Breaking the Boundaries: A Breach of Exclusive User Clause Unveiled, by Aideen Veale published in the irish law times journal – (2024) 42 I.L.T. 80-84 by Thomson Reuters, round hall.
The article ‘Breaking the Boundaries: A Breach of Exclusive User Clause Unveiled’ was published in the Irish Law Times – at (2024) 42 I.L.T. 80-84 by Thomson Reuters, Round Hall. The article is available on www.westlaw.ie or alternatively in print via email TLRUKI.orders@thomsonreuters.com
Restrictive user clauses are a common contractual provision in commercial lease agreements, defining and limiting how a leased premises can be used and granting rights to a tenant to conduct specific types of business or services within the leased property. A clause which prohibits the use of a premises for certain purposes is an exclusive user clause. They are often found in shopping centre leasing arrangements and are designed to provide tenants with protection by preventing a landlord from leasing nearby spaces to businesses that directly compete with the tenant’s operation. The article examines the scope and enforceability of this type of clause which was recently the subject of an Irish High Court (Court) judgment in the case of Rexbay Limited v Paul McCann, Stephen Tennant and (By Order) Hakuba Limited.
Background
This case arose following the grant of commercial leases to two neighbouring tenants in the Point Village Shopping Centre (Centre) in Dublin. The first lease was granted to Rexbay Limited (Plaintiff) (which operates various Starbucks cafés in Ireland) in 2015 in respect of Units 3 and 20 in the Centre (Rexbay Lease). In 2017, a lease of Unit 1 was granted to a company which had entered into two separate franchise agreements; one to operate a restaurant (Freshii) and the other to operate a coffee outlet selling specialty coffees (Handprint Coffee).
The Plaintiff initiated proceedings claiming that the use of part of Unit 1 as a coffee outlet amounted to a breach of the terms of an exclusivity clause granted to it in a side letter which was supplemental to its Rexbay Lease. The terms of the side letter provided that the landlord could not grant or consent to the granting of a new lease for any other unit in the Centre to other speciality coffee outlets or ‘any other similar type of coffee chain store where coffee is their primary product’. However, it went on to state that this did not prohibit the ‘use of a unit for the sale of coffee or other hot beverages where such use is ancillary to the main or permitted use’ of the unit (for example, a bakery, sandwich bar or restaurant). The Plaintiff submitted that it incurred financial losses as a result of the breach and sought an order for damages in the amount of €116,518.00 from the defendants.
By way of counter submission, the defendants submitted that in order to fall within the scope of the exclusivity clause granted to the Plaintiff, Handprint Coffee would have been required to occupy the entire of Unit 1. It also claimed that due to Freshii having the majority of sales and taking up a larger area of Unit 1, it accounted for a more significant aspect of the overall business carried out in that premises and therefore the Handprint Coffee outlet should be deemed as ancillary to the business of Freshii (which was expressly permitted in the exclusivity clause).
High Court Decision
The Court considered the principles of contractual interpretation in reaching its decision that there had been a breach of the exclusive user clause. Having carried out a detailed analysis of the wording of the clause, it found that:
- It was not necessary for Handprint Coffee to have occupied the entire of Unit 1 for a breach of the exclusivity clause to arise. Interpreted in its most liberal form, the Court held that the wording of the clause includes “any part” of a unit.
- Coffee did not need to be the primary product sold in the unit as a whole. In this case, it was sold in a part of a unit and this was sufficient for a breach of the exclusive user clause to arise.
- The lease did not have to be a coffee brand. In this case the lease had been granted to a company which then entered into a franchise agreement with Handprint Coffee.
- It was not necessary for Handprint Coffee to be a coffee chain. Even where this was its first and only outlet, it still fell within the scope of the exclusive user clause.
- There were two businesses operating in Unit 1; one being Freshii, which sold coffee as an ancillary part of its food offering, and the other being Handprint Coffee leading with the sale of coffee which was not ancillary to Freshii.
Accordingly, the Court found that the Plaintiff was entitled to the award of damages sought.
Conclusion
The Rexbay case highlights the fact that where an existing tenant has the benefit and enjoyment of an exclusive user clause, the landlord cannot then enter into a lease with another tenant which breaches that clause on the basis that the area being leased will be the subject of separate franchise agreements or such other arrangements which are claimed to be ancillary to each other when in reality they are separate entities.
Care should be exercised, therefore, in drawing up the wording of an exclusive user clause to ensure that it covers the uses which a landlord wishes to control and avoids any ambiguity and potential disputes regarding the obligations on a landlord and tenant in relation to such provisions. Exceptions and limitations, together with the consequences or remedies arising on the breach of a restrictive/exclusive user clause, should also be clear, specific, and reasonable.
This Moran & Ryan LLP material is not intended to provide, and does not constitute or comprise, legal advice on any particular matter and is provided for general information purposes only. You should not act or refrain from acting on the basis of any information contained in this material, without seeking appropriate legal or other professional advice.
Aideen Veale
Senior Associate
T: + 353 1 8725622
E: aveale@moranryan.com
