Thursday, May 7, 2015

Negotiating Exclusive Use Provisions in Commercial Leases

Alan P. Christenson
The exclusive use provision in a retail or restaurant lease is often a hotly-negotiated provision.  On one hand, a retail or restaurant tenant wants to protect its business by prohibiting competitors from operating in the same shopping center. Office tenants are also pushing more and more for exclusive use rights to protect employees from being recruited by competitors. On the other hand, the owner of a shopping center or office building wants flexibility to lease to tenants of its choice.

In negotiating an exclusive use provision, a tenant and landlord will need to agree to the scope of the tenant’s exclusive right. In retail leases, the scope may be defined in terms of specific items.  For example, an electronics retailer will want an exclusive use to sell the items it generally sells, such as personal computers or household appliances. A restaurant may want an exclusive right for the general type of food it sells, such as Italian, Thai, or Mexican, or may consider framing its exclusive right in terms of percentage of sales. For example, a pizza restaurant may want to prohibit any other restaurant in the shopping center from deriving more than a certain percentage of its gross sales from the sale of pizza.

An exclusive use right in itself is not as valuable to a tenant if the lease does not address what happens if that right is breached. As such, a tenant and landlord will need to agree on what that remedy will be. That discussion will likely include remedies such as abated rent, damages, and the Tenant’s ability to terminate the lease.

When putting in the effort to craft exclusive use provisions, tenants and landlords should consider certain practical applications. A tenant should be aware that, no matter how fiercely it negotiates an exclusive right, a competitor could spring up in a shopping center across the street that will not be bound by the exclusive right, making all the time and effort put into negotiating the perfect exclusive use right seem pointless. Landlords and tenants should also be aware that, in some cases, competing business can develop a synergy that may benefit both businesses. For example, customers may only want to shop for clothing and shoes in shopping centers that have multiple options so they can browse from store to store without having to drive down the street to get to the next store.

The factors that go into determining what exclusive use rights are appropriate for a tenant are diverse. Exclusive use provisions are not one-size-fits-all, and should be carefully thought out and negotiated with the assistance of capable legal counsel.

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