<b><i>In the Spotlight:</i></b> Exclusive Use Provisions

The Co-tenant's Perspective

A co-tenant that leases space in an existing shopping center that is already leased to other tenants is at a disadvantage, because the co-tenant does not know which exclusives have been granted to existing tenants, and how an existing tenant or a court may interpret an existing tenant's exclusive use provision.

Determining Which Exclusives Exist

The first of these issues is easily addressed by requiring a landlord to disclose the existing exclusives in a co-tenant's lease. The co-tenant may ask the landlord to include language in its lease to this effect:

Landlord acknowledges that Tenant is entering into this Lease in reliance upon its ability to conduct the Permitted Use without any limitation or restriction on Tenant's ability to operate the Permitted Use by reason of any exclusive provision or contractual restriction or limitation granted to any other party which applies to the Premises or Tenant's use thereof (a “Restriction”). Landlord shall take no action that would impair or limit Tenant's ability to conduct the Permitted Use. Landlord represents to Tenant that Exhibit X contains complete and correct verbatim excerpts of all Restrictions existing as of the date of this Lease and the name of the beneficiary of each Restriction.

Interpreting Existing Exclusives

What if, when the co-tenant reviews Exhibit X, it is concerned that its use might violate one of the exclusives listed on such exhibit? Take, for example, a shoe-store exclusive. Perhaps a co-tenant that leases space in the shopping center after the landlord grants the shoe-store exclusive sells some relatively inexpensive apparel and some higher-end shoes. Shoes are displayed in only 40% of the sales area of the store, but shoe sales represent 60% of gross sales Is the co-tenant in violation of the exclusive that prohibits the lease of any property in the shopping center for use as a shoe store?

The co-tenant can address its concern in a couple of ways. First, it can seek a waiver of the exclusive from the beneficiary of the shoe-store exclusive. A waiver should address the co-tenant's concern, but there is no guarantee that the beneficiary will grant a waiver, and any waiver is sure to take longer and be more limited than the co-tenant would like. Also, if it is unclear whether the exclusive truly applies to the co-tenant's use, the co-tenant might worry that by requesting a waiver, it is suggesting that it believes that it violates the exclusive, and the beneficiary may use such request against the co-tenant in a later lawsuit. The waiver may also be sub-optimal from the landlord's perspective, because the beneficiary may attempt to extract a pound of flesh from the landlord in connection with the waiver.

Another way to address the co-tenant's concern is to require the landlord to indemnify the co-tenant against any claim that the co-tenant has violated the shoe tenant's exclusive. The landlord may be reluctant to grant this indemnity, but as between the landlord (who negotiated the exclusive and should be familiar with its parameters) and the co-tenant (who was not a party to the negotiations), the landlord should be the one who assumes the risk of how the beneficiary will interpret the exclusive. If the landlord agrees to so indemnify the co-tenant, the indemnity should, of course, be conditioned upon the co-tenant not violating the terms of the exclusive, as further defined in the indemnity provision. For example, the indemnity may be drafted as follows:

Landlord shall indemnify, defend and hold Tenant harmless from and against any and all losses, liabilities, damages, obligations, judgments, penalties, claims, charges, costs and expenses (including reasonable architects' and attorneys' fees) (collectively, the “Indemnified Costs”) relating to the enforcement by any party (including Landlord) of the restriction described in Exhibit Y (the “Shoe Store Restriction”), provided, however, that Landlord shall not be obligated to indemnify, defend and hold Tenant harmless from and against any and all Indemnified Costs relating to enforcement by any party (including Landlord) of the Shoe Store Restriction if and to the extent that [more than 50% of Gross Sales are attributable to the sale of shoes in the Premises/more than 50% of the sales area of the Premises is dedicated to the sale of shoes].

In addition to including an indemnity provision pursuant to which the co-tenant is protected against costs and expenses relating to a lawsuit, the co-tenant may also request a termination right ' with reimbursement of its unamortized costs associated with the lease ' in the event the co-tenant is unable to operate its business in its demised premises as a result of any judgment or injunction with respect to the shoe store exclusive.

Almost every exclusive use provision negotiation involves some hand-wringing by both the landlord and the tenant about a so-called “rogue” tenant, i.e. , a tenant who is aware of an exclusive, and brazenly operates its business in violation of the exclusive. Sometimes, though, the issue may be that a co-tenant is simply unable to determine whether the landlord and the beneficiary of the exclusive contemplated that the exclusive would apply to the type of business the later tenant operates. In such a case, the later tenant should either seek a waiver from the beneficiary or request an indemnity from the landlord ' and perhaps a termination right in its lease.

Conclusion

Where exclusives are concerned, an ounce of prevention is truly worth a pound of cure. A landlord's first line of defense should be to offer a tenant a conditional remedy with respect to competing co-tenants rather than to make a covenant regarding competition. If the landlord must make a covenant, the covenant should clearly indicate whether it is intended to be a personal or a real covenant; and if it is a personal covenant, it should explicitly provide that it does not run with the land and it should not be memorialized in a document of record. The lease should further indicate that the remedies set forth in the lease ' which remedies should not include all remedies at law or in equity ' are a beneficiary's sole and exclusive remedies with respect to a violation of the exclusive.

In addition, the lease should prohibit the exclusive's beneficiary from suing co-tenants in the shopping center for a violation of the exclusive. Finally, a co-tenant should request that the landlord disclose all existing exclusives that have been granted to existing tenants, and if the co-tenant is uncertain whether such operations would violate the existing exclusive, the co-tenant should either request a waiver from the beneficiary or request that the landlord indemnify it against claims that its operations violate the exclusive and possibly grant the co-tenant a right to terminate the lease.

Ruth Schoenmeyer is of counsel to Chicago's Pircher, Nichols & Meeks.