Use 'First-Run' Language in Movie Theater's Use Clause

If you own a shopping center or mall, you know that the success of your tenants is connected to the amount of foot traffic that you can bring in. Movie theaters are a great example of one type of tenant that attracts crowds. But not all movie theaters show films that are of interest to a wide variety of moviegoers. For example, a movie theater that shows only independent films won’t draw as diverse a crowd as one that shows blockbusters and mainstream pictures.

To make sure that the whole center can benefit from a movie theater tenant, make sure that it runs movies that draw a crowd. You can do this by carefully drafting the use clause in your lease.

Understand Tenant’s Motivation

The use clause in some leases may say only that the tenant will operate as a movie theater and may not require the movies to be new—that is, “first-run.” But playing first-run movies is more beneficial for other tenants and your percentage rent. So draft the use clause to require this.

However, it’s not that simple from a movie theater tenant’s perspective. A tenant might want to show second-run movies. There are several reasons for this. First, it’s sometimes difficult to get first-run movies from a distributor. So the tenant may have to resort to second-run movies rather than keep some of its screens dark. Second, it’s less expensive for the tenant to show second-run movies, and the tenant may be anxious to keep its costs down. Or, some tenants may want to show second-run movies for tactical reasons—not out of necessity.

For example, suppose a movie theater has a continuous operations clause and a noncompetition clause in its lease. The theater is part of a chain that built another movie theater within the noncompete area. As a result, the chain has to pay percentage rent to the center on both theaters. The chain asks the owner to reduce its percentage rent on the two theaters, but the owner refuses. So the chain threatens to show only second-run movies at the first theater to decrease the theater’s attendance and the traffic to the rest of the center. The chain could do this if there’s no clause in the lease that the owner could use to stop it.

Use Specific Language

You can avoid this result—which can make the difference between your center being financially viable or not—by requiring first-run movies in your tenant’s use clause. To do this, ask your attorney about adding the following language to your lease:

Model Lease Language

As a material inducement for Landlord to enter into this Lease, Tenant hereby covenants and agrees to operate as a first-class multiplex movie theater and to show only so-called first-run motion pictures, as opposed to so-called second-run or sub-run motion pictures, at all times, on each of its screens in the Premises, during Tenant’s operating hours.

Compromise for Second-Run Success

If the tenant argues that some second-run movies are profitable (for example, updated versions of old movies with a “cult” following), so they won’t hurt business at your center, you can compromise to meet the tenant’s need to show second-run movies and your desire for it to show first-run movies. Here are two approaches:

Offer choice of “comparable” manner. Require the tenant to operate in a manner comparable either to the other primarily first-run theaters in your geographic area or to the other theaters in its chain. That means your tenant can show second-run movies only if the other theaters in the area or in its chain are also showing second-run movies. And if the other theaters in the area or in the chain are showing only first-run movies, then your tenant must also show first-run movies. To set up this compromise, add the following language to the lease where you discuss the tenant’s primary use.

Model Lease Language

…a first-class multiplex movie theater consistent with a first-class retail/entertainment center for presentation of motion pictures similar to [choose one: other primarily first-run theaters in (insert geographic location, e.g., North Potomac) Area or other theaters in the Tenant’s chain].

Limit second-run screens. With enough first-run movies to fill all of its screens being hard to find, a multiplex may complain about not being allowed to show second-run movies if the other theaters in the area or in its chain are showing only first-run movies. You can compromise by letting the tenant show second-run movies on a few of its screens—say, one screen for each 10 screens the tenant operates at your center. You can add the limit to your lease by using the following language, placed after the Model Lease Language that requires the tenant to operate in a manner comparable to other theaters in the area or in its chain:

Model Lease Language

…provided, however, that Tenant shall have the right to show so-called second-run or sub-run motion pictures on not more than [insert #, e.g., two (2)] screens in the Premises at the same time.