What are the risks associated with exclusive use clauses?
Landlords often have to weigh the risks of signing large retailers because many of them have blanket exclusivity clauses that limit the ability of other tenants or the landlords themselves from providing a full-service offering to customers. This could occur if a major grocery chain demands a clause that limits various uses such as florists, optometrists, pharmacies, daycare, fitness centers and delis. A large user will generally negotiate a lower rental rate, as well, so if the landlord agrees to this, he could be narrowing his profit margin on top of reducing the list of prospects to occupy his center.
For tenants, the risk involves the limitations placed on expanding or changing uses. If an exclusive use clause is part of your lease, you may not be able to add another business line to your company — a deli might not be able to add a specialty coffee bar to its location if it was situated near a gourmet coffee shop.
What can be included in a typical exclusive use clause?
You can look at percentage of sales or a certain use within an exclusivity clause. That can be a wet use, like a restaurant, or dry retail, such as a communications or optical store. Location can be included in an exclusive use clause. You can have an exclusivity that no other restaurants can be constructed on an out parcel near your location and will have first right of refusal on that out parcel if any restaurants try to come in.
The key is to make sure that the level of protection is as reasonable as possible for all parties. You don’t want one to be adversely impacted, so you can look at something like percentage of sales to keep it fair.
You also want to try to get as close as you can to all parties being protected in the lease and find out what’s really important to them, but that doesn’t always work. You have to pick your battles. You’d love to have everything, but where would you put it all?
How do exclusive use clauses vary between big box and small business tenants?
Big box tenants have more flexibility and carry a big stick. They can get a wider variety of clauses and uses in the lease. They can look for carve outs because they won’t necessarily dismiss a location just because someone else is doing similar business there. You have to look at the existing uses, because you can’t go back and hurt a company that’s already doing business in the center.
Small businesses just don’t have that flexibility — they need more protection because the exclusivity clause will directly impact them. They will need to stick to the key points of the clause because they’ll only go so far in the process. Even though you may not get every point of an exclusivity clause, it is absolutely worth going after and at least you can get some protection.
In the end, it all goes back to the structure of your document. You have to work with your broker to make sure that you know about and understand any exclusivity clauses in the lease before you are committed to a long-term agreement.
Jared S. Imperatore and J.R. Yocco are retail brokerage and leasing managers with Grant Street Associates, Inc. Reach Imperatore at (412) 697-1660 or [email protected]. Reach Yocco at (412) 391-1997 or [email protected].