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Negotiating Exclusive Uses

by / Sunday, 14 October 2012 / Published in Articles

Negotiating Exclusive Uses

By Bryan Mashian, Esq. 

 

While negotiating a shopping center lease, the tenant often requests the exclusive right to conduct its intended business in the center. However, granting the tenant an overly broad or an ambiguous exclusive right may harm the landlord. So, the landlord should minimize such potential negative consequences by considering the following:

 

Existing Uses

  • When considering exclusive use rights, it is important not to grant an exclusive right which conflicts with the existing businesses in the center. The landlord must carefully review the permitted and exclusive uses in existing leases and determine if any conflict would arise from the new exclusive use right.
  • Some conflicts between a proposed exclusive use and an existing use are common, for example, when a current tenant can use its store for broad business purposes, such as a “supermarket” or “department store.”
  • The landlord may resolve such conflict and nevertheless grant an exclusive use by making the proposed new exclusive use right subject to any existing potentially conflicting uses.

Scope of Exclusive  

  • The scope of the exclusive use right should be limited to only the tenant’s primary use and such use should be precisely defined. Imprecise words such as “accessories” or “similar items” should be avoided.
  • To qualify as the “primary use”, the tenant should be required to generate at least a certain percentage of gross sales from such use, to dedicate a minimum amount of retail floor area to such use, or to operate in compliance with some combination of these two factors.
  • Typically, other businesses in a shopping center incidentally sell products covered by the proposed exclusive use. To prevent disputes arising from such minor violations, the landlord should reserve the right for other tenants to incidentally sell the exclusive items. The tenant, though, may legitimately request a cap on such incidental sales.

Future Tenants 

  • A small tenant’s exclusive use for sale of a particular product may prevent the landlord from leasing to a large tenant which carries a wide variety of products, including the exclusive items.
  • If a large tenant does not pose a threat to the smaller tenant, the large tenant should be excluded from the scope of the exclusive use.
  • Conversely, granting the exclusive right for use by a small store may preclude a large tenant, but this may not pose a practical competitive threat to a large tenant. So, the landlord should provide in the exclusive uses for larger tenants that the landlord may enter into leases with smaller specialty businesses which conduct a part of the large tenant’s business.
  • Obtaining the appropriate tenant mix is imperative to the success of a center. Therefore, the landlord should retain the right to replace the center’s existing uses if they go out of business, or to add other competitive uses which the landlord may be contemplating.

Duration

  • The tenant typically requests an exclusive use provision to run the entire term of the lease.
  • But, at minimum, the tenant would like to be protected long enough to establish its business or to give a new or unusual product time to become popular.
  • The success of the tenant’s business may eventually lose its dependence upon the exclusive use. Therefore, the landlord should limit the term of the exclusive use and consider excluding option periods.

Defaulting Tenant 

  • A defaulting tenant with an exclusive use right can prevent a landlord from leasing the space to a competing new tenant. To cure this, the landlord should provide that the exclusive use right will terminate if the tenant defaults.

Personal Rights  

  • The landlord should make sure that the exclusive use right is personal to the original tenant and nontransferable. This restriction may be objectionable to some tenants because loss of the exclusive use will make it more difficult for the tenant to sell its business.

Tenants Remedies

  • If the exclusive use is violated, the tenant may seek to terminate the lease, obtain damages, or obtain an injunction. A prudent landlord should require the tenant to waive the right of terminating the lease or seeking injunctive relief. The landlord should also limit the tenant’s damages remedy to lost profits only.

Anti-Trust Laws

  • If the exclusive use right violates antitrust laws, then the tenant may argue that the entire lease should be terminated. Since the landlord grants the exclusive use right at the tenant’s request, the landlord should provide that the invalidity of the exclusive use right will not allow the tenant to terminate the lease.

In conclusion, the landlord’s success in negotiating an exclusive use depends on the landlord’s bargaining power, the center’s existing uses, and the importance of the particular tenant to the center. The landlord is well advised to concentrate on obtaining as many of the foregoing limitations as possible.

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