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
- 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
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
For more information, visit our
Washington-Baltimore Region Transactional Real Estate practice.