The Reserved Use ' A Modern Approach To 'Use Restrictions'

An example may help illustrate this problem. In one recent project, a theater desired to locate in an expansion area of a Lifestyle Center. The theater required limitations on other tenants with respect to sales of bulk candy, popcorn and coffee, the operation of arcades and, of course, the showing of movies or films. Existing leases in the center recognized all Exclusive Uses that had been granted to other tenants at the time the individual leases were executed, but did not all contain a) a provision giving the landlord the right to grant 'springing' Exclusive Uses, or b) a provision reserving to the landlord or other tenants the list of uses required by the theater. Finally, the leases did not adequately protect against alternative uses arising from assignment and subletting, or uses by occupants of outlots which had been sold prior to the time the theater deal was made. Consequently, the theater could not be guaranteed complete protection of its use, and the negotiation of the theater lease required lengthy and expensive negotiations with respect to the other tenants, including, but not limited to, a review of all existing Allowable Use clauses, Prohibited Use clauses, and Exclusive Use clauses.

One way of dealing with this dilemma is to add to the lease form to be used in new centers, a new clause pursuant to which uses are reserved to the landlord (a 'Reserved Use'). (See the sidebar to this article on page 3 for a sample 'Reserved Use Clause.') The nature of the center will necessarily dictate the kinds of uses that are included in the Reserved Use Clause. For example, Reserved Uses in a neighborhood grocery center may vary widely from those that would be appropriate for a Lifestyle Center or a Value Mega-mall. A typical clause for a Value Mega-mall, selected because of its rather all-encompassing nature, is provided in the box on page 3. The most important point to note, however, is that these particular uses are being selected by the landlord as ones that the landlord may elect to allow in the center, but only by such occupants or tenants as the landlord may determine is appropriate, from time to time during the life of the center.

This is not to suggest that no other tenants will have input in this decision. For example, some large department stores may protect some portions of the center from uses that are included on the Reserved Use List. The primary advantage to this approach is that the landlord can make these decisions on a case-by-case basis with assurance that it has reserved the right to protect each new tenant's rights, while also having the flexibility to make those decisions as the tenant mix develops, as all of the facts become known, and the center becomes fully occupied.

The use of a Reserved Use Clause does not mean that there is no need for a declaration of restrictions, because a well-designed declaration of restrictions will address many issues far beyond the use clause. However, these two approaches, used in conjunction, often can lead to shorter and simpler lease negotiations, give comfort to landlords, tenants, lenders, and future owners that the shopping center is being operated as a cohesive use unit, and help ensure that the center will retain its value in the marketplace over an extended length of time.

Dale E. Ahearn is a Member of Frost Brown Todd LLC and a member of the firm's Executive Committee. A substantial portion of his practice involves representing developers and lenders in commercial, office, and industrial developments in Kentucky and many other states. He has worked on the development of several mixed use office and commercial developments. He has also worked on the acquisition and development of many large shopping centers.

SECTION D: Reserved Uses

• Grocery store or supermarket (ie, a store used primarily for the sale and display of food, household paper products, kitchen accessories [aluminum foil, trash bags, etc.] and other such similar items).
• Drug store or pharmacy (ie, a store used primarily for the sale and display of drugs, pharmaceuticals, health and beauty aids, and other such similar items).
• Toy store (ie, a store used primarily for the sale and display of toys, games and other such entertainment items).
• Full-line sporting goods store (ie, a store used primarily for the sale of sports equipment, sports apparel and/or sports-related books), or a store carrying as one of its primary product lines hunting, fishing, camping, golf or boating equipment or recreational vehicles.
• Electronics store (ie, a store used primarily for the sale and display of audio equipment [stereos, compact disc players, radios, etc.], video equipment [televisions, video cassette recorders, video cameras, etc.], computers, computer software, computer games, and/or other such similar items and/or accessories for any of the foregoing).
• Hardware store or home improvement store (ie, a store used primarily for the sale and display of home improvement items such as paint, wallpaper, lumber, kitchen cabinets, bathroom cabinets, plumbing fixtures and materials, garden tools, and/or other such similar items).
• Furniture store (ie, a store used primarily for the sale and display of furniture, home furnishings and related accessories).
• Bookstore (including any store in which more than 500 square feet of GLA is used for the sale and display of books and magazines and/or other similar items).
• Record/music store (including any store in which more than 500 square feet of GLA is used for the sale and display of records, cassettes, tapes, compact discs, and/or other similar music products, or any combination thereof).
• A store dedicated to the sale of musical instruments and/or sheet music; provided, however, that the foregoing restriction shall not apply to i) the incidental sale of sheet music by any music store or book store in the Shopping Centre, or ii) the sale of musical instruments and/or sheet music in an area no larger than five hundred (500) square feet of floor area.
• A store selling primarily a variety of linens, domestics and bath accessories (including, but not limited to, sheets, bedspreads, blankets, comforters, pillows and pillow covers, window treatments, towels, shower curtains, toilet seats and other bed and bath accessories).
• Wholesale, off-price or discount jewelry store.
• Motion picture theater (including, without limitation, any IMAX-, IWERKS-, or Showscan-type theater or other similar large format theater, and/or other similar entertainment uses).
• Facility used for any theatrical purpose [whether 'live' or not], sporting events venue [whether live or telecast], or motion/seat or ride/simulator theater; provided that Tenant shall be permitted to feature live bands.
• Retail 'studio' stores primarily engaged in the sale of licensed merchandise bearing studio or media company logos, animated figures or cartoon characters or phrases, pictures, likenesses or the like).
• Ice skating or roller skating rink, miniature golf course, gambling establishment, or other similar sports and/or recreation facility, except to the extent included in Tenant's Permitted Use.
• Housewares store (ie, a store wherein more than fifty percent (50%) of the space is used for, or more than fifty percent (50%) of the gross sales thereof are derived from, the sale of wicker items, silk flowers, silk flower arrangements, table-top glassware or dinnerware).
• A store used primarily for the sale of tabletop products, including (but not limited to) glassware, flatware, crystalware, ceramics, dinnerware, giftware and cookware, except for the incidental sale of such items.
• Environmental and/or wildlife themed restaurant, entertainment and/or retail facility, such as, but not limited to, a 'Rainforest Cafe' format.
• Brew-pub style restaurant that engages in the on-premises production of microbrewery beers.
• Garden shop or nursery.
• Fitness center, health spa.

SECTION X: Reserved Uses.

Tenant covenants and agrees that under no circumstances shall the Leased Premises be used for any of the 'Reserved Uses' identified in Exhibit 'D' attached hereto and incorporated herein by this reference. Further, notwithstanding Section ____ above, and whether or not in connection with the uses permitted in the Leased Premises, none of the following businesses or activities shall be carried on in the Leased Premises: a) supermarket; b) department store, which for purposes of this Lease shall mean any full line department stores such as (but not limited to) Sears and Penney's, and discount department stores such as (but not limited to) Wal-Mart, primarily engaged in the retail sales of an extensive depth and breadth of a general line of merchandise, but not including clearance, outlet or catalogue stores of any department store or other retailer; and c) no partitioning or division of the Leased Premises shall be made which results in a store or premises having an area of 1,995 square feet of floor area or less.

Most modern leases contain one or more paragraphs addressing the use of the premises. Pursuant to these paragraphs the landlord and tenant agree, among other things, that the tenant is entitled to use the leased premises for one or more specified uses, an 'Allowable Use.' The parties may also agree that certain uses, 'Obnoxious or Prohibited Uses,' would be inappropriate for the tenant space or for any other space in the shopping center occupied by another tenant. In shopping centers where one or more tenants are acting as the initial anchor, that tenant will frequently require the landlord to agree not to let any other occupant have the right to use any portion of the center for a specified use (an 'Exclusive Use'). Sometimes the exclusive is coterminous with the anchor tenant's Allowable Use, but frequently it will be more narrowly drafted to include only a portion of the Allowable Use. In shopping centers where the initial anchor is a grocery store or other readily definable use and where the tenant has significant bargaining power, this process can be quite simple and, with the use of a well-drafted declaration of restrictions, can be applied with relative ease.

The situation becomes much more complicated, however, in the regional centers commonly known in the industry as 'Lifestyle Centers' and 'Value Mega-mall' developments.

The approach described above can lead to very complicated and difficult analysis and negotiations as the project grows in size and more tenants are added. This occurs because a) these developments typically have regional or national retailers joining the tenant mix at various times throughout the development process, and b) these new tenants will have their own specific requirements with respect to Allowable Uses, Exclusive Uses, and Prohibited Uses. Furthermore, some uses may be acceptable, or even attractive uses for co-tenants, but only if they are located in portions of the project acceptable to the other tenants.

An example may help illustrate this problem. In one recent project, a theater desired to locate in an expansion area of a Lifestyle Center. The theater required limitations on other tenants with respect to sales of bulk candy, popcorn and coffee, the operation of arcades and, of course, the showing of movies or films. Existing leases in the center recognized all Exclusive Uses that had been granted to other tenants at the time the individual leases were executed, but did not all contain a) a provision giving the landlord the right to grant 'springing' Exclusive Uses, or b) a provision reserving to the landlord or other tenants the list of uses required by the theater. Finally, the leases did not adequately protect against alternative uses arising from assignment and subletting, or uses by occupants of outlots which had been sold prior to the time the theater deal was made. Consequently, the theater could not be guaranteed complete protection of its use, and the negotiation of the theater lease required lengthy and expensive negotiations with respect to the other tenants, including, but not limited to, a review of all existing Allowable Use clauses, Prohibited Use clauses, and Exclusive Use clauses.

One way of dealing with this dilemma is to add to the lease form to be used in new centers, a new clause pursuant to which uses are reserved to the landlord (a 'Reserved Use'). (See the sidebar to this article on page 3 for a sample 'Reserved Use Clause.') The nature of the center will necessarily dictate the kinds of uses that are included in the Reserved Use Clause. For example, Reserved Uses in a neighborhood grocery center may vary widely from those that would be appropriate for a Lifestyle Center or a Value Mega-mall. A typical clause for a Value Mega-mall, selected because of its rather all-encompassing nature, is provided in the box on page 3. The most important point to note, however, is that these particular uses are being selected by the landlord as ones that the landlord may elect to allow in the center, but only by such occupants or tenants as the landlord may determine is appropriate, from time to time during the life of the center.

This is not to suggest that no other tenants will have input in this decision. For example, some large department stores may protect some portions of the center from uses that are included on the Reserved Use List. The primary advantage to this approach is that the landlord can make these decisions on a case-by-case basis with assurance that it has reserved the right to protect each new tenant's rights, while also having the flexibility to make those decisions as the tenant mix develops, as all of the facts become known, and the center becomes fully occupied.

The use of a Reserved Use Clause does not mean that there is no need for a declaration of restrictions, because a well-designed declaration of restrictions will address many issues far beyond the use clause. However, these two approaches, used in conjunction, often can lead to shorter and simpler lease negotiations, give comfort to landlords, tenants, lenders, and future owners that the shopping center is being operated as a cohesive use unit, and help ensure that the center will retain its value in the marketplace over an extended length of time.

Dale E. Ahearn is a Member of Frost Brown Todd LLC and a member of the firm's Executive Committee. A substantial portion of his practice involves representing developers and lenders in commercial, office, and industrial developments in Kentucky and many other states. He has worked on the development of several mixed use office and commercial developments. He has also worked on the acquisition and development of many large shopping centers.

SECTION D: Reserved Uses

• Grocery store or supermarket (ie, a store used primarily for the sale and display of food, household paper products, kitchen accessories [aluminum foil, trash bags, etc.] and other such similar items).
• Drug store or pharmacy (ie, a store used primarily for the sale and display of drugs, pharmaceuticals, health and beauty aids, and other such similar items).
• Toy store (ie, a store used primarily for the sale and display of toys, games and other such entertainment items).
• Full-line sporting goods store (ie, a store used primarily for the sale of sports equipment, sports apparel and/or sports-related books), or a store carrying as one of its primary product lines hunting, fishing, camping, golf or boating equipment or recreational vehicles.
• Electronics store (ie, a store used primarily for the sale and display of audio equipment [stereos, compact disc players, radios, etc.], video equipment [televisions, video cassette recorders, video cameras, etc.], computers, computer software, computer games, and/or other such similar items and/or accessories for any of the foregoing).
• Hardware store or home improvement store (ie, a store used primarily for the sale and display of home improvement items such as paint, wallpaper, lumber, kitchen cabinets, bathroom cabinets, plumbing fixtures and materials, garden tools, and/or other such similar items).
• Furniture store (ie, a store used primarily for the sale and display of furniture, home furnishings and related accessories).
• Bookstore (including any store in which more than 500 square feet of GLA is used for the sale and display of books and magazines and/or other similar items).
• Record/music store (including any store in which more than 500 square feet of GLA is used for the sale and display of records, cassettes, tapes, compact discs, and/or other similar music products, or any combination thereof).
• A store dedicated to the sale of musical instruments and/or sheet music; provided, however, that the foregoing restriction shall not apply to i) the incidental sale of sheet music by any music store or book store in the Shopping Centre, or ii) the sale of musical instruments and/or sheet music in an area no larger than five hundred (500) square feet of floor area.
• A store selling primarily a variety of linens, domestics and bath accessories (including, but not limited to, sheets, bedspreads, blankets, comforters, pillows and pillow covers, window treatments, towels, shower curtains, toilet seats and other bed and bath accessories).
• Wholesale, off-price or discount jewelry store.
• Motion picture theater (including, without limitation, any IMAX-, IWERKS-, or Showscan-type theater or other similar large format theater, and/or other similar entertainment uses).
• Facility used for any theatrical purpose [whether 'live' or not], sporting events venue [whether live or telecast], or motion/seat or ride/simulator theater; provided that Tenant shall be permitted to feature live bands.
• Retail 'studio' stores primarily engaged in the sale of licensed merchandise bearing studio or media company logos, animated figures or cartoon characters or phrases, pictures, likenesses or the like).
• Ice skating or roller skating rink, miniature golf course, gambling establishment, or other similar sports and/or recreation facility, except to the extent included in Tenant's Permitted Use.
• Housewares store (ie, a store wherein more than fifty percent (50%) of the space is used for, or more than fifty percent (50%) of the gross sales thereof are derived from, the sale of wicker items, silk flowers, silk flower arrangements, table-top glassware or dinnerware).
• A store used primarily for the sale of tabletop products, including (but not limited to) glassware, flatware, crystalware, ceramics, dinnerware, giftware and cookware, except for the incidental sale of such items.
• Environmental and/or wildlife themed restaurant, entertainment and/or retail facility, such as, but not limited to, a 'Rainforest Cafe' format.
• Brew-pub style restaurant that engages in the on-premises production of microbrewery beers.
• Garden shop or nursery.
• Fitness center, health spa.

SECTION X: Reserved Uses.

Tenant covenants and agrees that under no circumstances shall the Leased Premises be used for any of the 'Reserved Uses' identified in Exhibit 'D' attached hereto and incorporated herein by this reference. Further, notwithstanding Section ____ above, and whether or not in connection with the uses permitted in the Leased Premises, none of the following businesses or activities shall be carried on in the Leased Premises: a) supermarket; b) department store, which for purposes of this Lease shall mean any full line department stores such as (but not limited to) Sears and Penney's, and discount department stores such as (but not limited to) Wal-Mart, primarily engaged in the retail sales of an extensive depth and breadth of a general line of merchandise, but not including clearance, outlet or catalogue stores of any department store or other retailer; and c) no partitioning or division of the Leased Premises shall be made which results in a store or premises having an area of 1,995 square feet of floor area or less.