Is a Radius Clause Reasonable or an Illegal Restraint of Trade?

Many shopping center leases include “radius clauses” banning tenants from opening similar businesses within a certain radius of the leased location. The idea is to prevent tenants from establishing essentially identical establishments to siphon off revenues and thereby minimize gross sales subject to percentage rent under the lease. Although protecting gross rent revenues is a legitimate business interest, radius clauses are frowned on because they stifle new business and competition. Accordingly, courts will enforce them only if they’re clearly drafted and limited in scope. The following cases involving a shopping center tenant’s alleged violation of a radius clause illustrate how these principles play out in real life.

Case #1: Radius Clause Is Enforceable

Facts: A luxury boutique chain leases space in a posh suburban mall for a “women’s clothing and accessories boutique” under its “Fab’rik” trade name. The three-year lease bans Fab’rik from opening or operating another store within five miles without the owner’s consent. Fab’rik opens not one but two stores within five miles without the owner’s consent. The owner claims Fab’rik is in default and won’t let it renew the lease. Fab’rik asks the court to declare that the radius clause is overly broad and unenforceable.

Decision: The Georgia Court of Appeals rules that the clause is enforceable and that Fab’rik can’t renew because it violated the clause.

Explanation: The radius clause was “reasonable,” the court said because:

• As even Fab’rik admitted, five miles was a reasonable geographic scope for a radius clause;
• Three years—the term of the lease—was a reasonable duration; and
• The court interpreted the “not open or operate another store” language as meaning another Fab’rik store; Fab’rik’s interpretation of the language to mean any kind of store, which would have made the clause overbroad, was illogical and overly expansive, the court reasoned [Fab’Rik Boutique, Inc. v. Shops Around Lenox, 2014].

Case #2: Radius Clause Is Unenforceable

Facts: A tenant leases space in a mall to sell Chinese herbs and “over-the-counter Chinese medicine.” The lease bans the tenant from operating or owning a similar or competing business within a five-mile radius. The owner learns that the tenant plans to open an acupuncture shop a mile away. It claims the new location violates the radius clause because it sells some of the same herbs and medicines. So it asks the court to issue an injunction preventing the tenant from opening the new location.

Decision: The California Court of Appeal refuses to issue the injunction.

Explanation: The issue wasn’t whether the radius clause was reasonable (as in the Fab’Rik case), but whether the tenant had actually violated it. The court found no violation because the second location wasn’t a “similar” or “competing” business even though it sold some of the same products as the mall shop:

• The second location was a full-service acupuncture shop and not just an herb store;
• The second location served acupuncture patients while the mall store’s clientele was customers seeking to have their prescriptions filled;
•  The second location was not only not competing with but actually generating traffic and revenue to the mall store; and
• Issuing the injunction would force the tenants to give up the acupuncture shop business and lay off employees [Pacific Infinity Co., Inc. v. Xi Wan Li, 2013].

In a Nutshell

Courts are wary of radius clauses and will enforce them only if they’re “reasonable.” To be “reasonable,” the clause must:

• Be necessary to protect the owner’s gross sales (or other legitimate business interest);
• Go only as far as necessary to protect that interest and not be overly broad regarding geographic location, duration, and scope of business activities;
• Be clearly drafted—a court may seize on any ambiguity in the language to rule that the tenant’s new business isn’t the same or similar; and
• Not cause public harm like the loss of businesses, jobs, or competition.

Further reading: See “Consider Four Items When Negotiating Radius Clause,” available on our website at www.commercialleaselawinsider.com/article/consider-four-items-when-negotiating-radius-clause.