In an ideal situation the landlord should never provide a retail tenant with an exclusive right to sell a category of merchandise, or specific product or service. There are a lot of reasons for this, some of which will become apparent in my comments below.

But when the tenant requires an exclusive use right to close the deal, the landlord can also insert reasonable expectations to provide the tenant with this benefit.

Two caveats as we begin. First, I am not offering legal advice. You should always seek out a competent lawyer with experience in commercial leases to provide that advice and draft the required clauses. The second one is that each and every deal is different. Below I present the ‘full meal deal’ as to a desired landlord’s position, but you may not be able to accomplish all of this on each and every negotiation. Some items I personally consider to be more important than others. I’ll tell you why I think these are important. You may have different points and/or points that are more important to your specific situation and the negotiation. So let’s begin.

I believe that all ‘rights’ granted should be conditioned, so the right remains available only so long as the conditions granted in exchange for the right are met. Again, there are a lot of business and legal reasons for this; not the least of which is the right holder’s unilateral benefit to the right. While some may say the offset to the right is the rent received, I don’t concur. For example, I’ve rarely seen a tenant back away from an exclusive use clause for a reduction in rent.

Here are the conditions I think should be in an exclusive use clause:

1. The exclusive use clause should only be proprietary to the specifically named tenant. The main reason for this is that this specific tenant requested the right and has the leverage to obtain it, presumably because it is a highly desirable tenant with a good sales record and excellent covenant.
   

2. The right extends to the tenant only so long as they actually occupy the whole of the premises. No one wants to provide a tenant with a say over the landlord’s merchandising if they aren’t even in the property to benefit from the right. Yes, I’ve seen situations when the tenant went dark, opened across the street and still retained the exclusive rights to the former property, effectively locking out competition (without the landlord going to considerable expense to remedy the situation).
   

3. The tenant must be operating in accordance with the lease and must not be in default at any time. This allows the landlord to claw back this clause, with the appropriate default clause wording. And it follows that a bad tenant shouldn’t receive a one sided benefit.
   

4. There should be a performance provision, such as a sales volume achieved or percent rent being paid. Naturally, a tenant will argue that they need the exclusive to reach the sales volume and ask the questions: “What happens until I reach the threshold? Does that mean I don’t have the right I bargained for?” Ask your lawyer about wording that removes the restriction when sales volume decreases by X percent over Y period of time. Or having the tenant within A% of the break point. This can be ramped up over the term of the lease.
   

5. The restriction should be that the landlord will not “lease” another premises to a tenant with the prohibited use; and not that the landlord will not allow another tenant to ‘use’ their premises for the prohibited use. A lot of legal reasons for this I am sure. But, from a business perspective the landlord is in the business of leasing not monitoring product assortment and how the individual premises are used.
   

6. The restriction should only apply to the primary or principal use of another tenant and not generally. For example, it is entirely different to limit the number of, say, coffee shops (primary use concept) vs. restricting the sale of coffee, which could affect every food outlet in the property as well as grocery, drug and dollar stores selling coffee by the pound.
   

7. Don’t use generic terms to describe restricted uses (ie: coffee shops). Be specific, as suggested below.
   

8. The restriction should be written to be as specific and narrow as possible to address the tenant’s concern; but to also provide merchandising flexibility throughout the term. For example, consider the morphing of the merchandise mix in Target, a chain that now has a significant grocery department. Or grocery stores that now offer prepared, ready to eat hot meals; furniture; clothing and electronic departments and even their own branded in-store banks!
   

9. The restriction should only apply to and affect leasing entered into after the commencement date of the requesting tenant’s lease. Therefore it shouldn’t apply to existing tenants (heirs, assigns, etc.). Unfortunately, I have seen issues when this obvious matter wasn’t covered, particularly when the wording also includes the ‘use’ issue noted in #5 above.
   

10. The restriction should specifically exclude any anchor spaces at all times. No landlord wants to face a mountain of restricted, conflicting uses if they are attempting to backfill an anchor, or sub-anchor space.  
    

11. The landlord should ask if the exclusivity provision should apply to the entire property. The tenant may be happy to limit the total number of similar uses or where they can (or cannot) be located.
    

12. Likewise, if the restriction is on a single product line rather than an entire category (think patio furniture vs. coffee shops) consider my suggestion in number 6 as well as delineating the percentage of the primary use in the other lease. For example, a restriction might convey that the landlord won’t lease to another store selling patio furniture as part of its primary use if the patio furniture constitutes more than X% of the selling area. However, don’t get caught in the trap of a merchant requesting a laundry list of these types of product restrictions. The administration of that type of merchandising logistics would be unmanageable.
    

13. The landlord should also ask if the restriction can be time limited. A tenant may only need the comfort of the clause to kick start sales; such as during the first, say, 5 years of the initial term (my standard default position whenever possible).
    

14. Your lawyer will also want to include wording that nullifies the restriction if it found to contravene any laws or regulations, or changes to them over the term.
    

A retail property’s merchandising mix determines the property’s success overall and on an individual store basis. The owner (or asset manager) must maintain the ability to competitively merchandise their property at all times. Exclusive use rights can inhibit that ability. You now have some ideas on how to meet the merchant’s needs while retaining as much merchandising ability as possible.

 © 2011  Peter D. Morris SCLS, SCSM, SCMD

              Greenstead Group LLC

              pmorris@beyond-the-building.com