One of the most valuable and sought-after provisions in a retail lease for tenants is an exclusive use provision. Exclusives restrict the ability of a landlord to lease other space in a project for specified uses. This type of provision helps protect the exclusive-holder tenant's control with respect to a particular category of goods or items sold in a shopping center.
Exclusive use provisions tend to be enormously valuable for tenants, because they minimize local competition and avoid over-saturation within local markets. In addition, many retailers believe that their leases become more marketable to successor subtenants when they contain exclusive use provisions, thereby enhancing the ability to execute an exit strategy.
On the other hand, landlords view exclusives as too limiting on the development and planning of a shopping center. Any agreement which limits the landlord's flexibility to lease space within a shopping center (and potentially result in unoccupied space or non-income-generating space due to the fact that the landlord cannot lease space to a tenant that will violate the exclusive) is disastrous.
Moreover, many times it is beneficial for shopping centers to contain multiple retailers selling the same or similar types of goods. And, even without exclusives, most shopping center owners are incentivized and believe it to be within their best interests (for tenant relations, reputation and the success of the shopping center generally) to ensure that their projects are not unreasonably duplicative in terms of the categories of goods they sell.
In those situations in which a landlord is required to provide an exclusive, the landlord should attempt to negotiate various exceptions to the exclusive use provision. Most notably, the exclusive use provision should not apply to (or restrict) the uses of tenants currently operating in the shopping center. In addition, the landlord should not be in a position where it is in default under an exclusive if an existing tenant changes its use or assigns, subleases or otherwise transfers its interest in the lease to another party that operates a competing use, if it would constitute a violation under the existing lease for the landlord to withhold its consent to the subject change in use.
A landlord should also attempt, especially in a situation in which the exclusive is given to a retailer occupying relatively small square footage, to negotiate exceptions for other tenants occupying “anchor” or “major” buildings or other premises containing significant square footage. Such an exception could prevent a landlord from losing a potential lease with a major occupant, notwithstanding the exclusive given to the smaller retailer.
Furthermore, in most all situations, the landlord should be able to negotiate exceptions to exclusives, to the extent that other tenants sell items covered by the exclusive on an incidental basis. What constitutes an incidental basis, is usually the subject of negotiation. Sometimes, an incidental basis may mean that other tenants may utilize a percentage or up to 500 to 1,000 sq. ft. of their respective premises for the sale of items otherwise covered by the exclusive or derive a certain negotiated amount of gross sales from such items.
Finally, the landlord should attempt to negotiate circumstances under which the exclusive will lapse. Typically, a tenant will agree that its exclusive will lapse to the extent it does not sell the items covered by the exclusive for an agreed period of time (usually 30-90 days) or in the event of a change in use. Sometimes, landlords are successful in negotiating a termination of the exclusive in situations such as the following: (1) where an option to extend is exercised; (2) where the lease is assigned, subleased or otherwise transferred to another party; or (3) upon the effective date of a default by the exclusive-holder tenant.
The extent of the carve-outs and exceptions to an exclusive will usually depend upon the relative bargaining strengths of the parties and the sophistication of the representatives responsible for negotiating the subject lease. Given the value of an exclusive and the power of the limitations that they may impose upon a landlord, significant and deliberate thought should be given as to how they are negotiated.
Gary Glick and Scott Grossfeld are partners in the Los Angeles office of Cox, Castle & Nicholson LLP and specialize in retail development and commercial leasing.