Don't Rely on Descriptive Lease Terms as Use Restriction

Q: I signed a lease for space at my shopping center with a tenant that said it would operate a floral shop. Apparently, after a storefront that is more convenient for its business became available, it decided to use that space for retail sales and my space for storage and as a workshop for its employees to assemble its products.

The tenant informed me of its plan to sell the inventory at the second location. I think it’s breaching the lease by changing the use of my space from sales to a workshop and storage facility. Unfortunately, I’ve discovered that the lease doesn’t explicitly say that the tenant is required to sell items at my center. Based on past cases, what’s the likelihood that I’ll prevail in a lawsuit, making my time and the cost of litigation worth it?

A: It could depend on whether you have a specific use clause in your lease, or you just described the space as “store” space and assumed that by referring to it that way, the tenant must use it in that fashion.

Case on Point

Unfortunately for a Montana shopping center owner, its grocery store tenant prevailed in a similar situation. The tenant won its case after the owner tried to restrict the use of its space and collect additional rent.

Under its lease, the tenant was required to give the shopping center owner a percentage of its net sales. The tenant began using its space for storage instead of sales, and opened another location for retail sales. The center’s owner sued the tenant. Among several other claims, the owner alleged that the tenant had breached its lease by not using its space for retail sales. The owner said that it was entitled to the same amount of net sales made at the new location as it had been at the shopping center location. The tenant and owner each asked for a judgment in its favor without a trial.

No Imposition of Duty Existed

A Montana trial court concluded that the lease was unambiguous, and it contained no express terms or provisions requiring the tenant to use the space as a retail grocery store. The only provision in the lease that expressly describes the manner in which the tenant agreed to use the space stated: “Business Use. Tenant shall promptly comply with all laws, ordinances, and regulations affecting the premises and promulgated by duly constituted governmental authority affecting the cleanliness, safety, use, and occupation of the premises.”

The trial court said that neither this section nor the other sections of the “Operation and Use of Premises” portion of the lease imposed upon the tenant any obligation or duty to operate the premises as a retail grocery store. Rather, they limited the tenant’s use only to the extent that the tenant must comply with all laws and must not abuse the space or interfere with other tenants’ businesses or their rights.

Consent to a Particular Use Is ‘Permissive’

The owner asserted that the language “Landlord does hereby lease to Tenant and Tenant does hereby hire and take from Landlord store space containing approximately 20,000 square feet….” imposed a duty upon the tenant to operate a retail grocery store in the premises rather than use it for storage space. But the trial court determined that the use of the phrase “store space” in describing the premises in the preliminary section of the lease merely described the “space to be leased” and not the “use to which it must be put.”

In another case, the Montana Supreme Court had addressed the topic of “space description” in leases. It said that words used in a lease that are merely descriptive of the character of the premises, although indicating a particular use, are not to be construed as restrictions upon the tenant confining its right to use the premises to the particular use that those words may suggest. “Provisions which authorize the use of the premises for a specific purpose or which merely give consent to a particular use of the property, are generally regarded as permissive rather than restrictive in nature, and do not therefore, in the absence of other limiting language, restrict the lessee to the use specified in the lease,” said the state’s highest court.

The trial court here followed its lead, declining to agree with the owner that the mere description “store space” restricted the tenant to use the premises only as a retail grocery store.

And the owner couldn’t collect more rent based on the sales at the retail location, either. That was because the tenant hadn’t breached the lease by paying rent that didn’t include a percentage of net sales made in the leased storage premises. The owner wasn’t entitled to calculate rent based on net sales in the other location, the trial court decided [Clark v. F.T. Reynolds Co., December 2015].

When negotiating leases in the future, talk with your attorney about including a use clause, which is typical for commercial leases, instead of relying on descriptive terms to try to prevent the tenant from changing the way it uses the space.