Scott E. Seitter1
Anti-competition restrictive covenants and lease provisions, particularly in shopping centers and malls, have become commonplace. Neither Missouri courts nor the legislature, however, have established parameters for the duration of such restrictions.
I. Introduction
Anti-competition restrictive covenants contained in deeds to real property, and similar exclusive rights clauses found in leases, generally limit adjoining property from specific uses. In the last several decades anti-competition restrictions have become more commonplace. Many business sectors demand such restrictive covenants, either by deed restriction or in lease use and exclusive clauses. Grocery stores,2 restaurants,3 clothing stores,4 and other retail establishments5 have long sought various ways to assure their livelihood by protecting their turf. Currently many office-building owners are faced with similar negotiation demands from professional service providers, including lawyers.
Covenants that restrict competition in a given geographic area, either by restrictive covenant recorded against title to real property or contained in a lease agreement, come in a myriad of shapes and sizes. These so-called “anti-competition” restrictions can limit the use of affected property in countless forms. In the food service industry alone, restrictions can dictate use of property by service classification (full-service vs. quick-service), type of food (popularly priced food vs. ethnic food), various methods of delivery (take-out vs. drive-through), liquor sales and menu items, to name just a few. In order to be effective, these anti-competition clauses must define types of allowed and non-permitted business activities. Additionally, these restrictive clauses must precisely and carefully distinguish competing activities from one another. Beyond the scope of such restrictions (i.e., who is restricted from what) remains a central question, at least to practitioners of real estate law: What is the allowable duration of any such restrictive burden against the title to the affected property?
In legal terms, restrictive covenants against competition are a form of equitable servitude.6 This remains an important distinction because of the disparate historical treatment of equitable servitudes versus, in particular, personal covenants. Historically, the law attempted to define covenants dealing with real property as either real or personal.7 This dichotomy, in part, determines whether subsequent purchasers from the covenator (the person who created the restriction) are bound by the servitude (i.e., the restrictive covenant). And more particularly, whether subsequent purchasers from the beneficiary of the covenant can enforce the covenant.8 Equitable servitudes9 run with the land (and thus bind subsequent purchasers) if: (1) there is an intent that the covenant runs with the land, (2) there is notice of the covenant, and (3) the covenant is deemed to “‘touch and concern’ the land.”10 Historically, courts (rather inconsistently) refused to enforce many restrictive covenants under their protracted analysis of the “touch and concern” test.11 This resulted in uneven, unpredictable approaches to enforcement of negotiated restrictive covenants.
The American Law Institute’s newest restatement on servitudes, the Restatement (Third) of Property: Servitudes (Restatement), attempts to establish a new, more objective method for analyzing restrictive covenants, avoiding the historically convoluted and often meaningless discussions which invariably focused on the “touch and concern” analysis.12 Though not adopted by any court in Missouri, the Restatement’s position seeks to establish a new “analysis: whether the restriction is ‘illegal, unconstitutional, or against public policy.’”13 Several other jurisdictions have chosen to follow the Restatement’s lead.14 This brighter line test should be welcomed in Missouri. Until adopted by Missouri courts or enacted by the state legislature, however, we remain subject to the established historic analysis. Out of the Missouri courts’ continuing reliance on the historic framework has come (what passes for) a test for the allowable duration for any anti-competition restrictive covenant: the reasonable time test discussed below.
II. Anti-Trust Aspects Of Anti-Competition Restrictive Covenants
A short word on the anti-competition aspects of restrictive covenants and the Sherman Anti-Trust Act.15 Parties aggrieved by an anti-competition restrictive covenant may seek to void or deny enforcement of the anti-competitive nature of a covenant, either limiting its duration or application, by attacking the covenant’s enforceability under the federal Sherman Anti-Trust Act. The United States District Court for the Western District of Missouri, in a seminal case, reviewed restrictive covenants and their anti-competitive effects in the context of federal anti-trust legislation. In Dunafon v. Delaware McDonald’s Corp.,16 the court was faced with a claim by a fast-service restaurant competitor that a restrictive covenant contained in a lease agreement in a shopping center violated the Sherman Anti-Trust Act. More particularly, the plaintiff asserted that the anti-competition restriction violated the federal act’s proscription against restraint of trade and sought an injunction prohibiting enforcement of the restrictive covenant.
In arriving at its judgment upholding the restrictive covenant, the court first determined the plaintiff failed to demonstrate that the lease covenants restricted the “sites available to competitors generally.”17 Consequently, the court held the plaintiff failed to demonstrate there was “an exclusion from the relevant market.”18 The court determined the lease restriction did not have “a substantial adverse affect on competition,” and thus did “not unreasonably restrain trade [or] violate § 1 of the Sherman Act.”19 Interestingly enough, in the opinion’s dicta, it noted that “non-competition covenants are common in shopping center leases. In fact, [the plaintiff] proposed a similar covenant in the lease he submitted to [the landlord] to lease space for a Taco Bell at the Biscayne Mall.”20 The Dunafon case clearly demonstrates that seeking to limit the effectiveness of a restrictive covenant against real property under federal anti-trust law will be difficult, at best. Any statutory law limitations, in particular on the duration of restrictive covenants, will need to be found in state law.
III. Use And Exclusive Lease Clauses
Another method of limiting competition via real estate documents can be found in lease use and exclusive provisions. A lease use clause generally delineates a tenant’s right to conduct specific business activities on the leased premises (for example, an insurance agency, a quick service restaurant, a general office). An exclusive clause contained in a lease protects the benefited tenant from another tenant’s potentially harmful activities by requiring the landlord to prevent such activities (for example, a lease may require that the landlord not allow tattoo parlors in the building). Often use and exclusive clauses are provided in leases to limit the tenant’s use of the space, while simultaneously granting the tenant the exclusive right to operate their type of business on the affected property.
Generally, if use and exclusive clauses are contained in a lease agreement for improved real property, the duration of any such restrictions is, as a matter of course, limited to the term of the lease. Neither landlord nor tenant is generally interested in continuing any use and exclusive clause following the termination of the lease itself. Upon lawful termination of a lease containing a use and exclusive clause, the tenant should no longer be occupying the space. The landlord could lawfully relet the premises to another user and, thus, the need for the use restriction (in order to protect the departing tenant) would no longer exist. Therefore, in general and as a practical matter, use and exclusive clauses in lease agreements for improved real property do not continue beyond the term of the underlying lease.
Additionally, use and exclusive clauses are not always recorded on the land records. Landlords normally prefer their property not be burdened by any recording of the lease – not even a memoranda (or abridged form) of lease. And unless the entire lease agreement is recorded (often a costly and burdensome prospect given the length of many modern shopping center leases and the number of tenants in some megamalls), public notice of any restrictions contained in the use and exclusive clauses may not be made. Without putting the restrictive clauses on the public record, the opportunity that an unwary tenant may contract with an unscrupulous landlord (who fails to disclose any existing exclusive rights) is greatly increased. 21
IV. Restrictive Covenants
Use and exclusive clauses in leases, for practical reasons as briefly discussed above, are generally restricted in duration to the term of the lease agreement. Restrictive covenants and equitable servitudes that are direct burdens on the real property can theoretically survive in perpetuity. Restrictive covenants against competition most often arise either out of a transfer of title to real property or under a ground lease. These documents, by nature, encumber title to real property and, if properly recorded, appear in the public records.
Most states, including Missouri, now generally agree that covenants against competition may be made to run with the land.22 Missouri courts may fashion on their own accord limits on the type and scope of restrictive covenants while applying the rule that “restrictive covenants are to be interpreted narrowly.”23 Although Whitinsville Plaza v. Kotseas24 is a Massachusetts Supreme Court decision, it clearly reflects many of the standards of review adopted by Missouri courts. The Whitinville Plaza court held that “[r]easonable covenants against competition may be considered to run with the land when they serve a purpose of facilitating orderly and harmonious development for commercial use.”25 Further, the court determined “that a covenant restraining competition will be enforced if it is reasonably limited in time and space and consonant with the public interest.”26 Nevertheless, the court cautioned that its decision “should not be construed as an invitation to legal draftsmen to insert unlimited, ‘boilerplate’–type covenants against competition in real estate documents.”27 Yet the question remains unanswered: What is a reasonable time limit for anti-competition deed restrictions?
Courts generally proclaim (and frankly, without giving much justification) that the duration of a restrictive covenant will be limited to such time as seems reasonable from the nature of the case.28 Courts will not construe the restrictions as extending for a period of time longer than the nature of the circumstances and the purpose of the imposition.29 If the duration is specified in terms of years, months, weeks or days, and as thus fixed, such additional words as “at any time,” “ever,” “never” or “forever” appearing in the restrictions will be ignored in light of the particular specification of the restriction.
The use of “timeless” words will not void a restrictive covenant. For example, the Supreme Court of Missouri in Gardner v. Maffitt30 concluded that a deed provision that provided “the conveyance hereby made is subject to these reservations, easements, restrictions, covenants and conditions that shall remain in full force and effect for twenty-five years from the date of their deed” . . . “applies grammatically and logically to each of the restrictions” thereinafter set forth (i.e., all restrictions will apply for 25 years).31 Thus, even though the particular restriction purported to prohibit the specified use of the property “ever” or “at any time,” the Gardner Court concluded the restrictive covenant would nevertheless survive and be limited in duration to 25 years.32
There is little guidance from Missouri courts, other than the Gardner-type interpretative analysis, on the issue of the allowable duration of an anti-competition restrictive covenant. What we do know is that Missouri courts continue to adhere to the historic analysis. The courts continue to find that anti-competition restrictive covenants run with the land.33 But a central issue remains: How long can the covenant remain in force? Obviously, in the first instance, the breadth and duration of any restrictive covenant is subject to negotiation between the parties. But under what parameters and under what limitations can a restrictive covenant be enforced?
There is also a dearth of case law in Missouri regarding the legally enforceable duration of restrictive covenants in general, and almost no case law of record regarding the permissible duration of anti-competition restrictive covenants. Cases can be found with anecdotal comments, hardly even dicta, regarding the duration of restrictive covenants coming before the courts.34 In most cases, the courts apparently didn’t think the time duration of the anti-competition restriction was important enough to even warrant space in the opinions.
And finally, the Missouri statutes do not provide any guidance either. Without this statutory authority, the assurance that parties need in negotiating anti-competition restrictions will continue to be left, at least to some extent, to chance. There is precedence for Missouri to establish some certainty as it relates to the enforceable duration of anti-competition restrictive covenants. Some states have adopted statutory limitations through, for example, marketable title acts. These state laws affect the duration of certain covenants not re-recorded during a set period of time following their original creation.35
V. Drafting Considerations
Without either statutory or case law guidance, drafters of anti-competition restrictive covenants are left to their own best efforts. There are recorded cases where restrictive covenants, on their face, purport to provide protection in perpetuity.36 This raises the question: Does the rule against perpetuities per se limit this type of restrictive covenant? Or does the mere fact that such a purported perpetual covenant violates the rule against perpetuities cause the covenant to fail ab initio? Covenants and restrictions in property deeds do not, as a matter of Missouri law, violate the rule against perpetuities.37 In Beets v. Tyler, the Supreme Court of Missouri held that a restrictive covenant as part of plan development requiring any lot owner proposing to sell a lot to first give notice of the proposed sale (and its terms and conditions) to other development property owners, “constituted no impediment to [a] transfer of the property,” and, hence, did “not violate the rule[s] against perpetuities . . . even though not limited in time.”38 The Supreme Court also held that the restrictive covenant in question was not invalid as an unreasonable restraint on alienation.39
A court in least one state decided that a non-competition restrictive covenant “unlimited as to time,” though it could have been held to be void, was saved and modified.40 The Texas Court of Appeals did not invalidate the restriction, but on its own accord merely reduced the term of its duration to “a reasonable time.”41 Some states have enacted specific legislation limiting to a specified number of years the duration of conditions or restrictions on real property that on their face were intended to run in perpetuity.42
The Restatement (Third) of Property recognizes and reaffirms a general freedom in landowners to create an enforceable obligation between the original parties, and that requiring the covenant to run with the land does not violate public policy. However, the Restatement does limit the enforceability of any restrictive covenant if a successor in interest to the burdened property can establish that allowing the servitude to run with the land would either unreasonably restrain competition or otherwise violate public policy.
Missouri courts will enforce restrictive covenants, but they insist upon interpreting the covenant language by their own set of rules. Restrictive covenants are not favorites of the law and are strictly construed.43 The covenant must be written in clear and unambiguous language and must be specific to allow determination of whether the effect is reasonable.44 “[W]ords of restrictive covenants are not to be extended by implication, and any reasonable doubt as to their meaning is to be resolved in favor of the free use of [the] land.”45 The party seeking to enforce the restrictions carries the burden of proving the use “of the property is in violation of the restrictions.”46
So what is the poor legal drafter to do? How long can a restrictive covenant endure before it may be deemed in violation of the currently established reasonable time test? As already discussed, use and exclusive clauses in lease agreements are, generally, by their nature, limited in time in relation to the length of the lease. The restrictions endure so long as the lease is still in full force and effect. And presuming the lease term is reasonable, and the anti-competition clause is reasonably related to the protection of the tenant’s business, the restrictive covenants contained in the lease, and limited by design to the lease term, should be deemed reasonable in duration by a Missouri court.
In contrast with use and exclusive lease clauses, the duration of an anti-competition covenant that runs with the land is much more problematic. So long as the restrictive use continues to effectively protect the beneficiary’s business, keeping in mind potential changes in circumstances, the restriction should survive. Should the intended beneficiary of the restrictive covenant, for example, materially alter its business, or if changes in the surrounding area dictate limiting the effectiveness of the covenant, Missouri courts are prepared to curtail the scope and term of anti-competition restrictive covenants. The courts can always strike down anti-competition restrictive covenants on public policy grounds where the restrictions unduly restrain trade or restrict competition unless certain limitations on their scope, effect, and duration are incorporated.
Conclusion
Until such time as either the Missouri state legislature provides a statutory framework for limiting anti-competition restrictive covenants, or state courts adopt a more objective, uniform approach to analyzing such restrictions, the allowable duration of such restrictions will continue to be a matter for a case-by-case approach. Nevertheless, anti-competition restrictive covenants should escape judicial interference provided they are narrowly tailored in scope, the terms and conditions of the restrictions are “reasonable” in light of judicial precedence, and continually related to the use of the property. How long can these restrictions remain in full force? Currently, as long as Missouri courts will allow.
Footnotes
1 Mr. Seitter is a shareholder with Levy & Craig, A Professional Corporation, in its Kansas City office, where his practice is primarily focused on real estate development. He received his B.S. from Washburn University in 1980 and his J.D. from Washington University School of Law in 1983.
2 See, e.g., Sunny Isle Shopping Ctr. v. Xtra Super Food Ctrs., Inc., 237 F. Supp.2d 606 (D.V.I. 2002).
3 See, e.g., Dunafon v. Del. McDonald’s Corp., 691 F. Supp. 1232 (W.D. Mo. 1988).
4 See, e.g., Gastineau v. Summit Realty, 652 S.W.2d 711 (Mo. App. W.D. 1983).
5 See, e.g., St. Louis Union Trust v. Tipton Elec. Co., 636 S.W.2d 357 (Mo. App. E.D. 1982).
6 For an introductory discussion of equitable servitudes, see Alfred L. Brophy, Contemplating When Equitable Servitudes Run With The Land, 46 St. Louis U. L.J. 691 (2002); for more comprehensive treatment, see generally Restatement (Third) of Property: Servitudes (2000).
7 20 Am. Jur. 2d Covenants, Conditions and Restrictions § 12 (2005).
8 For example, a covenant personal to an individual is terminated by such individual’s death or by such individual’s ceasing to have an interest in the benefited property. See, e.g., Gardner v. Maffitt, 74 S.W.2d 604 (Mo. 1934); Parker v. Beasley, 54 P.2d 687 (N.M. 1936); Julian v. Lawton, 82 S.E.2d 210 (N.C. 1954); Allison v. Greear, 49 S.E.2d 279 (Va. 1948).
9 See Brophy, note 9 at 693 (stating
[b]ecause the requirements for equitable servitudes are substantially lower than real covenants, and because a plaintiff is typically interested in some form of injunctive relief, I spend relatively little time with students on the arcane requirements of real covenants. See generally James L. Winokur et al., Property and Lawyering 642-43 (2002). [T]here are some courts, however, that continue to hold plaintiffs to the requirements of real covenants – [mandating a showing of] horizontal privity. See, e.g., Sonoma Dev. [v. Miller, 515 S.E.2d 577,] 579 [(Va. 1999)]; Waynesboro Village v. BMC Prop., 496 S.E.2d 64, 68 (Va. 1998).
10 Brophy at 691.
11 Susan F. French, Can Covenants Not To Sue, Covenants Against Competition and Spite Covenants Run With Land? Comparing Results Under The Touch or Concern Doctrine and The Restatement Third, Property (Servitudes), 38 Real Prop. Prob. & Tr. J., 267 (2003).
12 French at 279.
13 Brophy at 692.
14 See, e.g., Roaring Fork Club v. St. Jude’s Co., 36 P.3d 1229 (Colo. 2001); Lazy Dog Ranch v. Telluray Ranch, 965 P.2d 1229, 1234 (Colo. 1998), aff’d, 2005 WL 851616 (Colo. Ct. App. 2005); Abington Ltd. P’ship v. Heublein, 778 A.2d 885, 893 (Conn. 2001); Schovee v. Mikolasko, 737 A.2d 578, 586 (Md. 1999).
15 15 U.S.C. §§ 1 et. seq. (2004).
16 691 F. Supp. 1232 (W.D. Mo. 1988).
17 Id. at 1242.
18 Id.
19 Id.
20 Dunafon at 1243 n.3. See also Child World v. South Towne Centre, 634 F. Supp. 1121, 1128-29 (S.D. Ohio 1986), declining to find a non-competition covenant in violation of § 1.
21 For a more thorough discussion of use and exclusive clauses in lease agreements see John R. Reilly, The Antitrust Aspects Of Restrictive Covenants In Shopping Center Leases (Int’l Council of Shopping Ctrs., 1986) and use and exclusive clauses as they relate in particular to food service lease, see Emanuel B. Halper, Food Service Lease Use and Exclusive Clauses, 32 Real Prop. Prob. & Tr. J. 455 (1997).
22 See Restatement (Third) of Property: Servitudes (2000); see also Andrews v. Metrop. Bldg. Co., 163 S.W.2d 1024, 1030-31 (Mo. 1942); Rombauer v. Compton Heights Christian Church, 40 S.W.2d 545, 553 (Mo. 1931); Kerrick v. Schoenberg, 328 S.W.2d 595 (Mo. 1959); Shepherd v. Spurgeon, 291 S.W.2d 162 (Mo. 1956); Dean v. Monteil, 239 S.W.2d 337 (Mo. 1951); Hall v. Am. Oil Co., 504 S.W.2d 313 (Mo. App. E.D. 1973).
23 St. Louis Union Trust, 636 S.W.2d at 359.
24 390 N.E.2d 243 (Mass. 1979).
25 Id. at 250.
26 Id. at 252.
27 Id. at 250.
28 See, e.g., Cruciano v. Ceccarone, 133 A.2d 911, 913-14 (Del. Ch. 1957); Norris v. Williams, 54 A.2d 331, 333 (Md. 1947); Gulf Oil Corp. v. Levy, 30 A.2d 740, 743 (Md. 1943); Duncan v. Acad. of Sisters of the Sacred Heart, 350 S.W.2d 814, 819-20 (Mo. 1961); Gardner v. Maffitt, 74 S.W.2d 604, 607-608 (Mo. 1934).
29 20 Am. Jur. 2d Covenants, Conditions, and Restrictions § 164 (2005).
30 74 S.W.2d 604, 605.
31 Id.
32 Id. at 607.
33 See Brophy at 693 (stating: “Simply put, restrictions on land use are easy to construe as directly related to the land. In every instance I can think of, negative servitudes touch and concern the land they are burdening.”) See also Sloan v. Johnson, 491 S.E.2d 725, 728-29 (Va. 1997), holding the restriction runs with the land and is not personal.
34 See, e.g., Davidson Bros. v. D. Katz & Sons, 579 A.2d 288, 289 (N.J. 1990) (the deed restriction at issue provided that the land “shall not be used as and for a supermarket or grocery store of a supermarket type, however designated, for a period of forty (40) years from the date of this deed.”)
35 See Cal. Civil Code §§ 880.020-887.090 (2006); see also Nicolopulos v. Superior Court, 130 Cal. Rptr.2d 626, 630 (Cal. Ct. App. 2003) (stating: “In 1982, the Legislature enacted the Marketable Record Title Act . . . ‘in order to make real property more freely alienable and marketable.’”)
36 Barnes v. Anchor Temple Ass’n, 369 S.W.2d 893, 899-900 (Mo. App. E.D. 1963).
37 Beets v. Tyler, 290 S.W.2d 76 (Mo. 1956).
38 Beets, 290 S.W.2d 76, at 82 citing Weber v. Texas Co., 83 F.2d 807 (5th Cir. 1936); “The covenants and restrictions do not violate the rule against perpetuities because that rule merely relates to remote vesting of an estate.” Cornett v. City of Houston, 404 S.W.2d 602, 605 (Tx. App. 1966); “[T]he rule against perpetuities does not pertain to covenants restricting the land to certain uses.” Gibson v. Huffman, 540 S.E.2d 222, 223 (Ga. Ct. App. 2000); “[A]s the rule against perpetuities only strikes at unvested interests[, it does not apply] where the estate passes . . . as a determinable fee or an estate upon a condition subsequent.” Schee v. Boone, 243 S.W. 882 (Mo. 1922).
39 290 S.W.2d at 83.
40 Bent Nail Developers v. Brooks, 758 S.W.2d 692, 693-94 (Tex. App. 1988).
41 Id.
42 See Mass. Gen. Laws ch. 184, § 23 (2006). “Limitation of term conditions” which provides, in part that: “Conditions or restrictions, unlimited as to time, by which the title or use of real property is affected, shall be limited to the term of thirty years after the date of the deed or other instrument or the date of the probate of the will creating them. . . .”
43 Daniel v. Galloway, 861 S.W.2d 759, 761 (Mo. App. S.D. 1993); Schneider v. Forsythe Group, 782 S.W.2d 139, 143 (Mo. App. E.D. 1989); Brasher v. Grove, 551 S.W.2d 302, 303 (Mo. App. S.D. 1977).
44 Addison County Auto. v. Church, 481 A.2d 402, 405 (Vt. 1984).
45 Daniel, 861 S.W.2d at 761; Brasher, 551 S.W.2d at 303.
46 Daniel, 861 S.W.2d at 761.