You have just signed a retail lease for a space in a strip mall and plan on opening your yoga studio there. Unfortunately, a week after you move in, you learn that your landlord has just leased a neighboring unit in the strip mall to a Pilates studio. This is obviously competition for your business and a big problem — a problem that could have been prevented with a carefully crafted “exclusive use” clause in your lease.
Exclusive use clauses are obviously incredibly valuable for tenants and often heavily negotiated between landlords and tenants. When including an exclusive use provision, be sure to consider some of these key components:
Scope. The goal of both landlord and tenant should be to come up with a clearly defined exclusive that leaves little to no room for interpretation. However, while a tenant wants as broad a definition as possible to exclude numerous kinds of competition, landlords want the flexibility to lease to whatever additional tenants they can, even if uses may overlap. This can get very tricky depending on the type of tenant.
As in the above example, while yoga and Pilates are not exactly the same type of exercise, clearly any fitness related business might create a problem for a yoga studio tenant. Or, as another example, an office supply store might have a problem with another office supply store opening up in the same mall. But a landlord isn’t going to be willing to eliminate all potential tenants who might sell pens, pencils and paper. Many grocery stores sell these things. In such an instance, the office supply store might want to try negotiate an exclusive use clause that limits the amount of office supplies any other tenant sells (i.e. “Landlord may not lease to any other tenant whose sale of office supplies uses more than 5 percent of its total sales floor area”).
Tenants may also want to limit the landlord’s ability to lease to a competing business at any other properties it owns within a certain distance from the shopping center it is leasing space in. In this case, a tenant should be clear that the exclusive extends to the landlord and any affiliated entities.
Enforcement. What happens if, in the above office supply example, an existing grocery store tenant expands its sale of office supplies to a bigger space than just 5 percent of the total floor space? Any exclusive use provision needs to also be clear on whether there is a cure period, rent abatement (and how much), and ability to terminate the lease in the event of a violation of the exclusive use provision. The lease should be clear on the notice process, time periods and remedies if violations are not cured.
Notice of Exclusives. Before either party gets too far into the lease negotiation process, everyone needs to be made aware of any existing exclusives. The tenant also needs to be sure that its intended use is a permissible one. As a tenant, if there’s any chance you may later expand the business, you will want to be sure that any expansion doesn’t violate any exclusives. If the office supply store above wants to expand to sell party supplies, it should make sure there is not already a party supply store exclusive. A tenant with an exclusive may want to make sure a memorandum of their lease gets recorded so that its exclusive use becomes public record.
Termination of Exclusive. When a landlord has given an exclusive use to a tenant who subsequently stops doing business, or who decides to change the kind of business it’s doing, the landlord might be stuck and unable to find another tenant with the same use unless a termination date has been negotiated. A landlord should try to negotiate the ability to terminate the exclusive if the tenant goes dark or changes its type of business, or if it sublets to someone else with a different use. Or, landlords may also want to negotiate the ability to terminate the lease altogether and recapture the space if the tenant is no longer using it for the exclusive use.
Exclusive use provisions are common in shopping center leases, but should be drafted very carefully to craft an exclusive use clause that both landlord and tenant can live with. If you are a landlord, tenant or broker negotiating an exclusive use clause, make sure you contact an attorney early in the process to make sure your interests are conveyed and protected in the final lease. If you have questions about this or anything else related to commercial real estate leases, please contact the real estate attorneys at Lavelle Law for help. To contact me directly, call (847) 705-7555 or email email@example.com.