Negotiating Fair and Balanced Radius Clause

Making a profit from tenants at your shopping center or mall depends on many factors—one of which is the key percentage rent arrangement. Percentage rent allows you to collect not only base rent, but also a percentage of the tenant’s gross sales done at the space it leases from you. But percentage rent doesn’t exist in a vacuum. It can be diminished by variables like the tenant’s success—not just with you, but wherever else it is doing business, if that is nearby.

It’s possible, though, to keep gross sales high, if you negotiate a radius restriction with certain key items that will stop the tenant from, in essence, competing with itself by opening another location close to yours. Radius restrictions can get complicated, but one of the most important things to keep in mind and negotiate is the specificity of the restriction. First, decide what it is that you’re restricting. In other words, make sure you define the type of operation you’re restricting the tenant from setting up in another location. For example, if the tenant’s name is important to your center, make sure that it’s not involved in a store with the same or similar name elsewhere.

Also consider the broadness of the restriction. You’ll have to use a broad enough definition of what your tenant is prohibited from doing. A narrow clause, like one that says simply that a tenant can’t open a new store with the same name, will leave wiggle room for the tenant to say that its other location is permissible—even though it sells exactly the same competing items—because its name is different.

For more tips to protect you from a diversion of gross sales by your own tenant, and a Model Lease Clause you can adapt, see “Use Radius Clause to Protect Your Percentage Rent from Tenant,” available to subscribers here.