Say your business decided to lease space within a plaza or inside a building where other businesses operate. You are in the process of negotiating the terms of your lease with your landlord. An attractive feature of leasing at this location is that there are no other businesses on the premises who sell the same product, or offer the same service as you. If you sell electronics, you may want to negotiate with the land lord to add a clause in the lease where the landlord agrees not to lease within that building to another tenant who sells electronics or offers.
The landlord agrees, and you both sign a lease with a non-compete agreement. Two years later, the landlord leases space to Radio Shack. That year your business profits are reduced by 50%. Can you enforce the non-compete against the landlord? Yes. The cases in Massachusetts uphold these agreements. The cases of R.M. Sedrose, Inc. v. Mazmanian 326 Mass. 578 (1950), Parker v. Levin, 285 Mass. 125 (1934) are two examples. The tenant’s rights in these situations include suing the landlord for monetary damages for the lost profits that the tenant incurred, as well as giving the right to the tenant to break the lease.
Even if the new tenant (Radio Shack in the above example) doesn’t engage in exactly the same business, but engages in a similar business as you, the Parker case says that in these situations too the landlord is prohibited from leasing to the new tenant. For example, if you sell breakfast items at your store, and a 7-11 opens up in the same plaza, although 7-11 sells a variety of items, breakfast items being only a portion of what they sell, you still have a right to seek relief against the landlord who permitted a 7-11 to operate on the premises.
What about the first tenant’s rights against the new competing tenant? Can the first tenant get a injunction preventing the new tenant from competing in addition to exercising its rights against the landlord? The new tenant could be considered an innocent party in these situations unless the new tenant knew about the covenant not to compete that the landlord previously entered into with the first tenant. In order for a non-compete clause to bind the new tenant, notice to the new tenant is required. A case in Massachusetts dealing with this issue, except in the context of two neighbors who owned property with restrictive covenants in their deeds (similar to non-compete clauses) is Whittinsville Plaza, Inc. v. Kotseas, 378 Mass 85 (1979). There, Whitinsville Plaza, a pharmacy, sued Kotseas who owned the property next door for leasing space to a CVS. The party who owned the property prior to Whitinsville had paid compensation to Kotseas not to use his land for the purpose of operating a pharmacy, and Kotseas agreed. Whitinsville and Kotseas had agreed that this covenant was not only for the benefit or Whitinsville’s predecessor, but for the benefit of all subsequent owners, thereby increasing the value of Whitinsville’s land. The Whitinsville case eventually went to the Massachusetts Supreme Judicial Court who agreed with Whitinsville that, as a subsequent owner, it could enforce the restrictive covenant against both Kotseas and CVS who was on notice of the covenant when it leased the property.
The general rule is that two people have freedom to enter into a contract with whatever terms that they’ve negotiated (with some exceptions for contracts that are prohibited as against public policy). So, if you are a business in the process of negotiating a lease, a non-compete clause is something you may want to consider.