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Restrictive Covenant Does Not Apply to Shopping Center Lease, Fourth District Decides

 

As Chicago business trial attorneys with substantial experience in disputes involving shopping centers, our firm was interested to see a recent Fourth District Court of Appeal decision allowing a shopping center to go through with its lease despite a restrictive covenant in a land sale by its predecessor. In Regency Commercial Associates v. Lopax, 4-06-0332 (May 4, 2007), the appeals court upheld the trial court’s ruling that the business at issue was not covered by the covenant, and that starting the lease while the case was still pending did not bar it from requesting a declaratory judgment.

Regency Commercial Associates, LLC and Lopax, Inc. are companies that own neighboring parcels of land in Savoy, Ill. The prior owner of Regency’s land, Arbours Development Limited Partnership, sold Lopax its land, which Lopax then leased to a Kentucky Fried Chicken franchisee. The sales contract between Lopax and Arbours restricted Arbours from allowing another “fast-food restaurant … or restaurant facility whose principal food product is chicken[.]” It also lists the types of businesses allowed, which include “casual dining.” Regency later purchased Arbours’ rights under the contract.

When Regency wanted to lease to a Buffalo Wild Wings restaurant, it negotiated with Lopax, arguing that the restaurant is “casual dining” and not fast food. Lopax disagreed, saying it believed the contract restricts any restaurant that primarily serves chicken. Regency filed for declaratory judgment, asking the court to find that Buffalo Wild Wings is not fast food and that the covenant restricts only fast-food restaurants that primarily sell chicken. Finding that there was a genuine issue of material fact to try, the court denied Lopax’s motion to dismiss.

During this phase, Lopax discovered that Buffalo Wild Wings franchisee had already signed a lease with Regency, contingent on the lawsuit’s success, before Regency’s filing. Lopax then filed for summary judgment based on nonliability for past conduct — the legal theory that a plaintiff may not seek declaratory judgment after already taking a contract-breaching action. Regency contended that because the lease didn’t take effect until the case was over, there was no lease. Lopax also moved to compel discovery of the lease. The court denied both that and the summary judgment motion. Lopax appealed both denials, as well as the denial of its motion to dismiss.

In its analysis, the Fourth District noted that the language of the restrictive covenant was ambiguous as to whether all chicken restaurants are banned, or just fast food restaurants. Using documents that illuminated the parties’ reasoning at the time the contract was written, it decided that the covenant restricted only fast-food restaurants primarily serving chicken. On the issue of nonliability for past conduct, the appeals court pointed out that the lease is not effective until this case is over and none of the actions adverse to Lopax — opening the buffalo wings restaurant — have taken place, so Regency is not seeking to avoid liability for past conduct. Finally, the court upheld the trial court’s decision that the lease was irrelevant and therefore should not be discoverable. It is worth noting that Justice Cook dissented from this decision.

As Chicago, Wheaton, Oak Brook and Naperville business trial lawyers with substantial experience with shopping center tenants disputes and shopping center tenants’ rights issues, we welcome clarifications to real estate contract law, especially on restrictive covenants. If you are involved in a similar dispute over a shopping center or other commercial real estate and you would like to speak with us about your options, please contact DiTommaso Lubin Austermuehle for a confidential consultation.