Some Chicago aldermen have proposed an ordinance to ban the use of “restrictive covenants” that some businesses use to keep new businesses from moving in if the existing business leaves. Supporters believe the ordinance would be the first of its kind.
On August 11 a joint Zoning and Economic Development committee reviewed the proposed ordinance.
Restrictive covenants are clauses in land deeds that govern the use of private property. If the deed says no new store can be built on the property after the seller leaves it, and a new property owner does so, the new owner can be sued. Such clauses have been used nationally by grocery and drug stores to keep competitors out of neighborhoods. Now the concept is under fire and causing a rift in the business community, pitting in some cases big firms against smaller competitors.
Ordinance ‘Breaks New Ground’
The proposed Chicago ordinance, introduced on May 11 by Democratic Aldermen Manuel Flores (1st Ward) and Margaret Laurino (39th Ward), “is breaking new ground,” said Peter Skosey, vice president of external relations at the Metropolitan Planning Council, which helped draft the measure.
“When a large plot of land in a city like Chicago is taken out of the site potential for a new store, it’s not as if large plots of land are plentiful,” Skosey said. “It’s difficult to site a new store in that community. Drug stores also have a clear health/safety component.”
Because of restrictive covenants, when a grocery story or pharmacy moves away, the property often sits vacant for an extended period of time, Skosey said.
“It becomes blight,” he said. “Often, when a grocery goes down, the rest of the stores [in the area] go down with it. You’re harming the rest of the retail in the neighborhood. From an economic competitive perspective, let the free market make a go of it. To date, nobody has tried this approach. Everyone has tried to lift existing restrictions [on land use]. We think this is more proactive.”
Business Organizations Opposed
The Chicagoland Chamber of Commerce opposes the proposed ordinance, arguing it would make the city a less attractive place for grocery stores and pharmacies to do business.
“Chicago has the highest commercial and industrial property taxes in the nation. We have amongst the highest workers compensation costs. We have the highest sales tax. And now the city will tell you how to manage your private property. We can’t continue to pile on ordinance after ordinance and take rights away from the business community,” said Jerry Roper, president of the Chicagoland Chamber of Commerce, at the hearing.
“This proposed ordinance is yet another example of how the City Council imposes requirements on Chicago employers to make it more difficult to do business in the city,” Roper said. “The ordinance sends a very strong and we believe, in some cases, a very negative message to the wider business community that, here in Chicago, government will tell you how to manage your private property.”
When contacted by the author, Roper warned that if passed, the ordinance could “limit growth, investment, and job opportunities.”
Fear of Competition Suspected
Edie Cavanaugh, executive director of the West Lawn Chamber of Commerce, supports the ordinance.
“Are businesses that use restrictive covenants so insecure and poorly managed that they can’t stand competition?” asked Cavanaugh at the hearing.
Flores said at the hearing, “When a business leaves the community, that doesn’t give the business the right to leave the community high and dry.”
Flores told hearing participants the ordinance is “not intended to beat up on businesses” but to “undo” practices he described as “anti-competition” and “anti-consumer.”
Need for Balance Noted
“It forces businesses that are failing to evaluate what they’re doing wrong,” Flores said. “But if you corner the market, you can abuse your power. If you do not allow anyone else to come in, it doesn’t matter whether you’re good or bad. You’re the only person in town.”
David Vite, CEO of the Illinois Retail Merchants Association, said the city would be on the “cutting edge” with the ordinance. But he warned at the hearing, “I hope we don’t sharpen the edge so finely that we cut out the businesses we’re trying to bring here. Please. Don’t tip the scales farther than they need to be tipped to solve the problem.”
When contacted by the author, Vite noted that “major grocers represent half a billion dollars in investment and an estimated 13,500 jobs within the city of Chicago.”
Groceries, Pharmacies Called Vital
Flores said the legislation “targets groceries and pharmacies because they are vital to the health of neighborhoods and frequently occupy large tracts of land in shopping centers or at key intersections where they are catalysts for development,” according to an August 12 article in the Chicago Tribune.
Alderman Bernard Stone (50th ward), speaking in favor of the ordinance, said, “I value the rights of property owners. But property owners do not have the right to hurt their community, they do not have the right to hurt their neighbors, and they do not have the right to hurt the municipality,” the Tribune story said.
Existing Leases Exempted
Under the ordinance, existing real estate leases would be exempt, and as currently formulated the new law would apply only to deals approved after May 11, 2005. In addition:
- The ordinance would apply only to stores of at least 7,500 square feet;
- Any new deed restrictions lasting longer than a year would be outlawed;
- Restrictive covenants would be allowed for relocation, but only if the grocery or drugstore owner moves the operation to a comparable or larger store within a half mile of the old store within a two-year period and the restriction expires in three years;
- The measure would not prohibit non-compete clauses included in shopping center leases in which a landlord agrees with the tenant of a grocery or drugstore not to lease space simultaneously to a similar business.
The city’s corporation counsel has reviewed the legislation and has deemed it legal, but aldermen are anticipating a court challenge, most likely from the grocery industry.
John W. Skorburg ([email protected]) is visiting lecturer in economics at the University of Illinois, Chicago and associate editor of Budget & Tax News.