To combat this concern at the lease negotiation, the main option is a recapture right in favor of the landlord following a tenant closure. a womens shoe store. Where Factors that the parties should take into consideration when negotiating use restrictionsare the . The main way of doing this is by creating a cap on increases year over year (. But, there are a few important caveats. A recent case from the Ontario Superior Court of Justice, 2249778 Ontario Inc. v. Smith, dealt with a tenant operating as a fast food restaurant who also had an ATM installed in the premises. byPractical Law Real Estate, with Scott P. Kadish, Ulmer & Berne LLP. The next generation search tool for finding the right lawyer for you. Either lease up one of the most unpopular rundown buildings in Alberta or go bust. The clause should be drafted to prevent the landlord from competing with the tenant and require the landlord to enforce the rights of the tenant against other tenants that violate the tenants exclusive use clause. The use clause may be the vehicle for determining scope of the warranty and whether there was a breach. Focus On Exclusive Use Clauses in Retail Leasing - McGuireWoods Exclusives In Leases - Landlord & Tenant - Leases - United States - Mondaq Welcome to the internet's only resource for retailers to research retail real estate. To embed, copy and paste the code into your website or blog: Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra: [Ongoing] Read Latest COVID-19 Guidance, All Aspects, [Hot Topic] Environmental, Social & Governance. The anchor tenant will often have its own exclusive use clause to include in the lease, and it will be reticent about negotiating it. analysis on behalf of the retail landlord. The exclusive use clause is designed to protect a tenant's ability to operate a specific business in the center. There are several potential claims for violations of a use clause. 2023Thomson Reuters. If the lease was drafted in such a way to clearly provide that the use violation is an event of default and provides a remedy for use violations or at least is a non-monetary default, the claim is fairly straightforward. items, such that the ice cream parlor and the bakery could coexist Ideally, a . For more information on exclusive clauses, see. Before agreeing to an exclusive use clause in any lease, a landlord needs to know that its other existing tenants have leases that contain relatively narrow permitted uses that do not compete with the new tenants business. Negotiating Exclusive Use Clauses (With Sample) - Retail Real Estate Often those legal options begin in the careful negotiation and drafting of a lease or other real estate instrument containing a restrictive use covenant. To analyze any use clause, it is necessary to begin with the basic rule that a tenant has the right to use the leased premises for any lawful purpose, without any interference from the landlord, so long as such use is not forbidden by any express provision in the lease or by some necessarily implied construction of the lease or other document at issue, or that does not result in waste or destruction of the premises. binding language for the landlord's successors and assigns. Additionally, retail landlords typically have a vested interest in What is an exclusive use clause? With a carefully drafted co-tenancy provision, the questions that landlords and tenants have to ask when a potential violation has occurred can be discussed and agreed upon ahead of time; thus, potentially eliminating confusion between the parties. Exclusive uses should be for the duration of the applicable lease. There are many ways to negotiate an exclusive use clause in our retail anchor lease. Use clauses commonly limit the tenants rights in or create obligations for the tenant for a particular leased premises. tenant's ability to operate a specific business in the center. There is no question that an exclusive use clause can be an reason, it is good practice for any existing lease granting Practically speaking, tenant-mix is always on . But make sure youve got other plans to differentiate yourbusiness from your competition. Other types of use clauses for shopping centers may include a clause that requires a tenant: b. to refrain from opening another store within in a certain radius of the center; c. to maintain certain hours of operation; e. to contribute to a joint advertising fund; Some jurisdictions also imply a covenant on the part of the tenant not to use the premises in such a way to cause damage to the premises.10 Regardless of the particular restriction, if sufficiently expressed within the lease, the clause will likely be enforced by the courts. In general, the exclusions from this cap on increases would exclude items that are completely out of the landlords control such as real estate taxes and insurance; however, many times landlords are successful including further line items in an operating budget, including security and snow and ice removal. For example, in Texas, [r]estrictive clauses in instruments concerning real estate must be construed strictly, favoring the grantee and against the grantor, and all doubt should be resolved in favor of the free and unrestrictive use of the premises.6 A similar rule may apply in your jurisdiction. In the context of retail leasing, a negotiated right that protects shopping center tenants from competitors opening and operating their retail stores either: Within a defined radius from the tenant's store. 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In fact, taken to an extreme, every clause that provides for an obligation of a tenant is a use clause. Waiver may be implied by conduct. The main way of doing this is by creating a cap on increases year over year (usually somewhere in the 3%-5% range). 838 Granby StreetNorfolk, Virginia 23510United States. leasing activities. By Pedal Retail Advisors. Tenants often request these clauses to prevent the landlord from renting space to other tenants who are competitors. Sample 1 Sample 2 Sample 3 See All ( 10) Save Copy Exclusive Use. Answer:If youre concerned about keeping your competitor out of the same building or shopping center, what youre looking for is an exclusive use clause in your lease. First, the case is much more expensive because testimony becomes relevant, depositions are necessary, and documents and correspondence traded at the time becomes discoverable and admissible at trial. The second question is a real grey area. Become your target audiences go-to resource for todays hottest topics. This is very rarely agreed to by anchor tenants as it provides no flexibility to close for renovation (, although this would usually be covered somewhere else in the lease, ) or to close due to the fact that the tenant is losing money in the location by continuing to operate (, Thankfully for landlords with go dark provisions in anchor leases, these provisions do not generally excuse the payment of rent. The economic interdependence of the parties to the shopping center enterprise has been a primary factor influencing the types of covenants found in shopping center leases, and the construction given those covenants by the courts.2, One of the most important operating covenants in a shopping center lease is the use clause. Tenants may find entire business plans rendered impossible to execute because of restricted use provisions in leases or even in instruments that originate at the time of development of the center or mall and place controls on all or parts of shopping centers or malls such as Covenants, Conditions, and Restrictions (CCRs); Reciprocal Easement Agreements (REAs); or Operation and Easement Agreements (OEAs).4. You WILL have to deal with competitors thats just a fact of retailing. There is a broad spectrum of clauses that provide such protection but in concept a tenant wants a broadly drafted provision and landlords advocate for provisions that are specifically tailored to the anchor tenants primary business. It is unclear whether a severability clause (e.g, one that states unenforceable clauses may be severed from the agreement so that the agreement can be enforced) would remedy a situation where the particular use in the exclusive use clause is found to be illegal. Commercial Restaurant Lease Agreement - UpCounsel If the tenant subsequently goes dark or engages in a different business activity in its space, the protection afforded by the exclusive use clause is no longer required, and the exclusive use clause should terminate at that point. Enter to open, tab to navigate, enter to select, Practical Law Standard Clauses 8-507-2295, 24 hour Customer Support: +44 345 600 9355. Moreover, judges may allow both written discovery and depositions prior to an injunction hearing which will greatly increase the costs and may mean that claims and defenses are missed, lost, or at least impaired because of the rapid and usually incomplete development of facts. What Are Exclusive Use Rights? For that A landlord with a property boasting significant traffic counts, synergistic co-tenancy, retail concentration in the immediate vicinity, and high average household incomes (among other things) can take more risks and can take rigid positions more frequently than an owner with inferior real estate. Courts may look to how the same terms are used in other parts of the contract even when those parts of the contract have nothing to do with operations of the tenant. consideration. Here, we will briefly discuss the following provisions: While our discussion touches on these various issues and certain strategies landlords can use in negotiating, there are countless ways to address these particular issues within a lease agreement that are different from those included here. The state of the office sector is grim. On the other hand, landlords prefer the clause to be as narrow as possible to avoid limiting the types of other tenants in a center. Want to learn more about the good, the bad, and the ugly of the much-hyped ExclusiveUse Clause? Exclusive Use Provisions in Commercial Leases While this provision, again, seems fairly straightforward when reading through it, a few questions should come to mind: what does open and operating mean, does that mean during normal business hours, does that mean 7 days a week, what if the particular tenant closes for a couple days a week; what is a nationally recognized tenant, what is the threshold between nationally recognized and regional, is it a number of locations that would push a tenant from regional to national?, is it a certain number of states in which the tenant is operating locations; what if the tenant provides notice to the landlord that the co-tenancy requirement has been violated and begins to pay 4% of gross sales as their rent under the lease, how does a landlord push back on this type of allegation? 4. the landlord may be willing to permit the tenant to terminate its Exclusive use clauses: A classic real estate newbie mistake - Clausehound In the LOI stage, landlords, correctly, are focused on the fundamentals of the deal including rent, term, options, relative construction obligations, guaranty, maintenance requirements and other threshold issues that allow a landlord to underwrite a lease deal. Protecting Retail Leases From 'Exclusive Use" Provisions Whether to grant an exclusive use often involves a more nuanced there are countless other regional retailers that are very well known in the Southeast, Northeast or some other area of the US, but would that constitute a nationally recognized tenant? The author seriously doubts that crack dealers have leases for their crack houses much less a commercial lease with an exclusive for that use. suites down may have an exclusive use clause that would prevent a Landlord's idea of a "permitted use" is a very narrow use and it provides that the premises may be used solely for the "permitted use" and for no other purpose whatsoever. A tenant which is a national or regional company like a grocery store or pharmacy chain will routinely require that it be granted an exclusive use. United States: Exclusives In Leases. Exclusive Use Clauses in Shopping Center Leases [T]he leasing of space in these centers brings into play considerations in addition to those involved in the usual leasing of commercial property, since the center (or mall) concept denotes a unified complex of stores.1 The landlord controls the tenant mix by deciding which tenants to lease space to and by entering into commercial leases containing certain operating covenants to ensure the desired tenant mix so that each store provides value to the center as a whole. Finally, while a landlord may This exception from the cap can be very meaningful in a given operating year in which the costs of those certain amounts exceed the prior year; thus, helping landlords collect more pass-through expenses for the benefit of the landlords management of the property. well-chosen location in a vibrant center, an exclusive use clause This website is using a security service to protect itself from online attacks. In shopping center leases, retail tenants often negotiate for exclusive use covenantsi.e., agreements by the landlord not to lease, or otherwise allow the occupancy of, other space in the remainder of the shopping center for uses that compete with the tenant. Second, at this point in time, what the parties really intended may very well be altered by the rules of construction available in the jurisdiction (i.e., contract construed against the drafter, clauses earlier in a contract prevail over clauses found later in the contract, a list of items limits the general term described by the list, etc.) If the tenant subsequently goes dark or engages in a different It should also not inadvertently preclude businesses that do not actually compete with the tenant desiring the exclusive use. To protect the effectiveness of its exclusive use clause, the tenant should negotiate for the exclusive to apply to the shopping center as it currently exists or is later expanded, any property within a certain radius of the center that is currently owned or later acquired by the landlord or an affiliate, and the landlords or its affiliates successors and assigns. The exclusive use clause is a negotiated right that must be expressly included in the lease. These are the distinctions youll determine in your leasenegotiation. i.e.. Will allowing one tenant to violate its use permit another tenant to sue landlord for breach of the covenant of quiet enjoyment. An anchor tenant therefore has the leverage needed to induce the landlord to give it an exclusive use clause. If the lease with the tenant to whom that exclusive was granted has terminated or expired, the exclusive use should automatically terminate. LEGAL TREATMENT AND ENFORCEMENT OF USE CLAUSES. Consider the use clause again. This exception from the cap can be very meaningful in a given operating year in which the costs of those certain amounts exceed the prior year; thus, helping landlords collect more pass-through expenses for the benefit of the landlords management of the property. When there are other leases that predate the tenants lease, the tenants exclusive use clause will most likely be subject and subordinate to the terms of those leases. Accordingly, use clauses should not appear by accident but rather because of a specific request of a party that was negotiated and/or agreed to by the parties to the agreement.