As a prospective commercial retail tenant, understanding exclusive use clauses is critical to your business’s success. This clause restricts the landlord’s ability to lease space in the shopping center to competitors of the tenant. This article will help you understand what you need to know about exclusive use clauses.
Exclusive Right is a Negotiated Right
The exclusive use clause is a negotiated right that must be expressly included in the lease. There is no implied duty of the landlord to protect the tenant from competition in the shopping center. Without an express exclusive use clause in the lease, the landlord can lease other space in the shopping center to direct competitors of the tenant.
Define What is Prohibited
When drafting an exclusive use clause, both parties should precisely define what is prohibited. The tenant wants protection against direct competition, while the landlord wants to maintain the ability to lease its space. If the lease prohibits only certain named competitors instead of types of products or retailers, the clause may be unenforceable based on restraint on trade and anti-trust considerations.
Tenant Considerations
The tenant should consider carefully whether it needs the protections afforded by the exclusive use clause. The more focused a retailer’s use is, the more important an exclusive clause may be. For example, a sushi restaurant may be significantly hurt by another sushi restaurant opening in the same center. The clause should be drafted to prevent the landlord from competing with the tenant and require the landlord to enforce the rights of the tenant against other tenants that violate the tenant’s exclusive use clause.
Negotiate During the Letter of Intent Stage
Once the tenant decides that an exclusive use clause is needed, then the tenant should ensure that it negotiates for the exclusive use right during the letter of intent stage. A landlord should be far more receptive to granting an exclusive use clause at the letter of intent stage than at the lease drafting and negotiation stage.
Include in a Memorandum of Lease
It is critical for the exclusive use clause to be included in a memorandum of lease, which should be recorded in the local county records. This puts the world on notice of its existence and precludes a new tenant from claiming it had no knowledge of the exclusive use and should not be bound by it.
Priority
The priority of the lease affects the enforceability of exclusive use rights. When there are other leases that predate the tenant’s lease, the tenant’s exclusive use clause will most likely be subject and subordinate to the terms of those leases. Therefore, another tenant with a lease that predates the tenant’s lease with the exclusive use clause will not be bound by the terms of the tenant’s exclusive use clause.
Radius
The tenant can strengthen the exclusive use clause by not only limiting the landlord’s ability to lease space to the tenant’s competitors within the center but also limiting the landlord’s ability to lease within a specified radius from the shopping center. To protect the effectiveness of its exclusive use clause, the tenant should negotiate for the exclusive to apply to the shopping center as it currently exists or is later expanded, any property within a certain radius of the center that is currently owned or later acquired by the landlord or an affiliate, and the landlord’s or its affiliates’ successors and assigns.
Tenant’s Remedies
A tenant with an exclusive use clause can negotiate for specified contractual remedies. The landlord should be given notice of any other tenant’s breach of the tenant’s exclusive clause. A tenant that knowingly violates another tenant’s exclusive use clause can be enjoined under law from continuing its operations. Additionally, if the landlord is in breach of the exclusive use clause, the tenant can seek remedies such as injunctive relief, specific performance, or monetary damages. In some cases, the tenant may also have the option to terminate the lease.
Conclusion
In conclusion, an exclusive use clause is a valuable tool for commercial retail tenants to protect their business from direct competition within a shopping center. When negotiating the lease, the tenant should carefully consider whether an exclusive use clause is necessary and ensure that it is drafted precisely to protect against true direct competition. It is also important for the clause to be included in a memorandum of lease and for the tenant to understand the priority of its lease and the potential risks associated with existing leases. The tenant can also strengthen the exclusive use clause by negotiating for a specified radius and including remedies for any breach of the clause by the landlord or other tenants. By taking these steps, the tenant can secure its position within the shopping center and maintain a competitive edge against its rivals.