What is an Exclusive Use Clause?
In the commercial leasing context, exclusive use clauses are a relatively common topic of conversation when landlords and tenants are negotiating a retail lease. Basically, exclusive use clauses are provisions within a lease that prohibit a landlord from leasing to another tenant for the same business purpose as the existing tenant. For example, a tenant that engages primarily in the business of selling submarine sandwiches might seek to prohibit the landlord from leasing space to another tenant in the same strip mall or retail complex that sells the same type of product (subject, oftentimes, to exceptions for incidental sales). In order to avoid anti-competition concerns, the general rule is that exclusive use provisions must be reasonable in scope (i.e., geographical area, duration and restricted use).
Who Does an Exclusive Use Clause Benefit?
In negotiating these provisions, tenants routinely argue that while exclusive use clauses certainly benefit the tenant because they help to increase sales, they also benefit the landlord by enabling the tenant to remain profitable, which, in turn, allows the tenant to continue to pay rent. Further, if the tenant is paying some form of percentage rent to the landlord based on the tenant’s gross sales, then the landlord would have additional incentive to grant an exclusive use request in order to increase the amount of percentage rent paid.
Issues Arising From the Use of Exclusive Use Agreements
One major issue that arises in this context is the nature of the remedy that is available to a tenant upon a violation of an exclusive use clause by a landlord. Violations of exclusive use provisions by landlords usually take the form of either non-enforcement by the landlord or, more overtly, subsequently leasing space to another tenant that engages in the same (or nearly identical) business. Due to the fact that a tenant is certainly not guaranteed to be successful in availing itself of the typical legal and equitable remedies available (i.e., damages or an injunction), a tenant would be wise to negotiate a specific remedy for a default by a landlord of an exclusive use provision. For example, the ability to terminate the lease after written notice and an opportunity to “cure” the default are provided to the landlord might be an option. However, if the tenant remains profitable despite the violation and wishes to stay in the leased premises, then a more desirable remedy might be a partial rent reduction (whether percentage rent or base rent).
In this day and age of stumbling retail sales, an exclusive use provision may be a key component in a retail lease and, if drafted properly, could potentially be a benefit to both a landlord and a tenant.