court to decide whether the state antitrust act prohibits the enforcement of the restrictive covenant and therefore the issuance of permanent injunctions against Harmor and Gourmet. Elida also questioned whether the state antitrust act applied to its contract with Harmor, which was entered into in 1970. The Connecticut Antitrust Act became effective October 1, 1971 (1971 P.A. 608, C.G.S. 35-24, et seq.). The Court held that the statute applies to contracts entered into prior to its effective date if the contract continues in existence after that date.

Because the state antitrust act incorporates various provisions of the federal Sherman Antitrust Act (15 U.S.C. 1, et seq.), the Court looked to judicial interpretation of the federal act in construing the state statute. It found that “per se” violations of the Sherman Act are carefully limited to agreements or practices with a “pernicious effect on competition and lack of any redeeming virtue,” such as price-fixing, agreements between competitors to divide markets, and group boycotts.

The Court cited numerous references upholding the common law rule that anticompetitive covenants added to a lawful contract are enforceable if the restraint on trade is reasonable. It relied on its own precedent (Mattis v. Lally, 138 Conn. 54, 82 A.2d 156 (1951)) saying that to satisfy the reasonableness requirement, the restriction must be limited with respect to time and place, give fair protection to the beneficiary of the restriction, and not unduly interfere with public interest.

Based on a review of relevant authorities, the Court rejected the assertion that the restrictive covenant in the Harmor-Elida lease was illegal “per se”, and that a “rule of reason” standard should apply. It set aside the trial court's judgment and ordered a new trial, in which all circumstances of the case were to be gathered and weighed when deciding if the restrictive covenant was prohibited as an unreasonable restraint on competition.

GENOVESE DRUG STORES, INC. V. CONN. PACKING CO., INC.

This case concerned the Copaco shopping center in Bloomfield, Connecticut, which had two distinct ownership-companies, Connecticut Packing Company, Inc. (Copaco) and Bercrose Associates (Bercrose). The two owners agreed to operate as a unified complex, executing a joint development agreement that required each owner to obtain written consent of the other before building any structure in the common areas of the complex, such as the parking lots. In October 1971, Bercrose leased space to Genovese Drug Stores (Genovese) to operate a retail drug store. The lease included a restrictive covenant that prohibited Bercrose from leasing any other portion of the shopping center to any drive-in operation whose main business was photographic film processing. In June 1982, Fotomat entered into an agreement with Copaco to operate a drive-in photo processing business at the shopping center.

When Fotomat was building its kiosk in the Copaco parking lot, Genovese filed suit in federal district court against Copaco, Bercrose, and Fotomat. The district court issued a preliminary injunction, finding that Fotomat had constructive knowledge of the restrictive covenant. Fotomat appealed the injunction.

The U.S. Court of Appeals, Second Circuit, vacated the injunction and remanded the case for further proceedings. It found that Fotomat had neither actual nor constructive knowledge of the restrictive covenant in the Bercrose-Genovese lease. The case primarily concerns chain of title and the recording of leases and agreements. Of interest here, however, is the court's statement as a premise of real estate law that because “restrictive covenants, especially those endeavoring to restrict commercial activity for competitive advantage, are not favorites of the law, those who seek to benefit from them must expect that their terms and effectiveness will be strictly construed.” The court suggested that Genovese might be able to obtain damages from Bercrose for its breach of the covenant.

JK:ts