Agree to ‘Landlord Leasing Covenant’ to Keep Center Free of Exclusives

If you have a desirable center in a prime location, you may have the bargaining power to refuse to give any tenant an exclusive. But a strong tenant may not be so willing to lease space at your “no-exclusives” center without an exclusive.

As a compromise, a new concept—called a landlord leasing covenant—has emerged in shopping center leasing, says Atlanta attorney R. Robinson Plowden. On behalf of a national developer, Plowden is currently putting leasing covenants in tenants' leases at centers in North Carolina and Alabama. With this type of covenant, you promise the tenant that you will set some restrictions on your ability to rent space to the tenant's competitors in the future.

This covenant is not as comprehensive as a tenant exclusive because it applies only to you, and not to any of your other tenants. However, a tenant may view the covenant as the next best thing to getting an exclusive, and agree to lease space at your no-exclusives center.

Unfortunately, if you don't draft the landlord leasing covenant properly, it can severely limit your ability to rent space to prospective tenants—as an exclusive would. That is why CLLI, with Plowden's help, will give you a checklist of 11 tips to follow in your covenant, so that it will not come back to bite you. We also give you a Model Lease Clause, on p. 3, that includes those tips and that you can adapt and use. And we will tell you about additional representations that the tenant may want you to make in the clause.

Follow 11 Tips When Drafting Covenant

Follow these 11 tips when drafting your landlord leasing covenant, says Plowden.

Set Conditions Tenant Must Meet

Neither a deadbeat tenant nor one that has not opened for business should benefit from a landlord leasing covenant that restricts your ability to rent space to other tenants, says Plowden. He advises you to agree to the terms of the covenant, but only if the tenant meets these two conditions:

• The tenant is not in default of the lease past any applicable grace period; and

• The tenant is open for business, and fully stocked and staffed [Clause, par. a].

Define Tenant's Primary Business

The landlord leasing covenant makes you agree not to rent space to a new tenant that has the same primary use as the tenant getting the covenant. Therefore, you should define “Tenant's Primary Use.” Plowden recommends defining the primary use by the type of store the tenant will operate—for example, a modern toy store.

Avoid using the more restrictive approach often found in exclusives aimed at preventing competition in the specific products that the tenant will sell—for example, toys, children's clothing, and other items used by children [Clause, par. a].

Terminate Covenant Near Lease End

If the tenant's lease term is about to end and it is going to leave your center, you should not remain bound by the landlord leasing covenant and barred from leasing to whomever you wish. Make it clear that the covenant will terminate several—for example, six—months before the lease term ends, says Plowden [Clause, par. a].

Editor's Note: A tenant may balk at this early termination of the covenant, especially if its biggest sales season is near the end of its lease term. Depending on the tenant's bargaining power, you may have to reduce the number of months that the covenant will end before the lease, or eliminate that requirement.

Prevent Covenant from Barring Leases with ‘Open’ Use Clauses

Make it clear that the covenant will not bar you from signing a lease with an “open” use clause—such as a clause that lets a tenant use its space for “any lawful use,” says Plowden [Clause, par. c]. Typically, strong tenants want open use clauses because they may decide in the future that it makes financial sense for them to switch to another use, he explains.

Agree Only to Not ‘Knowingly and Intentionally’ Sign Lease with Competitor

Some tenants will balk at letting you sign another tenant's lease with an open use clause. They fear that the tenant with the open use clause could switch to a use that directly competes with them. As a compromise, agree that you will not “knowingly and intentionally” sign a lease with a new tenant with the same primary use as the tenant getting the covenant [Clause, par. a]. This way, if you didn't know, at the time you signed the other tenant's lease, that the new tenant intended to operate a competing store, you will not have violated the covenant, explains Plowden.

If this sounds as if it could lead to a policy of “don't ask, don't tell,” that's a possibility. However, Plowden cautions against being “willfully ignorant” of a new tenant's proposed use, because doing so might create liability under the landlord leasing covenant. That is, the tenant that is benefiting from the leasing covenant could claim that you “should have known” that the new tenant was planning to use its space in violation of the covenant, he explains.

Set Conditions for Application of Covenant

Make sure that the landlord leasing covenant applies only to:

Tenants with big spaces. Don't let the landlord leasing covenant block you for renting space to small or midsize tenants—even if they have a use that competes with your existing tenants. Make the covenant apply only to tenants of a certain size—for example, at least 5,000 to 10,000 square feet, says Plowden [Clause, par. a].

Parcels you own. The landlord leasing covenant should not apply to parcels at your center that you don't own—for instance, parcels owned by big-box retailers. After all, you have no control over how those parcels are used. State in the lease that the covenant applies only to parcels that you own, advises Plowden [Clause, par. a].

State that Covenant Is Not Exclusive

Expressly state in the lease that the landlord leasing covenant is not an exclusive, nor will it bind any other tenants, says Plowden [Clause, par. b]. This way, the tenant should not have any expectation that it is getting an exclusive, he explains. Plus, stating that the other tenants will not have to comply with the covenant further drives home the point that the covenant is not an exclusive.

Covenant Is Personal to Tenant

Make it clear that the landlord leasing covenant is personal to the tenant, says Plowden [Clause, par. b]. That means that only the tenant can enforce the covenant against you. The tenant can't transfer the covenant to anyone else.

Bar Covenant from Restricting Changes to Other Tenants' Uses

State in the lease that the landlord leasing covenant will not restrict any other tenant from changing its use to one that competes with the tenant's primary use. Nor will the covenant bar another tenant from subletting its space or assigning its lease to a competitor of the tenant getting the covenant [Clause, par. c].

Don't Let Covenant Bar Leases with New Tenants that Sell Same Items

State that the landlord leasing covenant will not bar you from renting space to a new tenant selling items that the tenant getting the covenant sells, as long as the new tenant will not operate the same type of store as the existing tenant. For example, if the tenant benefiting from the covenant is a toy store, state that you can rent space to another tenant that sells toys, as long as it does not operate a toy store, explains Plowden [Clause, par. c].

End Covenant if Tenant Defaults, Stops Primary Use

If the tenant becomes a deadbeat in the future or stops using the space for the specified primary use, make sure that it can no longer benefit from the landlord leasing covenant, advises Plowden [Clause, par. d].

Possible Tenant Modifications

Expect a savvy tenant to demand certain modifications to the landlord leasing covenant. For example, it may want you to represent the following:

You don't intend to grant exclusives. The tenant may require you to represent that you have not nor do you intend to agree to give any other new or existing tenants an exclusive. Try to avoid giving this representation, because you may decide later that giving exclusives may make sense to attract very desirable tenants.

You will not consent to use changes that could create competition. The tenant may demand that you represent that you will not consent to letting an existing or a new tenant change its use, or assign or sublet, so that it (or its assignee or subtenant) can operate a competing store. Note that giving in to this demand could hurt you if a use change, sublet, or an assignment can occur automatically under a lease.

For example, if an existing or a new tenant's lease lets it assign its lease without your consent to an affiliate that operates a toy store—and that assignment actually occurs—you could end up violating the covenant, and that would be unfair.

You agree to “springing” exclusives. Expect a tenant to demand that you put a “springing” exclusive clause in the lease. This clause says that if you decide to grant exclusives to future tenants, then this tenant will also get its exclusive. In essence, the tenant's exclusive “springs” into effect when the first exclusive is granted to a future tenant. Owners typically have to agree to give a springing exclusive to a strong tenant, notes Plowden.

CLLI Source

R. Robinson Plowden, Esq.: Partner, Sutherland Asbill & Brennan LLP, Atlanta, GA