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Navigating Restrictive Covenants in Commercial Leases

Navigating Restrictive Covenants in Commercial Leases

Image: Aisling Monahan, Senior Underwriter

by Aisling Monahan, Senior Underwriter

In the world of commercial property, restrictive covenants within leases serve as essential tools to safeguard the interests of both landlords and tenants. However, a recent case in the Republic of Ireland, upheld by the Court of Appeal, underscores the critical importance of precise language and comprehensive understanding when drafting and interpreting these covenants.

Dunnes Stores v Dafora[1]

In the case in question, the plaintiffs sought to enforce restrictive covenants in a commercial lease that prohibited the defendants from selling “food, food products or groceries” from their unit within a retail park. While the defendants acknowledged the existence of these covenants, the crux of the dispute lay in defining the boundaries of permissible sales activities.

Key Legal Analysis

The High Court, after extensive deliberation, determined that the term “groceries” encompassed “non-durable consumable household items which are purchased frequently.” Despite providing a definition, the court acknowledged the inherent challenges in precisely identifying every item falling under this category. Furthermore, the court highlighted the evolving nature of consumer products, emphasising the potential for future disputes over the classification of novel items.

Court of Appeal’s Ruling

The Court of Appeal largely affirmed the High Court’s decision but introduced a crucial refinement to ensure clarity. Specifically, the court clarified that the term “non-durable consumable household items” should exclude durable products inadvertently included in the initial ruling. This adjustment aimed to mitigate ambiguity and align the covenant with its intended scope.

Implications and Recommendations

The economic implications of this decision for the defendant are vast and highlight the need for precise drafting and clarity when imposing covenants within commercial leases.  The interpretation of restrictive covenants is a complex area, and developers must carefully consider how enforcement of these terms could pose an obstacle to their intended use and development of land, particularly where provisions are ambiguous or lacking in sufficient detail.

The costs of defending an enforcement action can be high and often result in significant legal expenses.  In this case, each party will likely have borne the costs of obtaining legal advice, expenses in the high court and the subsequent appeal.  In situations where the existing or proposed use of a property may breach known or unknown covenants, title insurance can be a vital tool in providing a more efficient and cost-effective way to protect your client against the financial losses associated with the risk of enforcement action including the legal expenses associated in dealing with a claim.

At Westcor, we recognise the importance of keeping up to date with relevant case law and applying our understanding to the risks we insure. Aisling Monahan at Westcor’s Dublin office is always happy to discuss any title insurance requirements that you might have in relation to restrictive covenants or any other title defect and provide guidance on the availability of insurance and what is covered in the event of a claim.  

 

[1] High Court judgment: Dunnes Stores Unlimited Company v Dafora Unlimited Company [2022] IEHC 342, 476, Court of Appeal judgment: Dunnes Stores Unlimited Company v Dafora Unlimited Company [2024] IECA 37

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