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Leasing Covenant Loopholes

By Camilla Titterington
April 27, 2007

Protecting the success of its business is of prime concern to any retailer client in the course of shopping center lease negotiations. A protection commonly found in leases is an exclusive use right granting a tenant either the exclusive right to sell a particular product in a center or the exclusive right to operate a particular business. An exclusive right in a lease is violated any time an occupant of the shopping center fails to comply with its restrictive terms. As such, it places a burden on the landlord to administer and police a tenant's exclusive throughout the term of the lease. Landlords have, therefore, started to move away from granting exclusive rights to giving leasing covenants ' a provision intended to give a retailer the protection for its use while removing the administrative burden from the landlord in enforcing exclusives. However, is the retailer really getting the benefit of protecting its use from future tenants? Below are some considerations to keep in mind when drafting a leasing covenant for a tenant.

Before looking at some protections to be added to a leasing covenant, it is important to clearly understand the differences between an exclusive and a leasing covenant. In its most common form, a leasing covenant is a promise to the tenant by the landlord not to lease to a 'direct competitor.' The primary distinction between an exclusive use and a leasing covenant is that a covenant is made by the landlord only and is only binding on the landlord. An exclusive is binding on all future tenants and the burden is on the landlord to enforce it against future tenants. Unless a leasing covenant is carefully negotiated, a retailer does not have any of the following exclusive use protections in a leasing covenant scenario: 1) remedy in the event of a rogue tenant violation; 2) protection on second-generation space (i.e., assignments or subleases by tenants to a direct competitor); 3) protection for specific classes of use; and 4) obviously, a right to an exclusive if one is granted to another tenant in the future.

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