Say you decide to open a chicken restaurant selling your secret family recipe chicken. You find the perfect location, sign the lease, move in, and open for business. Sales are brisk when a few weeks later you see a construction crew building out the space next to you. Your landlord has leased the space to a fast casual restaurant specializing in chicken sandwiches. A month later, the space across the parking lot is being built out for a restaurant whose signature menu item is roasted chicken. Destroyed by your landlord's leasing scheme and an inability to compete with such market saturation, you close your doors, lose your investment, and leave the landlord with a defaulted lease and empty space.
How could this have been avoided? The answer is an exclusivity provision in your lease which anticipates and protects you from potential problems.
Advantages to Both Parties
Limiting competition among tenants is valuable to tenants and landlords alike. Tenants will pay more in rent if they know they have a competitive edge to fill a particular niche in the geographic area. Having a variety of tenants can increase foot traffic, improving everyone's bottom line. To maximize landlord and tenant profits, make sure you have an exclusivity provision in your lease that is carefully drafted, enforceable, and clear about the consequences if it is violated.
Be Clear and Specific
When agreeing to limit another tenant's use, choose your language carefully and make sure everyone understands the restricted use. In our example, limiting the sale of chicken is a good starting point. You may also want to cover a potential competitor's manner of presentation. As an example, an Italian restaurant should consider whether to try to preclude a Mediterranean-style restaurant specializing in regional grilled meats, pastas and flatbreads, even though it is not a "traditional" Italian restaurant. The nature and extent of incidental sales may also be a concern. If a fast-casual burrito restaurant is exclusive, can a full-service Mexican restaurant move in nearby? If a toy store is exclusive, can another tenant sell video games? If a grocery store has the exclusive right to sell food and beverages, can a gas station with incidental sales of convenience foods lease space?
Also consider including exceptions that the parties agree will not violate the exclusive use. For example, some tenants may agree that an anchor tenant can sell food, beverages, or toys without violating their exclusivity; or that a sit-down restaurant does not violate a fast-casual's exclusive rights. Avoiding broadly defined exclusivity provisions and providing examples of prohibited and permitted co-tenants can minimize the risk to everyone.
Enforce Your Provisions
How can you ensure other tenants abide by the exclusive use? As a landlord, include excerpts of all exclusive and prohibited use provisions from other leases at the project. This puts each tenant on notice and requires compliance. It is important for landlords to be able to independently verify compliance by requiring tenant reporting of sales or use, or providing landlord audit rights. As a tenant, these excerpts from other leases clearly define Tenant's rights.
Make sure your lease clearly defines tenant and landlord rights if there is a violation. A tenant may want the right to withhold rent, seek lost profits, or terminate the lease—and could seek moving expenses to a new location, if there is a use violation. Conversely, a landlord will want to limit its exposure by seeking indemnity from the rival tenant, or limiting the tenant to a specific measure of damages or some form of rent abatement. Additionally, a landlord will want to limit its exposure if a "rogue" tenant (violating its own lease) also violates another tenant's exclusive use rights.
Don't Get Your Feathers Ruffled
Each of these points is negotiable and it is important to have a plan in the beginning to ensure both tenant and landlord profits are preserved. Limiting uses at your project is a great way to incentivize tenants and increase your rental income. Do not get into "fowl" trouble by letting those benefits slip away. Keep "abreast" of best practices in exclusivity provisions by:
- Properly defining the restricted use;
- Strategically anticipating potential problems; and
- Specifically outlining and enforcing the remedy if there is a violation.
For More Information
Polsinelli's experience in negotiating leases and litigating landlord-tenant disputes is significant, and can be the feather in your cap as you seek to preserve your competitive edge. For more information on exclusivity provisions, please contact the authors or your Polsinelli attorney.