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Exclusive Use Provisions in Commercial Leases

Posted by James Duberman on September 22, 2022 at 2:36 PM

commercial lease exclusive use provisionsExclusive use provisions are common in commercial leases, especially those involving large shopping centers with many tenants. An exclusive use provision allows a tenant to use its premises for an intended specific use (for example, as a restaurant, clothing store or electronics retailer), and restricts other tenants in the shopping center from using their premises for the same or a similar use. Landlords and tenants generally understand what exclusive use provisions are, but often fail to give these provisions the time and attention they deserve when negotiating a lease. If not drafted carefully, an exclusive use provision can create problems for both tenant and landlord.

The Landlord Perspective
By granting an exclusive use provision to one tenant, the landlord effectively limits the number and type of other potential tenants to which it may lease other premises in its shopping center. Once granted, the landlord must be careful not to enter into a new lease that would violate any existing exclusive use provisions.

Additionally, depending on how the exclusive use provision is drafted, the landlord may be obligated to monitor how existing tenants use their premises. For example, a landlord may be required to confirm not only that current tenants are not presently engaging in the prohibited use; but also, in situations where the landlord has approval power over changes to the use of its premises, that future modifications do not violate the new tenant's exclusive use provision. Landlords facing this obligation should consider keeping detailed records of all exclusive use provisions granted to all of its tenants, which can be easily reviewed each time the landlord negotiates a new tenant lease.

Landlords who grant exclusive use rights also may need to enforce such provisions against other tenants who may violate their terms from time to time. To do so effectively, landlords should consider including a provision in new leases which explicitly restricts a tenant from using its premises in violation of any exclusive use provisions granted to other tenants. By including this limitation, the landlord can reserve the power to take action in the same way it would for any other breach of a lease provision. Without it, the landlord may not have a reliable method of enforcement, leaving the exclusive use tenant to pursue its own remedies. Similarly, enforcement of an exclusive use provision tends to be easier for the landlord when the provision itself is drafted with specificity.

Consider the following example:
A store that primarily sells coffee may want an exclusive use provision that prevents other tenants in the shopping center from also selling coffee. If the provision is drafted broadly (i.e., “landlord shall not enter into a lease for premises within the shopping center with a tenant that will use its premises to sell coffee”), it may have unintended consequences for the landlord, such as, in this example, preventing the landlord from entering into a new lease with almost any restaurant or other businesses (including desirable tenants like national or regional grocery stores) that sell coffee as a part of their business. However, a more narrowly drafted provision (i.e., in this case, a provision listing specific stores which are prohibited from operating in the shopping center, such as Dunkin Donuts or Starbucks) might help both the tenant and landlord understand the scope of the provision, thereby making it easier to enforce when necessary.

The Tenant Perspective
Broad exclusive use provisions, like the example given above, can be equally challenging for tenants. When requesting this right, tenants should try to ensure that the provision is drafted with clarity and specificity in order to avoid issues with enforcement, as well as other unintended consequences such as discouraging prospective tenants from the shopping center. While tenants may want to limit direct competition with their business, they certainly do not want to be the only tenant in an otherwise empty shopping center. Therefore, it is preferable to have an exclusive use provision that identifies the specific type of competition that would adversely affect the tenant, and nothing more.

Likewise, the exclusive use provision should be clear as to the leases to which it applies. In addition to restricting a landlord from entering into a new lease that would violate the exclusive use provision, a tenant requesting an exclusive use provision should also consider limiting the landlord’s ability to amend use provisions in its existing leases in a manner that would violate the tenant's exclusive use right (assuming the landlord has the power to approve changes in use). Ideally, an exclusive use provision would generally prevent any use by a new or existing tenant that would compete with its own business.

A tenant's ability to enforce the exclusive use provision is also important. If a tenant's exclusive use right is violated by another tenant, it can be difficult (or nearly impossible) for that tenant to enforce the exclusive use provision against the other tenant since the two tenants are presumably not parties to the same lease or any other contract. In legal terminology, the parties may not be "in privity" with one another, and, therefore, the offending tenant may not have a contractual obligation to the offended tenant that could be breached .

To protect its interests, the tenant being granted exclusive use should consider seeking the following provisions in its lease:

• Prohibiting tenants from violating the benefitted tenant's exclusive use provision;
• Requiring the landlord to enforce a violation of the exclusive use provision against the tenant in violation within a certain period of time; and,
• Including other options if the landlord does not enforce the provision, such as the right to terminate the lease or the right to pay a lower rent to compensate for the loss of business.

Additionally, when considering exclusive provisions, prospective tenants of large shopping centers should consider searching the title to a shopping center property before signing a new lease. Otherwise, they may find out too late that an exclusive use provision with another tenant effectively prohibits them from engaging in their intended business, but still be on the hook for the entire term of its lease!

Without these provisions, the tenant may be forced to sue the landlord for failing to enforce its exclusive use provision against a violating tenant. Multiple and specific remedies in a lease can potentially give the tenant avenues to deal with violations of exclusive use provisions other than filing a lawsuit.

Conclusion
Exclusive use provisions can be beneficial to both landlords and tenants. Tenants want to eliminate (or at least limit) competition, and landlords want to maximize the number of happy, successful tenants in their shopping center. However, as illustrated above, poorly drafted exclusive use provisions can disrupt this desired equilibrium. Accordingly, both parties should consider paying as much attention to exclusive use provisions as any other provision when negotiating the terms of a lease. If you are contemplating a new commercial lease for your business, or if you have questions about exclusive use provisions or an existing lease agreement, please feel free to contact Jamie Duberman at jduberman@outsidegc.com or 973-768-0117 for assistance.

 

Jamie Duberman is a Member with our New York-area team and brings over 25 years of legal and business experience in the real estate sector. He regularly handles a wide range of transactions relating to residential, commercial, industrial and new development real estate matters. Previously, Jamie co-founded and served as General Counsel of a regional title insurance company and mortgage company. He can be reached at jduberman@outsidegc.com or 973-768-0117.




Topics: Commercial Real Estate, commercial lease, exclusive use, landlord and tenant

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