Radius Clause

Ambiguity – radius clause and go dark clause


from DIRT, October 4, 2006


"Radius clause requiring that tenant not during the term of the lease, own, operate, manage or have any financial interest in, any store or business located within a radius of seven miles… that is similar to that then being conducted upon the demised premises is ambiguous when applied to tenant's operation of branch of its store after it had gone dark in the shopping center subject to the restriction, and trial court may take additional evidence to ascertain whether parties intended to lock out competing activities even when the protected space was dark.


The purpose of radius clauses in percentage rent leases is to protect the landlord's interest in having the highest possible percentage rents.
If a store opens too close, it has the potential to cannibalize sales at the subject store with the radius clause. The business... then being conducted kills the landlord's argument.


Because there was no business being conducted, there were no sales to be cannibalized. The landlord had no losses as a result so even if he won the argument he would have had no damages.


Wells Fargo v. Diamond Point Plaza, L.L.P. 2006 Westlaw 2788385 (Md.
App. 9/29/06)


This clause appeared in a lease to Sam's Club. Sam's Club, like all Wal Mart operations, negotiated a tough go dark clause in its favor. The clause indicated that Sam's Club made not representation that it would conduct any business at the location and reserved the right to go dark.


As it was shutting down the operations at the Diamond Point location protected by the radius clause, Sam's was stocking and preparing to open a store at another location within seven miles, and ultimately did open that location just as it closed at Diamond Point.
The shopping center's lender claimed that it suffered significant damages as a consequence of Sam's Club's violation of the radius clause covenant. Although the trial court found against Sam's Club on many counts, on this issue it granted summary judgment to Sam's Club, on the notion that the clause was not intended to protect dark space from competition. As Sam's Club had the right to go dark, it also had the right to open another location after it had done so.
The appeals court did not agree that this language was so clear. It concluded that summary judgment was inappropriate here. The lender argued that then being conducted unambiguously referred to the term of the lease, and that the radius clause protected the space from competing operations within seven miles whether or not the space was dark.


The lender claimed that the court's interpretation rendered the clause illusory and couldn't possibly have been the expectation of the parties.
It noted that, elsewhere in the lease, the tenant reserved the right to operate other stores which are in competition with such store subject to what else might appear in the lease (such as the radius clause). It argued that this permissive language to the tenant somehow bolstered its argument that the radius clause went beyond merely protected against competing store operations, but rather was intended to protect the space itself from competition.


Apparently counsel for the lender did a very impressive dance around the word then in the above caption that impressed the appeals court, which found that there was sufficient ambiguity in the clause to warrant a trial on the merits.
Sam's Club argued that to protect the operating store from competition was a perfectly valid purpose of the radius clause, and was not nonsensical. The lease was a percentage lease, and the landlord clearly had an interest in protecting the store from competition while it had the possibility of generating percentage rents. When the store was dark, however, that interest went away." See www.houstonrealtyadvisors.com or www.houstonrealtyadvisors.net