One of the more difficult aspects of developing a power center is reaching consensus among the big-box users (box stores) as to what they are entitled to sell and what they are prohibited from selling.
Typically, each of the box stores desires to have a use clause allowing it to operate its store for any lawful purpose, while at the same time, prohibiting the landlord from permitting any other store to compete with its operation (the exclusive).
The rationale for the box store having a permissive, rather than a restrictive use clause, is that box stores' business is constantly evolving. The box store needs the flexibility to continually tinker with its merchandise mix to maximize profits. For example, electronic stores, such as Best Buy, cannot easily forecast where technological evolution may drive their merchandise mix over the term of a lease. As computer technology becomes ubiquitous, such proliferation may lead these stores to adopt product lines totally foreign to them today.
To protect the broadest merchandise mix, an electronics box store might want an exclusive prohibiting such items from being sold in the center: (i) consumer, office and automotive electronics products; (ii) computer hardware and software (CDs, DVDs and video tapes); (iii) cellular and wireless telephones and communication devices; and (iv) household appliances.
If granted by a landlord, this exclusive would prohibit, among other merchants, cell phone stores; office product stores; movie rental stores; record stores; video game stores; computer electronic stores; and book stores. The book stores, on the other hand, will want an exclusive prohibiting the sale of books in any format or through any media, including so-called “electronic books.”
Not-so obvious resolutions
If the landlord had the luxury of concurrently receiving lease drafts from each of the box stores to whom space would be leased, the lease conflicts would be apparent, although the resolution of the conflicting use provisions would not be so obvious. Unfortunately, the developer does not receive lease drafts from all of its prospective tenants at the same time.
Engaging legal counsel experienced in box store lease negotiations will help identify the most likely conflicts between the use clauses of the various leases, since he will have previously addressed these situations in prior transactions.
It is nonetheless incumbent upon the developer to anticipate in advance what sorts of diverse uses the developer intends to have in its center, and the likely exclusives the prospective tenants may require. In order to properly comprehend the scope of the use and exclusive use provisions each box store is likely to require, the landlord can often contact the business representatives of the box stores to request copies of their respective use and exclusive use clauses from their form leases.
The developer must endeavor to make the exclusive use provisions as narrow as possible, affording protection for each tenant's primary business but not extending the exclusive to ancillary businesses or to evolutions from the primary business. In particular, the developer will want to be able to allow other tenants to sell as an incidental part of its business items protected by an exclusive granted to another tenant.
For example, the bookstore exclusive should not prohibit a hardware store from selling a limited area of books on gardening or remodeling. The box stores are accustomed to these “incidental use” carve-outs, but the description of the carve-out (e.g., number of lineal feet of shelf space, or square footage of floor area) is often heavily negotiated.
It is wise to keep in mind department stores, such as May Department Stores, and large discount stores, such as Wal-Mart, will not agree to be bound by any exclusives, and accordingly, the exclusives should expressly exclude from the effect of the exclusive any store containing in excess of an appropriate square footage, such as 90,000 sq. ft.
If use clauses are not carefully negotiated, the result may be the exclusion of tenants the developer never suspected would be affected by the exclusive granted to another tenant.
Doug Sansone is a principal of Sansone Group, a nationally recognized St. Louis-based commercial real estate firm.