Some might suggest this article is more about lease negotiation than lease management. However, I believe proper lease management starts with the negotiation. Because the merchandising of a shopping center is such an important part of its success, the way use clauses are structured becomes an important management item. The use clause should be one of the most managed, non-financial aspects of the leases. After all, it outlines the merchandising and subsequent types of tenants an owner targets for their properties.

Use clauses also become important once any use restrictions, aka exclusivity clauses, are introduced by other tenants. [Please read the article concerning exclusives at advance.beyond-the-building.com]. Note too, that I am approaching this discussion from a business perspective and am not offering legal advice. Please consult a commercial real estate lawyer for any legal questions or direction.

I believe the way to construct a workable use clause is to segment the use into what the tenant is primarily offering and what is ancillary to its main offer. The primary use also gives a sense of the store’s overall concept. The trick is to work with the tenant so they have flexibility within the concept to adjust their merchandise inventory as time goes on, but still remain within the original concept.

The ancillary use should be reserved for uses that support the main use but that may also be common to other uses or could be another’s primary use. For example, consider a better quality hair salon primarily focused on women’s and men’s hair styling. As ancillary to that main concept they may sell hair care products, cut children’s hair and/or offer make-up or nail services. Scheduling all these as ancillary to the main concept allows the salon to provide these, but also gives the owner the option of providing a store that has nail care as its main concept, or a store selling cosmetics or a salon that specializes in children’s hair styling. The concept can then change which makes the management of the property uses more difficult.

If these ancillary uses were part of a general, all-in-one use clause it is conceivable that the original tenant could react to the introduction of a similar but not directly competing business by shifting its focus to meet the new offering head on. If this morphing occurs it has a number of consequences for the center owner:

1. The original concept for the tenant will have changed and perhaps lost.
2. The second shop will be upset with both the other tenant and the landlord, resulting in bad relations.
3. The ability to effectively merchandise the property will be blunted as valuable space and use- inventory will be duplicated, and
4. The landlord may have other problems if there are any exclusivity infractions as a result.

Since the primary use also provides the overall framework for the store’s concept it is important to cast a fence around what that means. There is, for example, a vast merchandising difference between a “woman’s apparel store” and, say, a “woman’s apparel store specializing in petite sizes.”

Whenever possible, my preference is to attempt to narrowly define the primary use as much as possible but give the tenant the latitude to come back to me to request merchandising changes during the term. This second look allows me to consider the ever evolving merchandise mix in the property at the time of the request and to review any potential conflicts. I prefer that to attempting to anticipate what may occur two or three years into the term.

The Greenstead Group LLC provides asset management and international consultancy services to real estate owners around the world. To learn more contact Peter Morris

© 2011  Peter D. Morris SCLS, SCSM, SCMD

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