Negotiate Three Ways to Get Control over Tenant's Exclusive Use Right

The right to be the only tenant in a shopping center or mall that sells a certain type of product or operates a certain type of business is highly valuable—and, therefore, very strategically negotiated. This right, which is given to the tenant in the exclusive use clause of its lease, can contribute greatly to a tenant’s success at your center or mall, but it has the potential to undermine your own interests if it precludes you from renting space to tenants that are valuable to you but that sell specific products or services that conflict with an exclusive. Don’t let a tenant’s unfettered exclusive use right substantially limit your other lease opportunities; instead, use the following strategies, and our Model Lease Clause: Make Tenant’s Exclusive Work for Your Needs, to reduce the scope and impact of a tenant’s exclusive while still offering it enough benefits to make it worth the tenant’s while to lease from you.

Strategy #1: Set Crucial Limits on Exclusive

Don’t get backed into a corner by a tenant that requires an exclusive. You can reduce the scope of the exclusive by doing the following:

Limit exclusive to tenant’s “primary use.” Give an exclusive only for a tenant’s primary use. If you give a tenant an exclusive for a use that’s only a small or incidental part of its business, you may deprive another tenant of a use that could be a key source of business for it. You may even lose a potential tenant that’s unwilling to forgo that use. You can define “primary use” as a percentage of gross sales, a percentage of space dedicated to the use, or a combination of the two [Clause, par. d]. At least half the tenant’s gross sales and/or floor area would be dedicated to the exclusive use. An alternative to limiting the exclusive to a primary use is to limit it to a general description or category of space or store. For instance, you might agree only that you won’t rent space to another “consumer electronics store” or “appliance store” if the tenant with the exclusive primarily sells consumer electronics or appliances. This gives you leeway to rent space to prospective tenants that don’t fit the description or category but do sell merchandise that would otherwise violate the exclusive. For example, you could rent space to a furniture store that sells appliances, without violating the appliance store exclusive.

Limit exclusive to portion of center. Have the exclusive apply only to a specific portion of the center, rather than the entire center. For example, if the tenant is located in a certain wing of the center, make the exclusive apply only to the stores in that wing. This way, the exclusive doesn’t limit the pool of available prospective tenants for your center as severely. You and the tenant will have to choose the part of the center—the “protected area”—where the exclusive will apply [Clause, par. a]. If the tenant’s exclusive applies just to the protected area, you’ll violate the lease only if you rent space in the protected area to a “competing business”—that is, one that engages in a use that’s covered by the tenant’s exclusive [Clause, par. b(ii)].

Limit duration of exclusive. Try to limit the duration of the exclusive so that it doesn’t outlast its purpose [Clause, par. a]. Tenants often seek an exclusive to establish themselves in a new market. Past that time, it’s no longer needed. A tenant may be willing to give it up during the latter part of the term. So try to negotiate to allow the tenant to keep the exclusive only as long as it thinks it needs it to get established.

Limit remedy for exclusive violation to lower rent. Give the tenant only one remedy—lower rent—if the exclusive is violated, rather than giving it a termination right. And say that the tenant is entitled to a lower rent only until you cure the violation, not for the remainder of its term [Clause, par. a]. This way, the tenant can’t terminate its lease in response to the violation or ask a court to force you to correct the violation. A typical reduced rent scenario would allow the tenant to pay a certain percentage of its minimum rent while the violation continues. Also, try requiring the exclusive tenant to prove it was harmed by the violation of its exclusive before it can resort to the lower rent remedy. This will take into account the beneficial effects that a violation might have on the exclusive tenant if the tenant violating the exclusive brings more customers to your center. If that traffic increases the exclusive tenant’s gross sales, the exclusive tenant won’t be able to prove that it was harmed by the violation. So it won’t be entitled to the lower rent remedy.

Strategy #2: Exempt Specific Types of Tenants

You can reduce the impact of an exclusive if you make it apply only to a “competing business.” Try to exempt the following tenants from the definition of a competing business:

Existing tenants. Exclude all existing tenants from the exclusive, whether they currently engage in the business covered by the exclusive or not. This is important because an existing tenant’s lease may be vague in detailing how the tenant can use its space, so it may be able to change its product line in the future and sell the same product as the exclusive tenant—thereby violating the exclusive. You also want all existing tenants’ spaces to remain exempt from the exclusive even if they decide to relet their spaces when the current lease term ends. It doesn’t matter whether or not they have a renewal option in their leases [Clause, par. b(ii)(A)]. Otherwise, the exclusive could prevent you from keeping a desirable tenant in its space.

Assignee or subtenant of existing tenant. Exempt all existing tenants’ assignees or subtenants from the exclusive, even if they’re in a different business from the existing tenant [Clause, par. b(ii)(A)]. This allows an existing tenant that doesn’t engage in the exclusive use to assign or sublet its lease to a business that may compete with the exclusive tenant. If you don’t do this, you would have to police existing tenants to limit their assignment or sublet rights. But if you try to do this unilaterally, the existing tenant could claim that you’re violating its lease by cutting back its existing rights.

Replacement for existing tenant that’s no longer a competitor. You may have an existing tenant that uses its space primarily for the exclusive use that you granted the newer tenant. If the space occupied by the existing tenant is no longer being used primarily for that exclusive use (because the existing tenant changed its use, moved out, or closed down), you’ll want the flexibility to maintain the center’s current tenant mix. So say that in these circumstances, one new tenant will be exempt from the exclusive and can use its space (which may be located anywhere in the center) for the exclusive use.

To make this exemption acceptable to the exclusive tenant, agree to replace the exempt tenant with a smaller new tenant. For instance, a 10,000-square-foot exclusive tenant may not feel threatened if a 2,000-square-foot existing tenant is replaced by a tenant of a similar size or smaller [Clause, par. b(ii)(B)].

Anchor tenants. Exclude any anchor, variety, specialty, or other large store above a certain size (in square feet) from the exclusive [Clause, par. b(ii)(C)]. Since these stores typically are unwilling to limit the wide variety of products they sell, an existing exclusive may prevent you from adding a new big store to the center.

Small tenants. Exempt tenants below a certain size (in square feet) from the exclusive [Clause, par. b(ii)(D)]. Small spaces are typically the toughest spaces to rent in shopping centers. And tenants in these spaces shouldn’t pose a competitive threat to larger tenants. For example, try to exempt tenants with less than 1,000 square feet from the exclusive. You could also consider getting the right to exempt tenants in spaces that are less than 25 percent of the size of the exclusive tenant, even if they’re bigger than the 1,000-square-foot limit.

Tenants for whom exclusive use is incidental. Like small tenants, tenants that engage in the use prohibited by the exclusive on an incidental basis should be exempted from the exclusive. These tenants shouldn’t pose a competitive threat to the exclusive tenant because their volume for that use is small scale. Without this exemption, you could have trouble renting space to tenants that engage in the exclusive tenant’s use only as an incidental sideline to their businesses but consider the use important. Define an incidental use on the basis of a percentage of gross sales or space dedicated to the use, or a combination of both [Clause, par. b(ii)(E)].

Rogue tenants. Some tenants may violate the use restrictions in their own leases as well as another tenant’s exclusive. To protect yourself, exempt these rogue tenants from the exclusive [Clause, par. b(ii)(F)]. Otherwise, even though you’re not at fault, the exclusive tenant can still resort to its remedy against you. But be prepared for pushback: A savvy tenant may balk at this exemption unless you agree in the lease to try to stop the rogue tenant from continuing to violate the exclusive.

Strategy #3: Void Exclusive in Eight Circumstances

The tenant may do something during the lease and no longer be the type of tenant that deserves an exclusive. So make sure that you get an “out” if this happens. You’ll further reduce the impact of an exclusive by having the lease say it’s automatically void under these circumstances:

Tenant defaults in any way. An exclusive should go only to a desirable tenant. But once a tenant defaults, it’s no longer desirable and should no longer get the lease benefits it had before [Clause, par. c(i)]. This goes not only for exclusives but also for many other rights or even simple perks that it may have negotiated. Expect the tenant to demand that you limit this provision to defaults that are monetary (for example, failing to pay rent) or “material”—that is, major. Also, some tenants may argue that they shouldn’t lose the exclusive unless they’ve defaulted more than once.

Tenant sets up competing business nearby. Make it clear that the exclusive dies if the tenant defaults on the lease’s radius restriction [Clause, par. c(i)]. Otherwise, the tenant could open another store nearby—and compete with itself. So while you’re forced to comply with the exclusive to help the tenant’s business, the tenant is free to hurt your center by drawing business away from it.

Tenant sublets or assigns. End the exclusive if the tenant sublets the space or assigns the lease [Clause, par. c(iii)]. The exclusive is personal to the tenant. You gave it to the tenant based on its clout; there’s no reason a subtenant or assignee should also get this benefit. However, expect a tenant to balk at this provision, arguing that automatically voiding the exclusive after an assignment or sublet severely hurts the value of the lease because it makes it tougher to find an interested subtenant or assignee. A possible compromise is to say that the exclusive won’t end if the subtenant or assignee continues to use the space for the exclusive use.

Tenant doesn’t continuously operate. End the exclusive if the tenant doesn’t “continuously, actively, and diligently” operate its business in the entire space [Clause, par. c(ii)]. A tenant that’s gone dark or is using a small portion of its space shouldn’t get the benefit of an exclusive.

Tenant’s gross sales fall below set amount. Void the exclusive if the tenant’s gross sales fall below a certain amount over a set period of time [Clause, par. c(iv)]. You’ll generally give an exclusive only to a tenant with substantial negotiating clout—which generally means a retail tenant with significant gross sales. A tenant with a less-than-successful business shouldn’t be entitled to an exclusive. Keep in mind that you and the tenant will need to negotiate the amount below which its gross sales can’t fall. You’ll also need to agree on how long gross sales must be below this floor amount before the tenant loses the exclusive.

Tenant changes ownership. Say the exclusive ends if the tenant changes ownership [Clause, par. c(v)]. You gave the tenant an exclusive because of its unique characteristics. But if a majority of the tenant’s corporate shares or partnership (or limited liability company) interests are transferred in a sale, takeover, or merger with another company, these characteristics may change or disappear. The new entity running the tenant may not have the same reputation, drawing power, or clout.

You may have to compromise if the tenant argues that this provision restricts the salability and market value of its business. You can agree to let the tenant keep the exclusive if, in your sole discretion, the quality of its new ownership is similar to or better than its original ownership. Since this is a subjective test, it still may not fly with the tenant.

Tenant discontinues exclusive use. Void the exclusive if the tenant stops using its space primarily for the exclusive use [Clause, par. c(vi)]. Without this protection, your center may be left without an important retail use. For example, suppose you grant a pizzeria tenant an exclusive right to sell pizza in your center. The exclusive is meant to shield the pizzeria tenant from damaging competition. But if the pizzeria stops selling pizza, you can’t replace its use unless you have a right to terminate the exclusive. Expect the tenant to demand that it can temporarily stop the exclusive use, but if you agree to this compromise, you and the tenant will need to negotiate how long any temporary stoppage can last. Also, make sure to cap the number of times the tenant may temporarily stop the exclusive use.

Tenant doesn’t send notice to exercise remedy. Stop the exclusive if the tenant doesn’t notify you by a certain deadline—say, 30 days after the start of the exclusive violation—that it’s planning to exercise its remedy under the exclusive use clause [Clause, par. c(vii)]. If the tenant misses the deadline, it’s out of luck.