Define Key Business Words Like “Department”—Or Don’t Use Them

A retail tenant with the bargaining clout to command an exclusive right to sell certain merchandise at a shopping center may press for the broadest exclusive protection possible. It may insist that you refrain from leasing to any other tenants that have a “department” selling the merchandise the exclusive covers. Giving in to this demand may have unforeseen and unfavorable consequences.

What the Heck Is a “Department” Anyway?

Extending an exclusive to another retail tenant’s “department” seems pretty reasonable. The problem is that the word “department” is vague. From a landlord’s perspective, “department” may mean an entire floor or a large area of the store. But the tenant may interpret “department” to include even a small area with just a couple of shelves devoted to the merchandise. Any language that allows for such dramatically conflicting interpretations is a surefire recipe for a dispute and a court battle that will be tough for a landlord to win.

Landlord Gets Burned by Not Defining “Department”

The owner of a California shopping center learned this lesson the hard way. The lease gave a supermarket tenant an exclusive, stating that no portion of the shopping center except for the supermarket’s space could be operated as a supermarket or “department within a store for the sale of food, groceries, fruit, produce, dairy products, vegetables, bakery products, meats, or delicatessen products.” 

The trouble began when another tenant in the shopping center started selling groceries in a small area of its non-supermarket store. The supermarket accused the landlord of violating the exclusive by allowing the other tenant to create a “food department.” The landlord reassured the supermarket that the area from which the other tenant was selling grocery products wasn’t a “department.” But the supermarket refused to back down. Although convinced that the supermarket was way off base, with litigation pending, the landlord had to face some difficult realities: 

• The supermarket lease didn’t include a definition of “department”; 
• The resulting ambiguity and lack of a meeting of the minds on what a “department” was opened the door for a court to resolve the dispute; and
• Courts in contract disputes generally interpret ambiguous language against the party that drafted the agreement, which in this case was the landlord.

Recognizing its precarious situation, the landlord decided that going to court would be too risky and that it had to back down. But there was a price to pay. The landlord had to order the other tenant to halt its grocery sales. More important, it faced the challenge of dealing with the enormous power it had inadvertently invested in the supermarket by including a vague word like “department” in the exclusive clause.

2 Ways to Protect Yourself

Don’t make the same mistake with your own tenants. 

Option 1. Define “department.” If you agree to use the word “department” in the exclusive, ensure the provision defines the word. One approach is to spell out what features something must have to be considered a “department,” such as: 

• A stated minimum number of square feet in area; 
• Signs within and around the area clearly identifying the department;
• A listing in the store’s directory;
• A set number of dedicated or designated employees; and
• Annual gross sales of a stated minimum amount.

Option 2. Don’t use word “department” at all. The other option is to avoid the word “department” altogether. Strategy: 

• Instead of what it’s called, focus on what a department is used for—namely, the sale of merchandise subject to the exclusive;
• Agree not to lease space to another tenant that’s “primarily” used for that purpose; and
• Specify that “primarily” means use by the other tenant of 50% percent or other set percentage of its sales area for selling the merchandise covered by the other tenant’s exclusive. 

Bottom Line

The takeaway is the importance of ensuring that all of the key words and terms in your lease are clearly and objectively defined so that both sides understand what they mean. If they’re not, don’t use them. This applies not just to “department” in retail exclusives but to all words that have potentially significant business and legal ramifications in any kind of lease provision.