Tippecanoe Assoc. II v. Kimco Lafayette 671

• Decision Date: 23 June 2005
• Docket Number: No. 79S05-0506-CV-289.,79S05-0506-CV-289.
• Citation: 829 N.E.2d 512
• Parties: TIPPECANOE ASSOCIATES II, LLC, Appellant (Defendant below), v. KIMCO LAFAYETTE 671, INC., Appellee (Plaintiff below).
• Court: Indiana Supreme Court

829 N.E.2d 512

TIPPECANOE ASSOCIATES II, LLC, Appellant (Defendant below), v. KIMCO LAFAYETTE 671, INC., Appellee (Plaintiff below).

No. 79S05-0506-CV-289.

Supreme Court of Indiana.

June 23, 2005.

Charles R. Vaughan, Linda H. Havel, Lafayette, for Appellant.

Stephen R. Pennell, William P. Kealey, Lafayette, for Appellee.

BOEHM, Justice.

We hold that a covenant given by a shopping center to a tenant prohibiting the center from leasing to competitors of the tenant is generally enforceable. However once the tenant or its successor voluntarily relinquishes the original use of the site, the anticompetitive covenant is severed from the occupancy and no longer enforceable to give the tenant or an assignee the right to restrict competition for a location outside the center.

Facts & Procedural History

In 1973, SES Development Company leased one of the stores in its Sagamore shopping center to Kroger Company for an initial term of twenty years, with four options to renew the lease, each for a term of five years.¹ The lease contained a restrictive covenant preventing SES from leasing space in the shopping center to another grocery store. Kroger operated a supermarket at the leased premises until 1982. In 1983, Kroger closed all three of its Tippecanoe County stores and assigned their leases to Pay Less Super Markets, Inc., which at the time operated two other grocery stores within two miles of the Sagamore Center.² After the assignment, Pay Less opened stores in two of the former Kroger sites, but Pay Less cheerfully concedes that it never intended to operate a grocery store in the Sagamore Center and acquired the Sagamore lease for the purpose of excluding competitors of its nearby stores. In 1984, Pay Less subleased its Sagamore space to H.H. Gregg, an appliance dealer, who remains in that location today.³ The defendant, Tippecanoe Associates II, LLC, is a limited liability company owned by the family controlling Pay Less and the current holder of the Sagamore leasehold interest Pay Less acquired from Kroger. Tippecanoe acquired the lease in a series of maneuvers and seeks to enforce this thirty-year-old covenant against the current owner of the center, Kimco Lafayette 671, Inc.,⁴ even though there has been no grocery store in the center since 1982.

In 2000, another large tenant, Target, left Sagamore Center, leaving nearly one-half of the center's space unoccupied. Kimco contends that the only prospective tenant to fill the void caused by Target's departure is Schuncks, a Missouri-based operator of grocery stores. Kimco filed a complaint asking the trial court to declare the restrictive covenant unenforceable. After a hearing the trial court granted Kimco's request, reasoning that "the use of the property and the surrounding area have changed so radically ... that the original purpose of the covenant can no longer be achieved."

The Court of Appeals reversed, concluding that Tippecanoe's lease of the space to an appliance store and the empty space resulting from the Target move are not sufficient changes in the covenant to support invalidating the restrictive covenant. Tippecanoe Assoc. II, LLC v. Kimco Lafayette 671, Inc., 811 N.E.2d 438, 448-49 (Ind.Ct.App.2004). The result is that Tippecanoe, which operates grocery stores within a few miles of the center, is allowed to enforce a restrictive covenant that neither benefits the shopping center nor Tippecanoe's interest in the shopping center (its sublease to H.H. Gregg). We now grant transfer.

Restrictive Covenants in Shopping Centers

Indiana law permits restrictive covenants but finds them disfavored and justified only to the extent they are unambiguous and enforcement is not adverse to public policy. One Dupont Ctr., LLC v. Dupont Auburn, LLC, 819 N.E.2d 507, 516 (Ind.Ct.App.2004). Doubts should be resolved in favor of the free use of property and against restrictions. Id. However, courts have been quite willing to enforce restrictive covenants written in shopping center lease contracts even though they prevent competition within the center. See, e.g., Almacs, Inc. v. Drogin, 771 F.Supp. 506, 513 (D.R.I.1991); Whitinsville Plaza, Inc. v. Kotseas, 378 Mass. 85, 390 N.E.2d 243, 252-53 (1979); Kingpin, Inc. v. Hillcrest Dev., 267 Minn. 256, 126 N.W.2d 435, 439 (1964); Keith Hardware v. White, 956 S.W.2d 500, 501 (Tenn.Ct.App.1997) ("[R]ather than restricting competition, such covenants serve to facilitate trade and induce tenants to rent in a particular shopping center.... It is reasonable for the plaintiff to want to avoid competition within this center."); 49 Am.Jur.2d Landlord and Tenant § 70 (1995).

Restrictive covenants in shopping center leases have, for the most part, been found not to restrain competition unreasonably and have been generally found to be consistent with the public interest. The rationales for this result focus on the need to encourage the investment in new development by both the shopping center developer and its tenants. See, e.g., Vt. Nat'l Bank v. Chittenden Trust Co., 143 Vt. 257, 465 A.2d 284, 287 (1983). Courts have recognized that landlords and tenants of shopping centers invest considerable sums of money to make the center attractive to customers. Parker v. Lewis Grocer Co., 246 Miss. 873, 153 So.2d 261, 272 (1963) ("Tremendous outlays of venture capital and risk are required and entailed from the supermarket tenant as well as the developer-landlord. Restrictive covenants in the nature of ancillary and reasonable restraints are absolutely required to induce investors to place a new venture in such untried area."); Wal-Mart Stores, Inc. v. Ingles Mkts., Inc., 158 N.C.App. 414, 581 S.E.2d 111, 116 (2003) ("The development of new shopping centers requires tremendous outlays of venture capital and risk by prospective tenants as well as by landlords; restrictive covenants against unwanted competition are consistent with the public interest in such development."). Thus, restrictive covenants have allowed shopping centers to offer "noncompetitive and diversified, but interrelated, businesses designed not to serve just one need but as many needs of the consumer as is feasible within the economic framework of the shopping center." Annotation, 97 A.L.R.2d 4, 11 (1964). Accord Valley Prop., Inc. v. King's Dep't Stores of Tewksbury, Inc., 505 F.Supp. 92, 95 (D.Mass.1981) (restrictive covenants are "necessary inducements to shopping center tenants which facilitate the orderly and harmonious development for commercial use of real property"). All of these cited reasons support limiting the covenant to protection of current tenants of the center. Both the trial court and the Court of Appeals agreed that the initial covenant to Kroger was enforceable. In evaluating Kimco's claim that the covenant created in 1982 was no longer enforceable, the trial court and Court of Appeals focused on whether there have been significant changes in the circumstances. We think there is only one factor that is central and dispositive here. Because the Kroger site in the Sagamore Center is no longer being used as a grocery store location, there is no interest within the center for the restrictive covenant to protect. Pay Less is attempting to use the covenant to restrict competition for its grocery stores located at other locations. Kroger was within its rights to assign the lease to Pay Less, and if Pay Less had chosen to continue grocery operations at the center, its interest in the lease would support enforcement of the covenant. However, Pay Less voluntarily abandoned grocery operations in the center and thereby severed the restrictive covenant from the occupancy.

The shopping center obviously receives no benefit from permitting a transfer of the covenant. And it seems unlikely that a prospective new tenant would be significantly motivated by the prospect of recouping its investment by selling a restrictive covenant to a nearby competitor if the tenant's business fails. In any event, the effect of permitting a covenant to be sold separately from the operation it is designed to protect is perhaps to add some minimal value to the original lessee, but at considerable cost to the lessor and the public. None of these rationales suggests a powerful reason to permit a secondary market in restrictive covenants divorced from the real estate they are designated to protect. It is one thing to conclude that restrictive covenants in leases of shopping center tenants should be enforceable to protect the interests of the center and those tenants who have a current protectible interest within the center. It is quite another to permit enforcement of an anticompetitive covenant by someone foreign to the center who simply acquires the right to exclude competition without making any investment in the center. And the interest of the original lessee, Kroger in this case, may well be fully served by permitting enforcement of the covenant as long as it or a successor operates a grocery store in the center.

Finally, the issue is not whether the covenant violates federal or state antitrust law. We assume Judge Posner was correct in his passing observation deeming "implausible" a claim that federal antitrust law prevented a drug store from invoking a shopping center covenant to exclude a competitor.⁵ But the issue here is not whether the antitrust laws prevent enforcement of such a covenant. It is whether state law permits its enforcement not by a tenant of the center, but in the hands of one who has never occupied the center and merely attempts to purchase the right to exclude competition from a remote site. As the comment to the Restatement (Second) of Contracts explains:

[T]he restraint may be unreasonable in either of two situations. The first occurs when the restraint is greater than necessary to protect the legitimate interests of the...