January 10, 2011

A legal battle between developers of competing retail outlet shopping centers has culminated in a key ruling that allows creative leases to restrain competition by impeding the entry of competitors into the marketplace. The opinion, Sussex Commons Outlets, LLC, v. Chelsea Property Group, Inc., et al., held that commercial leases that prevent tenants from operating stores within competing commercial centers are valid, so long as they do not violate the “rules of the game.”

Sussex Commons Outlets, a proposed retail outlet center in northern New Jersey, was being developed and marketed as an alternative to two existing outlet centers located in New York (Woodbury Commons) and Pennsylvania (The Crossings) owned by Chelsea Property Group and CPG Partners. Sussex Commons was located between, and nearly equidistant from, the two existing outlet centers.

Sussex Commons filed suit against Chelsea Property Group and CPG Partners for tortious interference with prospective business advantage, unfair competition, and other similar causes of action. The lawsuit challenged the tactics employed by the defendants, including the use of radius and site-specific clauses in tenant leases, lower rent incentives, lobbying activities, and financially supporting a local citizen group that opposed the Sussex Commons application.

The defendants were concerned that Sussex Commons would acquire a significant portion of the retail outlet market share that was controlled by defendants, and impact the defendants’ interest in percentage rent, which is proportionate to tenant sales. In an attempt to protect its business interests, defendants negotiated restrictive clauses in their tenant leases. Certain leases included a radius clause that prohibited tenants from operating outlet stores within a defined number of miles from the existing outlets.

Other leases included a site-specific provision that prevented the tenant from operating an outlet store at Sussex Commons. A tenant in breach of this clause was subject to the “added sales remedy” provision that would increase the tenant rent based upon the sales figures at the tenant’s Sussex Commons location. In exchange for the additional burden imposed by these clauses, the tenants obtained a reduced rent.

Common Industry Practice

The Appellate Division affirmed the trial court’s dismissal of Sussex Commons’ complaint and found that these restrictive lease provisions were commonly used in the retail outlet industry. In fact, Sussex Commons had incorporated similar provisions into its leases with future tenants.

The court therefore concluded that the standard for determining tortious interference is whether the defendants engaged in conduct that was fraudulent, dishonest, or illegal, or if it violated the “rules of the game” as defined by the industry. As a result, the court ruled that radius and site-specific clauses in defendants’ tenant leases were legitimate ways to protect market share from competitors.

Hill Wallack LLP's Land Use Team

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For more information, contact one of the attorneys who work in this area: Thomas F. Carroll, III, Esq.; Stephen M. Eisdorfer, Esq.; Kenneth E. Meiser, Esq.; Henry T. Chou, Esq. or Michael J. Lipari, Esq.

This article provides information of general interest and is not intended, and should not be used, as a substitute for consultation with legal counsel. Any questions regarding the specific issues raised in this article should be directed to the authors or to your contacts at Hill Wallack LLP.