Can A Lessor Disregard An Exclusivity Provision In a Lease Agreement After the Lessee has Defaulted?

An exclusivity provision is a provision that bars a lessor from leasing a rental unit to an establishment that competes with the existing lessee. There may be circumstances in which a lessor or owner may disregard an exclusivity provision in its lease agreement when the lessee or tenant defaults in its lease payments.

In BG Monmouth, LLC., v. Sue’s Frozen Yogurt, Inc., et. al., No. A-2020-10T4 (N.J. Super. Ct.
App. Div. August 3, 2012), the Appellate Division of the Superior Court of New Jersey considered this issue. That case concerned the circumstances under which an exclusivity provision was rightfully abandoned.

The Plaintiff was the owner (Owner) of a shopping complex and shared a lease agreement with the Defendant, Sue’s Frozen Yogurt (Defendant, or Renter). The Defendant operated several food service establishments in Plaintiff’s shopping complex. Defendant’s establishments primarily served hot dogs, bagels, ice cream, and frozen yogurt. The lease agreement between the Plaintiff and the Defendant included an exclusivity provision that barred the Plaintiff from renting units in the shopping complex to proprietors that competed with the Defendant by providing primarily similar menu items. Id. at 2-5.

Though Defendant operated several food establishments in Plaintiff’s shopping complex, Defendant proved consistently tardy in paying rent and eventually left defaulted payments uncured. Plaintiff sent several letters to Defendant warning of the potential breach of the lease. Id. at 14.

The dispute escalated when Plaintiff granted a lease to Amazon Cafa food establishment that provided
menu items very similar to those of Defendant. Id. at 7. Defendant argued that Plaintiff breached the exclusivity provision found in its lease agreement. The exclusivity provision read as follows,

Provided the Lessee has not been in default hereunder and Lessee is operating the Demised Premises as a restaurant featuring hot dogs, ice cream, bagels, yogurt, and frozen yogurt, then Lessor agrees not to lease any space in the Shopping Center to any tenant whose primary business is either the sale of hot dogs, ice cream, bagels, yogurt and/or frozen yogurt.

Id. at 13.

In its decision, the Court began with the legal doctrine that [w]here the terms of a contract are clear and unambiguous there is no room for interpretation or construction and the courts must enforce those terms as written. Id. at 11.

In this case, the terms of the exclusivity provision clearly stated that it would only be enforced [p]rovided
the Lessee has not been in default hereunder. However, since the lessee was in default (by not paying rent), the Court held that the lessee could not enforce the exclusivity provision.

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