Self Evident Truths About Exclusive Use Clauses

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It is the rare retail project that is unencumbered by exclusive use rights granted by a landlord to one or more tenants. While that may not have been as true in the distant past, this is now the “rule of the game.” What is more, this concept has begun to spill over into the office leasing environment.

Large space tenants have the bargaining power to demand protection against competition within the project. Conceptually, such protection is not unreasonable. Think about it. A large (often specialty) retailer draws customers to its store by dint of its reputation and expensive advertising. Uncurbed, competing businesses would locate “next door” and draw business away just as a parasite would feed on a host. In the office context, there are tenants who don’t want employees and invitees of competing businesses to be present in the lobbies, elevators, and lunchrooms.

That having been said, every exclusive use right granted to a tenant impairs the landlord’s ability to lease other space. For example, what a consumer may think is an “office supply” store, is actually a business that derives significant revenue from the sale of computers and computer related merchandise and from the sales of copying services. Every national “office supply” retailer asks for the exclusive right to sell computers, software, computer accessories, and copying services. Acceding to such a request, without modification, would bar leasing to consumer electronic companies, appliances dealers (who almost always sell computer equipment), and to parcel centers who commonly have copy machines. A toy store might not be able to sell “children’s” computer games. A card shop might not be permitted to have a single, convenience copier.

Aside from crafting the scope of a lease’s grant of “exclusive use rights,” a landlord and tenant must agree on who will bear the burden of enforcing those rights and what remedies the tenant may have if either another tenant “steps on its feet” or the landlord fails to include the applicable restriction in future leases. The range of possible solutions is nearly endless. At one extreme, a landlord might be required to pursue the infringing tenant with all of its force and with all of its might and with all its money. At the other end, the landlord might merely delegate that task to the “protected” tenant, as the ultimate beneficiary, giving the “protected” tenant, as a sole remedy, the power to pursue the wrongdoer in the landlord’s name.

As to a tenant’s remedies, possible solutions can include exposing the landlord to a damage claim (possibly including consequential damages), giving the “protected” tenant the right to terminate the lease (with or without the right to pursue damages), abatement of rent, or changing from a fixed rent to a rent based on a percentage of sales.

None of the above is very helpful in “making the deal,” but should be a useful guide for each “side” appreciating the other “side’s” needs. So, sometime down the road, I’m going to force myself to synthesize a unifying theory about “remedies” and what works and what doesn’t work. I’ll probably start by talking about why “loss of profit” isn’t how you measure the harm a tenant feels if it is hurt by the violation of its exclusive use right. Beyond that, I’d welcome anyone’s thoughts about what are and are not appropriate remedies for an exclusive use violation.

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  1. Ira,
    The best remedy for a landlord is not to give a “restrictive covenant”.

    Why not?

    Because no matter how carefully a landlord words it, it will, over time, come back to haunt the landlord.

    Think of a drug store years ago, & a drugstore today.

    Today’s drug store is practically a supermarket.

    On the other hand, if you are a tenant, always ask for a restrictive covenant,

    If you, as a tenant, don’t ask, you won’t get.

    Harvey M. Haber, Q.C. J.D.

    • That doesn’t seem like a “remedy,” because no illness would yet have befallen the landlord who will just have empty space or a less valuable tenant at the project, but no exclusive use problem. Landlords shouldn’t grant Exclusive Use Rights when it isn’t necessary to get a wanted tenant, but may have no business choice when space is “sucking wind” and looks like it will do so for some time to come. I think, however, you are putting your finger on a problem that many landlords have created for themselves – granting poorly drafted Exclusive Use Rights such as a “drug store,” an “office supply store,” an “electronics store.” To me, the key is drilling down to “what is the key protection” that a prospective tenant is requiring and can a landlord “live” with that? So, as to a drug store, the key might be dispensing prescriptions, and an appropriate carve-out might be for a retail food supermarket or a store with more than 100,000 square feet (9 290.304 square meters) of floor area. There are a lot of things that haunt a landlord or a tenant – try, rent. The rent set today may be much higher or lower than market rent 5 years from now. So, even the “rent” decision can come back and haunt a party. Unles a landlord (or a tenant) can bear the consequence of insisting that the other party make a Hobson’s Choice, everything is a compromise with attendant risks. That’s business.

  2. Jack Levey says:

    Back in the mesoleasic period when landlords still had some leverage, some landlords would limit the tenant to enforcing the exclusive against the infringer directly, with no other obligation on the landlord’s part and no remedy against the landlord directly. Even then, some landlords would not grant an exclusive unless the tenant agreed to indemnify the landlord against any resulting liability. In today’s soft market, I have not seen similar demands for indemnity.

    I’m told that some landlords do not keep a property-by-property record of what exclusives they have granted. It seems to me that any landlord who does not keep that record, or who does not make the record available to its leasing agents, is playing Russian roulette with a semi-auto pistol.

  3. A tenant termination right is harsh but from the tenant’s point of view, not an unreasonable ask if it put serious marketing research into choosing a location. A more balanced approach would be a reduction in rent until violation cured. I’m personally not in favor of shifting responsibility to cure to tenant. LL may incur time and legal fees, but I believe most would prefer to be in driver’s seat. If an exclusive is granted and I represent LL, I always include incidental use clause of a certain % and SF, e.g., 5%/500 SF to prevent chasing very minor violations, such as music CDs sold by local musician at cash register. If representing LL, I also recommend suspending exclusive use rights during any period that tenant is dark, and restricting exclusive use rights to original tenant only (not to subtenants or assignees, excluding intra-corporate xfers).

    • You are 110% correct – giving a tenant the remedy of terminating the Lease is harsh, but not always to a landlord, especially when it is the tenant’s sole (or sole practical) remedy. In some cases, the landlord gets what it wants. It gets to exchange one tenant for another. If a 3,500 square foot Radio Shack-type retailer had an exclusive for Radio Shack-type items and its remedy upon breach was only that it could terminate the Lease, what single-minded landlord wouldn’t lease to a Best Buy-type tenant in 35,000 square feet of space and let the Radio Shack-type tenant “terminate”? As a “circuit-breaker” remedy on top of other possible remedies, a tenant’s right to terminate its Lease certainly makes sense for a tenant (or gives it a way to get out of what was already a bad location), but as a sole remedy (as I’ve seen many, many times) is just another business option for the landlord.

  4. I agree with others that the responsibility for enforcement of the exclusive should not be placed solely on the exclusive holder’s shoulders. The exclusive is usually triggered in one of two ways:

    1. Where the landlord leases to another with a use clause that permits or does not adequately prevent that tenant from encroaching upon the exclusive holder’s protected merchandise. Here the landlord is directly responsible.

    2. Where a rouge tenant operates outside of the boundaries of its use clause, even a tightly drafted one. Here the landlord owes the exclusive holder the duty of vigorous enforcement of the other tenant’s lease which may include equitable relief, damages and ultimate termination.

    Whether the duty to cure or enforce is lessened to a reasonable effort with ultimate relief being found in the tenant’s remedies discussed below is often a negotiated outcome.

    The framework for the exclusive holder’s remedies can be infinite in variation. Generally, however, the following is the most common.

    1. Requiring the landlord to cure the breach or enforce the other tenant’s lease, as stated above;

    2. During the enforcement period the exclusive holder acquires a rent reduction. Totally negotiable in amount. It can be very severe – a 50% rent reduction or more compensatory in nature and designed to reflect the decline in rental value to the exclusive holder of its premises – e.g. 75% to 85% of the lease rent. Often an exclusive holder will agree that nothing bad happens to the landlord (a) during this period or (b) if enforcement is a long process, then during a shorter, arbitrary grace or relief period;

    3. At the end of the “cure or enforcement’ period, a harsher penalty kicks in – either or both (a) the rent reduction becomes more severe, or (b) a termination right accrues to the exclusive holder. The termination right may continue indefinitely or, more commonly, a fish-or-cut bait decision arises after a time and either (x) the rent reduction and termination right both go away, or (y) one or the other remains;

    4. I do not favor sales drop tests or a straight percentage rent approach. Often the exclusive holder is trying to protect its brand image as well as its sales. A Best Buy located next door to the exclusive holder’s premises and selling its product (which it purchased from the exclusive holder at wholesale) will offend the exclusive holder as a dilution of its brand;

    5. The exclusive holder should never agree to indemnify the landlord from any action arising out the exclusive.

    Lastly, I agree that limiting the exclusive holder’s remedies to these monetary and termination remedies and barring the exclusive holder from resort to legal and equitable relief is neither uncommon nor unreasonable

    I look forward, Ira, to your “unified field theory’ on the exclusive holder’s remedies.

  5. As always, Ira has brought forth to the table an interesting paradox.
    Having sat for many years in the seat of a regional retailer with over 100 locations, and also for almost as many years representing a Landlord with over 100 shopping centers, I have seen, heard, and participated in both sides of the ”discussion” and as such offer the following comments:
    1. I believe that most Landlords to in fact maintain a chart of exclusives for each of their properties, and that each leasing agent is fully cognizant of that information. Additionally, as a Landlord, a ‘lease request’ could not be completed without the use clause being apparent, and at some level that would be checked against the restrictive covenants clauses for the shopping center before a lease draft would even be produced.
    2. There are many ways to ‘contain’ the use clause of what could be deemed ancillary products such as linear square footage display limitations or limitations as to the expected percentage of sales by the controlled category i.e. food in a dollar store.
    3. Enforcement could be administered in a King Solomon like manner. The Landlord will enforce a restrictive covenant at the expense of the Tenant. In this way the Landlord is not giving up power or control of a situation nor is he/she incurring the expense.

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