Exclusive use provisions are common features in commercial real estate leases, especially in shopping centers and other retail settings. They typically prohibit the landlord from leasing additional space in a defined area to anyone who might compete with an existing tenant. Exclusive use provisions can positively impact a tenant’s ability to succeed, but they can also restrict the landlord’s ability to put together an attractive and successful mix of tenants and uses. In this blog post, I’ll examine what exclusive use provisions do and review some of the major issues these provisions present for both the landlord and the tenant in negotiating and drafting them.
What Exclusive Use Provisions Do
Exclusive use provisions in leases grant the tenant the exclusive right to engage in a defined type of business in a defined area, usually all or some portion of a shopping center. They do this by prohibiting the landlord from leasing space to other tenants who would engage in the defined business. Tenants often require these to reduce competition and increase their market share in the designated area.
For example, a landlord may wish to lease space in its shopping center to a breakfast restaurant specializing in pancakes. That restaurant could demand that its lease include an exclusive use provision prohibiting the landlord from leasing space in the shopping center to any other person selling pancakes, coffee, or other breakfast items. The restaurant could then be confident that no other tenant in the shopping center would compete with its core business. But a landlord would have concerns about an exclusive use provision this broad, as we will discuss below.
Major Issues with Exclusive Use Provisions
Although exclusive use provisions may seem simple and straightforward, they must be negotiated and drafted with care. The precise wording of an exclusive use provision must take into account several key issues. Those issues may include the following:
How is Exclusive Use Defined?
Defining the exclusive use carefully will benefit both the landlord and the tenant. Both parties should be eager to avoid ambiguity, which sows the seeds for future conflict.
Turning again to our pancake house example, it may be helpful to define “coffee” more clearly: does it apply only to “drip coffee,” or does it also include espresso and espresso-based beverages like lattes, frappés, or café Bombon? What about pancakes: does that term apply only to cakes made of wheat-based batter and cooked on a griddle, or could it also apply to hoe cakes, waffles, or even French toast?
Exclusive use provisions sometimes also apply only to certain types of tenants, but not to others. The pancake house exclusive may apply only to cafes and restaurants, but not to grocery stores or other “take-home” retailers.
Exclusive use provisions also often include threshold criteria and exceptions. The exclusivity on the sale of coffee could, for example, apply only to tenants deriving more than 10% of their sales from coffee, thereby not prohibiting the sale of coffee by a non-breakfast restaurant. Or it could include a clause allowing grocery stores and tenants occupying large shops to sell otherwise prohibited items.
Where and When Does the Exclusive Use Provision Apply?
Landlords and tenants are also able to negotiate the duration of an exclusive use provision, conditions for its effectiveness, and its geographical extent.
Most exclusive use provisions apply for the entire duration of the lease. But some leases specify that they expire with the original term and will not apply during renewal terms. It is also common for leases to state that exclusive use provisions will become ineffective upon the occurrence of certain specified events, such as an assignment of the lease by the tenant, the tenant vacating the premises or “going dark,” or the tenant hitting a certain sales figure.
Additionally, the parties may wish to negotiate the geographical extent of an exclusive use provision. A tenant may wish for the provision to cover the entire shopping center, but a landlord may want to limit it to certain portions of the shopping center; this becomes especially important in large shopping centers or those developed in phases. If a tenant has significant leverage, they can sometimes persuade a landlord to agree to apply the exclusive use provision to any property owned by the landlord or its affiliates within a certain distance of the leased premises.
How is the Exclusive Use Provision Enforced?
Signing a lease with a well-crafted exclusive use provision only solves half the problem. Landlords and tenants must also consider how to enforce the provision and what will happen if it is violated.
Landlords, particularly those in large shopping centers, must be careful to apply exclusive use provisions in existing leases to all future tenants. This can sometimes have the effect of limiting a landlord’s options for potential tenants or limiting the business opportunities available to those tenants. They should also monitor tenants for violations of exclusive use provisions, especially those that can be identified through sales reports or review of signage or advertising materials.
An exclusive use provision should always require the tenant to alert the landlord to the presence of an alleged violation. But what happens once the landlord is alerted? A tenant may wish for its remedies to become immediately available, but landlords should want the lease to give them some amount of time (30 to 60 days is a typical time period) to determine whether a violation is actually occurring and to cure it.
If a violation of a tenant’s exclusive use provision has occurred, the lease should clearly state what the tenant’s remedies are. These remedies should incentivize a landlord to uphold the exclusive use provision and cause the violator to stop, without being unduly harsh or punitive. Rent abatement or reduction is a common remedy. In some leases, a tenant can terminate its lease if a violation of its exclusive use provision continues for long enough.
Conclusion
As we have discussed, exclusive use provisions in leases are of the utmost importance to both landlords and tenants. A tenant will want a broad exclusive use to minimize competition and maximize sales; a landlord will want a narrowly defined exclusive use provision so that it has freedom in leasing other portions of the shopping center. Both sides should want the exclusive use provision to be clearly drafted and consider the issues discussed above to avoid conflict and even expensive litigation years after lease execution. Nobody wants to have to go to court to determine whether a waffle is a pancake, or how many shots of espresso have to go into a pumpkin spice Frappuccino for it to count as “coffee.”
Edward B. Woodall is an attorney at Venn Law Group who works incorporate law and commercial real estate, including leasing, financing, taxation, business structures, and dispute resolution. He is passionate about helping business owners solve a variety of complex legal problems and has performed more than 100 hours of pro bono work. In addition to his law degree, he also has a background in history and Spanish.
Edward B. Woodall is an attorney at Venn Law Group who works incorporate law and commercial real estate, including leasing, financing, taxation, business structures, and dispute resolution. He is passionate about helping business owners solve a variety of complex legal problems and has performed more than 100 hours of pro bono work. In addition to his law degree, he also has a background in history and Spanish.