Lease's Non-Compete Covenant Didn't Apply to Prior Tenants

Facts: A tenant and owner signed a lease extension for shopping center restaurant space that the tenant had been renting to run its pizza parlor. The extended lease term was from June 1, 2010, to May 31, 2026. The lease extension provided a restrictive non-compete covenant: “Owner shall not rent [certain specified nearby premises] to any tenant who offers for sale the same type of food sold by Tenant and if a tenant occupying one of these premises commences the sale of prohibited foodstuffs, Owner shall take steps necessary to have the tenant cease and desist from those sales.”

The tenant later sued the owner and the property manager of the center, claiming that another tenant occupying an area of the center that was specified in the lease extension was selling pizza. The owner and the property manager asked the court for a judgment in their favor without a trial, arguing that their right to allow the competing tenant to sell food similar to the tenant's preexisted the tenant's lease extension. The court ruled in the owner's and property manager's favor, and the tenant appealed.

Decision: The appeals court upheld the lower court's judgment in favor of the owner and the property manager.

Reasoning: The owner and the property manager claimed that the restrictive covenant in the lease extension could not be enforced against a “prior tenant,” such as the competing tenant, which had rented space for several years before the lease extension was negotiated.

The court stated that the restrictive non-compete covenant in the lease extension could not be enforced against a competing tenant whose lease predated the covenant's execution in June 2010—absent evidence that the competing tenant's lease was falsely dated, or that the competing tenant, before it had entered into its lease several years before, had notice of the owner's intention to enter into a restrictive non-compete covenant later with another tenant.

The tenant alleged that the competing tenant was a “subsequent lessee” that signed its lease with “full knowledge” of the restrictive covenant. However, it couldn't produce any evidence proving that the competing tenant had any idea that, when it originally signed its lease, the owner intended to sign future leases containing restrictive non-compete covenants that would apply to tenants with preexisting leases, such as itself.

• Fratelli's Pizza and Restaurant Corp. v. Kayzee Realty Corp., et al., June 2010