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Out of Bounds: Radius Restrictions in Shopping Center Leases
A common restrictive covenant in shopping center leases is the so-called “radius restriction,” a lease provision that prohibits a tenant from opening a competing establishment within a proscribed distance from the present location. Typically, a radius restriction goes hand in hand with a percentage rent provision, which allows the landlord to participate in the tenant's gross sales after a certain threshold or “break point” is achieved.
Landlords argue that the radius restriction is necessary to prevent a shopping center tenant from operating from a nearby location to the detriment of the landlord and its center. The presumption by landlords is that a competing establishment within a certain distance from their shopping center would divert customers away from the center and result in a dilution of percentage rent. On the other hand, tenants argue that a radius restriction does not protect either the landlord's competitive position or percentage rents, but is anticompetitive and prevents them from acting aggressively in a quickly-expanding market (which, in turn, hinders their ability to compete vigorously in the marketplace).
The arguments surrounding radius restrictions are heightened in rapidly growing and increasingly competitive market areas. In light of the potential impact on both landlord and tenant, each of the terms and conditions in a radius restriction requires careful negotiation and drafting to ensure the most effective and enforceable restriction possible.
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