Tenant's Exclusive Use Provision Applied to Other Buildings

Facts: A fast-food restaurant had an exclusive right to sell “sandwiches and subs” in a shopping center that consisted of three buildings (Building A, Building B, and Building C). The fast-food restaurant tenant was located in Building A. Its exclusive use provision stated: “Throughout the Term … Tenant shall have the exclusive right in the Shopping Center to engage in the sale of delicatessen and submarine type sandwiches.” Knowing this, the shopping center's owners allowed a computer services company in Building B to become an Internet café that sold Internet access, drinks, and food, including sandwiches.

The fast-food restaurant tenant sold its business and assigned its lease—including the exclusive use provision—to a new tenant. It did not discuss the fact that the Internet café was serving sandwiches—the sales of which had escalated to a high of 30 percent to 50 percent of its total sales over several months.

When the new tenant discovered that the Internet café was selling sandwiches, it sued the owners, claiming that the exclusive use provision in its assigned lease had been breached by the sandwich sales in Building B. The owners argued that the exclusive use provision did not apply to the Internet café, only competing businesses in Building A.

The court ruled that the new tenant's exclusive use provision extended beyond Building A to include the Internet café in Building B, prohibiting it from selling sandwiches. The owners appealed.

Decision: The appeals court upheld the trial court's decision in favor of the new tenant.

Reasoning: The appeals court stated that the new tenant's lease, the layout of the shopping center, and the purpose of the exclusive use provision were evidence that the provision applied to Building B.

Under the lease, the exclusive use provision applied “in the Shopping Center.” The appeals court pointed out that several lease provisions defined “Shopping Center” to include all three buildings. For example, the “Shopping Center” had only one name and address listed for the all three buildings in the lease. And the site plan for the “Shopping Center” included all three.

The appeals court decided that the term “Shopping Center” must be interpreted to apply to all three buildings, because to rule otherwise would undermine the “full force and effect” language of the exclusive use provision—that is, to limit the new tenant's competition in the shopping center—by permitting the owners to lease space in Building B to a competitor that could devastate the new tenant's business.

The purpose of an exclusive use provision is to protect a tenant by reducing the prospect of future competition within the same shopping center, the appeals court noted.

• Garcha et al. v. Central Plaza-Union City, L.P., December 2009

LESSON LEARNED: Restrict Portion of Retail Complex Covered by Tenant's Exclusive

Exclusive use provisions were once considered essential for a tenant in a retail complex, points out Louisiana real estate attorney Marie A. Moore. Now that retail chains are filing for bankruptcy protection and closing stores, tenants are more concerned about being the only tenant left standing, and are focusing more on cotenancy provisions than on exclusive use rights, she notes. However, exclusive use provisions remain important to many tenants, particularly food court tenants that specialize in particular products. These tenants would lose sales if the owner permitted another tenant to sell the same product in a nearby space.

“Owners can grant these rights if they craft the tenant's exclusive use provision carefully,” warns Moore. First, the owner should identify the products for which the tenant really needs protection. Although an exclusive with respect to a fairly discrete product such as “pizza” may not cause trouble in the future, the owner should avoid granting an exclusive with respect to a broad category of products, such as sandwiches, soft drinks, or cookies. Today, an owner may not even wish to grant an exclusive with respect to wraps and smoothies since many other tenants may sell these items as a minor part of their broader product mix.

“To give a tenant comfort with respect to its specialty while maintaining the right to lease to a tenant with a broad range of offerings, the owner should specify that the exclusive use provision will not be violated by another tenant's incidental sale of the same type of product,” suggests Moore. For example, a provision granting a tenant the exclusive right to sell cookies should state that the owner will not be in violation of the exclusive if another tenant also sells cookies as a minor part its business. The tenant may be satisfied if it is assured that cookies cannot account for more than 5 percent of any other tenant's sales.

Second, the owner can restrict the portion of the retail complex covered by the tenant's exclusive, notes Moore. If a retail complex is large and contains several food courts, then the owner should restrict the exclusive to the particular food court in which the tenant is located. The owner may also be able to stipulate that the exclusive covers only a particular building or wing of the retail complex.

“When an owner grants a tenant an exclusive, however, it needs to remain aware of the exclusive when it enters into other leases,” stresses Moore. “Even if the owner has limited the product for which the exclusive was granted and the portion of the retail complex affected by the exclusive, it must remember the tenant's rights and incorporate the exclusive as a use prohibition in any other lease of the same type in the affected portion of the retail complex,” she notes.