Restrictive Covenants in Leases

The Court of Appeal recently upheld a High Court decision. The decision related to the interpretation of a restrictive covenant in a lease that “food, food products or groceries” means not just food products but includes “non-durable consumable household items which are purchased frequently”. James Morrin, partner, analyses how the Irish courts interpret restrictive covenants of this type.

In a recent case between Dunnes Stores and Mr Price Branded Bargains, the Court of Appeal upheld the High Court’s interpretation of a restrictive covenant in a lease held by Mr Price. The High Court decision found that the phrase “food, food products or groceries” in Mr Price’s lease referred not only to food products but also included “non-durable consumable household items which are purchased frequently”.

What is a restrictive covenant?

A restrictive covenant is a clause in an agreement between a landlord and tenant that sets out certain things that the tenant cannot do.

Background to the case

The case arose out of a dispute between Dunnes Stores and Mr Price over the meaning of a restrictive covenant in Mr Price’s lease. Dunnes, as part of its deal to become the anchor tenant in Barrow Valley Retail Park in Carlow, had required that the lease agreements offered to all other tenants required the tenants:

1. Not to use or permit or suffer to be used the Demised Premises or any part thereof as a supermarket, hypermarket, grocery, discount food store, frozen food outlet, mini food market, convenience store or any similar premises for the sale of any food, food products or groceries;
2. Not to sell or display or permit or suffer to be sold or displayed any food, food products or groceries;
3. Not to sell or permit or suffer to be sold wine, beer or spirits.

Dunnes brought proceedings before the High Court alleging that Mr Price had breached this restrictive covenant by selling certain types of products such as cleaning products, shower gels, deodorant, in violation of the restrictive covenant. Dunnes applied for an order restraining Mr Price from selling these products.

Mr Price argued that these products were not included in the definition of “food, food products or groceries”.

The High Court proceedings

The High Court heard expert evidence from both parties regarding the proper interpretation of the restrictive covenant. The High Court also considered the law on interpretation of contracts as set down by the Supreme Court in The Law Society of Ireland v The Motor Insurers Bureau of Ireland. Our full analysis of the High Court case is available online.

The High Court held that the context of the restrictive covenant in question was relevant when interpreting the meaning of that covenant. The court held that, in the context, “groceries” was clearly meant to include more than just “food” and “food products” and extended to “non-durable consumable household items which are purchased frequently”.

The Court of Appeal

Mr Price appealed the decision on a number of grounds, including on the basis that:

• The High Court was incorrect in its interpretation of the restrictive covenants
• The High Court gave too much weight to the evidence of the expert who testified on behalf of Dunnes, and
• The injunction granted by the High Court was expressed in “ambiguous and unclear language” and as a result it was not clear to Mr Price what exactly it was prohibited from selling.

The Court of Appeal held that the trial judge’s interpretation of the restrictive covenants was correct and confirmed that the trial judge was right to take into account the context in which the restrictive covenants were negotiated and the overall agreements entered into by each party.

The Court of Appeal rejected the assertion by Mr Price that the trial judge had erred in law by preferring the expert evidence produced by Dunnes over the evidence produced by Mr Price. The court held that the trial judge had significant discretion to favour the evidence they found most compelling, in circumstances where they had the benefit of observing the experts give their testimony.

Finally, the Court of Appeal held that the order made by the High Court was sufficiently clear. The Court of Appeal made one amendment to the terms of the order made, adding a qualification that products must be “non-durable” in order to be included in the definition of groceries.

Conclusion

Clearly, it is important that all contract terms are clearly defined. This is particularly true for restrictive covenants and exclusivities in lease contracts, which can have a significant effect on the parties entering into the lease. This case highlights that parties should be as clear as possible as to the intent and meaning of restrictive covenant and exclusivity clauses in advance of execution of a lease. It also demonstrates that the courts will uphold restrictive covenants. This case has clarified the rules of interpretation that the courts will apply when interpreting these covenants, and commercial contracts in general.

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The content of this article is provided for information purposes only and does not constitute legal or other advice.