knowledge | 8 September 2022 |

Restrictive Covenants in Commercial Leases – A Stitch in Time

In this case,¹ the plaintiffs sought to enforce restrictive covenants in a commercial lease, which prevented the defendants from selling “food, food products or groceries” from a unit at a retail park. The defendants accepted that the restrictive covenants applied to their unit. The real dispute between the parties was whether or not the defendants had been in breach of the lease in selling items which should properly be regarded as “groceries” and whether or not the defendants were entitled to sell “groceries” which extended beyond “food or food products”.  

The resolution of this issue ultimately involved five days of hearing before the High Court on liability alone, the tendering of extensive evidence as to what exactly was comprised in the term “groceries” and lengthy and complex legal submissions with the court ultimately unable to draw a final line under the matter.

Decision of the court

In a lengthy judgment examining relevant case law and evidence, Sanfey J said that in deciding what came within the definition of “groceries”, the court must ascertain “the meaning which [the lease] would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract”…The reasonable person must “have, or acquire, a sympathetic understanding of the commercial or practical context in which the agreement was meant to operate…”.

He said that there was no relevant definition in the lease nor was there a list of items or general categories appended to the lease which might comprise “groceries”.

He ultimately held that the term “groceries” included “non-durable consumable household items which are purchased frequently” and agreed that a list of items cited by the plaintiffs ranging from cosmetics to kitchen towels came within the definition and that the defendants had breached the restrictive covenant.

However, this was not the end of the matter. He said that it might well be possible to pick holes in this formulation, or to suggest that it did not cover every item which might or might not be “groceries”. Nevertheless, on this point, he expressed confidence that in relation to any remaining items in respect of which there is doubt as to whether or not they are “groceries”, the parties as substantial and responsible traders would be able to come to a business-like accommodation, rather than resorting to further legal action.

Finally, he looked to the past, saying that perceptions of what was comprised in the term “groceries” had changed over the years. This meant that in the future, items which had yet to be invented or which were not yet on the market could give rise to a bona fide dispute as to whether they are “groceries” for the purpose of the lease between the parties. He tailored his final order to take this eventuality into account.

Comment

While the High Court has given judgment on liability here, it is clear that this is not the end of the road for the parties. Giving the lack of precision around the term “groceries” and the fluidity of the term over time, as the court has recognised, there may be a need for ongoing dialogue between the parties over the long term and further disputes may arise. This gives rise to an undesirable level of uncertainty going forward and illustrates the need for clarity and precision at the outset when drafting restrictive covenants in a commercial lease.

This case is currently under appeal and the view of the Court of Appeal is awaited with interest.