Exclusive Rights in Your Lease Can Make a Difference

You’ve heard the horror stories.  A landlord who didn’t know what a brewpub was until you started yours realizes you’re doing great and decides to open one in the same building or even next door.  One of your landowners decides he’d like to grow his own grapes and stops renting to you.  These events are devastating to your business and they’re why a good exclusivity clause in your lease can be a lifesaver.

Consider this recent scenario from the an appellate court in California:  A brewpub has been renting space since May of 1991 in a building owned by a landlord (a winery) that has had a tasting room right down the street in a different space.  In 2011, the landlord informed the brewpub that it would be relocating the tasting room to the building housing the brewpub.  The brewpub had no problem with the winery selling its bottles at the building, but said that the sales and tasting room would violate an exclusivity clause in the brewpub’s lease.  This clause was shorter than usual exclusivity clauses and didn’t specifically mention the brewery because at the time the lease was signed, it appears the brewpub was actually just a restaurant; it read:

32. EXCLUSIVE RIGHT: So long as this Lease shall be in force, Lessor will not operate or use, or permit any other person to operate or use, any portion of the building in which the Premises are located, as or for a restaurant or for catering services. The term “restaurant” shall be defined as a retail business purveying food and/or beverages for consumption on the Premises, and such definition shall not include packaged foods and canned or bottled beverages.

When the winery didn’t agree not to open the tasting room, the brewpub went to court to stop it and got an injunction to temporarily halt all the winery’s activities until a full trial on the meaning and extent of the exclusivity right under the lease could be determined.  The winery didn’t like this result and appealed.

Now, this is the kind of wine on beer violence that we normally don’t hear about – which makes it interesting.  The winery argued that “all wine tastings, tours, and the like, whether sold or not” were permissible and didn’t intrude on the exclusive right of the brewpub under the lease.  The brewpub argued that the clause prohibits any retail business tenant from providing anyone food or beverages that are consumed on site and that a tasting room would provide beverages for consumption on the premises.

The Appellate Court looked to the language of the lease provision and said that to read “purveying” as meaning anything other than “selling” might lead to the absurd result of any other retail business on the premises being barred from offering free food or drinks (the examples given were a candle and gourmet shop giving away free crackers, a hair solon offering water or coffee, or a business providing free meals to its employees).

Given the interpretation of “purveying” reached by the Court, it found that “in addition to selling bottled wine in its tasting room, it should be able to provide complementary wine tasting, free events, wine-related seminars and education” until a lower court could hold its full hearing on the merits to determine what the contours of the exclusive right under the lease entail.  But the winery would be prohibited from selling food or beverages for consumption on the premises in any portion of the building until the trial court reached a decision.

It’s likely that the parties didn’t revisit the exclusivity clause when they were renegotiating and updating their lease over the years and that when the restaurant apparently turned into a brewpub, the clause was overlooked.

So let this be a lesson, make sure you’re paying attention to this type of provision not just in the initial lease negotiations, but through any amendments and changes in your business as well.