Don't Get Left on Hook for Costs of Enforcing Illegal Exclusive

The exclusive right to sell a product or provide a service at a shopping center is invaluable to a tenant. The tenant won’t have any direct competition for profits, which sometimes means that it can set prices that would otherwise have to be lower to lure customers away from other businesses. But exclusives can be tricky when it comes to this type of price setting. You might not be aware of antitrust laws that apply to this scenario—and that can leave you with the cost of defending yourself if you’re sued because the exclusive use you granted for a tenant violates those laws. You could also owe damages if a court rules against you. And the tenant won’t be required to pay any of these costs or protect you—unless you’ve included a provision that can plug this loophole. Here’s how you can get the protection you need if you inadvertently grant an illegal exclusive use right to a tenant at your center.

Understand Antitrust Issues

Many leases have indemnification provisions that require a tenant to pay an owner whatever cost that owner had as a result of a certain event happening—for example, if you’re sued for an accident that was the result of a tenant’s wrongdoing and you require the tenant to reimburse you for the costs you incurred as a result. Being sued by a tenant that’s upset that you gave another tenant an illegal exclusive is much less common, but it’s still a risk.

In order to understand that risk, you should understand the law. Both federal and state antitrust laws bar restrictions on trade and commerce that eliminate or stifle competition. These laws sometimes apply to exclusive use clauses because of their intrinsic nature: They are exclusive. For example, it’s illegal for an exclusive in a major retailer’s lease to have the effect of “price fixing”—that is, keeping the cost of merchandise at the center at a high level, and eliminating discount competitors.

Let’s say that an owner gives a strong tenant an exclusive at its center and the exclusive has the effect of stopping classes of retailers and discount stores from opening there. A discount store sues the owner and the strong tenant, claiming that they were restraining its trade by trying to stop it from operating at the center. A court could rule that the exclusive was illegal because it was a restriction on trade, designed to keep prices high and to stop competition.

Keep in mind that most exclusives don’t violate the law, but that doesn’t mean that another tenant won’t attempt to challenge the exclusive. So including an indemnification provision is a smart move that will save you from the costs involved in even an unsuccessful lawsuit against you.

How to Make Tenant Indemnify You

Like our Model Lease Clause: Require Indemnification for Tenant’s Antitrust Violation, the indemnification clause that you should add to your leases should do two things: 

Cover costs. First, it should make the tenant responsible for reimbursing your losses and expenses, including reasonable attorney’s fees, if someone sues you, claiming that you’re enforcing an illegal exclusive [Clause, par. a].

Terminate illegal right. Your clause should also say that if the exclusive violates the law, the exclusive will terminate immediately and you won’t have to enforce it any longer [Clause, par. b].