- March 8, 2024
- Posted by: Colm Hurley
- Category: News
In light of the recent Court of Appeal Judgment in the Dunnes/Mr. Price case, Cian Duane, Partner at CKT reflects on why restrictive covenants in commercial leases remain so common and why the term “grocery” caused such controversy.
Background
Developers of large commercial or mixed use developments will often attempt to protect the value of their investment by securing an “anchor tenant” to maximise footfall. For this reason, it is usual to see large supermarket chains such as Dunnes, Tesco, Lidl, Aldi etc take large units in a commercial development as these “anchor tenants”. However, they will inevitably insist that the landlord grant them exclusivity so that no other tenant will operate a similar business in the development in direct competition with them. The clauses in commercial leases, granting this exclusivity to the “anchor tenant”, and, obliging the Landlord to ensure no other tenant of a unit in the development is permitted to carry on a similar business (or use), are called “restrictive covenants”.
From an anti-competitive perspective it is worth remembering that in a decision of 17th June 1998 the Competition Authority (Notification No. CA/8/97 – First Rate Bureau De Change Ltd.,/Minister for the Marine) stated “the Authority has already indicated its view that exclusive user clauses in the letting of premises in a particular shopping centre or building complex does not contravene section 4(1) of the Competition Act”.
The Case
In the Dunnes/Mr. Price case a dispute arose over the interpretation of the restrictive clauses. Dunnes had acquired two units in Barrow Valley Retail Park as anchor tenant. The Landlord of the retail park covenanted not to permit any other unit in the development to be used as a supermarket, hypermarket, grocery, discount food store, frozen food outlet, mini food market, convenience store or any similar premises” or “to sell or display or permit or suffer to be sold or displayed any food, food products or groceries”. This restriction was to be included in every other lease the landlord granted to tenants of other units in the development.
In October 2020 Mr. Price took a lease of a unit in Barrow Valley Retail Park and thereafter Dunnes Stores’ local manager attended at their unit and found for sale a number of products which he considered to be “food products and groceries”. Dunnes Stores asserted breach of the restrictive covenants and while Mr. Price agreed to remove its “food products” it maintained that the term “groceries” was vague and ambiguous (as it was not defined in the lease) and as such void.
Ultimately, Dunnes issued proceedings and brought an injunction to restrain Mr. Price from offering groceries for sale. What constituted a “grocery” was ventilated at length at hearing and the High Court trial judge’s findings were that he did not consider the term “groceries” to be ambiguous and that the purpose of imposing the restrictive covenants was to protect the anchor tenant from competition within Barrow Valley Retail Park. Mr. Price appealed to the Court of Appeal arguing that it could not know with certainty as to what it was not permitted to sell given the meaning of “grocery”.
In the Court of Appeal at paragraph 125 of the Judgment it was stated that Mr. Price ignored “the prior agreements between the lessor and Dunnes Stores in respect of the Units 5 and 6, and the overarching purpose of the covenants which are expressly stated to be for the benefit and protection of Dunnes Stores. They fail to take into account the broader context that in 2005 the lessor required an anchor tenant supermarket, and that the anchor tenant would require “exclusivities” – in order to prevent potentially damaging competition in respect of its core business from those who later took tenancies of other units in Barrow Valley”.
Conclusion
The Court of Appeal therefore dismissed Mr. Price’s appeal and affirmed the order of the High Court (save an amendment clarifying the extent of the order) as it was found that Mr. Price could not sell “groceries” in the development shared with Dunnes Stores. This case is illustrative how careful consideration must be given both to negotiating restrictive covenants at the start of the development and assessing the impact they could have on any incoming tenants with a particular intended business and user.
[i] Dunnes Stores Unlimited Company & Anor -v- Dafora Unlimited Company & Ors [2024] ICEA 37