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.