When leasing space in a shopping center, tenants should pay close attention to what exclusivity rights are in the lease agreement if any. Exclusive use clauses prohibit the landlord from leasing space in the shopping center to other parties for uses that compete with the tenant. Such provisions provide important protections to tenants and should be carefully negotiated where possible.
Benefits of Exclusivity
Typically, tenants make a significant investment in leasing a new space including the time and money involved in getting permits and design and construction of the space. Leases may lock in a tenant for five or more years. An exclusive use clause helps ensure that the tenant’s business will not be hurt by a competitor in the same shopping center.
Enforcing Exclusivity Rights
While landlords may agree to an exclusive use provision, there are instances where a landlord may breach the agreement because it is more profitable to do so. A new tenant may be willing to pay a high enough rent to mitigate the loss of the first tenant. As a result, it is imperative for tenants to have various ways to enforce their rights in the event of a breach.
When a landlord violates a tenant’s exclusive use rights, a lawsuit can be brought against the landlord to stop the landlord from renting to the competitor, however, litigation is time-consuming, expensive and the results are not always certain. Alternatively, the tenant may have the right to terminate the lease if the landlord breaches the exclusivity clause, but this puts the tenant out of business until a new space is found and the business is reestablished.
Where possible, it may be useful to negotiate the right to a rent reduction if the landlord breaches the agreement. This may discourage a breach or if it occurs, compensate the tenant for revenue lost to the competitor.
Landlords will seek to protect their interests in the lease by trying to limit the types of businesses that would be considered competitive. In addition, they will likely restrict what uses tenants can make of the property in the future. This helps ensure that one tenant does not subsequently start using its space in a manner that would compete with another tenant, thereby resulting in liability for the landlord. However, contract language is not a guarantee that a tenant will not breach the lease.
As a result, some leases may provide that the landlord is not liable to a tenant when the competing tenant breaches its agreement by making a nonpermitted use of the property. This clause should also be carefully negotiated as it determines who bears the risk of a breaching tenant.
Lease exclusivity provisions can be complicated and how much can be negotiated depends on the leverage of the parties and the skill of legal counsel. If you need assistance with a lease, contact us today.