Negotiating Exclusive Use Clauses (With Sample)

Print
Print Friendly, PDF & Email

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 electronics 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.

One other major negotiating and drafting component of the “exclusive use right” grant is making sure that existing tenants may continue their businesses without interference.  This means that existing tenants with broad permitted use rights (i.e., those that may use their premises for any permitted use) may, in fact, compete with the new tenant.  Further, the right reserved for existing tenants to be “carved out” of the newer tenant’s “exclusive use rights” should continue through lease renewals.  Almost always, the “carve-out” will continue regardless of a subsequent assignment or sublease.  Another issue to be considered is whether lease extensions for existing tenants beyond pre-existing renewal periods should be protected against the “exclusive use rights” or whether lease modifications that expand the size of the existing tenant’s space or that relocate the existing tenant would be similarly protected.

Over time, we’ll present some examples of exclusive use clauses as initially proposed and what they became after negotiation. Today’s example also includes some interim stages. Readers will note that the revisions aren’t very extensive. There’s a point to be made. They don’t have to be. What a lease needs are a workable set of provisions. Leases aren’t a memorialization of who won and who lost. Also, these aren’t “ideal” clauses; they reflect real-world conditions. That’s important to keep in mind. It is very easy to pick apart a negotiated document by pointing out where it could have been better. In fact, that sometimes seems like a sport engaged in by those who lack life experience. All negotiation is a process of give and take. Landlords and tenants want to make deals. To do so, they trade. Also, things that would concern one party would not concern another. So, just as we look askance at publications that advise tenants or landlords that they “must always” get something in their lease, we also look askance at those who look at a document after it has been negotiated and executed and ask “why isn’t ‘such and such” in the lease” or “why did the landlord (tenant) ever agree to ‘this.’” Enough with the caveat – here’s a sample exclusive use provision. It displays a tenant’s “light” hand and includes a redlined version highlighting the agreed-upon changes. If we ever deliver on our promise to present some other samples, we promise the redlined comparisons will be much more colorful.

NATIONAL SHOE RETAILER

Landlord’s First Draft

ARTICLE XXIV

Tenant’s Exclusive Use Rights

Section 24.1.  Subject to the provisions of Section 24.2, and provided that: (a) this Lease has not been terminated; (b) Tenant is not in default of this Lease beyond applicable notice and grace periods; (c) Tenant opens to the public at the Demised Premises for the Permitted Use; and (d) after it first opens to public the Demised Premises it has not ceased operating a retail store at the Demised Premises primarily as a footwear store for any period of more than ninety (90) consecutive days after the day it opens for business with the retail public (other than as a result of casualty), Landlord shall include a provision in the lease of every tenant at the Shopping Center prohibiting that tenant from operating a business at the Shopping Center that primarily engages in the sale of footwear.

Section 24.2.   The prohibition against primarily engaging in the sale of footwear shall not apply to: (a) any tenant whose lease is in effect prior to the Effective Date; (b) any tenant under a lease with a successor to or assignee of any tenant whose lease is in effect prior to the Effective Date; (c) any tenant leasing pursuant to a renewal, extension or modification of any lease in effect prior to the Effective Date; or (d) where the aggregate Floor Area of other premises at the Shopping Center being occupied primarily for the sale of footwear (other than by Tenant) is less than ten thousand (10,000) square feet.

Section 24.3.  Should any other tenant at the Shopping Center violate the exclusive use rights granted to Tenant by this Article, Landlord shall take all prudent actions necessary or desirable to be taken to cause the offending tenant to cease its violation.  Should, within a reasonable time after Tenant has given Landlord notice of an alleged breach by that other tenant, Landlord fail to proceed as provided in the previous sentence, Tenant, as its sole remedy, may proceed against that tenant, in its own name, and at its own expense, to obtain injunctive relief against the offending tenant and/or to obtain monetary damages from the offending tenant.  Landlord agrees to cooperate with Tenant in any such action, but Tenant shall reimburse Landlord for any out-of-pocket expense incurred by Landlord in so doing.

Tenant’s First Comment to Landlord’s Draft

ARTICLE XXIV

Tenant’s Exclusive Use Rights

Section 24.1.  Subject to the provisions of Section 24.2, and provided that: (a) this Lease has not been terminated; (b) Tenant is not in default of this Lease beyond applicable notice and grace periods; (c) Tenant opens to the public at the Demised Premises for the Permitted Use as required herein; and (d) after it first opens to public the Demised Premises it has not ceased operating a retail store at the Demised Premises primarily as a footwear store for any period of more than ninety (90) consecutive days after the day it opens for business with the retail public (other than as a result of casualty, or any permitted closure hereunder), Landlord shall not lease any space within the Shopping Center or permit any space within the Shopping Center to be used by any person, persons, partnership or entity who devotes five percent (5%) or more of its selling area to the sale of footwear.

Section 24.2.   The prohibition against primarily engaging in the sale of footwear shall not apply to those tenants listed on Exhibit I, attached hereto, and the successors and assigns of any tenant listed on Exhibit I.  Provided, however, that the aggregate Floor Area of all other premises at the Shopping Center being occupied primarily for the sale of footwear (other than by Tenant) shall not exceed ten thousand (10,000) square feet.

Section 24.3.  Should any other tenant or occupant at the Shopping Center violate the exclusive use rights granted to Tenant by this Article, Landlord shall take all prudent actions necessary or desirable to be taken to cause the offending tenant or occupant to cease its violation.  Should, within a reasonable time after Tenant has given Landlord notice of an alleged breach by that other tenant or occupant, Landlord fail to proceed as provided in the previous sentence, Tenant shall be entitled, at its option and without limitation of any other remedy permitted by law or equity or by this Lease, to elect to pay, in lieu of Rent and Additional Rent due under this Lease, two percent (2%) of Tenant’s gross sales calculated according to Tenant’s standard procedures in accordance with generally accepted accounting principles.

Final Version

ARTICLE XXIV

Tenant’s Exclusive Use Rights

Section 24.1.  Subject to the provisions of Section 24.2, and provided that: (a) this Lease has not been terminated; (b) Tenant is not in default of this Lease beyond applicable notice and cure periods; (c) Tenant opens to the public at the Demised Premises for the Permitted Use; and (d) after Tenant first opens to public the Demised Premises it has not ceased operating a retail store at the Demised Premises primarily as a footwear store for any period of more than ninety (90) consecutive days after Tenant opens for business with the retail public (other than as a result of casualty), Landlord shall include a provision in the lease of every tenant at the Shopping Center prohibiting such tenant from operating a business at the Shopping Center that devotes more than ten percent (10%) of its selling area to the sale of footwear.

Section 24.2.   The prohibition against primarily engaging in the sale of footwear shall not apply to: (a) any tenant whose lease is in effect prior to the Effective Date; (b) any tenant under a lease with a successor to or assignee of any tenant whose lease is in effect prior to the Effective Date; (c) any tenant leasing pursuant to a renewal, extension or modification of any lease in effect prior to the Effective Date; or (d) where the aggregate Floor Area of other premises at the Shopping Center being occupied primarily for the sale of footwear (other than by Tenant) is less than ten thousand (10,000) square feet.

Section 24.3.  Should any other tenant or occupant at the Shopping Center violate the exclusive use rights granted to Tenant by this Article, Landlord shall take all prudent actions necessary or desirable to be taken to cause the offending tenant or occupant to cease its violation.  Should, within a reasonable time after Tenant has given Landlord notice of an alleged breach thereof by such other tenant or occupant, Landlord fail to proceed as provided in the previous sentence, Tenant, as its sole remedy, may proceed against that tenant or occupant, in its own name, and at its own expense, to obtain injunctive relief against the offending tenant and/or to obtain monetary damages from the offending tenant or occupant, unless Landlord has failed to include Tenant’s exclusive in the offending tenant’s lease, in which case Tenant may proceed against Landlord.  Landlord agrees to cooperate with Tenant in any such action, but Tenant shall reimburse Landlord for any out-of-pocket expense incurred by Landlord in so doing.

Blacklined Comparison – Landlord’s First Draft to Final Version

ARTICLE XXIV

Tenant’s Exclusive Use Rights

Section 24.1.  Subject to the provisions of Section 24.2, and provided that: (a) this Lease has not been terminated; (b) Tenant is not in default of this Lease beyond applicable notice and gracecure periods; (c) Tenant opens to the public at the Demised Premises for the Permitted Use; and (d) after itTenant first opens to public the Demised Premises it has not ceased operating a retail store at the Demised Premises primarily as a footwear store for any period of more than ninety (90) consecutive days after the itTenant opens for business with the retail public (other than as a result of casualty), Landlord shall include a provision in the lease of every tenant at the Shopping Center prohibiting thatsuch tenant from operating a business at the Shopping Center that primarily engages indevotes more than ten percent (10%) of its selling area to the sale of footwear.

Section 24.2.   The prohibition against primarily engaging in the sale of footwear shall not apply to: (a) any tenant whose lease is in effect prior to the Effective Date; (b) any tenant under a lease with a successor to or assignee of any tenant whose lease is in effect prior to the Effective Date; (c) any tenant leasing pursuant to a renewal, extension or modification of any lease in effect prior to the Effective Date; or (d) where the aggregate Floor Area of other premises at the Shopping Center being occupied primarily for the sale of footwear (other than by Tenant) is less than ten thousand (10,000) square feet.

Section 24.3.  Should any other tenant or occupant at the Shopping Center violate the exclusive use rights granted to Tenant by this Article, Landlord shall take all prudent actions necessary or desirable to be taken to cause the offending tenant or occupant to cease its violation.  Should, within a reasonable time after Tenant has given Landlord notice of an alleged breach thereof by thatsuch other tenant or occupant, Landlord fail to proceed as provided in the previous sentence, Tenant, as its sole remedy, may proceed against that tenant or occupant, in its own name, and at its own expense, to obtain injunctive relief against the offending tenant and/or to obtain monetary damages from the offending tenant or occupant, unless Landlord has failed to include Tenant’s exclusive in the offending tenant’s lease, in which case Tenant may proceed against Landlord.  Landlord agrees to cooperate with Tenant in any such action, but Tenant shall reimburse Landlord for any out-of-pocket expense incurred by Landlord in so doing.

Print

Comments

  1. Elliot L. Warm, Esq. says:

    While I appreciate the final clause being the product of negotiation, I have to question the wisdom of it from a tenant point of view, even though I myself am almost always on the other side. If the landlord has an obligation to take action against the offending tenant and simply fails to carry out that obligation, why should the tenant then have to expend its own money, and even reimburse the landlord, for what the latter failed to do? Am I missing something?

Leave a Reply