Is Breaching Restrictive Covenants Cost-Effective?

“Fortune favors the bold”, Virgil, Aeneid X, 284

If the other party breaches your restrictive covenant, an injunction or specific performance (with a temporary or preliminary injunction) often seems to be the only way to “stop the bleeding”. However, even when faced with a clear-cut breach of an enforceable covenant, getting an injunction or specific performance has never been easy. The plaintiff usually must show the court, as prerequisites, that (a) it has no adequate remedy at law (the subject matter sought is unique or rare such as land is deemed, the amount of damages would be too speculative or the defendant is insolvent or irreparable harm would occur, or multiple lawsuits would be required to protect the plaintiff); (b) equitable relief is feasible, i.e. equitable relief would not require extensive court supervision or leave the court without standards with which to measure compliance (the so-called negative injunction vs. an affirmative one); (c) the hardship the relief would cause the defendant is not disproportionately harsh compared to the benefit it would provide to the plaintiff; (d) the general public will not be substantially adversely affected by the relief; and (e) particularly in the case of specific performance, the contractual remedies are mutual. In addition, the plaintiff must overcome various equitable defenses, such as “unclean hands”, laches, unconscionability, impossibility or hardship, fraud, equitable estoppel, or changed circumstances. Last, but not least, for a temporary or preliminary injunction, the plaintiff usually has to post a bond to protect the defendant during the pendency of the litigation. Furthermore, unless the covenant provides otherwise, the plaintiff must bear its own attorneys’ fees for proceeding with all that, a particularly sobering thought given the possibility that in any case a plaintiff may unexpectedly lose and where the covenant contains a “prevailing party” attorneys’ fees clause or the defendant may counterclaim that the lawsuit was frivolous or filed for improper purposes or that the plaintiff is guilty of tortious interference.

Now, making a would-be plaintiff’s decision even more difficult, the recent case of Lord & Taylor, LLC v. White Flint, L.P. (“White Flint”) seems to create a new prerequisite or defense – some combination of feasibility, laches and a judicial policy against waste. That case is an interlocutory appeal of the U.S. District Court’s denial of the injunction requested by the plaintiff (Lord & Taylor, LLC, the only remaining anchor tenant of the subject shopping center) to enforce a shopping center reciprocal easement agreement (“REA”). At that stage of the litigation, before the District Court had determined the truth or falsity of any of the plaintiff’s allegations, the procedural posture of the case required the Court to view those allegations most favorably in favor of the plaintiff (even though those allegations were denied by the defendant, the landlord, White Flint, L.P.). I have no idea whether any of those allegations has any merit whatsoever. However, looking at them most favorably to the plaintiff, it seems to me that the plaintiff was alleging that the defendant clearly and purposefully violated the REA for the defendant’s own economic advantage (to make more money by redeveloping the shopping center another way). Yet, despite those allegations and the fact that laches (much less the legal elements thereof or the facts applicable thereto) was not presented or argued as an issue in this regard, the Court held (quoting from LEXIS):

Like the district court, we must take account of the practical realities of the situation. At the time of the district court's decision in December 2013, Bloomingdale's had declined to renew its lease, and the building it occupied had been demolished. Much of the Mall itself was vacant, and according to Lord & Taylor, many of the remaining tenants were on short-term leases due to expire in 2014. Restoring the Mall to its former glory, as Lord & Taylor requested in Count II of its complaint, would have required more than a negative prohibition on the site's redevelopment. It would have necessitated an affirmative injunction ordering White Flint to transform the now-fading Mall back into a "first class high fashion regional retail [s]hopping [c]enter" - the kind of order that is so hard to draft with specificity and then to enforce that Maryland courts generally will grant it only as a last resort. See Md. Trust Co., 153 A.2d at 284.

In this case, affirmative injunctive relief would have been even more impractical than usual, thanks to the highly detailed provisions of the REA. An order that White Flint "abide by its obligations under the REA," as sought by Lord & Taylor, also would require judicial oversight of compliance with the myriad of REA conditions that control every facet of the Mall's operations, from the distribution of parking and interior access roads to the placement of entrances to the design of the various retail stores and restaurants that populate the Mall. And once it had ascertained that the Mall's operations were again compliant with every provision of the REA, the district court's job still would not be done: It would have to ensure that the Mall remained in compliance for the duration of the REA, at least until 2042 and potentially for over forty years. See M. Leo Storch L.P., 620 A.2d at 414 (declining to enforce continuous-operation clause because court would be required to monitor ongoing performance). Such long-term, ongoing supervision eventually would entangle the district court in every aspect of the Mall's daily operations, with any potential violation of the REA's specifications becoming fair game in a subsequent contempt proceeding.

The cases Lord & Taylor cites to argue that all of this would be perfectly feasible suggest to us just the opposite. The scale and complexity of the Mall's operations - spread over 45 acres, and potentially involving dozens of new counter-parties as the Mall repopulates — and the duration of the proposed injunction have no parallel in the Maryland case law. . . . We can find no Maryland precedent, and Lord & Taylor provides none, even suggesting that it would be feasible for the court to craft and enforce an order directing White Flint to reboot and then maintain a "first class high fashion regional retail [s]hopping [c]enter," consistent with the REA's detailed specifications, through the year 2057.

At oral argument, Lord & Taylor refined its position, suggesting that it would be satisfied with a more limited, negative injunction that simply prohibited White Flint from moving ahead with the destruction of the Mall and its adjacent parking areas. That is essentially the same proposal Lord & Taylor offered to the district court when it moved there for a stay pending appeal. The district court rejected this version of the proposed relief as well, deeming it "unrealistic" to require White Flint to maintain the status quo of a mostly empty Mall with a demolished "anchor" store on one side. In effect, the district court held, the redevelopment had passed the point of no return.

Again, we must attend to the realities of the situation facing the district court. A negative injunction, as the court understood, would freeze in place a vacant and partially demolished Mall, tantamount to a judicially mandated blight on the area. That outcome would serve neither party to the dispute, let alone the interests of the general public. Indeed, it is so patently unworkable that Lord & Taylor defends it not on its own terms, but as a form of leverage that might encourage White Flint to resume Mall operations, consistent with the REA. But the district court cannot simply assume that best-case scenario, and must instead contend with the very real possibility that a negative injunction would produce nothing but an empty and unusable 45-acre Mall site in the heart of Montgomery County's redevelopment project.

Moreover, even if a negative injunction did send White Flint back to the drawing board and eventually to the negotiating table, feasibility concerns would remain. Should the parties dispute whether any White Flint proposal to repopulate and restore the Mall lived up to the detailed specifications of the REA or produced a sufficiently "first class" and "high fashion" shopping experience, the district court would find itself inserted once again into the thick of ongoing and complex commercial relationships. And any effort to resolve that dispute by way of injunctive relief would raise precisely the feasibility issues already described.

Taken together, these concerns are more than enough to persuade us that the district court did not commit a "clear error of judgment," Brown, 576 F.3d at 161, in finding that injunctive relief would be infeasible. * Continuous judicial supervision of commercial relationships on this scale may place a particular strain on a district court, and the decision to refuse such intervention goes to the heartland of that court's discretion to manage its own affairs. HN7 Where, as here, the district court follows applicable state law and reasonably exercises its discretion in denying injunctive relief as infeasible, we have no grounds to second guess its decision.

Thus, accepting and reading the plaintiff’s allegations in a way most favorable to the plaintiff and as actually being true, the Court appears to have allowed the defendant (a) to create facts, or at least to breach its obligations under the REA (to try to mitigate the effects of the general economic changes that were occurring in the shopping center industry at the time) in a way that created facts; and then (b) to take advantage of the fact that the facts had changed as a result.

As to the defendant’s risks of any damages remedy the plaintiff may have - In some cases, the amount of profits the defendant expects to earn from the breach may outweigh the amount of the plaintiff’s expected losses. Secondly, the logical fallacy of post hoc ergo propter hoc comes into play - even if the plaintiff has had a long history of earning profits allegedly based upon the benefits provided by the subject covenant and it turns-out that the plaintiff actually does suffer losses subsequent to the defendant’s breaches of that covenant, then, at any trial on the amount of those damages, will the defendant argue that those losses were actually caused by the plaintiff’s own fault, or events unrelated to the subject covenant, during that subsequent period? If so, will the Court then be required to second-guess all of the decisions the plaintiff makes during that subsequent period?

Lessons to be learned from the case: (a) when negotiating a restrictive covenant, especially an extensive one that is intended to last for a long period of time and is for property located near a major public amenity, the beneficiary needs to be aware of the risks that there are limits upon judicial remedies – the beneficiary may not be able to enforce the covenant via an injunction or specific performance, even in the case of real estate covenants, and that a risky and expensive court fight may be necessary just to try to get compensated for any damages the beneficiary may suffer; and (b) a potential plaintiff needs to be particularly alert to the possibility that a potential defendant’s early actions or inactions, even if not actually intended to implement a subsequent breach, may prove to be little steps that eventually allow such a breach to occur and, therefore, that potential plaintiff may need to proactively seek temporary and preliminary relief as the facts change, even at the risk having the case be deemed not ripe, if that potential plaintiff does not want to be left with just a damage remedy.