Don't Let New Tenant's Exclusive Conflict with Old Tenants' Sales Rights

Offering an exclusive can help you lure new tenants. But offering the wrong kind of exclusive can cost you a renewal. SNAFUs are apt to occur when you use a common form of exclusive stating that the tenant is the only tenant in the shopping center that’s allowed to sell a particular product. The problem is that the leases of your current tenants may not include any provisions expressly limiting what they’re allowed to sell. And absent such restrictions, those tenants can legally sell just about any product they like—including the particular product you gave the new tenant to sell on an exclusive basis.

Result: You catch grief from both the new and existing tenants, each of whom may have a valid claim to sue you for breach of lease.

Court Slams Landlord for Violating Video Rental Exclusive

Of course, this is hardly a new lease trap. In fact, one of the best illustrations of how it can trip up landlords is a venerable 1993 New York City case involving video rentals. It began when the landlord gave its new video store tenant an exclusive right to rent out videotapes. An existing supermarket tenant also decided to get into the video rental business. The video store was incensed and demanded the landlord crack down on the supermarket. But since the supermarket’s lease didn’t include any restrictions on such sales, the landlord’s hands were tied.

So, the video store sued for damages. And it won the case, with the New York court ruling that the landlord violated the video store’s exclusive by failing to properly restrict the supermarket’s right to rent videos [Forsee Corp. v. Pergament Enterprises of S.I., 604 N.Y.S.2d 123 (A.D. 2 Dept. 1993)].

How to Avoid Conflict Over Exclusives

While video rentals have become extinct, landlord liability risk to tenants for exclusive conflicts is alive and well. Attorneys suggest three strategies for avoiding them:

1. Give exclusive use, not exclusive right to sell a product. While exclusives are still a potent inducement to new shopping center tenants, try making the tenant an exclusive tenant instead of offering it an exclusive right to sell a product. Thus, the landlord in the Forsee case might not have come to grief had it tried this approach by including language like the following in its lease with the video store: “Landlord shall not permit any other video store, other than the Demised Premises, in the Shopping Center.” Since the supermarket that rented out videos wasn’t a video store, the tenant would probably not have had a valid lease violation claim against the landlord.

2. Exempt existing tenants from new exclusive. If new tenants don’t accept the exclusive tenant pitch and insist on an exclusive right to sell the product, try to at least carve out existing tenants even if they’re not currently engaged in the business that the new exclusive covers. That way, the new tenant still gets an exclusive but it applies only to future tenants. After all, you’ll be able to ensure that the leases of those tenants require compliance with the exclusive, something you may be unable to do with the leases you’ve already signed.

Model Lease Language

The foregoing restriction shall not apply to any tenant or occupant operating in the Shopping Center as of the Commencement Date (or their successors or assigns) under leases or agreements, or renewals thereof, which do not restrict the sale of the aforementioned item(s).  

3. Exempt incidental sales of exclusive product. Another strategy for preventing exclusives conflict is to exempt from the new tenant’s exclusive all tenants for whom sales of the exclusive product would constitute only a minor part of their business. Specifically, you could offer an exclusive that exempts tenants in the shopping center whose sales area or gross sales relating to the exclusive product are below a certain stated percentage that you can negotiate.

Model Lease Language

A business (other than the business conducted at the Demised Premises) shall not be deemed to use its premises in the Shopping Center primarily for the Exclusive Use, and shall not be considered in breach of this Lease, if either: (i) it devotes less than [insert percentage] of the sales area of such premises to the Exclusive Use; or (ii) on an annual basis, less than [insert percentage] of the gross sales from such premises are generated by the Exclusive Use.

While such a clause reduces your risks, it doesn’t completely eliminate them to the extent that existing tenants with no restrictions in their lease meet or exceed the percentage limits.