In a prior post, we introduced the topic of exclusive use provisions, which are used to limit the number or type of tenants that can operate in a common development. In this post, we will discuss negotiating exclusive use provisions for commercial properties.
Examples of these exclusive use provisions are readily available. For example, while a Rite Aid store and CVS Pharmacy may be close in proximity, they are rarely if ever in the same shopping plaza. That is because exclusive use provisions may be preventing these adjoining businesses from competing side-by-side.
When negotiating exclusive use provisions, both landlords and tenants must also be aware of the pitfalls. These provisions obligate the landlord to stay cognizant of the tenant’s use of the leased space during the duration of the lease and may limit the type of tenants that the landlord lets into the development. Likewise, tenants may be limited in their ability to expand or change product and service offerings in the course of the lease.
Here are a few common items:
The description of the exclusive use should be as detailed as possible to avoid having the court apply a definition that was not contemplated by the parties
Take an exclusive use provision between a landlord and grocery store tenant that generally excludes the entry of other stores carrying “groceries.” In this situation, it is possible that a discount store that sells snacks and food items would not be permitted to become a new tenant in the same shopping center. To prevent the tenant’s right from becoming too broad, a landlord can clearly define that “groceries” includes a specific list of items, such as fresh produce, dairy, and meat. Or the landlord can narrow the provision by specifying that any future tenant carrying snacks and food items must limit its food section to a certain square footage or restricted number of aisle space.
The duration of the exclusive use should be limited in time
The language of exclusive use provisions may become outdated or ambiguous over time as new products and services appear in the market. For example, an existing exclusive use provision may not contemplate whether a potential new tenant can sell cronuts next to a donut store that has a exclusive use provision restricting other donut stores from entering the strip mall. An existing exclusive use provision may also not contemplate whether a martial arts studio can expand its offerings to include adult fitness classes to compete with the gym next door. Therefore, it is important to limit the duration of the exclusive use provisions to permit the parties to reevaluate and revise the language from time to time.
The remedies should be made clear and enforceable
Parties to such agreements should agree on both damages and enforcement to give the agreement some teeth. Because actual damages may be too difficult to calculate, the parties can agree on other forms of relief, such as termination of the lease, liquated damages, or reduction of rent.
For help with your commercial lease review, or negotiating exclusive use provisions for your commercial lease, please contact us today. You can reach us at (310) 954-1877, firstname.lastname@example.org or by filling in the contact form.
By Valerie Li, esq.