The pressures of today’s economy have elevated several formerly mundane areas of leasing practice to the forefront. A prime example is the concept of exclusivities, or more properly, covenants against competing use(s).
These have often been poorly negotiated and not artfully drafted – despite the best intentions of the parties involved – and yet may have significant consequences not only for the particular landlord or tenant under a lease, but for surrounding properties. Landlords with troubled properties and tenants seeking to expand or alter their business models in difficult times should be especially cognizant of the potential pitfalls surrounding exclusivities.
The general rule is that for tenants, exclusivities can be wonderful, effective guarantees against competition. For landlords, exclusivities have been quietly disfavored as limitations on the available pool of potential tenants, but often accepted as a necessary evil in attracting top tenants, and particularly tenants that are franchisees of large national or regional chains.
The relative negotiating power of the parties is obviously determinative of whether or not an exclusive use clause will be included in any lease (and the scope of such exclusivity). Assuming the parties agree to include one or more exclusivities in the lease, however, there are a number of considerations:
- What is the scope of the proposed exclusive use? For example, a covenant by the landlord that it shall not permit another tenant to “sell food” is subject to interpretation – does that mean prepared meals? Snacks? Drinks? Another example: a tenant obtains an exclusive use clause that states it shall be the only tenant permitted to sell pizza. Does that mean that a landlord may not then lease to a grocery store that sells, among its myriad other products, frozen pizza? Food, grocery and restaurant uses are a frequent battlefield in the exclusivity area.
- Does the exclusivity apply to the landlord itself (and not just against prospective tenants)? Careful choice of language is key here – often drafters of exclusive use covenants neglect to include a prohibition against the landlord itself competing with the tenant who has the benefit of the exclusivity.
- Does the exclusivity apply to future owners of the premises/building/project (or portions thereof)? This is particularly important in the current economic climate where commercial and other property is being transferred either voluntarily or otherwise.
- Does the exclusivity apply to expansions of existing property? As just one example, suppose a tenant obtains a lease in a shopping center or mall under construction. Does the exclusivity apply everywhere within the proposed “shell” of the project? What if there is an annexation of other land into the property on which the project is situated? Should the exclusivity apply there as well?
- Does/should the exclusivity include a radius restriction? These can be the subjects of much dispute, especially in congested urban areas or areas under development. The empty parcel three miles away from the existing project where a tenant is locating may tomorrow become the latest regional mall.
These are a few of the many considerations for tenants and landlords in considering exclusivities. It is critical, therefore, that each party be adequately represented by professionals with significant experience not only in crafting these clauses, but also in dealing with situations that have arisen over the years that these clauses have been utilized.
It isn’t sufficient to simply reuse provisions from other leases or sample clauses from whatever source: as much as any lease provision, careful drafting of an exclusive use clause (or the decision as to whether or not to seek or to offer one) can save significant headaches and legal consequences for all parties involved.
For more information, visit our GreaterWashington-Baltimore Region Transactional Real Estate practice.