Define "Primary" and "Secondary" Uses in Lease
As a retail property owner, you’ve certainly spent time considering the tenant synergy—that is, stores functioning together to draw shoppers that a center normally wouldn’t capture without them as a group—that will maximize profits. That’s why the use clause in your leases with tenants is so important; it requires them to use their space in the way that you’ve determined is the best for your center, and prevents them from using the space in a way that would interfere with your plan. But it’s not as easy as determining with the tenant what its use will be. That’s because many tenants have more than one “use.” While the majority or a large portion of their business is devoted to selling a single type of item or providing a single type of service, that’s not all they offer. So how do you make a tenant’s use work to your advantage when it has more than one? When drafting the lease, designate the “primary” use and “secondary” use of the space.
Use “Amount of Space” as Standard
When restricting a retail tenant’s use, many owners put words like “primary” and “secondary” in the lease. For example, the lease will say a tenant’s “primary” use must be the sale of home entertainment systems. Or the lease might limit a tenant’s exclusive by saying that other tenants may perform the exclusive use as long as it’s only their “secondary” use.
When you draft the lease, you may think you and the tenant are in agreement on what these words mean. But there could be a dispute with the tenant later over these words, after you’ve signed the lease. For instance, must a “primary” use take up more than 50 percent of the store or over 50 percent of the gross sales? If a tenant has five uses, is a use “primary” if it’s more than one-fifth of the business? And is a use “secondary” simply because it’s not the “primary” use in the space? Ultimately, this misinterpretation could lead to litigation.
You can avoid this by not using these vague words at all when preparing your use clause. Instead, for a primary use, the lease should set a minimum amount of space that must be devoted to the use. And for a secondary use, the lease should set a maximum amount of space that may be devoted to the use.
Set “Primary” Use Two Ways
You may want the tenant to make a specific use—such as the sale or rental of home entertainment equipment—its “primary” use. To do this, you’ll want to set a minimum amount of space by square footage that must be used for the sale or rental of home entertainment equipment. There are two possible ways to do this. The one you use depends on how you want to define this “primary” use. Let’s say that you don’t want the sale of home entertainment equipment to make up less than a certain amount—say, 65 percent—of the tenant’s business.
Option #1: Require minimum percentage of entire space. One method is to set a minimum for how much of the entire space the tenant must use in its sales of the product. So, suppose you want the tenant to use at least 65 percent of its space for the sale or rental of home entertainment equipment. To do this, ask your attorney about putting the following lease language in your use clause:
Model Lease Language
Tenant shall have the right to sell or rent home entertainment equipment, provided the gross leasable area devoted to the sale or rental of such merchandise does not account for less than sixty-five percent (65%) of the gross leasable area of the Premises.
Option #2: Require minimum percentage of sales area. You may want your minimum to apply only to the sales area and not care how the tenant uses its storage space. In other words, you don’t care if the tenant has no home entertainment equipment in the storeroom as long as no less than 65 percent of the sales area contains home entertainment equipment. Be sure you define the sales area in your lease. It’s also a good idea to mark the sales area on your floor plan.
Model Lease Language
Tenant shall have the right to sell or rent home entertainment equipment, provided the display area devoted to the sale or rental of such merchandise does not account for less than sixty-five percent (65%) of Tenant’s entire Sales Area (as defined in Paragraph [insert #]) in the Premises.
Set “Secondary” Use Three Ways
You may want the tenant to keep a specific use—such as the sale of men’s shoes—as a “secondary” use. Here are three possible options. Choose the approach that best suits the restriction you want.
Option #1: Limit percentage of space for use. Restrict how much of the tenant’s entire space can be used for sales of a secondary product. For example, you could say in the lease that the sale of men’s shoes can’t take up more than 10 percent of the tenant’s entire space. This will limit the secondary use in the tenant’s storage areas, not just its display areas. To do this, put the following lease language in your use clause:
Model Lease Language
Tenant shall have the right to sell men’s shoes, provided the gross leasable area devoted to the sale or rental of such merchandise does not exceed ten percent (10%) of the gross leasable area of the Premises.
Option #2: Limit sales area. Restrict how much of the sales area is used to sell or display a given product. So the entire storage area may be filled with men’s shoes as long as only 10 percent of the sales area is devoted to their sale.
Model Lease Language
Tenant shall have the right to sell men’s shoes, provided the display area devoted to the sale of such merchandise does not exceed ten percent (10%) of Tenant’s entire Sales Area (as defined in Paragraph [insert par. #]) in the Premises.
Option #3: Restrict lineal footage. If a “secondary” product can be displayed in racks along the walls, the display may be much larger than you intended, even though it takes up only a few square feet of floor space. To make sure that a tenant can’t mount this type of display, limit the secondary product’s “lineal” footage.
Model Lease Language
Tenant shall have the right to sell men’s shoes, provided the display area devoted to the sale of such merchandise does not exceed ten percent (10%) of the lineal footage of Tenant’s entire Sales Area (as defined in Paragraph [insert par. #]) in the Premises.
Make Use Clause Mutually Beneficial
If you’re tempted to measure a “primary” or “secondary” use by the gross sales it brings in, be aware that this will complicate things for both you and the tenant. For instance, if you say in the lease that the sale of men’s shoes (a “secondary” use) cannot account for more than 10 percent of the tenant’s gross sales in a given month, it will be incredibly tough to monitor on a daily basis and could force the tenant to turn customers away. Suppose the tenant hits the 10 percent mark and the next customer in line wants to buy a pair of shoes—it would be unrealistic to expect the tenant to turn this customer away, especially since its profitability will boost your bottom line.
It’s also important to realize that the economy, although improving, has forced many struggling tenants to resort to expanding their original permitted use. A too narrow use clause could stop a tenant from boosting its sales by selling additional items. So you’ll want “secondary” use and “primary” use terms to work for you but not against the tenant. That’s why, when drafting the lease, you should consider giving the tenant a broader range of options to accommodate merchandise expansion or a shifting business model. It’s a balancing act, but can ensure that the tenant will stick to operating in a way that, although different from its original use, will still be beneficial for your center and not disrupt the mix. For tips on how to balance your and a tenant’s use interests when circumstances could change, see “Help Tenant Adapt to Market with Flexible Use Clause,” in the November 2011 Insider, available in our online archive.