An exclusive use provision protects a tenant’s competitive edge by prohibiting a landlord from leasing space in a shopping center to competitors
When a restaurant negotiates a lease for space in a shopping center, a thorny issue that commonly arises is the exclusive use provision. An exclusive use provision is intended to protect a tenant’s competitive edge by prohibiting a landlord from leasing space in a shopping center to competitors. This is an important protection for a restaurant owner who has invested significant time and money into developing a successful concept and does not want that success compromised by a similar restaurant opening in the same shopping center; however, this protection needs to be balanced with a landlord’s desire for flexibility in creating the tenant mix it feels will create the most synergy for the shopping center.
Determining the scope of the tenant’s exclusive use right
In crafting an exclusive use provision that protects both a tenant’s and landlord’s interests, the parties will first need to agree to the scope of the tenant’s exclusive use right. Defining this scope can be quite complex due to many factors at play, such as the size of the shopping center and the uniqueness of the restaurant concept. For example, a restaurant that specializes in Ethiopian cuisine will likely not have difficulty convincing the landlord to grant it an exclusive use right for the sale of Ethiopian food because of its uniqueness. A burger restaurant, on the other hand, may have more difficulty in obtaining an exclusive use right and will have to be more creative in its approach. Such a tenant may have to make its exclusive use rights contingent on other factors, such as the sale of both burgers and craft beer or the sale of organic and locally-sourced burgers. Also, since many other restaurants include the incidental sale of hamburgers, the tenant will likely have to agree that its exclusive use right will not extend to restaurants deriving less than a certain percentage of gross sales from burgers.
Additional ideas for narrowing the scope of an exclusive use right
A restaurant can propose other scope limitations to help satisfy the landlord’s desire for a narrower exclusive use. For example, a square footage threshold can be added to exclude restaurants that fall under or above a set size. A tenant may also suggest limiting the restriction to the restaurant classification, such as sit down, fast food, or buffet. For larger shopping centers, the restriction could be limited to a smaller portion of the center. Another consideration for narrowing the scope of an exclusive use provision is non-food items that are essential to a concept. For example, a sports bar may not be concerned about another restaurant with a similar menu as long as that restaurant does not have more than a couple of televisions.
The bottom line is that a restaurant tenant needs to clearly understand its concept before negotiating an exclusive use provision. The better prepared the tenant is, the more likely it will be able to protect the essential aspects of its concept from competitors in the same shopping center.
Tenant’s remedies for breach of an exclusive use right
In addition to defining the scope of the exclusive use right, the tenant and landlord will need to agree on the tenant’s remedies if the provision is breached. These remedies may include abated rent, damages, and the ability to terminate the lease. Typically, a landlord will insist that the remedies will not be effective if the breach results from another tenant violating the use provision in its lease, as long as the landlord gives such tenant notice of the violation and uses good faith efforts to enforce the landlord’s rights under such lease. For example, should the aforementioned sports bar find out that the restaurant six doors down with a similar menu remodeled its space to a sports theme with an expanded number of televisions, the landlord will not want to be held liable for that tenant’s breach; however, the sports bar would want to ensure that its lease requires the landlord to take good faith efforts to remedy the situation with the violating tenant.
Landlord’s remedy for the tenant discontinuing operations
When negotiating an exclusive use provision, a landlord will want to avoid the situation in which it grants exclusive rights to a tenant that then discontinues operations after a few years, leaving the landlord’s hands tied to lease to similar tenants. As such, a landlord will likely require that any exclusive use rights be contingent upon the tenant’s continuous operations, meaning that the tenant either uses its exclusive rights or loses them. If a landlord makes this request, the tenant will want to ensure that temporary closures permitted under the lease, such as closing for remodeling, will not result in the loss of its exclusive use rights.
A tenant should keep certain practical considerations in mind when contemplating exclusive use rights. For example, an exclusive use provision will only apply to the area defined in the lease, which is the shopping center or a portion thereof. It will not protect a restaurant from competitors opening in the shopping center across the street or down the road. Before signing a lease, a tenant needs to conduct due diligence on the surrounding area to determine the proximity of existing competitors and the potential for new ones.
The factors that go into determining what exclusive use rights and remedies are appropriate for a restaurant tenant are diverse. Exclusive use provisions do not come in a one-size-fits-all, pre-tailored format and should be carefully thought out. Further, engaging the assistance of capable legal counsel can help a tenant maneuver the potentially thorny negotiations and craft a provision that will both protect the tenant and provide the landlord its desired flexibility. You can learn more at the Jennings, Strouss & Salmon website.