Deeds--restrictive covenant-_lease agreement-_radius restriction_-use of land as grocery
store
The trial court did not err by granting summary judgment in favor of plaintiff store based
on its conclusion that although the restrictive covenant in a 1991 deed created a real covenant
running with the parking lot tract of land transferred to plaintiff thus barring plaintiff's use of that
tract for a grocery store, the restrictive covenant did not impose upon plaintiff the five-mile
radius restriction to which defendant landlord agreed in its negotiated commercial lease with
defendant company operating a grocery store, because: (1) Memorandum § 6 in the commercial
lease contained personal covenants of the landlord, and the landlord honored its personal
covenant by including in the 1991 deed a restrictive covenant stating that the parking lot tract
sold to plaintiff was conveyed subject to a condition that plaintiff would comply with
Memorandum § 6; (2) the restrictive covenant in the 1991 deed did not impose upon plaintiff the
landlord's personal covenant not to operate a grocery store anywhere within five miles of the
shopping center; and (3) the restrictive covenant did not impose an implied equitable servitude
upon land subsequently purchased by plaintiff.
Smith, Debnam, Narron, Wyche, Story & Myers, L.L.P., by Bettie
Kelley Sousa and Ashley H. Story, for plaintiff-appellee.
Hunton & Williams, by Matthew P. McGuire, and Hartman, Simons,
Spielman & Wood, by David L. Pardue, for defendant-appellant
Ingles Markets, Inc.
Robinson, Bradshaw & Hinson, P.A., by D. Blaine Sanders, for
defendant-appellant E.H. Properties, L.P.
LEVINSON, Judge.
Defendants (Ingles Markets, Inc., and E.H. Properties, L.P.)
appeal from an order granting summary judgment in favor of
plaintiff (Wal-Mart Stores, Inc.). For the reasons discussed
below, we affirm the trial court. The factual and procedural background may be summarized as
follows: In 1987, defendant Ingles leased space in the Stanly
County Shopping Plaza (the shopping center), in Albemarle, for
operation of a grocery store. Ingles and defendant Horne, then the
owner of the shopping center, executed a lease setting out the
terms of the rental. An abbreviated Memorandum of Lease
(Memorandum) was subsequently recorded in Stanly County.
Memorandum § 6 set out a radius restriction by which the landlord
(then defendant Horne) generally promised not to occupy, rent, or
sell property for use as a grocery store either in, or within five
miles of, the shopping center. In 1991, plaintiff bought a small
section of the shopping center parking lot (the parking lot tract)
from defendant Horne. This tract did not include any of the
property that Ingles rented for its grocery store, and plaintiff
did not become Ingles' landlord. The deed for the parking lot
tract included a restrictive covenant requiring plaintiff to
“comply with the terms, covenants, and restrictions” of § 6 of the
memorandum. Plaintiff did not sign the deed.
About ten years later, plaintiff began planning construction
of a large Wal-Mart Supercenter, in which plaintiff planned to
include a grocery department. The property plaintiff acquired for
this project was not identified in the 1987 lease between Ingles
and Horne, nor in the 1991 deed of the parking lot tract. Further,
the proposed Supercenter property was not located in the shopping
center, although it was within five miles of the shopping center.
In June, 2001, plaintiff wrote defendants asking them to
acknowledge that the provisions of the 1991 deed for the parkinglot tract would not prohibit or restrict its planned Supercenter.
Defendants would not agree to this, and on 4 September 2001,
plaintiff filed a complaint seeking a declaratory judgment that its
planned Supercenter would not violate the restrictive covenant in
the 1991 Horne/Wal-Mart deed. Plaintiff's complaint named three
defendants: Ingles, Horne, Inc., and E.H. Properties, L.P. (E.H.),
Horne's successor in interest and Ingles' landlord.
On 15 November 2001, defendant Ingles filed a motion for
summary judgment. E.H. joined Ingles' motion for summary judgment
on 27 November 2001. Plaintiff filed its own motion for summary
judgment on 19 November 2001. On 19 March 2002, the trial court
entered summary judgment for plaintiff. The court's order stated
in relevant part that:
3. The covenants contained in the deed from
Horne Properties, Inc. to Wal-Mart Stores,
Inc. dated October 4, 1991, . . . do create a
valid, enforceable covenant, running with the
land, which prohibits the plaintiff, Wal-Mart
Stores, Inc. from using any portion of the
lands conveyed in that deed for a term of
twenty years commencing on April 21, 1987 for
[the sale of groceries]. . . . This covenant
is enforceable by the defendant, Ingles
Markets, Incorporated.
4. The covenants in the deed from Horne
Properties, Inc. to Wal-Mart Stores, Inc.,
dated October 4, 1991, . . . do not create a
valid, enforceable covenant that would
prohibit the plaintiff, Wal-Mart Stores, Inc.,
from operating a “Supercenter” containing a
grocery store, on a tract of land (other than
the property described in [the 1991 deed])
located within five miles of the Stanly County
Plaza Shopping Center.
From this order, defendants E.H. and Ingles have appealed.
Defendant Horne did not respond to the complaint, and has not
appealed the trial court's summary judgment order.
Defendants appeal from the entry of summary judgment. Summary
judgment is proper “if the pleadings, depositions, answers to
interrogatories, and admissions on file, together with the
affidavits, if any, show that there is no genuine issue as to any
material fact and that any party is entitled to a judgment as a
matter of law.” N.C.G.S. § 1A-1, Rule 56(c) (2001). In the
instant case, each party claims entitlement to summary judgment
based on its proposed interpretation of the terms of the same
documents: the 1987 Horne-Ingles lease, the 1987 Horne-Ingles
Memorandum of Lease, and the 1991 Horne/Wal-Mart deed. Thus:
[e]ach party based its claim upon the same
sequence of events. . . . Neither party has
challenged the accuracy or authenticity of the
documents establishing the occurrence of these
events. Although the parties disagree on the
legal significance of the established facts,
the facts themselves are not in dispute.
Consequently, we conclude that 'there is no
genuine issue as to any material fact'
surrounding the trial court's summary judgment
order.
Adams v. Jefferson-Pilot Life Ins. Co., 148 N.C. App. 356, 359, 558
S.E.2d 504, 507, disc. review denied, 356 N.C. 159, 568 S.E.2d 186
(2002). “'A deed is to be construed by the court, and the meaning
of its terms is a question of law, not of fact.'” Elliott v. Cox,
100 N.C. App. 536, 538, 397 S.E.2d 319, 320 (1990) (quoting Mason
v. Andersen, 33 N.C. App. 568, 571, 235 S.E.2d 880, 882 (1977));
see also Alchemy Communications Corp. v. Preston Dev. Co., 148 N.C.
App. 219, 222, 558 S.E.2d 231, 233, disc. review denied, 356 N.C.
432, 572 S.E.2d 421 (2002) (plaintiff's claim that defendant
violated lease presented “a matter of contract interpretation andthus, a question of law”) (citing Harris v. Ray Johnson Constr.
Co., Inc., 139 N.C. App. 827, 534 S.E.2d 653 (2000)).
We conclude that “there is no genuine issue as to any material
fact” surrounding the trial court's summary judgment order. Rule
56(c). We next consider whether the trial court correctly
determined that plaintiff is entitled to a judgment as a matter of
law.
The central issue presented in this appeal is the proper
construction of the restrictive covenant in the 1991 deed to the
parking lot tract. Defendants contend that the restrictive
covenant imposes upon plaintiff the radius restriction found in
Memorandum § 6, thus prohibiting plaintiff from operating a grocery
or food store within five miles of the shopping center. We
disagree.
The restrictive covenant in the 1991 deed states in relevant
part:
The property conveyed hereby has been
transferred subject to the following covenants
running with the land:
(i) The Grantee and any person(s) or entity
hereinafter owning or leasing an interest in
the Property shall comply with the terms,
covenants, and restrictions found in Section
Six (6) of the Memorandum of Lease . . .
between Ingles Markets, Incorporated and the
Grantor. . . .
(emphasis added). Thus, the question before us is the correct
interpretation of plaintiff's agreement to “comply with the terms,
covenants, and restrictions found in Section Six (6) of the
Memorandum of Lease.”
The memorandum was authorized by a provision in the lease
allowing either party to prepare and record a “short form ormemorandum of this Lease in a form acceptable to Tenant[.]”
Memorandum § 6, referenced in the restrictive covenant, states in
pertinent part:
6. The lease provides that during its term,
Landlord covenants and agrees not to lease,
rent, occupy, or suffer or permit to be
occupied, any part of the Shopping Center or
any other area owned or controlled, . . . by
Landlord, its successors, heirs or assigns, or
Landlord's principal owners, stockholders,
directors, or officers, or their assignees
(hereinafter sometimes referred to as the
“Owners”), which is within five (5) miles of
the Shopping Center for the purpose of
conducting therein or for use as, [a]
supermarket, [or] food store, . . . and
further, that if Landlord or Owners own any
land, or hereinafter during the term of the
Lease Landlord or Owners acquire any land
within such distance of the Shopping Center,
neither will convey the same (other than the
Wal-Mart Premises as defined in the Lease)
without imposing thereon a restriction for a
period of twenty (20) years which secures
compliance with the terms of the Lease. This
Section 6 shall not be applicable to the
portion of the Shopping Center to be purchased
by Wal-Mart Properties, Inc.
(emphasis added).
Preliminarily, we observe that Memorandum § 6 states broadly
that any property sold by the landlord within five miles of the
shopping center will be conveyed subject to a restrictive covenant
“which secures compliance with the terms of the Lease.” Taken
literally, the restrictive covenant in the 1991 deed stating that
the property was conveyed “subject to” compliance with Memorandum
§ 6 would require plaintiff to, e.g., maintain the shopping
center's common areas, purchase fire insurance, or pay rent on the
Ingles property, all of which are “terms of the lease.” We
conclude that § 6 is written so expansively that it cannot be readat face value. We are, therefore, required to determine the
meaning of Memorandum § 6 by reference to established principles of
contract interpretation.
“A lease is a contract which contains both property rights and
contractual rights.” Strader v. Sunstates Corp., 129 N.C. App.
562, 570, 500 S.E.2d 752, 756, disc. review denied,349 N.C. 240,
514 S.E.2d 274 (1998). Thus, the provisions of a lease are
interpreted according to general principles of contract law. See
Martin v. Ray Lackey Enterprises, 100 N.C. App. 349, 354, 396
S.E.2d 327, 330 (1990) (“the interpretation of an assignment [of a
lease] is governed by rules applicable to the interpretation of a
contract”) (citing 3 Williston on Contracts § 431 (3d ed. 1960)).
Further, “[t]he terms of a lease, like the terms of any contract,
are construed to achieve the intent of the parties at the time the
lease was entered into.” Lexington Ins. Co. v. Tires Into Recycled
Energy And Supplies, Inc., 136 N.C. App. 223, 225, 522 S.E.2d 798,
800 (1999), disc. review denied, 351 N.C. 642, 543 S.E.2d 872
(2000) (citation omitted). In so doing, the lease “'should be
interpreted as a whole and the meaning gathered from the entire
contract, and not from particular words, phrases, or clauses.'”
Starling v. Still, 126 N.C. App. 278, 281, 485 S.E.2d 74, 76 (1997)
(quoting Divine v. Watauga Hospital, 137 F. Supp. 628, 631
(M.D.N.C. 1956)). Moreover,
it is proper to seek for a rational purpose in
the language and provisions of the [lease],
and to construe it consistently with reason
and common sense. . . . [W]e should reject
that interpretation which plainly leads to
injustice, and adopt that one which conforms
more to the presumed meaning, because it does
not produce unusual and unjust results.
Meroney v. Cherokee Lodge, 182 N.C. 739, 746, 110 S.E.2d 89, 92
(1921). In addition, “[t]he heart of a contract is the intention
of the parties as determined from its language, purposes, and
subject matter and the situation of the parties at the time of
execution.” McDonald v. Medford, 111 N.C. App. 643, 647, 433
S.E.2d 231, 233 (1993) (citation omitted).
With these principles in mind and reading Memorandum § 6 as a
whole, we conclude that § 6 states personal covenants of the
landlord, whereby landlord promises that during the term of the
lease it will (1) not occupy a competing grocery store in, or
within five miles of, the shopping center; (2) not lease to, or
permit occupancy by, any grocery store on land it owns or acquires
in, or within five miles of, the shopping center; and (3) that any
property conveyed by the landlord in, or within five miles of, the
shopping center will be conveyed subject to a restrictive covenant
barring its use as a grocery store.
These covenants are only one part of the mutual consideration
between Ingles and the landlord, which includes “two useful devices
of radius clauses and percentage rent. Percentage rent . . . was
developed for the protection of both parties from losses incurred
because of fluctuations in the economy over the term of the lease.
As a necessary corollary, the [lessor may] rel[y] upon a radius
clause so that the tenant is prevented from having a site too close
to the shopping center which would necessarily pull customers away
from the shopping center site and reduce the percentage rent that
would ordinarily be payable.” Winrock Enter. v. House of Fabrics
of N.M., 91 N.M. 661, 663, 579 P.2d 787, 789 (1978). Radiusrestrictions also protect the lessee. See Dan's Super Market, Inc.
v. Wal-Mart Stores, Inc., 38 F.3d 1003, 1005 (8th Cir. 1994) (“the
broad purpose of this covenant . . . was to permit the sale of the
restricted lots to a discount store operator, while affording the
store to be built by [Dan's] protection from a grocery sales
competitor”).
Thus, we agree with defendants' contention that the inclusion
of radius restrictions is an accepted commercial practice in the
negotiation of shopping center leases. “Radius restrictions serve
a legitimate business purpose.” Winrock Enter., 91 N.M. at 663,
579 P.2d at 789. “The development of new shopping centers requires
tremendous outlays of venture capital and risk by prospective
tenants as well as by landlords; restrictive covenants against
unwanted competition are consistent with the public interest in
such development.” Valley Properties, Inc. v. King's Dept. Stores,
Etc., 505 F. Supp. 92, 95 (D.C. Mass. 1981) (citing Parker v. The
Lewis Grocery Co., 246 Miss. 873, 153 So. 2d 261 (1963)).
Moreover, to be meaningful, a radius restriction must effectively
prevent a landlord from evading its terms by leasing or selling
land to a lessee's competitor, while continuing to collect rent
from the lessee. See id. (“landlord's promise binds him for the
duration of the lease[;]” the Court holds that landlord “may not
avoid that obligation by [purchasing] . . . land within the
restricted area after the lease is signed”). However, our general
acceptance of radius restrictions does not resolve the issue of
whether the radius restriction in Memorandum § 6 applies to
plaintiff by virtue of the restrictive covenant in the 1991 deedfor the parking lot tract. To do so, we must examine the nature of
the landlord's covenants in Memorandum § 6. A restrictive covenant
is defined as a “'private agreement, usually in a deed or lease,
that restricts the use or occupancy of real property, especially by
specifying lot sizes, building lines, architectural styles, and the
uses to which the property may be put.'” Hutchens v. Bella Vista
Vill. Prop. Owners' Ass'n, 82 Ark. App. 28, 35, 110 S.W.3d 325, 329
(2003) (quoting Blacks Law Dictionary 371 (7th ed. 1999)). Restrictive
covenants may be either real or personal:
Covenants that run with the land are real as
distinguished from personal covenants that do
not run with the land. . . . Three essential
requirements must concur to create a real
covenant: (1) the intent of the parties as can
be determined from the instruments of record;
(2) the covenant must be so closely connected
with the real property that it touches and
concerns the land; and, (3) there must be
privity of estate between the parties to the
covenant.
Raintree Corp. v. Rowe, 38 N.C. App. 664, 669, 248 S.E.2d 904, 907-
908 (1978) (citing 20 Am. Jur. 2d Covenants, Conditions, Etc. § 30
(1965)). The distinction between real and personal covenants is
that “a personal covenant creates a personal obligation or right
enforceable at law only between the original covenanting parties,
. . . whereas a real covenant creates a servitude upon the land
subject to the covenant ('the servient estate') for the benefit of
another parcel of land ('the dominant estate')[.]” Runyon v.
Paley, 331 N.C. 293, 299, 416 S.E.2d 177, 182 (1992) (citing
Cummings v. Dosam, Inc., 273 N.C. 28, 32, 159 S.E.2d 513, 517
(1968)). Further, in analyzing whether a covenant is real or
personal, “[t]he instrument must be construed most favorably to thegrantee, and all doubts and ambiguities are resolved in favor of
the unrestricted use of the property.” Stegall v. Housing
Authority, 278 N.C. 95, 100, 178 S.E.2d 824, 828 (1971).
We conclude that Memorandum § 6 contained personal covenants
of the landlord. Plaintiff has never been Ingles' landlord, and is
not subject to the personal covenants found in the lease. These
personal covenants, standing alone, do not place restrictions on
the use of any specific property; rather, the landlord personally
promises to apply certain restrictions during the term of the lease
to property it owns or acquires, as one part of the contract
negotiated between Ingles and its landlord. The landlord honored
its personal covenant by including in the 1991 deed a restrictive
covenant stating that the parking lot tract was conveyed subject to
a condition that plaintiff would “comply with” Memorandum § 6.
We further conclude that the restrictive covenant in the 1991
deed, construed with Memorandum § 6, creates a real covenant
running with the property transferred in the deed to the parking
lot tract, which bars its use as a grocery or food store. Thus,
the trial court was correct when it interpreted the restrictive
covenant in this manner.
We reject defendant's argument that the restrictive covenant
in the 1991 deed also imposed upon plaintiff the landlord's
personal covenant not to operate a grocery store anywhere within
five miles of the shopping center. “[Defendant] seeks to construe
the lease clause in isolation. It ignores the fact that the
instrument containing the clause is itself a commercial lease
agreement.” Reagan Nat. Advertising v. Capital Outdoors, 96 S.W.3d490, 493 (Tex. App. 2002). The language of the restrictive
covenant in the 1991 deed does not indicate that plaintiff agreed
to a five mile radius restriction, any more than it agreed to keep
the common area grass mowed, the property insurance current, or any
of the landlord's other obligations under the lease. Nor would
such a restriction fall within the original purpose of the radius
restriction, which was to establish the landlord's obligation not
to allow grocery store competition, in exchange for the income it
would receive in the form of rental payments. Thus, “'when the
benefit and burden of a contract are inseparably connected, both
must go together, and liability to the burden is a necessary
incident to the right to the benefit.'” Reed v. Elmore, 246 N.C.
221, 227, 98 S.E.2d 360, 365 (1957) (quoting Raby v. Reeves, 112
N.C. 688, 16 S.E. 760 (1893)).
We also disagree with defendants that the restrictive covenant
imposed an implied equitable servitude upon land subsequently
purchased by plaintiff for use as a Supercenter. See Harry v.
Crescent Resources, Inc., 136 N.C. App. 71, 80, 523 S.E.2d 118, 124
(1999) (“We have not adopted the doctrine of implied equitable
servitudes in North Carolina.”).
We conclude that the trial court correctly determined that the
restrictive covenant in the 1991 deed created a real covenant
running with the land transferred in the deed, and barred
plaintiff's use of that tract for a grocery store. We further
conclude that the trial court correctly determined that the
restrictive covenant did not impose upon plaintiff the five mile
radius restriction to which landlord agreed in its negotiatedcommercial lease with Ingles. Accordingly, the trial court's order
is
Affirmed.
Judges MCGEE and MCCULLOUGH concur.
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