Prevent Use Abuse by Negotiating Narrow Use Provisions

You signed a lease with a tenant who agreed to use its space for a specific purpose. When you find out that the tenant sublet the space, and that the subtenant is using it for a completely different purpose than you and the tenant had agreed upon, you realize that your lease's use clause wasn't as strong as you thought. Or you could discover that one of your tenants that hasn't sublet its space is using it improperly itself.

What should you do when a current tenant abuses its agreed-upon use? And what provisions should you negotiate with future tenants to avoid an ineffective use clause? Follow these guidelines to protect yourself from uses that are incompatible with your building's purpose, disturb other tenants, or violate restrictive covenants.

Tailor Use Clause to Specific Function of Building, Center

A lease typically has a general use clause specifying for what general purposes the tenant may use the space. For example, the use clause in an office building tenant's lease would allow it to use the space for general office building purposes. But some owners make the mistake of including other uses, rather than restricting tenants’ use to the type of building they own.

“Tailor the use clause to specifically what that property is supposed to be,” stresses Winston-Salem, N.C.-based commercial real estate attorney M. Joseph Allman. “If it's an office building, tailor the use to be ‘general office use,’” he says. “Stay away from including the blanket phrase ‘any other use allowed by zoning,’ in addition to the tailored use,” Allman points out.

Tailoring the use clause to the specific function of the property or building the space is in helps avoid a situation where a tenant has such a broad permissible use that, even if the tenant may not be using its space for a purpose beyond the typical use of space in a building of its type, an assignment is valuable because it allows a subtenant to come in and convert office space into an inappropriate use, like an entertainment center, as long as the use is permitted by the zoning law.

“Tenants will try to negotiate as broad a use for their space as possible,” Allman warns. You can protect yourself by narrowing your use clause to the specific function of your building or center and stay away from any language that gives it a broader use, such as phrases like “any use permitted by law.”

Get Information Before Agreeing to Expand Use

In certain circumstances—typically for larger, more valuable tenants—you might want to agree to expand the permissible use or uses of the space. “Whether an owner is willing to make a use exception depends on how important that particular tenant is to the owner, and the market at the time,” notes Allman. “Now, owners are much more amenable to a broader use clause because they have vacant space they need to rent.”

For example, a company that's using the space as a corporate headquarters might need to have certain amenities that don't typically fall under the general use for office space, such as a small gym or a cafeteria for its employees. You could give it a right to have certain things that are over and above general office use, but don't forget to—aside from the specific exceptions—tailor it to the tenant's specific use so the tenant can't go out into the marketplace and find someone to sublet the space with a use that you're not comfortable with.

If you decide to make an exception, require the tenant to tell you up front exactly what it will need so the lease can be expanded to include those needs—but only those needs. Although you're making an exception, don't make it overly broad to allow for extras that will pose a problem later. “The owner should initially get that information from the tenant,” recommends Allman.

Put Tenant on Notice of Use Violation

You may not know how to deal with your tenant's improper use of its space, especially if this is the first time you have encountered use abuse. And use abuse can be tricky.

“Monetary defaults, such as late rent, are easy to document, but a use violation is more difficult,” notes Allman. “If you have a violation of the use clause, you need to put the tenant on notice right away because if you let it slide and continue, you run the risk of creating a situation where a tenant could argue that you have effectively amended its lease to allow the improper use,” he warns.

Document use abuse in writing and put your tenant on notice that it has violated that particular provision in its lease. Usually, with a nonmonetary default, a tenant will want a period of time in which to cure the violation. “You have to take action; don't just sit back and let it happen, especially if the use abuse is disturbing other tenants,” he adds.

Permit and Prohibit Uses in Lease

Often, an improper use of space disturbs neighboring tenants. Use provisions tell a tenant the purpose (or purposes) for which it can use the space. But it's important to use these provisions to tell the tenant what it can't do in the space. Use two separate sections to do this.

The first section, the “permitted use” section, tells the tenant how it's allowed to use the space, such as “for general office purposes.”

The second section, under the “general use” provision, can include a list of the activities the tenant is prohibited from doing. For example, “Tenant shall not use the premises in any manner that: (1) violates restrictive covenants; (2) constitutes a nuisance or trespass or disturbs other tenants in the Building; or (3) increases Landlord's insurance premiums.” “This second section isn't called a prohibited use section, but effectively it is one,” notes Allman.

Many of the concepts are the same for use provisions in office buildings and center leases, but office uses are much broader. Usually, an office building tenant like a law firm or stock brokerage firm won't care if other tenants also are law firms or stock brokerage firms.

“You run into far fewer exclusive uses in office leases,” comments Allman. Occasionally, a tenant will ask the owner to refrain from leasing any other space in the building to a business similar to its own, but this is rarer than with retail tenants. It's common for a law firm to share its building with other law firms. But a retail tenant that's selling a particular type of product will want an exclusive in its use clause prohibiting the owner from renting space in its center to a tenant that sells the same product.

“There's often some tension over how narrowly use clauses are drafted,” says Allman. This is because of the limits an exclusive use clause can impose on an owner. For instance, an owner that has given its restaurant tenant an exclusive for a section of its center has to be very careful about the use provisions it negotiates with all of its other tenants. It's critical for the owner to avoid allowing those tenants “any use permitted by law,” because if they decide to start selling the same product as the tenant with the exclusive use, they could use as a defense the fact that the owner essentially gave them permission to sell the same product—as long as it's lawful.

“You have to make sure you exclude from the tenant's permitted use clause a use that would violate a covenant you have with another tenant,” urges Allman.

Avoid Termination as Penalty

It's important to be able to penalize tenants that abuse the use for their space, but in today's market, owners should try to use penalties other than lease termination.

“Termination is the last resort, particularly now,” says Allman. “There aren't many owners out there that are eager to lose tenants,” he says. “It's a tough situation for an owner to be in, because it has to deal with a violation of the lease, but in many cases it's still getting its stream of income; the tenant violated the lease by abusing its use, not by failing to pay the rent—which would make it easier for the owner to make the decision to terminate. Rather, you could have a situation where the tenant is paying the rent on time every month, which would make it a more difficult call for you—you may not want to terminate the lease and cut off that income stream.

“If you don't want to use termination as a penalty, you still have to use provisions with some teeth to them,” says Allman, who suggests requiring an increased security deposit as an alternative. The most important thing to remember, overall, is that if it is a specific type of property, keep the permitted use to that specific type of use, he adds.

And, says Allman, stay away from broad use provisions that would allow the tenant to do anything permitted by law—the tenant's interpretation of “anything” could cause a huge headache for you.

Insider Source

M. Joseph Allman, Esq.: Member, Allman Spry Leggett & Crumpler, P.A., 380 Knollwood St., Ste. 700, Winston-Salem, NC 27103; www.allmanspry.com.

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