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Protecting and Attacking Exclusive Use Provisions in Retail Leases
Exclusive use provisions form the foundation of the economic relationships between tenants and landlords in shopping centers across the United States. Landlords make use of these provisions to obtain the right tenant mix in their shopping centers as well as to demand premium rents from the tenants that desire these economic protections. Tenants desire exclusive use provisions to gain the competitive advantages and protections that such provisions afford to their products and services. With the proliferation of so-called 'big box' retailers in shopping centers and the phenomena of over-retailing in communities throughout the United States, exclusive use provisions are increasingly coming under attack. In Tippecanoe Assocs. II, LLC v. Kimco Lafayette 671, Inc., 829 N.E.2d 512 (Ind. 2005), the Supreme Court of Indiana entered the fray on this issue with a decision that affects the way these provisions should be drafted. This article, through a discussion of the court's decision in Tippecanoe Assocs. II, LLC, describes how exclusive use provisions are coming under attack and practical ways to draft around these issues and to protect landlords and tenants with exclusive use provisions in retail leases.
The Decision in Tippecanoe
What occurred in Tippecanoe Assocs. II, LLC is that the validity of an exclusive use provision was contested on the basis that the provision constituted an unreasonable restraint on trade. An exclusive use provision may be invalidated if it can be shown that the provision prohibits an overbroad type of activity or if the provision is excessively burdensome to one of the parties to the lease or to the public. In Tippecanoe Assocs. II, LLC, Kroger Company ('Kroger') assigned three leases in Tippecanoe County, IN, to Pay-Less Super Markets ('PayLess'). One of the leases (the 'Kroger Lease'), located in the Sagamore Shopping Center (the 'Center'), contained an exclusive use provision that prevented the owner of the Center from leasing space to another grocery store. At the time that PayLess took the assignment of the Kroger Lease, PayLess already operated two other grocery stores within two miles of the Center. PayLess, as the Indiana Supreme Court put it, 'cheerfully conceded' that it had no intention of operating a grocery store in the Center and acquired the lease to exclude competitors from the location. While PayLess did not operate a grocery store in the space formerly occupied by Kroger, PayLess paid rent and subleased the space to an appliance store. In 2000, 18 years after PayLess took the assignment of the space from Kroger, the owner of the Center asked the Indiana courts to declare the restrictive covenant unenforceable because the space was not being operated as a grocery store. This was done to allow the owner of the Center to enter into a lease with another grocery store chain in a large space that had become available.
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