A Tenant’s Exclusive Use Right Can Hurt It

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Some weeks we Ruminate more than others though we freely admit it may be hard to tell the difference. So, here’s more than a clue. This is a big Ruminating week.

We’ve spent a lot of our hours, far too many, negotiating exclusive use provisions. Perhaps we should have written “arguing” about exclusive use provisions. Lately, we’ve been thinking about “why” and wondering how healthy an activity this topic of negotiation really is. One conclusion is that in many cases (granted, not all cases) a tenants’ demand for exclusive use rights is at the level of an idée fixe or a priori right.

[Britannica.com defines “idée fixe” (French: “fixed idea”) as a recurring theme or character trait that serves as the structural foundation of a work. The term was later used in psychology to refer to an irrational obsession that so dominates an individual’s thoughts as to determine his or her actions. The same dictionary defines a “priori” knowledge as knowledge that is independent of all particular experiences, as opposed to a posteriori knowledge, which derives from experience.]

Here’s why the exclusive use right opened up this week’s wound. It wasn’t because we know that if a tenant really, really wants to be in a particular location, failing to get its “absolutely non-negotiable” exclusive use right won’t get in the way. It is because we’ve been walking a lot of city streets lately. And, what we are seeing are streets full of shoe stores; streets full of jewelry stores; streets full of walk away with ready to eat food stores; streets full of whatever category you’d like to imagine. We’ve been walking through REAL market spaces – nearly primordial shopping centers. You pass hundreds of stalls and they include a dozen hardware stores, ten spice merchants, ten fishmongers, six butchers selling red meat but not poultry, six selling poultry but not red meat, nine cell phone stands, five bars, and on and on.

We’d always been aware of “marketplaces” such as New York City’s “Diamond District.” We understood (or believed) that these (at least the retail side of them) worked because most of the merchants were “curators.” Each one offered a unique collection of items that related one to the other. One might offer modern-set diamond rings. Another might feature antique-design brooches.

But, what puzzled us was why a market would need more than one seller of bulk (in the open sack) spices. Certainly, the spices came from the same source or from fungible sources. The offerings are all unbranded. We’ve asked the question of shoppers and the prevailing answer is that they’ve chosen their favorite seller and that’s where they return time after time. That answer was dissatisfying until we moved near a large farmers market, the kind with ten vendors of romaine lettuce, eight selling strawberries, and six selling heirloom tomatoes. Week after week, we return to look and buy. And, surprise, surprise, we tend to go to the same stands each time. BUT, we look at all of the stands. And, we’ll buy green onions from someone and purslane from another. Before locating near this farmers market, we also had access to farmers markets, the kind with one seller of lettuce, two bread stands, and one farmer who sold tomatoes. Guess what: those stands earned one visit.

So, what is the difference? We think it is the “shopping experience.” Seeing lots of produce generates lots of endorphins. It’s fun to shop. A farmers market creates a buying environment. It is worthwhile to spend $3-$4 gas money to walk such a market. And it doesn’t matter that you can’t tell one bunch of arugula from the next.

Now, what about city street shopping? It’s the same dynamic. Willie Sutton, when asked why he robbed banks, said: “Because that’s where the money is!” Yes, shopping centers are where the stores are, but only a small percentage of shoppers are interested in stores in general. They want a specific store. They want sporting goods; they want a shirt; they want a pair of shoes. While it is true that shopping centers, even more and more, create an “experience,” most people don’t go to them for their morning walk (usually pre-opening, and some do); they go to shop. Department stores used to provide the shopping center experience – everything under a single roof. Most are no longer successful. The notable exceptions are Harrods or perhaps Macy’s on 34th Street in New York City. But, just as department stores are on the wane, it appears that traditional shopping centers are headed that way. They’ve turned into enormous department stores. What is slowing their decline is that shopping centers have usually resisted granting exclusive use rights. Yet, those rights still exist in one form or another for tenants with a strong brand presence or strong bargaining power, but we wonder if those tenants are being short-sighted – relying on market protection instead of strong merchandising.

If you are going to buy a suitcase, where would you rather go – to a mall with one suitcase vendor or to a street with five? How about for a blouse? There are some major chain cooking goods stores. Their wares overlap, but each has a unique “look.” When you want to buy a knife, wouldn’t you sooner go to where both were located so if your “favorite (think spice)” vendor didn’t have exactly what you wanted, perhaps its neighbor did? And, right next door is that cookbook store next door to the olive oil seller. That wouldn’t be the case if one of the kitchen goods stores got a “broad” exclusive to sell all of those goods. A single pizza parlor at a shopping center is a parasite – it lives off its hosts. Few go to the property to buy a slice. Few plan their visit as follows: first, we’ll visit the chocolate shop, then we’ll get a pair of running shoes, and then, let’s not forget: two slices with anchovies and a can of soda. But, there are plenty of people who know that if they visit the mall, they can rely on the food court where they can choose what appeal to them on that day. The food court brings pizza customers. Yet, there are food vendors who seek to be the exclusive hand-held food seller at a property.

So, what about city streets where there are no exclusive use rights, not because tenants wouldn’t be asking for them, but because the property owners don’t control the street. Well, we’ll now reveal the piece of sand that irritated the oyster that is this week’s Ruminations blog posting. It was when our co-shopper said, “Let’s go down to that neighborhood we saw two years ago, the one with all of the boutiques.” Would we have taken that cab ride to go to a shopping center where we could gaze into six stores, especially when they were somewhat homogenized? [The correct answer is, (d) no.]

Before any reader, especially any reader wholly wed to the “we must have an exclusive,” busts a gut, Ruminations knows (and believes) that there is a place for exclusive use rights. However, it isn’t “everyplace.” Exclusive use rights sometimes can hurt the requesting tenant and can hurt a shopping center. Sometimes it is better to get a smaller part of a bigger pie. Sometimes competition brings customers. Tenants, ask yourself: “Is your desired exclusive use right really ‘all-important, critical, essential, imperative, indispensable, integral, necessary, necessitous, needed, needful, required, requisite, and vital’”? A shield can be pretty good protection, but can also make it hard to run fast or follow some lucrative paths.

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Comments

  1. Jeremy Deeken says:

    I believe that any tenant’s “rational” rational for insisting on an exclusive use in a shopping center is the fear of being out-positioned by a latter arriving competitor. Tenants seek to prevent this by insisting on a blanket exclusive use, as opposed to a tailored one.

    Tenants are typically not disillusion enough to believe that an exclusive use clause is going to allow them to corner a market for their services (except in unusual circumstances where their is only shopping center dominates a trade area).

    The detriment of these blanket exclusive use clauses is that they prevent any agglomeration efficiency and cross-fertilization. I believe a reasonable compromise can be struck by prospective tenant allowing for in-center competition but retaining a reasonable say in where any future competitor can locate within the center.

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