When a retail tenant signs a lease, it does so with the intention of operating a particular business. In order to be successful, a tenant needs to maintain a competitive advantage over other tenants in the same center.
With this in mind, many commercial retail leases include a very thorny and hotly-negotiated provision, called the “exclusive use” clause. The inclusion of an exclusive use clause, or a decision not to do so, is a critical issue, and is one that is commonly glossed over by the parties. A well-crafted exclusive use clause will serve both parties’ legitimate business interests by providing the tenant with a competitive edge in its shopping center while giving the landlord the flexibility it needs to lease other spaces at the center to a compatible mix of tenants. If the tenant mix is compatible and each tenant is given its own protection against competition from other tenants in the same center, then the center will enjoy more traffic, each tenant will do more business, and the landlord will have happy tenants who do not have problems paying their rent. All parties are happy!
Exclusive use clauses are intended to protect a tenant’s business so as to ensure that the named tenant is the only tenant in the particular shopping center (or, sometimes, for a tenant with more bargaining power, in the particular shopping center as well as any other properties owned by the landlord or an affiliate of the landlord within a certain mileage radius) that can sell or offer to sell particular products or services. By way of example, a national drugstore chain’s lease might provide:
“Landlord represents, warrants, and covenants that from and after the Effective Date, neither Landlord nor any Landlord Affiliate will lease any space in the Shopping Center (except the Premises hereby demised) as the same may now exist or as now being reconstructed or as enlarged or altered at any time in the future or at any location within a five (5) mile radius of the Premises, or permit the use or occupancy of any such space, whether at wholesale or at retail, to any tenant or other occupant which sells, or displays for sale any one or more of the following: health and/or beauty aids, vitamins or dietary supplements, prescription drugs, or over the counter drugs.”
The thought might be that only large tenants leasing large spaces would have the negotiating power to ask for exclusive use protection. While it’s true that large tenants generally always insist on, and get, exclusive use protection, it is, in fact, the smaller tenants, whose businesses are even more vulnerable and who really need this kind of protection. Having said that, however, not all leases contain such exclusive use language. A prospective tenant needs to have a good understanding of its business before entering into its lease so as to know whether this is an important protection to include in the lease. If so, it should be discussed early in the negotiations, such as when rent, lease term, and renewal options are being discussed. If the tenant is granted any exclusive use rights, the letter of intent (“LOI”) is the perfect place to clarify the nature and extent of the tenant’s exclusive use rights, as well as any applicable carve-outs and, possibly most importantly, what are tenant’s remedies if the exclusivity covenant is breached.
Once exclusive use rights are granted, the next logical issue to resolve is what are the tenant’s remedies if there’s a breach of its exclusive use protections. The most common remedies are that the tenant’s rent will be abated (either entirely or by some fixed percentage) until the violation is remedied, and/or that the tenant will have the right to terminate the lease if the violation is not remedied within a set period of time. These clauses also often impose on the landlord the obligation to use commercially reasonable efforts to stop such violation(s) and, if it doesn’t, the tenant can do so at the landlord’s expense and with landlord’s full cooperation.
Given the critical nature of this kind of tenant protection, any exclusive use clause in a lease should be included in a Memorandum of Lease which should be recorded with the appropriate recorder’s office.
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