Exclusive Use Provisions: Practical Considerations for Landlord's Counsel

It is important for the landlord's counsel to consider what should happen if a tenant ceases selling some or all of the items for which it was granted an exclusive right to sell. Not only may it seem fair for a landlord to expect a tenant to sell its exclusive items, but also at times it may be critical for such items to be sold at the shopping center in order for the shopping center to have a proper merchandise mix. Though most retailers will not agree to an operating co-venant (ie, promising to operate the store), a landlord can often obtain a provision that limits or terminates a tenant's exclusive use if the tenant stops selling some or all of the exclusive items. Common points of negotiation usually include the extent to which the tenant must stop selling the exclusive items (ie, completely or as to any one particular item) and for how long (ie, immediately, for 6 months, etc.) before the tenant's exclusive would be lost or limited.

The landlord will want a provision that allows for the situation to be addressed on an item-by-item basis and in a timely manner, while the tenant will want the provision not to apply during any 'excused periods' during which the tenant is permitted to cease or limit operations (eg, store remodeling). Another point of negotiation is whether the tenant's exclusive should be reinstated if the tenant again sells one or more of the previously protected items. In situations where the tenant requires the right to have the exclusive reinstated, the landlord's counsel should provide that the reinstated exclusive will not apply to new leases entered into during the period of time that the exclusive was not in effect or to any existing tenant that commenced selling one or more of the previously protected items while the exclusive was not in effect.

Assignees and Subtenants

Most tenants will want the benefit of their exclusive to run in favor of assignees or subtenants. In turn, the landlord, at a minimum, will want the same operational provisions described above to apply to assignees and subtenants. That is, the exclusive items must be sold by the tenant or the permitted occupants of the premises. In addition, in order for the benefit of the exclusive use provision to run in favor of a subtenant, the landlord's counsel should provide that the sublease covers some minimum square footage relative to the original premises (eg, at least 75% of the original premises).

Violation of Exclusive Use Provision

A tenant will consider a violation of its exclusive use provision to be quite serious and will want, among its remedies, the right to pay an alternate rent in lieu of the base rent provided for in the lease (eg, 50% of normal base rent or 2% of gross sales). The landlord's counsel should distinguish between situations where the landlord did not include the tenant's exclusive in the other tenant's lease and those where the landlord did include it. In the case where the landlord failed to limit the use of another tenant, the landlord's counsel is at a disadvantage to argue for a limitation of the tenant's remedies. That being said, the landlord's counsel should attempt to provide for some period after which the tenant either resumes paying full rent or elects to terminate its lease.

As serious as it may be for the tenant to elect to terminate the lease, it is often better than having a major tenant pay a substantially reduced rent for an extended period of time. In the case where the breach of the exclusive use provision is caused by a tenant whose lease was made subject to the exclusive use provision, the landlord's counsel should limit the landlord's obligations as a result of such breach to the landlord's using commercially reasonable efforts to enforce the lease against the breaching tenant to cause such tenant to cease its violation. The tenant whose exclusive has been breached can be granted the right to enforce, at its expense, the exclusive use provision against the breaching tenant. The tenant should not have any remedy against the landlord unless the landlord fails to enforce the other lease as previously described.

Conclusion

By their nature, exclusive use provisions can be quite complicated and can, for a landlord, significantly affect the future leasing and operations of a shopping center. These provisions should be negotiated by landlord's counsel in a manner that allows for the tenant to obtain the protection it requires while allowing the landlord the flexibility it needs to lease the shopping center effectively and ensure its future smooth operation. The key for the landlord's counsel is to take a thoughtful and practical approach to the negotiation of these provisions by considering the landlord's own leasing plan, the needs of the tenants, and the potential interaction of all of the expected exclusives. With these considerations in mind, the landlord's counsel should be able to provide for reasonable limits and controls on the necessary exclusive use provisions in order to ensure the successful leasing of the shopping center.

Dominic J. De Simone is a partner in the Philadelphia office of Ballard Spahr Andrews & Ingersoll, LLP, and is a member of the firm's Real Estate Leasing, Real Estate Development, Real Estate Finance and Transactional Finance practice groups. He practices general real estate law and has extensive experience in real estate finance, acquisition, sale, development, and leasing transactions, including retail development and leasing transactions on behalf of both landlords and
tenants.

Part Two of a Two-Part Series

Part One of this article discussed the scope of the exclusive use provision, reasonable exclusions from the provision, and future exclusives. The conclusion addresses ceasing operations, assignees and subtenants, and violation of the exclusive use provision.

Ceasing Operations

It is important for the landlord's counsel to consider what should happen if a tenant ceases selling some or all of the items for which it was granted an exclusive right to sell. Not only may it seem fair for a landlord to expect a tenant to sell its exclusive items, but also at times it may be critical for such items to be sold at the shopping center in order for the shopping center to have a proper merchandise mix. Though most retailers will not agree to an operating co-venant (ie, promising to operate the store), a landlord can often obtain a provision that limits or terminates a tenant's exclusive use if the tenant stops selling some or all of the exclusive items. Common points of negotiation usually include the extent to which the tenant must stop selling the exclusive items (ie, completely or as to any one particular item) and for how long (ie, immediately, for 6 months, etc.) before the tenant's exclusive would be lost or limited.

The landlord will want a provision that allows for the situation to be addressed on an item-by-item basis and in a timely manner, while the tenant will want the provision not to apply during any 'excused periods' during which the tenant is permitted to cease or limit operations (eg, store remodeling). Another point of negotiation is whether the tenant's exclusive should be reinstated if the tenant again sells one or more of the previously protected items. In situations where the tenant requires the right to have the exclusive reinstated, the landlord's counsel should provide that the reinstated exclusive will not apply to new leases entered into during the period of time that the exclusive was not in effect or to any existing tenant that commenced selling one or more of the previously protected items while the exclusive was not in effect.

Assignees and Subtenants

Most tenants will want the benefit of their exclusive to run in favor of assignees or subtenants. In turn, the landlord, at a minimum, will want the same operational provisions described above to apply to assignees and subtenants. That is, the exclusive items must be sold by the tenant or the permitted occupants of the premises. In addition, in order for the benefit of the exclusive use provision to run in favor of a subtenant, the landlord's counsel should provide that the sublease covers some minimum square footage relative to the original premises (eg, at least 75% of the original premises).

Violation of Exclusive Use Provision

A tenant will consider a violation of its exclusive use provision to be quite serious and will want, among its remedies, the right to pay an alternate rent in lieu of the base rent provided for in the lease (eg, 50% of normal base rent or 2% of gross sales). The landlord's counsel should distinguish between situations where the landlord did not include the tenant's exclusive in the other tenant's lease and those where the landlord did include it. In the case where the landlord failed to limit the use of another tenant, the landlord's counsel is at a disadvantage to argue for a limitation of the tenant's remedies. That being said, the landlord's counsel should attempt to provide for some period after which the tenant either resumes paying full rent or elects to terminate its lease.

As serious as it may be for the tenant to elect to terminate the lease, it is often better than having a major tenant pay a substantially reduced rent for an extended period of time. In the case where the breach of the exclusive use provision is caused by a tenant whose lease was made subject to the exclusive use provision, the landlord's counsel should limit the landlord's obligations as a result of such breach to the landlord's using commercially reasonable efforts to enforce the lease against the breaching tenant to cause such tenant to cease its violation. The tenant whose exclusive has been breached can be granted the right to enforce, at its expense, the exclusive use provision against the breaching tenant. The tenant should not have any remedy against the landlord unless the landlord fails to enforce the other lease as previously described.

Conclusion

By their nature, exclusive use provisions can be quite complicated and can, for a landlord, significantly affect the future leasing and operations of a shopping center. These provisions should be negotiated by landlord's counsel in a manner that allows for the tenant to obtain the protection it requires while allowing the landlord the flexibility it needs to lease the shopping center effectively and ensure its future smooth operation. The key for the landlord's counsel is to take a thoughtful and practical approach to the negotiation of these provisions by considering the landlord's own leasing plan, the needs of the tenants, and the potential interaction of all of the expected exclusives. With these considerations in mind, the landlord's counsel should be able to provide for reasonable limits and controls on the necessary exclusive use provisions in order to ensure the successful leasing of the shopping center.

Dominic J. De Simone is a partner in the Philadelphia office of Ballard Spahr Andrews & Ingersoll, LLP, and is a member of the firm's Real Estate Leasing, Real Estate Development, Real Estate Finance and Transactional Finance practice groups. He practices general real estate law and has extensive experience in real estate finance, acquisition, sale, development, and leasing transactions, including retail development and leasing transactions on behalf of both landlords and
tenants.