shopping center legal update · tort liability _____25 ... case the landlord may recover from the...

V O L . 2 8 I S S U E 3International Council of Shopping Centers, Inc.1221 Avenue of the Americas, 41st floor, New York, NY 10020-1099Phone (646) 728-3800

F A L L - W I N T E R 2 0 0 8

Shopping Center Legal UpdateThe legal journal of the shopping center industry

In Practice

Is a Landlord Obligated to Mitigate Damages? __________2

Federal Circuit Courts Provide Different Rulings

on Union Activity __________________________________6

Training Required to Ensure Equal Access for Disabled

Individuals ________________________________________8

Protesters Enjoy Expanded Rights at Shopping Centers __10

Update on Rights and Duties of Shopping Center

Owners Dealing With Expressive Activity ____________13

No More Free Looks in California? ____________________16

DOJ Moves to Adopt 2004 Accessibility Guidelines ______20

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Of Interest

Articles ______________________________________________23

Cases ________________________________________________23

Bankruptcy ________________________________________23

Covenants/Clauses ________________________________24

Guarantees ________________________________________24

Landlord and Tenant ______________________________24

Leases ____________________________________________25

Permits __________________________________________25

Public Access ______________________________________25

Tort Liability ______________________________________25

Waivers __________________________________________26

Zoning____________________________________________26

6Legislation___________________________________________26

From Canada

In Depth

Are Continuous Operation Clauses in Leases

Enforceable? _______________________________________27

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In Depth

Is a Landlord Obligated to Mitigate Damages?

Elizabeth H. Belkin*DLA Piper LLP (US) Chicago, IL

Lara E. Rycyk**DJM Realty ServicesMelville, NY

Whether or not a landlord has an obligation to mitigate its damages (i.e., find a replacement tenant) when its current tenantabandons a leased premises is always a concern for the parties to a lease. This issue is gaining increased attention, especiallyconsidering the current economic environment. Mitigation is governed by state law, and the states are not in agreement.Some states do not require a landlord to take any steps to mitigate; others do. Therefore, it is important for both landlordsand tenants to be sensitive to the fact that “one size does not fit all.” So far, state courts addressing this issue have takeneither a property law-based approach or a contract law-based approach when deciding whether to require a landlord to miti-gate damages resulting from the tenant’s breach. The jurisdiction in which the leased premises is located must be consideredto determine why a given approach should be prescribed when a solvent tenant defaults.

Under the property law-based approach, common law principles maintain that the landlord is not required to mitigateits damages when a tenant abandons the tenant’s leased premises. Under this approach, the landlord has the option of (i)allowing the premises to remain vacant and collecting the accrued rent from the tenant at the end of the lease term or in suc-cessive increments as it accrues; (ii) entering the premises for the sole purpose of re-letting it on the tenant’s behalf, in whichcase the landlord may recover from the tenant the difference between the rent provided for in the lease and the rent receivedfrom any replacement tenant that occupies the premises; or (iii) terminating the lease and re-leasing the tenant from anyfuture liability under the lease. Under any of these options, a landlord may (but has no affirmative duty to) mitigate dam-ages. This view is based on the rationale that the tenant has been conveyed a binding interest in the premises for the term ofthe lease; therefore, property law is applicable when the tenant abandons the premises.

Under the contract law-based approach, the mitigation rule is applied. This rule requires that when a tenant abandonsits lease premises, the landlord has an obligation to mitigate damages by attempting to lease the space to another party. Thisview is based on the rationale that a lease is a contract between the landlord and the tenant. Therefore, contract law is appli-cable, requiring the injured party to exercise diligence to avoid the consequences of the other party’s breach. A trend in recentyears has demonstrated a shift toward this contract law-based approach by state courts and state legislatures.

Below is a state-by-state survey of how the states have addressed the question of whether a landlord has a duty to mit-igate its damages when a tenant abandons its leased premises:

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Shopping Center Legal Update is published by the Legal Department of the International Council of Shopping Centers, Inc., 1221 Avenue of the Americas,41st floor, New York, NY 10020-1099; Mary Lou Fiala, Chair, Michael P. Kercheval, President & CEO; Gregory Peterson, General Counsel.

This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understandingthat the publisher is not engaged in rendering legal, accounting or other professional services. If legal advice or other expert assistance is required, the servicesof a competent professional should be sought.

Editor-in-Chief: Stephanie McEvily, Esq.

Spring Issue Editors: Thomas Barbuti, Whiteford, Taylor & Preston LLP, Baltimore, MD, www.wtplaw.com; Mitchell Block, Selman, Munson & Lerner,Austin, TX, www.selmanmunson.com; Stephen Snively, Holland & Knight, Orlando, FL, www.hklaw.com; Joshua Stein, Latham & Watkins, New York, NY,www.lw.com; Natalie Vukovich, Daoust Vukovich, Baker-Sigal, Banka, Toronto, Ontario, Canada, www.dv-law.com; Daniel K. Wright, Taft, Stettinius &Hollister, Cleveland, OH, www.taftlaw.com

Summer Issue Editors: Elizabeth Belkin, DLA Piper, Chicago, IL, www.dlapiper.com; Fredric L. Carsley, De Grandpré Chait LLP, Montreal, Canada,www.dgclex.com; Kevin Groarke, Sonnenschein, Nath & Rosenthal, New York, NY, www.sonnenschein.com; Brian D. Huben, Katten, Muchin Rosenman, LosAngeles, CA, www.kattenlaw.com; George J. Kroculick, Duane Morris LLP, Philadelphia, PA, www.duanemorris.com; Eric Rapkin, Akerman, Senterfitt, Ft.Lauderdale, FL, www.akerman.com

Fall/Winter Issue Editors: J. Yost Conner, Jr., Patton Boggs LLP, Washington, DC, www.pattonboggs.com; Gary Kessler, Kessler, Collins, Dallas, TX,www.kesslercollins.com; Karen O’Malley, Goulston & Storrs, Boston, MA, www.goulstonstorrs.com; Blair A. Rebane, Borden Ladner Gervais LLP, Vancouver,Canada, www.blgcanada.com; Matthew P. Seeberger, Cox, Castle & Nicholson, Los Angeles, CA, www.coxcastle.com

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Alabama X Bowdoin Square, L.L.C. v. Winn-Dixie Montgomery, Inc., 873 So. 2d 1091, 1100 (Ala. 2003).

Alaska X Winn v. Mannhalter, 708 P.2d 444, 450 (Alaska 1985); Coffin v. Fowler, 483 P.2d 693, 696 (Alaska 1971).

Arizona X Tempe Corporate Office Bldg. v. Arizona Funding Servs., 807 P.2d 1130, 1135 (Ariz. Ct. App. 1991); Dushoff v. Phoenix Co., 528 P.2d 637, 640-41 (Ariz. Ct. App. 1974), aff’d, 532 P.2d 180 (1975). T

Arkansas X Weingarten/Arkansas, Inc. v. ABC Interstate Theatres, Inc., 811 S.W.2d 295 (Ark. 1991).

California X Cal Civ Code §§ 1951.2, 1951.4 (2007). T

Colorado X Schneiker v. Gordon, 732 P.2d 603 (Colo. 1987). T

Connecticut X Conn. Gen. Stat. § 47a-11c (2008). T

Delaware X Lee v. Brown, 2000 Del. C.P. LEXIS 4 (Del. C.P. 2000). LL

District of X Hart v. Vermont Inv. Ltd. Partnership, 667 A.2d 578, 587 Columbia (D.C. 1995). T

Florida X Wagner v. Rice, 97 So. 2d 267, 270 (Fla. 1957).

Georgia X Allen v. Harkness Stone Co., 609 S.E.2d 647, 650 (Ga. Ct. App. 2004).

Hawaii X Malani v. Clapp, 542 P.2d 1265, 1271 (Haw. 1975), cited with approval in Marco Kona Warehouse v. Sharmilo,Inc., 768 P.2d 247, 251 (Haw. Ct. App. 1989). T

Idaho X Consol. Ag v. Rangen, Inc., 912 P.2d 115, 117 (Idaho 1996). T

Illinois X 735 ILCS 5/9-213.1 (2008). LL

Indiana X Grueninger Travel Service, Inc. v. Lake County Trust Co.,413 N.E.2d 1034 (Ind. Ct. App. 1980). T

Iowa X Aurora Bus. Park Assocs., L.P. v. Michael Albert, Inc., 548 N.W.2d 153, 157 (Iowa 1996), citing Vawter v. McKissick, 159 N.W.2d 538 (Iowa 1968). LL

Kansas X Gordon v. Consolidated Sun Ray, Inc., 404 P.2d 949, 953 (Kan. 1965); Leavenworth Plaza Assoc., L.P. v. L.A.G. Enterprises, 16 P.3d 314, 317 (Kan. Ct. App. 2000). T

Kentucky X Dulworth v. Hyman, 246 S.W.2d 993 (Ky. 1952).

Louisiana X La. C.C. Art. 2002 (2008).

Maine X Dahl v. Comber, 444 A.2d 392 (Me. 1982).

Maryland X Circuit City Stores, Inc. v. Rockville Pike Joint Venture Ltd. P’shp, 829 A.2d 976, 990-91 (Md. 2003). T

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Massachusetts X Krasne v. Tedeschi & Grasso, 762 N.E.2d 841, 846-47 (Mass. 2002); Woodbury v. Sparrell Print, 84 N.E. 441 (Mass. 1908) LL

Michigan X Barocas v. THC, Inc., 549 N.W.2d 86, 87-8 (Mich. Ct. App. 1996). T

Minnesota X Markoe v. Naiditch & Sons, 226 N.W.2d 289, 291 (Minn. 1975).

Mississippi X Alsup v. Banks, 9 So. 895 (Miss. 1891); Evans v. Clemons,872 So.2d 23, 30 (Miss. Ct. App. 2003).

Missouri X Rhoden Inv. Co. v. Sears, Roebuck & Co., 499 S.W.2d 375, 386 (Mo. 1973).

Montana X Bunke, Inc. v. Johnson, 666 P.2d 1234, 1242 (Mont. 1983), construed in Nealy v. Rude Sheet Metal, Inc., 2002 ML 4226, at *25 (Mont. Dist. 2002); Fox Grain & Cattle Co. v. Maxwell, 885 P.2d 432 (Mont. 1994), construed in TSI, Inc. v. Am. Gem Corp., A Mont. Corp., 2002 ML 2465 at *9 (Mont. Dist. 2002). T

Nebraska X S.N. Mart, Ltd. v. Maurices, Inc., 451 N.W.2d 259 (Neb. 1990). T

Nevada X Nev. Rev. Stat. Ann. §§ 118.171; 118.175 (2007).

New X Matte v. Shippee Auto, Inc., 876 A.2d 167, 170-72 Hampshire (N.H. 2005); See also RAL Auto. Group, Inc. v. Edwards,

861 A.2d 795, 799 (N.H. 2004), rev’d, 2008 N.H. LEXIS 7 (N.H. Feb. 13, 2008); Novak v. Fontaine Furniture Co., 146 A. 525, 526 (N.H. 1929). T

New Jersey X McGuire v. Jersey City, 593 A.2d 309, 314-15 (N.J. 1991). LL

New Mexico X Mesilla Valley Mall Co. v. Crown Indus., 808 P.2d 633, 635 (N.M. 1991).

New York X Holy Properties Ltd., L.P. v. Kenneth Cole Prods., 661 N.E.2d 694, 696 (N.Y. 1995).

North X Weinstein v. Griffin, 84 S.E.2d 549, 552 (N.C. 1954); Carolina Kotis Props., Inc. v. Casey’s, Inc., 645 S.E.2d 138, 140

(N.C. Ct. App. 2007). T

North X Ruud v. Larson, 392 N.W.2d 62, 63 (N.D. 1986) Dakota (citing Mar-Son, Inc. v. Terwaho Enters.,

259 N.W.2d 289, 291 (N.D. 1977)). T

Ohio X Frenchtown Square P’ship v. Lemstone, Inc., 791 N.E.2d 417 (Ohio 2003). T

Oklahoma X Carpenter v. Riddle, 527 P.2d 592, 594 (Okla. 1974).

Oregon X United States Nat’l Bank v. Homeland, Inc., 631 P.2d 761, 765 (Or. 1981); Portland General Electric v. Hershiser, Mitchell, Mowery & Davis, 738 P.2d 593, 595 (Or. Ct. App. 1987). LL

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Pennsylvania X Stonehedge Square Ltd Pshp. v. Movie Merchants, 715 A.2d 1082, 1084 (Pa. 1998).

Rhode Island X Tomaino v. Concord Oil, 709 A.2d 1016, 1026-27 (R.I. 1998). T

South X Simon v. Kirkpatrick, 139 S.E. 614, 617 (S.C. 1927); Carolina Blumberg v. Nealco, Inc., 416 S.E.2d 211

(S.C. Ct. App. 1992).

South X S.D. Codified Laws § 43-32-18 (2007); Dakota Paulton v. Kreiser, 101 N.W. 46, 47 (S.D. 1904)

(construing Becar v. Flues, 64 N.Y. 518 (N.Y. 1876)).

Tennessee X Hailey v. Cunningham, 654 S.W.2d 392 (Tenn. 1983). T

Texas X Tex. Prop. Code § 91.006 (2007); Austin Hill Country Realty v. Palisades Plaza, 948 S.W.2d 293 (Tex. 1997). T

Utah X Reid v. Mutual of Omaha Ins. Co., 776 P.2d 896, 906 (Utah 1989). T

Vermont X O’Brien v. Black, 648 A.2d 1374, 1376 (Vt. 1994). T

Virginia X Crowder v. Virginian Bank of Commerce, 103 S.E. 578, 579 (Va. 1920), reviewed by Laskin Road Assocs., L.P. v. Capitol Indus., 2007 U.S. Dist. LEXIS 41276 at *15-25 (D. Va. 2007).

Washington X Myers v. W. Farmers Asso, 449 P.2d 104, 106 (Wash. 1969) (recognizing rule by implication), construed by Hargis v. Mel-Mad Corp., 730 P.2d 76, 79 (Wash. Ct. App. 1986). T

West Virginia X W. Va. Code §§ 37-6-6; 37-6-7 (2007); Russell v. Pineview Realty, 272 S.E.2d 241, 242 (W. Va. 1980); Arbenz v. Exley, Watkins & Co., 50 S.E. 813, 815 (W. Va. 1905).

Wisconsin X Wis. Stat. § 704.29 (2006); First Wisconsin Trust Co. v. L. Wiemann Co., 286 N.W.2d 360, 366 (Wis. 1980). LL

Wyoming X Wolin v. Walker, 830 P.2d 429, 431 (Wyo. 1992); Goodwin v. Upper Crust, 624 P.2d 1192, 1196-7 (Wyo. 1981). T

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*ELIZABETH H. BELKIN is Of Counsel to the international law firm of DLA Piper LLP (US) in Chicago.** LARA E. RYCYK is an Associate with DJM Realty Services in Melville, NY. She may be contacted at [email protected].

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Federal Circuit Courts Provide Different Rulings on Union Activity

James J. Sullivan, Jr.*Buchanan Ingersoll & Rooney PCWilmington, DE

Owners of private shopping malls are faced with a constant barrage of requests from civic, charitable and other organizationsfor permission to engage in activities in the shopping center to promote their organizations to shoppers and tenants. Whenthe organization seeking access to the property is a union, property owners must be cognizant of the rights possessed byunion organizers and must treat the union like any other organization. Recent court decisions from the Second and NinthCircuits highlight the difficulty faced by mall owners in reaching an appropriate and non-discriminatory balance of interestsand the impact of state law on the actions that a property owner may take to prevent union activity.

Recently, the Second U.S. Circuit Court of Appeals ruled that a shopping center did not violate the rights of a unionwhen it denied the union access to its customers and employees while regularly granting access to other organizations com-municating different information. In Salmon Run Shopping Center v. N.L.R.B., No. 06-4961 (2nd Cir. July 18, 2008), contractorsbuilding a new store at the shopping center hired non-union subcontractors for remodeling work. To protest the hiring ofnon-union subcontractors, the Empire State Council of Carpenters (“Carpenters”) requested permission to distribute twounion-related fliers to mall patrons.

The shopping center denied the Carpenters’ request pursuant to its general “no solicitation” policy, despite the factthat it had permitted civic and charitable organizations to solicit when mall management determined that the permittedsolicitation would benefit the mall by increasing foot traffic or providing good publicity. Because the mall operators deter-mined that solicitation by the union would not benefit the mall or its tenants, however, the Carpenters’ request was denied.The Carpenters filed unfair labor practice charges, alleging the shopping center acted in a discriminatory manner.

Although the National Labor Relations Board (“NLRB”) found that the mall’s actions constituted discrimination, theSecond Circuit disagreed. While union organizers generally do have the right to engage in organizational activities at theirplace of business during non-work hours, the court held that these same rights do not apply to non-employee organizers.Accordingly, an employer may prohibit organizing activities by non-employee organizers, unless otherwise required by statelaw, except when:

1. The employees are otherwise unavailable (the “inaccessibility” exception) or 2. The employer has permitted other similar activity (the “discrimination” exception).

In this case, the court focused its opinion on the discrimination exception.Here, the Second Circuit held that the NLRB, in holding that the mall was denying the union access merely because it

was a “union seeking to engage in labor-related speech,” erroneously focused on the mall’s motives. Instead, the court stated,the focus must be whether the mall engaged in disparate treatment of protected speech. The analysis of disparate treatmentmust look at whether the mall permitted one organization to communicate regarding unionization less favorably than ano-ther organization looking to communicate regarding the same subject. The comparison of the union to the civic and charitableorganizations was not a legitimate comparison, the court held, because they communicated regarding different subjects.

Through this holding, the Second Circuit joins the Fourth and Sixth Circuits in taking a narrow view of the discrimina-tion exception to the trespass rule. The Fourth Circuit, for example, has held that proving discrimination in this contextrequires a union to demonstrate that the employer favored one union over another, or permitted employer-related materialwhile banning union-related material. The Sixth Circuit has held that permitting limited charitable or civic appeals whilebanning union distribution is unlikely to constitute discrimination.

In contrast to the Second Circuit’s holding, which permits mall owners to limit a union’s actions in certain situations,the Ninth Circuit recently held that a California mall owner’s attempt to place restrictions on union speech was illegal. InUnited Board of Carpenters & Joiners of Am. Local 848 v. NLRB, 9th Cir., No. 05-75295, Aug. 25, 2008, the Ninth Circuit consid-ered six separate restrictions placed on solicitations by the mall owner, and determined that all six unlawfully interfered withprotected union activity. (See article infra by Conner.) These six restrictions, or rules, intended to protect the commercial activ-ities of the mall and provide shoppers with a pleasant shopping experience and protect shoppers’ safety, were:

1. A ban on all activities identifying by name the mall owner, manager or tenants; 2. A ban on signage and written materials that interfere with the commercial purpose of the mall; 3. A ban on carrying or wearing signs; 4. An application process, requiring the advance submission of written materials; 5. The prohibition of expressive activities in exterior areas, including sidewalks; and 6. The prohibition of expressive activities during peak traffic days.

As a preliminary matter, the Ninth Circuit noted that the rights of a non-employee union to access private property arebased in state law. When state law grants non-employee unions the right to access private property, violations of the state

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law will also be violations of the NLRA (“National Labor Relations Act”). Because California law protects expressive activityconducted in privately owned shopping centers, such centers must respect the free speech rights of unions on their premises,but may impose reasonable content-neutral restrictions (i.e., restrictions on the time, place and manner—but not the con-tent—of speech).

The Ninth Circuit addressed each rule in turn. The Court determined that Rule 1 (the ban on identification) and Rule 2(the ban on interference with commercial purpose) were content-based rules because the mall owner had to examine the con-tent of the speech to determine whether it was permissible. A content-based restriction is presumptively unlawful and willonly survive a challenge if it is the least restrictive means of furthering a compelling interest. The Ninth Circuit held that thepurposes of Rules 1 and 2, to “protect the good name of the mall and its tenants” and eliminate negative publicity, were notcompelling interests sufficient to counter the suppression of the union’s free speech. Similarly, Rule 4 (the advance applica-tion requirement) was unlawful when used to enforce Rules 1 and 2. Rule 4’s advance application requirement would bevalid, however, for the purpose of promoting legitimate content-neutral time, place and manner restrictions.

Rule 3, the ban on carrying or wearing signs, and Rule 5, banning expressive conduct on sidewalks, were both foundto be content-neutral; but both were invalidated because neither was narrowly tailored. Content-neutral restrictions must benarrowly tailored to meet a significant interest. While the Ninth Circuit found that the stated interests in convenience, safetyand aesthetics were significant, the signage ban was not narrowly tailored to meet these interests because it banned virtuallyall speech communicated through images or text and, therefore, burdened substantially more speech than was necessary. Inaddition, the Ninth Circuit held, the ban did not permit sufficient alternative means of communication, and in prohibitingpicketing it foreclosed a “venerable medium” of communication. By banning signage, the mall diminished the impact of theunion’s message and left it without effective alternatives for communication. Similarly, the sidewalk rule, which was enactedto preserve traffic flow and ensure compliance with fire codes, was overly broad and failed to leave open alternative meansof communication. Thus, Rules 3 and 5 were not narrowly tailored and both rules were declared invalid.

Finally, the Ninth Circuit considered the validity of Rule 6, prohibiting expressive activity during peak traffic hours,which included the entire time period between Thanksgiving and the end of December. The court found that this rule didnot advance a significant interest and called the complete ban “certainly overbroad.” Therefore, this rule also was invalid.

RecommendationsThese two cases demonstrate that mall owners must be cautious in their efforts to protect their property from union activity.Property owners, especially shopping mall owners, are regularly inundated with requests from organizations to distributematerials on their property. Owners need to be diligent and consistent in their treatment of unions and other organizationsseeking permission to distribute literature. Inconsistent treatment will open the door to unfair labor practice charges byunions that are denied access. Owners, especially those with facilities in California, must also be aware of the applicable statelaws and be cognizant of the impact that state law has on the protected rights of unions.

*JAMES J. SULLIVAN, JR., a shareholder in Buchanan Ingersoll & Rooney PC, in Wilmington, DE, has counseled employers inmany aspects of labor and employment. He has represented employers in federal and state court and before various admin-istrative agencies in virtually all areas of labor, employment, and safety and health-related litigation for more than 27 years.

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Training Required to Ensure Equal Access for Disabled Individuals

Patricia Anderson Pryor*Taft, Stettinius & Hollister LLPCincinnati, OH

Public accommodations must adopt policies and procedures and effectively train their employees to assist disabled individu-als. A recent decision from the Second U.S. Circuit Court of Appeals highlights the importance for restaurants, stores andother places of public accommodation to have effective policies in place and effective training for their employees. Camarillov. Carrols Corp., 2008 WL 341544, *4 (2d Cir. 2008).

Camarillo’s ClaimsAlice Camarillo, a legally blind individual, brought a lawsuit under the Americans With Disabilities Act (“ADA”) and NewYork Executive Law § 296.2(a) against several fast-food restaurants, claiming that she was discriminated against on the basisof her disability. Camarillo claimed that she was unable to read the menu items and prices at the restaurants and that none ofthe restaurants offered large-print menus. Camarillo alleged that, on at least two occasions, when she informed the employ-ees that she could not read the posted menu items, she was not offered any substitute means for learning the menu options.Then, when Camarillo asked the employees to read the menu to her, they read only part of the menu. At one restaurant, thecashier refused to read the menu to Camarillo until the cashier had filled the food orders for the patrons who were in linebehind Camarillo. Camarillo also alleged that the employees laughed and stared at her and, when she asked to be directed tothe Women’s restroom, employees “directed her to the Men’s room and laughed at her humiliation.”

The defendants claimed that Camarillo did not have a claim because she did not allege that she was denied services atthe restaurants. The Second Circuit Court of Appeals disagreed, stating:

Rather, a reasonable inference to be drawn from her complaint is that defendants failed to adopt policiesor procedures to effectively train their employees how to deal with disabled individuals. Such a failure totrain can constitute a violation of the ADA, which requires owners of public accommodations, with limi-ted exceptions not applicable here, “to take such steps as may be necessary to ensure that no individualwith a disability is excluded, denied services, segregated or otherwise treated differently than other individu-als because of the absence of auxiliary aids and services.” 42 U.S.C. § 12182(b)(2)(A)(iii) (emphases added)(citations omitted).

Ensuring Access and ServicesTitle III of the ADA provides that “[n]o individual shall be discriminated against on the basis of disability in the full andequal enjoyment of the goods, services, facilities, privileges, advantages, or accommodations of any place of public accommo-dation.” 42 U.S.C. § 12182(a). Under the ADA, discrimination is defined to include:

a failure to take such steps as may be necessary to ensure that no individual with a disability is excluded,denied services, segregated or otherwise treated differently than other individuals because of the absenceof auxiliary aids and services, unless the entity can demonstrate that taking such steps would fundamen-tally alter the nature of the good, service, facility, privilege, advantage, or accommodation being offered orwould result in an undue burden. 42 U.S.C. § 12182(b)(2)(A)(iii).

The key word is “ensure.” According to the Second Circuit, it is not enough that employees are “available” to read menus toindividuals with disabilities. Owners of public accommodations must “ensure effective communication with individualswith disabilities.” 28 C.F.R. § 36.303(c).

This does not mean that a place of public accommodation is liable for every errant or insensitive act of its employees.Not every act of rudeness constitutes a violation of the ADA. Courts recognize that the ADA cannot regulate every individ-ual’s conduct or prevent employees from being rude or insensitive to individuals with disabilities. However, when thereappears to be a pattern of this behavior, it tends to indicate that the public accommodation has not effectively trained or insti-tuted policies or procedures to ensure that no individual with a disability is excluded, denied services, segregated or other-wise treated differently than other individuals.

The facts in Camarillo were distinguished from those in Stan v. Wal-Mart Stores, 111 F. Supp. 2d 119, 121-22 (N.D.N.Y.2000). In Stan the court found no cognizable injury where the plaintiff, who was also legally blind and used a service dog toassist her, was told that she could not bring her service dog into the store. In Stan, the store manager apologized to the plain-tiff, told her that she was allowed to bring her dog into the store and assured her he would train the employees to make surethe same mistake did not happen again. In addition, the store had official policies permitting service animals in the stores,had signs out front welcoming service animals and all employees received some training on allowing individuals with serv-

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ice animals to enter the stores. In other words, the store had made good-faith reasonable efforts to ensure that disabled indi-viduals, in particular individuals with service animals, were not denied services.

Policies and Training Are Important Steps in Ensuring AccessThese cases stress how important it is for shopping centers, stores, restaurants and other places of public accommodation tohave effective policies in place and to train employees to follow these policies. Individuals who deal with the public must betrained so that they know how to assist patrons who are disabled. Common issues upon which employees should be trainedinclude wheelchair access, service dog access, as well as assistance requirements for the visually impaired, hearing impairedand other individuals who are disabled and cannot otherwise access services.

A company must first have a good policy. Just as a company should have an anti-discrimination and anti-harassmentpolicy protecting its employees, it should also have one for its customers. The policy should provide that the store or restau-rant does not discriminate on the basis of disability (or any other protected status) and that it strives to ensure the full andequal enjoyment of its goods, services, facilities, etc. for all patrons.

The policy should remind employees that the company complies with the ADA, and that it believes in equal access. Itshould emphasize to the employees that it is part of their job, as employees who deal with the public, to ensure that no indi-vidual with a disability is excluded, denied services or treated differently. In some cases, this may require the employees tooffer assistance to disabled individuals or accommodate their needs. The company can further emphasize the importance ofthis responsibility by including it in job descriptions and job evaluations.

All employees should receive a copy of the company’s equal access policy. However, simply having a policy is notenough. Providing employees with a copy of the policy or posting it on a bulletin board may not be a sufficiently effectivemanner to ensure that employees know how to respond to disabled patrons. Companies need to train their employees onhow to follow the policy. Training should not be a one-time occurrence.

In many respects, ADA training can be as important as harassment training. A retail or service company should con-sider providing its employees with ADA training upon initial hire and then at least annually thereafter. Training shouldinclude guidance on how to assist individuals with disabilities and the types of access issues that may occur. One componentof the training program should be sensitivity training.

Aside from training, companies must also enforce the policy to ensure its effectiveness. A policy is not effective on itsown. If a company learns that its policy concerning access is not being applied or that employees are not acting or talking inan appropriate and sensitive manner concerning disabled individuals, it needs to respond appropriately to ensure that suchconduct is not repeated. The policy itself and/or the discipline policy should provide that discipline and discharge mayoccur for conduct in violation of, or inconsistent with, the purposes of the equal access policy.

In addition to requiring discipline, the existence of inappropriate conduct or lack of assistance may indicate a need tore-train employees. If employees are not following the policy or do not remember their responsibilities, then the training hasnot been effective.

Responding to Customer ConcernsWhen employees act inappropriately or a customer expresses concern about an employee or a policy, the company needs torespond. Not every customer complaint means that a company or its employees have violated the ADA; nevertheless, it isimportant to investigate the customer’s concerns to determine whether there is an issue to address. The company’s responseto the concern, either by correcting the situation or by offering appropriate alternatives for the customer, can go a long way toestablishing good will with the customer and possibly a defense to any future litigation.

ConclusionThe lesson from these cases is clear. While a restaurant or store cannot control every action an employee takes or attitude anemployee may have, in the absence of well-communicated policies and training designed to achieve the goals of the ADA, anemployer will be subject to liability for its employees’ actions. Posted policies, effective training and appropriate responses tocustomer complaints or concerns will help a company avoid both litigation and liability for an otherwise errant act of anemployee.

**PPAATTRRIICCIIAA AANNDDEERRSSOONN PPRRYYOORR is a Partner in the Labor and Employment Department at Taft, Stettinius & Hollister LLP inCincinnati. She represents and advises employers in all forms of litigation and dispute resolution, including mediation andarbitration, and in managing all aspects of the employment relationship. She is a frequent speaker at legal seminars and toemployers and professional groups, and has been featured on the radio broadcast, “Employment Straight Talk.”

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Protesters Enjoy Expanded Rights at Shopping Centers

J. Yost Conner, Jr.* Ramona Quillet**Patton Boggs Washington, DC

Two years ago in this space, the lead author set out a rationale by which the California Supreme Court could hold for the mallowner in the then-pending Fashion Valley Mall, LLC v. National Labor Relations Board.1 In the interim, the California SupremeCourt, in Fashion Valley, and the Court of Appeals for the Ninth Circuit, in United Brotherhood of Carpenters and Joiners of AmericaLocal 848 v. National Labor Relations Board, 2 have both issued decisions supporting the rights of union protesters at shopping cen-ters over otherwise seemingly rational rules established by mall management. These cases provide an opportunity to review thenarrowing circumstances under which a mall owner may restrict protests on its property.

The threshold case on this issue in California was decided in 1979. In Robins v. Pruneyard Shopping Center 3 the CaliforniaSupreme Court held that the free speech protections in the California Constitution4 are more inclusive and definitive than thosein the First Amendment of the U.S. Constitution and that shopping centers are invaluable and essential public fora. Therefore,the California Constitution affords enhanced speech protections in privately owned shopping centers.5

In Fashion Valley, the California Supreme Court took that decision one step further, invalidating a number of rules inten-ded to regulate protests. The policy at Fashion Valley Mall was to allow expressive speech but require all demonstrators toobtain a permit from the management office and abide by all of the mall’s rules. One of them was Rule 5.6.2, which prohibiteddemonstrators from urging customers to boycott any of the stores in the mall. In October 1998, the president of the GraphicCommunications International Union, Local 432M, AFL-CIO (“Union”), called mall management to give notice that the Unionintended to protest at the mall the following day. Management, on behalf of the mall’s owner (“Owner”), informed the Unionpresident of the policy; however, the Union refused to apply for a permit. The next day, the Union stationed about 30 membersand supporters—five to seven at each entrance—outside of the mall’s Robinsons-Mays department store. The protesters talkedwith and distributed flyers to Robinsons-Mays employees and shoppers.

A quarter-hour after the protesters arrived, the mall’s general manager approached the demonstration to enforce the rules,and gave the Union representative a notice of trespass and copies of the mall’s application and rules. The representative refusedthe application and rules, and the protesters left the mall peaceably without applying for a permit.

Shortly after the aborted protest, the Union filed an unfair labor practices charge against the Owner with the NationalLabor Relations Board (“NLRB”) and ultimately refused two invitations from the owner to structure a protest that would com-ply with the mall’s rules. The NLRB prosecuted the Union’s claim in front of an administrative law judge and won a ruling thatthe Owner had violated the Union’s rights6 under § 8(a)(1) of the National Labor Relations Act (“Act”).7 The NLRB affirmed andordered the Owner to rescind Rule 5.6.2. The Owner took an appeal to the Court of Appeals for the District of Columbia, andthe NLRB cross-petitioned for enforcement of its order. The court of appeals, finding that the Owner had violated the law only ifit did not have a right under California law to enforce its rule, certified to the Supreme Court of California the following ques-tion: “Under California law may Fashion Valley maintain and enforce against the Union its Rule 5.6.2?”8

The court’s answer was that the right to free speech granted by the California Constitution includes “the right to urge cus-tomers in a shopping mall to boycott one of the stores in the mall.”9 In arriving at that conclusion, the court determined that theregulation was content-based because it distinguished favored speech from disfavored speech on the basis of the ideas or viewsexpressed. Even though the ban was viewpoint-neutral, it was not content-neutral because it prevented public discussion of anentire topic. Further, because the regulation was content-based, the court applied strict scrutiny analysis. Strict scrutiny requiresthat a restriction must be necessary to serve a compelling interest and narrowly drawn to achieve that end. The court held thatthe mall’s goal of profit maximization for its merchants was not a compelling interest.10

The Ninth Circuit continued down the Fashion Valley path in United Brotherhood of Carpenters. At issue in the case were sixrules promulgated by mall management (“Management”):

RRuullee 11 (“identification ban”): a ban on activities that identify by name the mall owner, manager or tenants;RRuullee 22 (“commercial purpose rule”): a ban on signage and written materials that interfere with the “commercial purpose”of the mall;RRuullee 33 (“signage ban”): a ban on the carrying or wearing of signs;RRuullee 44 (“application requirement”): an application process that requires the pre-submission of written materials;RRuullee 55 (“designated areas rule”): the exclusion of exterior areas, including mall sidewalks, from designated areas whereexpressive activities may occur; andRRuullee 66 (“peak traffic rule”): the prohibition of expressive activities during “peak traffic days.11

Two malls managed by the same company were the sites of demonstrations by non-employee union members of theUnited Brotherhood of Carpenters and Joiners of America, Locals 586 and 505 (“Carpenters’ Union”). The protesters neither

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applied for a permit nor submitted any materials for approval. The protesters were ejected; some were arrested. TheCarpenters’ Union filed unfair labor practices charges against Management. The charges were consolidated by the NLRB intoa complaint alleging that Management had violated § 8(a)(1) of the Act by maintaining the six rules and by ejecting the pro-testers from mall property for engaging in protected activity.12

The administrative law judge found that Management had engaged in unfair labor practices by maintaining andenforcing each of the challenged rules. The NLRB affirmed the administrative law judge’s determination on the identificationban, the commercial-purpose rule and the application requirement. Contrary to the administrative judge’s findings, however,the NLRB found that Management’s signage ban, designated area rule and peak traffic rule were permissible time, place andmanner restrictions. Management appealed the portion of the NLRB’s ruling that held the identification ban, the commercialpurpose rule and the application requirement unconstitutional. Likewise, the Carpenters’ Union appealed that portion of theNLRB’s decision to the Ninth Circuit, arguing that the signage ban, the designated area rule and the peak traffic rule wereoverly restrictive and constitutionally prohibited.13

The Ninth Circuit held that all six rules were impermissible regulations of free expression under the CaliforniaConstitution.14 The court agreed with previous tribunals that the identification ban and commercial purpose rule were con-tent-based restrictions because Management sought to review the contents of the speech or literature before issuing a permit.Following Fashion Valley, the court applied strict scrutiny analysis to the regulations and determined that they were unlawfulrestrictions on free expression.

The court invalidated the application requirement to the extent it was used to enforce the identification ban and com-mercial purpose rule, holding that it was used to identify prohibited content. The court explained that “the examination ofthe content of a speaker’s message is the hallmark of a content-based rule. The application requirement becomes unlawfulwhen used to ferret out objectionable content.”15

With respect to the signage ban, the designated area rule and the peak traffic rule, the court held that they were all con-tent-neutral restrictions. Both the California Supreme Court and the Ninth Circuit took care to explain that content-neutralregulations of time, place and manner of speech are permitted to prevent interference with normal business operations; how-ever, they must withstand intermediate scrutiny.16 To survive intermediate scrutiny, restrictions must (i) be justified withoutreference to the content of the regulated speech, (ii) be narrowly tailored to serve a significant interest and (iii) leave amplealternative channels for the communication of information.

The Ninth Circuit held that the signage ban, the designated area rule and the peak traffic rule failed intermediatescrutiny. It said that the signage ban was not narrowly tailored because it burdened substantially more speech than necessaryto further Management’s legitimate interests.17 The court went further by stating that the signage ban did not leave amplealternative channels for communication because picketing and carrying signs are unique and venerable modes of communi-cation that are foreclosed by the ban. The court did not find Management’s regulation allowing two signs to be posted on theside of a table to be a sufficient alternative means of communication.18 Likewise, the court determined that the designatedarea rule was not narrowly tailored and did not leave ample alternatives for communication, reasoning that excluding exter-ior protest areas such as the mall sidewalks deprived the Carpenters’ Union of its intended audience. The court did notbelieve that the designated speech areas were an effective alternative, because they “may be hundreds of yards from anygiven store or its patrons.”19 Also, the court was not persuaded by the argument that the Carpenters’ Union could still hand-bill on public property or advertise its dispute through the media.20 Using the same reasoning, the court held that prohibitingexpressive activities during the mall’s busy season was not narrowly tailored and did not leave ample alternatives for expres-sion. The court held that because the mall’s tenants make approximately 75% of their sales during the peak season, it wouldunreasonably restrict demonstrators’ ability to communicate effectively with mall patrons to allow the mall to prohibit suchactivity during those periods.21

These cases represent a trend in California, limiting shopping owners’ and operators’ ability to regulate speech on theirpremises, and the results can be one-sided. However, there is not a consensus of opinion on the issue. Both Fashion Valley andUnited Brotherhood of Carpenters had strong dissents. The dissent in Fashion Valley noted that many other jurisdictions withsimilar constitutional provisions have declined to follow California’s path.22 In United Brotherhood of Carpenters, the dissentargued that there is California precedent upholding similar signage bans, designated area rules and peak traffic restrictions.23

Because there is not unanimity on these questions in California or in other jurisdictions, mall owners and operators shouldalways consult with an attorney before adopting new protest rules.

**JJ.. YYOOSSTT CCOONNNNEERR,, JJRR..,, is a Partner and the Real Estate Practice Group Leader at Patton Boggs. He is resident in theWashington, DC, office. ****RRAAMMOONNAA QQUUIILLLLEETT is an Associate at Patton Boggs and is also resident in the Washington, DC, office.

1172 P.3d 742 (2007).

22008 U.S. App. Lexis 18158 at *1.

3592 P.2d 341 (1979).

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4Article I, § 2, of the California Constitution reads: “Every person may freely speak, write and publish his or her sentiments on all subjects, being responsible forthe abuse of this right. A law may not abridge liberty of speech or press.”

5Pruneyard, 592 P.2d at 346–47.

6Fashion Valley, 172 P.3d at 744.

729 U.S.C. § 158(a)(1)(2008).

8Fashion Valley Mall, 172 P.3d at 745.

9Id. at 743.

10Id. at 754.

11United Brotherhood of Carpenters, 2008 U.S. App. Lexis 18158, at 2–3.

12Id. at 5.

13Id. at 6–8.

14Id. at 2.

15Id. at 21.

16Fashion Valley, 172 P.3d at 751; United Brotherhood of Carpenters, 2008 U.S. App. LEXIS 18158, at 10–11.

17United Brotherhood of Carpenters, 2008 U.S. App. Lexis 18158, at 25–27.

18Id. at 28–30.

19Id. at 35–37.

20Id.

21Id. at 37–41.

22Fashion Valley Mall v. NLRB, 172 P.2d 742, 757 (Chin, J., dissenting).

23United Brotherhood of Carpenters, 2008 U.S. App. LEXIS 18158, at 53–60 (Callahan, J., dissenting).

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Update on Rights and Duties of Shopping Center Owners Dealing WithExpressive Activity

Gary S. Kessler*Howard C. Rubin**Kessler & Collins, P.C. Dallas, TX

The approximately one-year old California Supreme Court case of Fashion Valley Mall v. NLRB,1 holding that a mall may notenforce rules that limit the rights of unions to influence mall patrons to refrain from shopping at stores, has stirred discussionin real estate circles about the status of the rights of shopping center owners versus those who believe that the public natureof shopping centers makes them appropriate forums for speech and other expressive activity.

This article briefly explores the history of this dispute and provides an update on the current status of the law.

A Brief HistoryIn the 1946 case of Marsh v. Alabama,2 the United States Supreme Court held that the distribution of religious literature in acompany town’s business district was protected speech and could not be curtailed. Although the property was privatelyowned, “the more an owner for his advantage, opens up his property to the public in general, the more do his rights becomecircumscribed by the statutory and constitutional rights of those who use it.”3

The Court extended First Amendment protections to shopping centers in Amalgamated Food Employees Union v. LoganValley Plaza,4 finding that a shopping center is the functional equivalent of the business district discussed in Marsh. The Courtsaw no reason to treat a shopping center any differently from a Marsh business district “simply because the property sur-rounding the ‘business district’ is not under the same ownership.”5

Less than five years later, the Court distinguished Logan Valley Plaza in Lloyd Corporation v. Tanner,6 holding that a shop-ping center owner that had not dedicated its property to public use, but had invited the public to carry on business withinthe stores located at the center, could lawfully exclude those who would distribute literature for purposes not relevant to thebusiness activities in the center.

In 1976, the Supreme Court in Hudgens v. NLRB 7 formally overruled Logan Valley, finding only that property “that hadtaken on all the attributes of the town” should be treated as a public forum with almost unfettered rights to speech andexpressive activity. Under the facts of this case, the shopping center in question did not take on the “attributes of a town.”

Finally, in 1980, the Supreme Court held in PruneYard Shopping Center v. Robbins 8 that state courts may interpret theirown constitutional bills of rights more expansively than the United States Constitution and allow expressive activity such aspicketing in derogation of the rights of property owners.

The Effect of PruneYard and Labor CasesThe PruneYard decision opened the Pandora’s Box of federalism. Courts could now consider the interpretation of state consti-tutional provisions in determining whether expressive activities not related to the business of the shopping center should beallowed. This jurisprudence grew and is best exemplified in labor litigation, in which unions seek to publicize various griev-ances with shopping center tenants and their construction contractors. Unlike the “traditional” First Amendment litigation,these cases are decided under the National Labor Relations Act (“NLRA”), §§ 7 and 8, which guarantee employees the right to“engage in . . . concerted activities for the purposes of collective bargaining or other mutual aid” and make it an “unfairlabor practice” for employers to “interfere with, restrain, or coerce employees” in the exercise of those rights.9

Consequently, the broad expanse of the NLRA put a statutory gloss on expressive conduct cases involving laborunions, and the case law following PruneYard became an amalgamation of federal statutory and state constitutional and com-mon law interpretation against the faint shadow of the First Amendment of the United States Constitution. This has resultedin a “sliding scale” or “balancing test” where the courts weigh who (employer or non-employee) is trying to assert rights toexpression and where the expression is to take place.

For instance, in 1992, the Supreme Court held in Lechmere, Inc. v. NLRB that once an employer’s private property rightsare established under state law, the employer generally “cannot be compelled to allow distribution of union literature bynon-employee organizers on his property.”10 On the other hand, it has long been held that if employee-organizers areinvolved, the employer may not prevent reasonable access and the right to exclude from property must yield to the extentneeded to permit communication.11

Lechmere and its progeny established the following factors for courts to consider.

1) The court must determine whether there is an effort to influence employees of a particular employer or the publicat large. If the thrust is the public at large, it is doubtful whether NLRA considerations exist and the analysis thenmay turn on the Lloyd v. Tanner interpretation of federal constitutional law.

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2) If the activity is aimed at a particular employer, the courts look to whether state law would prohibit the ownerfrom excluding the actors. The Fashion Valley Mall case squarely held that, in California, property owners do nothave this right where the property, such as a shopping center, is open to public use. However, the court did reaf-firm the right of the property owners to adopt and enforce reasonable time, place and manner restrictions on theexpressive activities.

3) If the state common law grants the employer the right to exclude non-employee union organizers from its prop-erty, the NLRA guarantees access only if the union can show the employees are otherwise inaccessible to unionorganizers and that the property owner’s actions do not discriminate between labor unions.12 This last factor is avery narrow one and the union will have a heavy burden to show that it applies.13

Recent Case LawWith the exception of cases decided under California common law, the courts have generally placed a high burden on laborunions wanting access to private property that caters to the public at large (shopping centers, for instance).

In Sandusky Mall Company v. NLRB,14 the panel relying on previous precedent in the Sixth Circuit15 held that the mallcould not discriminate among organizations by disallowing non-employee union members to trespass on its property for thepurpose of distributing handbills to mall customers, but allowing occasional limited charitable activities in the mall deemedbeneficial to the owner and tenants.

In Waremart Food v. NLRB,16 the District of Columbia Circuit held that there was no right to handbill at a stand-aloneretail supermarket although the store was located in California. The court noted that even California common law does notrecognize a free speech right to those seeking to engage in expressive activities on private sidewalks or in private parking lotsof stand-alone supermarkets. A parking lot of a stand-alone store does not have the same “public” characteristics of a mall orshopping center.

In Salmon Run Shopping Center v. NLRB,17 a 2008 opinion in the Second Circuit, the court found that attempts by non-employee union representatives to influence the public at a shopping center approached the “unprotected end” of allowablespeech because the content and context of the literature distribution did not show a strong nexus to § 7 (NLRA) rights. Thecourt upheld the shopping center’s ban on the activity.

On the other side of the spectrum, the Fashion Valley Mall case and the United Brotherhood of Carpenters and Joiners ofAmerica v. NLRB 18 (Ninth Circuit opinion) found ample California precedent to allow what courts in other states would not.

Outside the realm of labor law, the cases have been sparse. In Riemers v. Super Target,19 the United States District Courtrefused to extend North Dakota constitutional provisions beyond the United States Constitution and held that the SuperTarget of Grand Forks, ND, could exclude a person seeking signatures for a petition drive. This case was decided under Lloydv. Tanner analysis.

In an e-commerce case out of Delaware, the United States District Court in Langdon v. Google 20 used a shopping centeranalogy in analyzing whether a private Internet service provider (“ISP”) was a public forum. The court relied on Lloyd v.Tanner in finding that it is no more a public forum than a shopping center.

ConclusionExpressive activities cases will most likely continue to arise as a result of organized labor activities, as most states havedeclined to adopt California’s expansive state constitutional protection. However, there could be change in the attitudes ofthe courts. The advent of “lifestyle” centers with their “town square” concepts may alter the view of public versus privatespace. Also, the potential changes in the composition of the United States Supreme Court with a changing administrationand the willingness of the Court to revisit this issue in the past may also signal a more expansive view of expressive activitiesin shopping centers.

**GGAARRYY SS.. KKEESSSSLLEERR is President of Kessler & Collins, P.C., in Dallas. He has argued before the Texas Supreme Court and multi-ple Federal Circuit courts and has broad experience through commercial litigation involving insurance, securities, intellectualproperty and corporate matters.****HHOOWWAARRDD CC.. RRUUBBIINN is a shareholder in Kessler & Collins, P.C. He has helped clients resolve disputes both in state and feder-al courts located in Texas and across the nation. Mr. Rubin now focuses his practice on commercial litigation representing realproperty owners, secured creditors and unsecured creditors in bankruptcy cases; commercial landowners and contractors incontract disputes and business tort cases; and practice in employment and general contact disputes.

142 Cal. 4th 850, 172 P.3d 742 (2007).

2326 U.S. 501 (1946).

3Id., at 506.

4391 U.S. 308 (1968).

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5Id., at 319.

6407 U.S. 551 (1972).

7424 U.S. 507, 516–517 (1976).

8447 U.S. 74 (1980).

929 U.S.C. §§157, 158.

10502 U.S. 527, 533 (1992).

11NLRB v. Babcock & Wilcox Co., 351 U.S. 105, 112 (1956).

12Lechmere, Inc., 502 U.S. at 538.

13Id. at 535. See also, NLRB v. Pneu Electric, Inc. 309 F.3d 843, 853 (5th Cir. 2002) discussing the narrowness of this factor.

14242 F. 3d 682 (6th Cir. 2001).

15Cleveland Real Estate Partners v. NLRB, 95 F. 3d 457 (6th Cir. 1990), overruled on other grounds in NLRB v. Webcor Packaging, Inc., 118 F. 3d 115 (6th Cir. 1997).

16359 F. 3d 212 (D.C. Circuit 2004).

17534 F. 3d 108 (2nd Cir. 2008).

182008 U.S. App. LEXIS 18158, 184 L.R.R.M. 3025 (9th Cir., Aug. 25, 2008).

19363 F. Supp. 2d 1182 (D.N.D. 2005).

20474 F. Supp. 2d 622 (D. Del. 2007).

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No More Free Looks in California?

Matthew Seeberger*Cox, Castle & Nicholson LLPLos Angeles, CA

On May 28, 2008, the California Court of Appeal for the Third District (“Court” or “Third District”) upheld the judgment ofthe Superior Court of Sacramento County in Steiner v. Thexton (2008) 163 Cal. App. 4th 359, a potentially troublesome case forpurchasers of real property. In Steiner, the court determined that a purchase agreement for land was actually an option topurchase because the agreement bound the owner to sell but did not obligate the buyer to purchase since the decisionwhether or not to purchase was left entirely in the buyer’s discretion. The court then held that the option to purchase wasunenforceable for lack of consideration, as the buyer’s deposit into escrow was fully refundable and the buyer did not other-wise suffer any detriment or confer any benefit on the seller. On this basis, the court found that the “purchase agreement”was in effect an offer to sell, which could be revoked at any time prior to acceptance, and affirmed the lower court’s rulingthat the owner was under no obligation to sell the property to the buyer until such time as the offer was accepted, Thus,Thexton’s termination of the purchase contract was upheld.

FactsSteiner, a real estate developer, approached Thexton and offered to buy 10 acres of unimproved land from Thexton. Steinerintended to develop this land with several residences. The 10 acres were part of a 12.29-acre parcel of land, and the purchaseprice was to be $500,000. Such a development would require certain county approvals (a parcel split and development per-mits). Since Thexton did not want to be responsible for obtaining such entitlements, Steiner agreed to pursue them at his owncost. Steiner prepared a three-page “Real Estate Purchase Contract,” which required him to deposit $1,000 into escrow, butdid not require him to pursue the entitlements; the deposit would be fully refunded if he decided not to purchase the prop-erty for any reason. The document was signed on Sept. 4, 2003, and gave Steiner until Sept. 1, 2006, to obtain the entitlementsand purchase the property. In January 2004, the parties signed an addendum to the purchase contract, allowing Steiner tobuy additional land and obligating him to perform certain additional tasks. However, the addendum also relieved him ofother additional tasks.

Steiner applied for and expended considerable effort, time and money (tens of thousands of dollars) in pursuing thenecessary county approvals, and received assistance from Thexton during this process in May and August of 2004—includ-ing the signing by Thexton of an application for a tentative parcel map to split Thexton’s property into two parcels. However,just a couple of months later, in October 2004, Thexton asked the title company to cancel the escrow. Steiner, who had by thattime allegedly completed most of the work needed for the entitlements, nonetheless proceeded with a final hearing and,apparently, obtained county approval for the map. Then Steiner filed a lawsuit seeking specific performance.

Results at TrialThe trial court denied Steiner’s request for specific performance. The court first found that the purchase contract “must beconstrued as an option contract because the defendant bound himself to sell the subject property to plaintiff at a stated pricefor an undefined period of up to three years (defined in the contract as the ‘investigation period’), while plaintiff retained the‘absolute and sole discretion’ to elect not to continue in the transaction at any time during that period, in which case the pur-chase contract would become ‘null and void’. The unilateral nature of this agreement is the classic feature of an option . . . .”

The trial court then held that the option was unenforceable because it was not supported by consideration. AlthoughSteiner did make the $1,000 deposit, it “was to be applicable to the purchase price and was not for the grant of an option.”Furthermore, “there was no evidence that any money was paid directly to defendant for his grant of the option to purchasethe property, or that defendant received any other benefit or thing of value in exchange for the option.” The court applied therule that consideration must be measured as of the time the document was executed. It held that since, at the time the pur-chase contract was signed by the parties, Steiner was under no obligation to do anything beneficial to Thexton or detrimentalto Steiner, but could terminate the contract at any time and have his entire deposit returned, there was no consideration. Thetrial court also stated that Steiner’s promises to do certain things (such as expeditiously pursue the entitlements, giveprogress reports on the entitlement process, indemnify the seller for costs of the buyer’s investigations and deliver to the sell-er copies of all information if the contract was terminated) did not constitute consideration, because the buyer could have ter-minated the contract before undertaking any such actions.

On appeal by Steiner, the Third District upheld the trial court’s rulings.

The Third District’s ReasoningOOppttiioonn,, NNoott PPuurrcchhaassee CCoonnttrraacctt.. The Third District swiftly dispensed with Steiner’s claim that the subject document was apurchase contract rather than an option. The court cited the California Supreme Court’s decision in Johnson v. Clark (1917) 174

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Cal. 582 for the rule that where an owner obligates itself to sell property on certain terms but the decision to purchase is com-pletely discretionary in the other party, there is only an option to purchase. The court then held that, notwithstanding that thedocument was entitled “Real Estate Purchase Contract,” form did not alter substance, and the document actually was anoption because although Thexton was obligated to sell the property throughout the approximately three-year term of thecontract, Steiner retained the right to cancel at any time and get the full deposit returned. The Third District went on to statethat, even if there was consideration for the option (which the court expressly found was not the case), Steiner never exer-cised the option because none of his actions constituted an exercise by Steiner himself of the option because, notwithstandingsuch actions he was never obligated to purchase the property.

LLaacckk ooff CCoonnssiiddeerraattiioonn.. The court’s decision with respect to the lack of consideration was more involved. Steiner put forthseveral arguments that he had provided consideration, chiefly that he (i) conducted due diligence investigations at hisexpense, with the results to be turned over to Thexton if Steiner elected not to go forward, and (ii) agreed to “expeditiously”seek the entitlements.

The court held that neither of these constituted consideration because the contract itself did not obligate Steiner to per-form due diligence or seek the entitlements, and because Steiner could elect not to proceed at any time if he so desired.1

Steiner also argued that he had provided consideration through (i) the implied covenant of good faith and fair dealing (i.e.,that he was required by such implied covenant to take such actions as would bestow the benefit of the contract on the seller)and (ii) the general rule that if a contract is capable of two constructions, the court must choose the interpretation that willmake the contract binding if it can be done without violating the parties’ intentions. However, the court distinguished theopinions cited by Steiner based on one of them being (a) a federal case, and thus not binding on a California court, and (b) acopyright infringement case for damages, which was not an action for specific performance, and the other based on thebuyer’s promise not to unreasonably withhold its approval in connection with a parcel map.

The court concluded that the “purchase contract” was an unsuccessful attempt to create an option and thus was merely a revocable offer that could be withdrawn at any time by Thexton before acceptance by Steiner. Consequently, sinceSteiner had not accepted the offer, Thexton’s termination was valid. The court further stated that based on California CivilCode § 3391, which provides that specific performance of a contract is not available where there is no consideration, Steinerwas not entitled to specific performance of the purchase contract.2

PPrroommiissssoorryy EEssttooppppeell.. Steiner also claimed that he provided consideration by virtue of the doctrine of promissory estoppel,since by the time Thexton canceled the contract, Steiner, in reliance on the contract, had (by his account) performed between75% and 90% of the work needed for county approvals. However, the court found that Steiner had expended money at hisown risk, since promissory estoppel requires that the promisor should reasonably expect that the promise would induceaction or forbearance on the part of the promisee, and the court evidently did not think that Thexton should reasonablyexpect Steiner to do anything since Steiner could terminate the contract at any time. Then, since promissory estoppel is anequitable doctrine, the Third District used its discretionary power in equity to find it not an unjust resolution of the case thatThexton have the same right as Steiner to terminate the contract. Steiner further argued that a benefit was conferred onThexton by increasing the value of the property by obtaining entitlements, but the court thought that this was more impor-tant to Steiner than to Thexton (in part, because Steiner had pursued Thexton, who was not even marketing the property),and held this argument to not be strong enough to support forcing Thexton to sell his property.3

Fallout Created by the RulingSteiner v. Thexton calls into question the enforceability of the vast majority of real estate purchase contracts that allow the pur-chaser the unfettered right to terminate the contract at any time during the due diligence period and get its entire depositback. Although the contract at issue essentially gave Steiner a “free look” at the property for a period of three years, which isunusually long, and a typical purchase and sale agreement has a much shorter due diligence period (e.g., 60 or 90 days) dur-ing which the buyer can terminate and have its deposit returned, the concept is the same and the buyer could be subject totermination based on Steiner. The same reasoning could also be applied to a contract that provides a long period of time (twoor three years would not be unusual) to obtain entitlements after the due diligence period. If the entitlements were obtainedand the buyer simply elected not to go forward, the deposit would be forfeited to the seller, and the buyer would get itsdeposit returned if the entitlements were not obtained. Theoretically, the promise of the buyer to purchase the propertyunless the entitlements are obtained should be consideration enough, but after Steiner it could be argued that the entitlementsperiod was merely a second option, and that despite the buyer’s waiving due diligence, and thus “exercising” that option, nofurther consideration was given for the entitlements period option.

Some SuggestionsBased on the Third District’s reasoning in Steiner v. Thexton, there may be some steps that could help avoid the issue of noconsideration. Perhaps the strongest is for the buyer simply to pay the seller for the grant of an option.4 However, this raises

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questions: How much consideration is enough; and, if consideration is given for the option, will it constitute considerationfor the period following the exercise of the option? A commonly held view is that any consideration (such as the proverbialpeppercorn) is adequate; however, this may not be true after Steiner, in which a number of factors which might have, tosome, been adequate, were found not to be.

An alternative is to have the buyer obligate itself to perform due diligence or process entitlements. However, eventhough Steiner arguably made such promises, the court observed that Steiner nonetheless could have terminated the contractbefore any such actions were undertaken; thus, such promise was not sufficient consideration. Therefore, it would seem thatthe buyer would not only have to obligate itself to perform such actions; the buyer would also have to agree that it could notterminate the purchase agreement until it had actually performed such work. This, however, could be problematic, as itcould expose a buyer to an argument from the seller that the buyer did not actually undertake the stated actions, or that theactions taken were not consideration enough. In some situations, a seller might (as discussed in the opinion) attempt to seekspecific performance of the buyer’s promises to perform such actions in a situation where the buyer had already determinedthat there were insurmountable difficulties with the property, and thus force the buyer to expend unnecessary time, effortand money.

Another step that may help is based on California Civil Code § 1605, which defines “consideration” as a benefit con-ferred or agreed to be conferred on the promisor by another party, to which the promisor is not lawfully entitled, or a preju-dice suffered, or agreed to be suffered, by the promisee that it is not lawfully bound to suffer. Thus, the buyer could set forthin the purchase agreement the benefit(s) to the seller or the detriment(s) to the buyer, such as that the seller wants the specificentitlements and/or the due diligence materials to find out how much his or her property is worth, or that the buyer will beexpending resources and foregoing other opportunities to pursue the one at hand.

Unfortunately, due to the lack of guidance from the Third District, it is not clear if any of these by themselves, or evenall of them, would be enough to constitute consideration. Nonetheless, it would be prudent to consider some or all of them,to the extent applicable, to buttress the buyer’s position that consideration was given.

Distinguishing Steiner v. ThextonIt is possible that Steiner can be distinguished from cases involving other purchase and sale agreements. For example, Steinermay be a policy decision based on the sympathetic facts of the case revealed in the appellate briefs submitted to the court.The briefs assert that Thexton was suffering from alcoholism during the negotiations for the sale and that Thexton may havebeen influenced by a “meddling companion.” These facts, coupled with the three-year “investigation period” (which wasmore in the nature of a “due diligence period”) and the distinct lack of consideration on Steiner’s part, may have swayed thecourts to hold for Thexton; however, the Third District stated that the alleged alcoholism and “meddling companion” cir-cumstances were not relevant to its decision. In addition, Thexton was characterized as “uneducated,” and was apparently atrustee for a family trust, which when combined with some evidence that the property may have been worth significantlymore than $500,000 at the time the contract was entered into and the fact that the $1,000 deposit represented only 0.2% of thepurchase price also may have figured in the courts’ decisions; however, neither court specifically commented on theseaspects.5 Therefore, the ability to distinguish Steiner based on these factors should not be relied upon at this time.

Another possible distinguishing factor is that the Third District, at least seven times in the opinion (one of which waspart of a cite of the trial court’s decision), specifically referred to the fact that Steiner prepared the contract and stated the gen-eral rule that ambiguities are to be construed against the drafter, implying that since the contract allowed Steiner to back outat any time during the three-year investigation period and have his deposit refunded, Steiner could not then claim thatThexton could not similarly revoke the offer. As noted above, the contract was a three-page document, and did not containmany of the “boilerplate” provisions commonly found in fully negotiated purchase and sale agreements, such as a clausestating that both parties participated in negotiating the document and therefore ambiguities are not to be construed againstthe drafter. The Third District did not elaborate further on this, so it is not known whether the existence of such a clausemight have resulted in a different outcome; and while alone it likely would not have done so, it is advisable to include such aclause in purchase contracts to provide support for that position (as well as related clauses, such as one stating that the par-ties are sophisticated in buying and selling real property and a “merger” clause to the effect that all of the parties’ agreementsare set forth in the document).

Appeal to Be HeardOn Sept. 17, 2008, the California Supreme Court agreed to review the Third District’s decision in Steiner v. Thexton, whichmeans that the case is no longer considered final and thus ceases to be the law. The supreme court could uphold Steiner;however, even if it reverses the decision, it may not fully reject the logic of Steiner. Further, in the year or more required forthe supreme court to hear arguments and issue a decision, other courts may adopt a similar rationale and void contracts thatdo not adequately address the concerns raised in Steiner. During this period of uncertainty, and until there is further guid-ance from the courts as to the significance or impact of Steiner on real property purchase and sale agreements, buyers should

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be extremely cautious and should consult their legal counsel as to whether and how to address the consideration andenforceability issues raised by Steiner.

**MMAATTTTHHEEWW PP.. SSEEEEBBEERRGGEERR is a Partner in the Los Angeles office of Cox, Castle & Nicholson LLP. He specializes in Real Estate:Acquisitions and Dispositions, and Landlord and Tenant Leasing.

1The Third District affirmed the trial court’s reliance on the rule that consideration is to be determined as of the date of the agreement, not the time of perform-ance, citing Drullinger v. Erskine (1945) 71 Cal. App. 2d 492.

2The court noted that California Civil Code §3386 does permit specific performance in certain situations where it would otherwise not be applicable if one of theparties could avail itself of such remedy. But the court did not further consider this statute since Steiner did not invoke it and because Thexton’s attempt tospecifically enforce Steiner’s obligations was more in the nature of damages (which even Steiner thought would have be de minimus).

3Although promissory estoppel was not raised at trial, the trial court nonetheless stated that it would not have been applicable in any event because there was noconsideration.

4Note that the opinion suggests, but does not explicitly state, that the option payment should not be applicable to the purchase price.

5The Third District also noted that the property had been in Thexton’s family since 1944, and that Thexton had lived there most of his life and planned to con-tinue living there, although it is not clear whether this was relevant to the court.

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DOJ Moves to Adopt 2004 Accessibility Guidelines

Daniel S. Brennan*DLA Piper US LLP Chicago, IL

The U.S. Department of Justice (“DOJ”) recently issued a rulemaking notice to advance the process to update the AmericansWith Disabilities Act Accessibility Guidelines (“ADAAG”). The current ADAAG has been in effect since 1991. Starting in thelate 1990s, various government agencies have reviewed ADAAG and made recommendations on expanding the scope andtechnical requirements of ADAAG and reconciling ADAAG with widely used building codes. At the same time, many retailbusinesses undertook costly programs to modify stores and other facilities to comply with ADAAG and the other regulationspromulgated under the Americans With Disabilities Act (“ADA”), which was enacted in 1990. The latest announced rule fromDOJ would adopt a revised ADAAG that was first published in 2004, with changes based on comments received since thattime.

This article provides a brief overview of the rulemaking process in connection with the proposed ADAAG standards,as well as several substantive aspects of the proposed rule that DOJ announced in its June 17, 2008, notice of proposed rule-making. These issues include the safe harbor provisions, the financial threshold for small businesses in connection with barri-er removal, and clarifications on type and function of service animals. Many organizations representing the interest of retail-ers have been participating in the rulemaking process since 2004. Lawyers representing retailers should examine the latestnotice carefully and coordinate a response with relevant trade organizations. DOJ set a deadline of Aug. 18, 2008, for com-ments.

Background on the Rulemaking ProcessOn June 17, 2008, DOJ issued a notice of proposed rulemaking setting in motion what should be the final steps in the processto adopt the revisions to the ADAAG that were issued by the U.S. Access Board on July 23, 2004 (“2004 Standards”) as final,enforceable regulations. For those readers who are familiar with accessibility laws, the 2004 Standards are a comprehensiveupdate of the original ADAAG that was issued in 1991 (“1991 Standards”) pursuant to the ADA, which came into effect in1990. The 1991 Standards provide the current benchmark for DOJ’s enforcement of the ADA’s requirement that places of pub-lic accommodation remove physical barriers to access by individuals with disabilities where it is readily achievable to do so.

Although the 2004 Standards were first published in July 2004, they do not yet have the force and effect of law. Unlessand until DOJ adopts them as regulations under Title III of the ADA, which regulates places of public accommodation, theywill not be enforced as law. DOJ started the process of adopting the 2004 Standards in September 2004 when it issued anadvance notice of proposed rulemaking to gain public input on the issues relating to revision of ADAAG and other informa-tion for DOJ’s required regulatory impact analysis. In particular, DOJ was interested in public feedback on the application ofthe 2004 Standards to existing facilities that had already undertaken barrier removal programs. Barrier removal programswere required in existing public accommodations (such as retailers) under the ADA, and the barrier removal was to conformwith the 1991 Standards. Therefore, for example, a department store with doors that were too narrow or water fountains thatwere too high would look to the technical requirements for the width of doorways and height of water fountains specified inthe 1991 Standards as a benchmark. Not surprisingly, DOJ anticipated that the business community would be concerned thatthe new 2004 Standards would elevate the requirements for readily achievable barrier removal, even where a businessalready complied with the 1991 Standards.

The regulatory impact information that DOJ sought during the initial comment period focused primarily on the effectthat the 2004 Standards might have on small businesses. The small business community, acting through the Small BusinessAdministration and other advocacy groups, was very vocal in commenting on the proposed adoption of the 2004 Standards.

Safe Harbor ProvisionsIn its September 2004 advance notice of proposed rulemaking, DOJ described several options to create “safe harbors” forexisting public accommodations that already comply with the 1991 Standards. The first option provided that facilities com-plying with the scoping and technical provisions in the 1991 Standards would not have to comply with requirements thatmight be imposed by the 2004 Standards—unless a space is altered after the 2004 Standards are adopted by DOJ. The secondoption proposed exemptions of certain building elements in the scoping and technical requirements of the 2004 Standards(i.e., play areas and recreation areas). The final option proposed the exemption of certain elements under the proposed stan-dards where DOJ determines that certain supplemental requirements are inappropriate for barrier removal.

According to the June 17, 2008, notice, DOJ decided on a combination of the first two options. Many of the changes inthe 2004 Standards are incremental and were added only because the U.S. Access Board undertook additional study for thosechanges or the changes were made to harmonize the requirements under ADAAG with existing model building codes. DOJfound that, because many of the changes were incremental, a safe harbor provision was in order.

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The safe harbor provision is proposed as the new § 36.304(d)(2), which reads as follows:

Safe Harbor. Elements in existing facilities that are not altered after [insert effective date of final rule], thatcomply with the 1991 Standards, are not required to be modified in order to comply with the require-ments set forth in the proposed standards.

DOJ reasons that it would be an inefficient use of resources to require covered entities that have complied with the1991 Standards to modify their facilities again to comply with the 2004 Standards if the changes will only provide a minimal,incremental improvement in accessibility to persons with disabilities. As DOJ noted in its June 17, 2008, notice, for those enti-ties that already comply with the 1991 Standards:

[t]o a substantial degree, the barrier has already been removed. In addition, covered entities would have astrong disincentive for voluntary compliance if, every time the applicable standards are revised, coveredentities are required once again to modify elements simply to keep pace with new proposals. 73 FederalRegister 34533.

In addition to the general safe harbor provisions discussed above, DOJ has also recommended certain limited scopingrequirements (i.e., defining which elements and areas need to be accessible) under the 2004 standards. These limited scopeprovisions are contained in § 36.304(d)(3), and address play areas and swimming pools.

In addition to the general safe harbor provision, DOJ is also proposing provisions that provide some relief from, andclarification of, the barrier removal requirements for small businesses. Small business advocacy groups argued that the obli-gation to remove barriers to accessibility had a disproportionate impact on small businesses because (1) small businessestend to be located in older buildings; (2) the 1991 Standards were too technical and often conflicted with local building codes,causing great confusion and uncertainty among the small business community; and (3) small businesses were more suscepti-ble to litigation and, due to costs involved in the court actions, felt compelled to settle rather than fight the alleged violationsin court.

While the 2004 Standards attempt to harmonize the local building codes with ADAAG, DOJ expressed a willingness toafford special consideration to small businesses in measuring whether or not appropriate efforts have been expended to pur-sue readily achievable barrier removal. In particular, a new regulation, § 36.304(d)(5), would establish an expenditure thresh-old that would entitle a small business to a presumption that it has met the readily achievable barrier removal standard. Theproposed regulation reads as follows:

Qualified Small Business. A qualified small business has met its obligation to remove architectural barrierswhere readily achievable for a given year if, during that tax year, the entity has spent an amount equal toat least one percent (1%) of its gross revenue in the preceding tax year on measures undertaken in compli-ance with the barrier removal requirements of this section.

Service AnimalsUse of service animals, such as Seeing Eye dogs by persons with disabilities, is protected by DOJ’s current regulations.However, in the course of the current rulemaking process, many retailers and others logged complaints that the variety anduse of animals as service animals was not consistent with the goals of the ADA or otherwise imposed unreasonable burdenson business. For example, many more species of animals beyond the traditional Seeing Eye dogs are being used, or at leastclaimed to be used, by customers with disabilities. Additionally, many businesses were unclear about when restrictions onthe presence and behavior of service animals were permissible.

DOJ attempts to address these problems in the current proposed rule. First, DOJ proposes to exclude certain animalsfrom the definition of a service animal. For example, any wild animal, whether born in the wild or bred in captivity, are noteligible for protection under the proposed regulations as service animals. A service animal must be a dog or other commondomestic animal. DOJ is also proposing that a place of public accommodation have flexibility to ask an animal owner toremove the animal if it is not being controlled or is not housebroken; if the presence of the animal fundamentally alters thenature of the public service; or if the animal poses a direct threat to the health and safety of others, which cannot be elimin-ated by reasonable modifications.

What constitutes a service animal versus a “comfort animal” has led to much debate in connection with the presentrulemaking. As DOJ notes, certain animals provide comfort to persons with certain psychological and mental impairments.However, an animal that provides comfort and a service animal are not synonymous in the eyes of DOJ. Certain animals thatare used as companions by persons with mental or psychological impairments can serve a function by, for example, remind-ing an individual when to take medication or alerting others that the person with the mental or psychological impairment is

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engaged in some sort of destructive behavior. In that case, the animal, subject to all the other requirements proposed by DOJ,can be considered a service animal that is entitled to access to the place of public accommodation.

ConclusionThe proposed rule that DOJ has published contains many provisions that can affect the operation of a retailer. This articlehighlights only a handful of the more significant issues. The safe harbor provision for barrier removal is an issue of particularconcern, which DOJ has attempted to address in a fair and balanced way. Lawyers who advise retailers on accessibility issuesshould review the proposed regulations in order to alert their clients of what is on the horizon or, even better, work with theappropriate trade organizations to provide comments to DOJ.

**DDAANNIIEELL SS.. BBRREENNNNAANN is a Partner in the Construction Law group of DLA Piper US LLP in Chicago, IL. He concentrates hispractice in advising owners, designers and contractors on risk management in the construction process; in prosecuting anddefending construction claims, including professional negligence, and delay claims; in negotiating and drafting constructionand design contracts for owners, architects and contractors; and in advising clients with respect to design and construction ofaccessible facilities under Title III of the Americans With Disabilities Act and the Fair Housing Act.

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Of Interest

ArticlesJohn T. Gregg, “Compelling Nondebtor Suppliers to Perform Under Executory Contracts,” 27-JUN Am.Bankr.Inst.J. 20 (June2008).Michael J. Kelly, “Recognizing the Breadth of Non-Assignable Contracts in Bankruptcy: Enforcement of Nonbankruptcy Lawas Bankruptcy Policy,” 16 Am.Bankr.Inst.L.Rev. 321 (Spring 2008).Gary W. Marsh and David E. Gordon, “Processing Credit Card Charges in Chapter 11,” 82 Am.Bankr.L.J. 253 (Spring 2008). Meghan S. Towers, “In re Winn-Dixie Stores, Inc.: A Lesson in Claim Amendment,” 27-SEP Am.Bankr.Inst.J. 28 (Sept. 2008).

Cases

BankruptcyCommercial lessors moved for allowance of the rent due on the first of every month as an administrative expense and imme-diate payment of stub rent relating to that portion of the month in which the bankruptcy petition was filed, which postdatedthe order for relief. The court held that the mere fact that the Chapter 11 debtors occupied the leased premises post-petitionand used them for their store was insufficient to establish that payment for use and occupancy during the stub period fromthe date of the order for relief to the last day of the month in which the bankruptcy petition was filed was for the actual, nec-essary expense of preserving the estate. The lessors were due the fair market value of the premises. However, the courtwould not order immediate payment of the stub rent. In re Goody’s Family Clothing, Inc., 392 B.R. 604 (Bankr.D. Del. 2008).

A landlord moved for relief from the automatic stay, and the debtor-franchisee objected. The debtor operated under asublease with its franchisor and asked the court to permit him to exercise the franchisor’s renewal option under the masterlease. The court held that the debtor could not assume his franchisor’s lease pursuant to the terms of the bankruptcy statutedealing with unexpired leases of non-residential property, and could not renew the lease because he had failed to avail him-self of the process designated by the parties for compelling renewal by not giving notice to his sublessor in a timely fashion.In re Dumas, 392 B.R. 204 (Bkrtcy.D.S.C. 2008).

A landlord filed an administrative expense claim seeking to have the debtor pay for a bond to clear a contractor’srecorded mechanics’ lien against commercial property, to pay for attorney fees that the landlord incurred in defendingagainst the contractor’s foreclosure action and for unpaid post-petition rent. The debtor argued that its obligations to indem-nify against the lien and pay for the attorney fees and bond were general unsecured claims. The court held that the landlordwas entitled to an administrative expense claim for all attorney fees that it incurred during the post-petition, pre-lease rejec-tion period. However, the debtor’s obligation to indemnify the landlord against liens on leased property did not arise withinthe time period covered by the statute requiring timely performance of post-petition, pre-rejection lease obligations. In reDesigner Doors, Inc., 389 B.R. 832 (Bkrtcy. D. Az. 2008).

A debtor-in-possession (DIP) objected to proof of claim filed by its former subtenant, to which the debtor had assignedits rights and obligations under the underlying leases. The DIP did not effect an anticipatory repudiation of the subleasesmerely by indicating to the subtenant that it intended to reject the underlying leases. Moreover, the subtenant to which thefinancially distressed retailer had rented certain properties for less rent than what the retailer was paying, in order to mitigateits damages after the stores located on those properties closed, waived whatever claim it had to “spread rent” after the sub-tenant accepted assignment of the debtor’s obligations under the leases, by entering into an assignment agreement withoutexpressly reserving the right to assert a claim for “spread rent.” Rubloff Development Group, Inc., 389 B.R. 555 (N.D. Ill. 2008).

A Chapter 11 debtor’s landlord moved to dismiss the debtor’s petition on the ground that it was a bad-faith attempt tomodify an earlier plan of reorganization that was substantially consummated. The court held that dismissal of the case onbad-faith grounds was not warranted, but the court had an obligation to minimize the harm to the landlord and other partiesin interest. In re 1633 Broadway Mars Restaurant Corp., 388 B.R. 490 (Bkrtcy.S.D.N.Y. 2008).

A commercial lease did not terminate pre-petition upon the expiration of its initial three-year term, but continued post-petition, as an unexpired month-to-month holdover tenancy, which imposed continuing obligations: first, on the Chapter 11debtor-in-possession and then on the trustee pursuant to 11 U.S.C.A. 365 (d)(3). It was undisputed that the debtor did notquit the premises upon the expiration of this initial three-year term, but continued to remain in possession with the lessor’sconsent, thereby triggering a holdover provision in the lease. A month-to-month holdover tenancy may constitute an “unex-pired lease” of a kind that imposes continuing post-petition obligations on a debtor-tenant or the trustee. In re Van Vleet, 383B.R. 782 (Bankruptcy D. Colo. 2008).

Master leases into which restaurant operators entered as part of sales-leaseback transactions were, by their plain terms,indivisible agreements under Illinois law, which the restaurant operators, after commencement of their Chapter 11 cases, hadto assume or reject in their entirety. Moreover, even assuming that the master leases were ambiguous, evidence of circum-stances surrounding negotiation of master leases, as well as evidence that the restaurant operators subsequently sought thelessor’s consent to substitute one restaurant for another under the master lease, showed that the parties intended each masterlease to be one, indivisible agreement. In re Buffets Holdings, Inc., 387 B.R. 115 (Bkrtcy.D.Del. 2008).

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A food retailer, debtor-in-possession, moved to reject a project agreement between itself and a real estate developer.The Second U.S. Circuit Court of Appeals held that the project agreement was an executory contract as of the filing of thepetition. Consequently, the non-debtor party could not, by post-petition tender or performance of its own outstanding obliga-tions under the contract, deprive the debtor party of the ability to exercise its statutory right to reject the contract as disad-vantageous to the estate. In re Penn Traffic Co., 524 F.3d 373 (2nd Cir. 2008).

Res judicata applied to bar the plan administrator from contending that the lease and sublease agreements had to becharacterized as a disguised financing arrangement. Equitable estoppel applied to preclude the assignee of claims from chal-lenging a stipulation that released the debtors from liability arising out of or relating to certain claims. The assignee did nothave a claim for unpaid obligations for the shopping mall’s CAM (common area maintenance) charges. In re MontgomeryWard, LLC, 388 B.R. 49 (Bkrtcy.D. Del. 2008).

A Chapter 7 trustee brought an adversary proceeding to avoid, as an alleged preference, a lease termination paymentthat the debtor had made during the 90-day period preceding the petition date. The landlord argued that the payment wasnot “for or on account of an antecedent debt” because it had been made to extinguish the debtor’s un-matured obligation forfuture rent under a five-year lease it had signed more than two years earlier. The bankruptcy court held in favor of thetrustee and the district court affirmed, and the trustee was able to avoid the payment. Midwest Holding #7, LLC v. Anderson,387 B.R. 892 (N.D. Ga. 2008).

Covenants/ClausesThe leased property was damaged by two hurricanes, and the landlord gave Panera timely notice of its intent to terminatethe lease under the “damage or destruction” clause of the lease. Thereafter, Panera commenced an action contesting the land-lord’s right to terminate, and the landlord counterclaimed for eviction. Panera argued that the landlord had failed to establishproof that the cost to repair the hurricane damage exceeded 20% of the building’s insurable value because the landlord failedto present estimates by a “reputable contractor” as contemplated in the lease. The trial court issued a temporary injunctionpreventing eviction after finding that Panera had a substantial likelihood of success on the merits on the condition thatPanera post a bond of double rent. After a trial, at which time both the landlord and Panera had obtained expert testimonyregarding the repair of the premises, the court held that although the landlord had breached the relevant termination provi-sion in the lease, the landlord was justified in terminating the lease. It held that the breach was not material and awardedpossession of the premises to the landlord. It also awarded the double rent posted by Panera, finding that Panera was aholdover tenant. The court of appeals affirmed, finding that the decision to terminate the lease was proper because the land-lord’s breach by failing to present a proper estimate was not material: It had no effect on the actual repair costs as presentedat trial. However, the court of appeals held that the double rent award was not proper because Panera was not a holdovertenant, but rather had a well-founded claim of possession under the trial court’s temporary injunction as well as the land-lord’s delay in providing a proper repair estimate. Covelli Family, L.P. d/b/a Panera Bread v. ABG5, L.L.C., as successor in interestto Three Avenues, L.L.C. and Continental Casualty Company, No. 4D06-4298, Court of Appeal of Florida, Fourth District,Jan. 2, 2008, Rehearing granted by, in part, Opinion withdrawn by, Substituted opinion at 977 So. 2d 749 (Fl. Ct. App. 4th Dist.,March 26, 2008).

GuaranteesThe landlord and tenant entered into a lease agreement for space in a shopping center. Thereafter, the tenant fell behind inthe rent and the landlord filed a complaint seeking to evict the tenant and for damages against the guarantor. The tenant fileda motion for summary judgment seeking a determination that she was not personally liable on the lease. The landlordopposed the motion and sought its own summary judgment motion. Although the trial court held that the issue of damageswas inappropriate for summary judgment, it held that the lease agreement disallowed liability for a representative of eitherthe landlord or the tenant and concluded that the tenant was not personally liable for any unpaid rent. The appellate courtreversed. It held that when parties enter into a lease agreement, they create a separate guaranty agreement, where the“undersigned” gives a guaranty to pay rent and other costs associated with a lease agreement. It held that, in this case,because the tenant signed the guaranty with her personal name and wrote only “Executive Director” immediately beneathher signature, she could not avoid personal liability. Such a designation is only descriptive of the character or capacity of theperson, and does not allow such individual to deny the guaranty. Westgate Village Shopping Center v. Parker, Court of AppealsNo. L-08-1017, Court of Appeals of Ohio, Sixth Appellate District, Lucas County, May 30, 2008.

Landlord and TenantThe landlord, who had acquired the building from a third party, leased space in a building to American Express. Prior to thelandlord’s acquisition of the building, American Express had also acquired the stock and other assets of the third-party’sbusiness in a Stock Purchase Agreement, but not the building itself. In addition, prior to commencement of the lease, certainitems were installed in the building, including kitchen fixtures, specialized rooms, customized trade spaces, satellite dishes,customized fixtures, gym lockers, signage, piping from water purification systems, and superfluous cabling and wiringthroughout the building. The lease provided that American Express was required to remove all “furniture, trade fixtures,

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office equipment and all other items of the Tenant’s property” prior to vacating the building. Four days prior to the termina-tion of the lease, the landlord sent a letter to American Express, requiring American Express to remove the above-nameditems. American Express replied, stating that it had no obligation to do so because it had not installed any alterations, addi-tions, improvements or fixtures to the property. After several letters were exchanged, the landlord sent a contractor’s estimateto American Express with the cost of removing the above-named items. The landlord commenced an action againstAmerican Express for breach of lease, and American Express moved for summary judgment. The court granted the motion,holding that the lease did not require American Express to remove items that were fixtures prior to commencement of thelease. It considered that American Express provided sufficient evidence to prove that the items in dispute were fixtures, andthe landlord was unable to support a contrary conclusion. 2401 Walnut, L.P. v. American Express Travel Related ServicesCompany, Inc., Civ. No. 07-1281, United States District Court for the Eastern District of Pennsylvania, Jan. 24, 2008.

LeasesRocar was the ground lessee of the subject premises pursuant to an agreement between Rocar and the landlord’s predecessor(“the ground lease”). JPMorgan was the subtenant of Rocar pursuant to a written lease agreement (“the bank lease”). Thebank lease was scheduled to expire on Jan. 30, 2004, but JPMorgan had an option to renew for an additional five-year period.In this event, Rocar was obligated to timely exercise its option to renew the term of the ground lease. JPMorgan timely exer-cised its option to renew the bank lease, but Rocar failed to exercise its option to renew the ground lease. Thereafter, Rocarclaims that it paid rent to the landlord, Jefferson, for February and March 2004, giving rise to a month-to-month tenancy.Jefferson did not contest the claim but served Rocar with a 30-day notice, terminating the putative month-to-month tenancyas of November 2004. Meanwhile, Rocar and JPMorgan entered into a stipulation in April 2004, in which the partiesacknowledged that JPMorgan had made payments, totaling $33,097.20, to Rocar for February and March 2004 under thebank lease. Simultaneously, JPMorgan had made rent payments directly to Jefferson for the same time period. The agreementfurther provided that JPMorgan would resume paying Rocar rent under the bank lease for the period April 1, 2004, onward.Thereafter, faced with competing demands by Jefferson and Rocar during the same period, JPMorgan commenced an actionseeking, inter alia, a judgment interpreting the rights and obligations of the parties with respect to the competing demands forrent. The court held that even though the ground lease “expired” as of Jan. 31, 2004, Rocar continued as a month-to-monthtenant after such time, and JPMorgan continued in possession of the premises. Therefore, the relationships of sublessor-para-mount landlord and sublessor-subtenant remained the same. The court further held that the double payments made byJPMorgan for February and March 2004 were made in good faith and under compulsion because the alternative was evictionif rent was not paid. The court held that any rent paid by JPMorgan to Jefferson was properly offset against amountsJPMorgan owed Rocar under the sublease. Further, if any excess remained, JPMorgan would be liable to Rocar for the periodFeb. 1 through Nov. 30, 2004, on the rent JPMorgan owed Rocar under the sublease. JPMorgan Chase Bank, N.A. v. Rocar RealtyNortheast, Inc., and Jefferson Valley Mall Limited Partnership, 2488, 2488A, 117237/04, 47 AD3d 425, Supreme Court of NewYork, Appellate Division, First Department, Jan. 8, 2008.

PermitsA town wetlands commission denied a permit to a landowner to create a 20-lot subdivision that included wetlands, eventhough the owners presented an expert at the hearing on the application. The trial court dismissed an appeal, but the appel-late court reversed. It held that there was no substantial evidence of adverse impacts. The owners’ expert testified on theminimal impact and resolution, and neither the opponents nor the commission presented scientific evidence to support thedenial. Fanotto v. Inland Wetlands Comm’n of the Seymour, 108 Conn. App. 235, 947 A.2d 422 (2008).

Public AccessA shopping mall operator refused to permit a local carpenter’s union, which was having a dispute with a tenant using non-union employees in remodeling its space, from setting up a table and distributing literature at the mall. Adopting an admin-istrative law judge’s finding that the mall operator breached NLRA § 8(a)(1), the NLRA (National Labor Relations Act) ruledthat the mall had engaged in an unfair labor practice by excluding the union from its property because it was a labor organi-zation. The appeals court vacated the NLRB’s (National Labor Relations Board) order and its petition for the order’s enforce-ment. Although rights under NLRA § 7 were implicated, the facts did not show discrimination under NLRB v. Babcock &Wilcox Co. There was no evidence that any employer was permitted to communicate to the general public, through the use ofmall facilities, its reasons for not paying area standard wages to members of a unionized trade. Nor was any competing laborgroup permitted to engage in efforts to organize members of its trade. Salmon Run Shopping Center LLC v. National LaborRelations Board, 534 F.3d 108 (2nd Cir., 2008).

Tort LiabilityHealth club employees had no duty to administer cardiopulmonary resuscitation (CPR) to a health club member after he hadfallen off the club’s stepping machine. In this case, the Florida Court of Appeal found that even if business owners have a

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duty to provide “first aid” to business invitees facing medical emergencies, such obligation does not encompass the duty toperform skilled treatment such as CPR. The court found that although the procedure for CPR is relatively simple and widelyknown as a major technique for saving lives, it nonetheless requires training and re-certification and that—unlike firstresponders, for whom performing CPR is routine—non-medical employees certified in CPR remain laymen and should havediscretion in deciding when to utilize the procedure. This was an issue of first impression. L.A. Fitness International, LLC, aForeign Limited Liability Corporation d/b/a as L.A. Fitness Sports Clubs, and L.A. Fitness—Florida, Inc., a Florida corporation d/b/a L.A.Fitness Sports CLUBS, Appellants v. MAYER, 980 So. 2d 550, (Fl. Ct. App. 4th Dist. 2008).

WaiversCG Properties owned a shopping center where CG Foods, a grocery store, and Oaken Keg Spirit Shops (Oaken Keg), a liquorstore, were located. Originally, Oaken Keg was housed in a separate building from CG Foods, pursuant to Alaskan law. In1994, Alaskan law was modified, which allowed liquor to be sold in grocery stores, pursuant to certain conditions. As aresult, CG Foods carved out a section of the grocery store for Oaken Keg, but constructed glass partitions in order to conformto Alaskan law. Thereafter, Safeway purchased CG Foods. A few years later, CG Properties commenced an action againstSafeway, CG Foods and Oaken Keg Spirit Shops, alleging that Oaken Keg’s relocation to the partitioned area was without theconsent of CG Properties. CG Properties claimed that the relocation violated the lease’s use and sublease clauses. CGProperties sought declaratory relief and a permanent injunction preventing Safeway from operating an Oaken Keg liquorstore on the supermarket premises. The trial court granted CG Properties’ motion for summary judgment concerning thesublease clause, holding that CG Foods breached its duty to seek permission before sub-leasing a portion of the leased prem-ises. The Alaska Supreme Court reversed. It held that by its delay in objecting, CG Properties had acquiesced in the move ofthe liquor store. It considered that CG Properties was completely aware of the relocation and failed to protest in a timelyfashion. Because the supreme court concluded that CG Properties had waived its right to claim that CG Foods breached thesublease or use clauses, it did not address the other issues raised by the parties. Carr-Gottstein Foods, Co. and Safeway, Inc. v.Wasilla, LLC, d/b/a Wasilla Shopping Center, LLC, Supreme Court No. S-12010, 182 P.3d 1131 (Alaska 2008).

ZoningThe approval of a hotel for a special-purposes district, intended as a transition between commercial and residential uses, isappropriate to balance uses in the area. Miller v. D.C. Board of Zoning Adjustment, 948 A.2d 571 (D.C. Ct. App. 2008).

LegislationAArriizzoonnaa —2008 New Laws, H.B. No. 2615, authorizes solar construction permits and a study committee.CCoolloorraaddoo —2008 New Laws, H.B. No. 08-1164, amends § 40-2-123 C.R.S. to authorize the commission to consider acquisi-

tion of utility-scale solar resources under certain circumstances.—2008 New Laws, S.B. No. 08-117, amends provisions concerning solar installation permits.

MMiicchhiiggaann —2008 New Laws, H.B. Nos. 5541 and 5542, amend the tax increment financing law.MMiinnnneessoottaa —2008 New Laws, H.B No. 3195, adopts the Green Solutions Act of 2008, authorizing three studies regarding

Minnesota’s intent to participate in a cap-and-trade program for greenhouse gas emissions.VViirrggiinniiaa —2008 New Laws, S.B. No. 320, allows community associations to establish reasonable restriction on solar en-

ergy collection devices, but prohibits a ban on the devices.—2008 New Laws, S.B. No. 464, establishes the Commission on Energy and Environment.

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From Canada

In Depth

Are Continuous Operation Clauses in Leases Enforceable?

Blair Rebane*Borden Ladner Gervais LLPVancouver, Canada

IntroductionIn Longwood Station Ltd. v. Coast Capital Savings Credit Union1 (“Longwood Station”), the British Columbia Supreme Court con-sidered whether a landlord could enforce a covenant in a lease that required a tenant to continue in business at the leasedpremises until the expiration of the lease. This sort of clause is commonly referred to as a continuous operation clause. Whatmakes Longwood Station interesting is that the continuous operation clause (“Injunction Clause”) under consideration con-tained a provision whereby the tenant agreed that the landlord would be entitled to an injunction if it failed to operate fromthe leased premises.

The FactsThe parties to this case were Longwood Station Ltd. (“Longwood”) and Coast Capital Savings Credit Union (“CoastCapital”). Longwood owned and operated a commercial mall in Nanaimo, British Columbia, known as Longwood Station(“Mall”), while Coast Capital was Canada’s second largest credit union. In May of 1998, Coast Capital entered into an agree-ment to lease 3,489 square feet of commercial space, or roughly 3.5% of the Mall (“Premises”) from Longwood (“Lease”).While originally set for a term of five years, Coast Capital renewed the Lease for a further five years, making the effective ter-mination date July 31, 2008.

At the commencement of the Lease, Coast Capital primarily operated an insurance business from the Premises. Thischanged in 2004 when Coast Capital started to offer full banking services. Initially, it did this on a small sale; however, astime progressed, banking services became a larger part of its business at the Premises.

As Coast Capital’s business at the Premises grew, it determined that it would require additional space fromLongwood. Coast Capital informed Longwood of this fact and, in turn, requested additional space. Unfortunately,Longwood was unable to accede to this request, which resulted in Coast Capital abandoning the Premises prior to the expiryof the Lease term. Despite this, Coast Capital promised to continue to pay rent under the Lease, as required.

In response to Coast Capital’s actions, Longwood brought an application for an interlocutory mandatory injunction. Inthe application, Longwood sought to require Coast Capital to return to the Premises and operate a credit union therefrom. Tothis end, Longwood relied on a continuous operation clause in the Lease. It appears that Longwood’s real concern and possi-ble reason for initiating the application was that if Coast Capital did not return to the Premises to operate its business, apotential purchase deal for the Mall could fall through.

The Decisions and Reasoning of the CourtA key issue in the interlocutory mandatory injunction application was the effect of the continuous operation clause, whichcontained a provision that entitled Longwood to an injunction if Coast Capital breached the Injunction Clause. TheInjunction Clause provided that:

The tenant will not use or permit the premises or any part thereof to be used for any purpose other thanfor the operation of a credit union, as defined in the Credit Union Incorporation Act . . . , including the oper-ation of an insurance business as defined in the Financial Institution Act . . . , and the offering of financialplanning services, brokerage services, and real estate agency services. The tenant will at all times:

(a) remain open for business during the tenant’s normal business hours, and(b) continuously, actively, and diligently carry on the premises the type of business for which the premisesare leased to the tenant.

The Tenant acknowledges that its continued operation of the premises and the regular conduct of its busi-ness therein are of utmost importance to the Landlord and to other tenants of the Lands and any failure toso continuously operate will entitle the Landlord to obtain an injunction or order compelling the Tenant to continu-ously operate its business in the premises and the Tenant hereby consents to such injunction . . . . (emphasis added)

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The chambers judge was troubled by the Injunction Clause, noting that both parties to the Lease were sophisticatedparties. Nevertheless, he declined to rely on it. Accordingly, Longwood was required to satisfy the well-established test inCanada for interlocutory injunctions. To this end, Longwood was required to show that there was a serious question to betried as to whether there was a breach of the Injunction Clause; that it would suffer irreparable harm if the injunction was notgranted; and that the balance of convenience favoured the granting of an injunction.

Further, and perhaps most importantly, Longwood had to overcome a wealth of case law where courts refused toenforce continuous operation clauses by way of mandatory injunctions due to, among other things, judicial reluctance tosupervise such injunctions.

After hearing submissions from counsel, reviewing the affidavit evidence and the case law on point, the chambersjudge concluded that an injunction should not be granted. While Longwood had established that there was a serious ques-tion to be tried, it could not satisfy the remaining aspects of the injunction test. Further, the chambers judge expressed reluc-tance about supervising the injunction and noted that Longwood had arguably waived its right to enforce the InjunctionClause. Despite the foregoing, costs were awarded to Longwood since Coast Capital “invited [the] application” by agreeingto the Injunction Clause.2

DiscussionWhile there are numerous Canadian decisions that have refused to enforce continuous operation clauses by way of manda-tory injunction, Longwood Station is unique in that it appears to be the only British Columbia case to consider such a clausewith a built-in consent to injunction.

Canada-wide, there appears to be only one other case that has considered this issue. That case, which was referencedin Longwood Station, is Tritav Holdings Ltd. v. National Bank of Canada 3 (“Tritav”). In Tritav, the Ontario Court of Justice (GeneralDivision) held that a clear and unequivocal consent to injunction clause did not operate to contract out of the law as it exists.

The chambers judge in Longwood Station was not bound by Tritav. Accordingly, it was open to the chambers judge torefuse to rely on Tritav and give effect to the Injunction Clause. Arguably, this could have been accomplished in one of twoways: First, the chambers judge could have ruled that because the parties were on equal footing at the time the Lease wasentered into (both Longwood and Coast Capital were relatively large, sophisticated corporate entities), he would not interferewith their stated intention. Second, the chambers judge could have ruled that the Injunction Clause was an acknowledge-ment by Coast Capital that if it breached the continuous operation clause, Longwood would suffer irreparable harm.

While Longwood did not advance a stated intention argument, the chambers judge effectively rejected it. He noted:“[Longwood] properly concedes that [the Injunction Clause] cannot bind the court in the exercise of its equitable jurisdic-tion.”4 Longwood did, however, advance a variant of an irreparable harm argument. Specifically, Longwood argued that the InjunctionClause “. . . should weigh against Coast Capital in considering irreparable harm, and in particular the balance of convenience.”5 On thestrength of Tritav, and for the same reason the chambers judge effectively rejected the stated intention argument, the chambers judgerejected Longwood’s variant of the irreparable harm argument. After all, if one cannot contract out of the entirety of the court’s equitablejurisdiction, it should not be able to contract out of a part of it.

Given the foregoing, and as a result of Longwood Station, injunction clauses in commercial leases that purportedly entitle alandlord to an injunction cannot fetter a judge’s discretion. Ultimately, this means that in order for a landlord to enforce acontinuous operation clause, it will have to satisfy the test for an interlocutory mandatory injunction. Doing so is not an easytask. Longwood Station identifies a number of obstacles that a landlord will face. A review of the chambers judge’s reasonson irreparable harm and the balance of convenience illustrate this best.

With respect to irreparable harm, the chambers judge noted that the only harm approaching the status of beingirreparable was the impact that Coast Capital’s departure could have on the potential sale of the Mall. On this point, thechambers judge found Longwood’s evidence to be deficient. He noted that Longwood failed to introduce evidence from thepurchaser and further noted that the evidence provided by Longwood (which is not detailed in the judgment) was entirelyspeculative.

As for the balance of convenience, the chambers judge held that it did not favour Longwood for several reasons:

• There was only a short amount of time left on the Lease; • Coast Capital had already moved out of the Premises and would continue to pay rent for the balance of the lease

term;• Coast Capital was not an anchor tenant; and • Longwood could mitigate its losses by seeking a new tenant.

If this was not enough, the chambers judge identified two further problems with Longwood’s case. First, he noted thatthere would be “real difficulty” in supervising the injunction, if ordered, since Coast Capital’s operations changed over thecourse of the Lease. In effect, it was not clear what Coast Capital would have to do in order to comply with the Lease.

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Second, and in connection with Coast Capital’s changing operations, the chambers judge noted that Longwood’s failure toobject to Coast Capital’s changing operations arguably amounted to a waiver of the continuous operation clause.

Given the foregoing, it would appear from Longwood Station that a landlord’s ability to enforce a continuous operationclause by way of interlocutory mandatory injunction will depend on whether it can establish:

(a) Clear, non-speculative evidence of irreparable harm from the most appropriate source, which may include evi-dence that: (i) The tenant who is in breach of the continuous operation clause is a key or anchor tenant; and/or (ii) Other tenants will breach their leases or fail to renew as a result of the breach that is being complained of6;

(b) And a combination of the following:(i) The tenant has not yet moved out, but has stated that it will; (ii) There is a considerable amount of time left on the lease;(iii) The tenant who is in breach of the continuous operation clause (anticipatory or otherwise) is not willing to continue to

make payments under the lease; and/or(iv) The tenant who is in breach of the continuous operation clause (anticipatory or otherwise) is unable to pay damages if the

landlord is successful at trial.

What is more, Longwood Station suggests that in order for a continuous operation clause to be enforceable by way of aninterlocutory mandatory injunction, a landlord must have vigilantly enforced that clause throughout the term of the lease.Failure to do so may give rise to a problem of supervision or, more seriously, a waiver of the right to rely on the continuousoperation clause.

All that being said, it would be a mistake to conclude that consent to injunction clauses should not be included in com-mercial leases. Granted, they cannot be relied on to guarantee an interlocutory mandatory injunction. However, it is possiblethat in an appropriate case, where the balance of convenience is even between the parties, a judge might rely on such a clauseto tip the balance of convenience in favour of the landlord. Longwood Station was not such a case, as the balance of conven-ience was clearly against Longwood. Further, consent to injunction clauses may, as in Longwood Station, form the basis of acosts award in favour of a landlord regardless of whether it is successful in its application.

ConclusionLongwood Station is of significance in Canada because it shows that our common law courts are reluctant to enforce continu-ous operation clauses by way of interlocutory mandatory injunctions. Most importantly, it shows that injunction clauses thatpurport to entitle a landlord to an interlocutory mandatory injunction will not fetter a court’s discretion to determinewhether or not to grant an injunction. It remains to be seen whether consent to injunction clauses will have much of animpact on future cases where a landlord seeks to enforce a continuous operation clause. Accordingly, the full effect of suchclauses will have to be clarified in subsequent cases.

**BBLLAAIIRR RREEBBAANNEE is a Partner in Borden, Lardner, Gervais’ Vancouver office. He is the National Leader of the Franchise &Distribution Focus Group and has extensive experience with advising franchisors in all types of franchise matters. In addi-tion, Mr. Rebane practices in the area of construction and contract law. His clients include a number of Canada’s largest fran-chisors, manufacturers and those involved at all levels of the construction industry.

12007 BCSC 1564.

2Longwood Station, supra, at para. 20.

3[1996] 47 C.P.C. (3d) 91 (Ont. Gen Div).

4Longwood Station, supra, at para. 8.

5Ibid.

6Lackner Center Developments Inc. v. Toronto Dominion Bank (1993), 32 R.P.R (2d) 204 at paras. 16 and 19 (Ont. Gen. Div.).

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