Congratulations on landing that national, credit-rated tenant for your shopping center or building! Expect that your new tenant will require assurances that it will be the only one of its kind in your shopping center or building. The lease clause in that case is commonly called an exclusive use provision. Your negotiating leverage with a national tenant is usually such that you will have to give it, but there are ways that you can protect yourself from “giving up the ship.” Consider these five simple tips:
1. Be Specific – Drill down to the granular level to define what your tenant does. Eliminate generalities that might exclude leasing to other viable tenants. For example, instead of saying that the tenant has an exclusive on selling “hot caffeinated drinks,” say that it has the exclusive on the sale of “coffee and the incidental sale of tea and hot chocolate” or something similar. In today’s segmented specialty retail market, we see expanding chains that specialize, for example, in the sale of specific hot drinks, like tea or dessert drinks. Why give Starbucks an exclusive control over all hot drinks sold in your shopping center or building, including tea, when Starbucks only sells tea incidentally? Give yourself the wiggle room you need to allow David’s Tea, for example, to open.
2. Carve-Out Incidental Sales – Assume you’ve secured Starbucks. Now assume a new grocer has expressed interest in your large vacant space due to its proximity to Starbucks. The grocer, however, sells coffee beans, ground and whole. Can it do that in your shopping center while Starbucks has an exclusive on the sale of coffee? The answer is yes if you are careful. Consider allowing the incidental sale of coffee for parties that are not Starbucks’ direct competitors, but limiting the area for such sales to a certain square footage by either number or percentage of the floor area for merchandise displayed on the shelves and in the aisles. This approach should make Starbucks in our example comfortable.
3. Use It or Lose It – Imagine your grocer-tenant “goes dark” (meaning it closes and never reopens), but continues to pay rent. Its exclusive may or may not expire if your lease is unclear. Your grocer-tenant now opens down the block in a new shopping center and blocks you from leasing its former space in your center (or elsewhere in your center) to a new grocer because it’s paying rent and its exclusive arguably remains in effect. To avoid that scenario, your grocer-tenant should lose its exclusive if it goes dark for a continuous period of time, like 180 days. This would not apply to temporary closures for casualty or condemnation repairs, for refitting the space with a new look or for restocking merchandise, provided those situations do not drag on indefinitely.
4. Tenant Remedies – What happens if you forget that you granted an exclusive use to a tenant and sign a lease with a direct competitor? In this case, your lease should require that your exclusive use holding tenant should first give you written notice of your mistake and give you some time to correct your mistake without negative repercussions, if possible. Most retailers should be open to this approach. What happens if you cannot quickly resolve the problem that you created by having your new tenant give up its exclusive because your existing tenant already had one? Consider allowing your exclusive holding tenant to pay less than the full amount of its rent or to shift to an alternative rent where it pays a lesser amount based upon a formula (like a percentage of its monthly sales) for a period of time, rather than giving your exclusive use holding tenant the right to sue you or to terminate your lease almost immediately. What happens, though, if you enter into a lease with another tenant that specifically prohibits that tenant from selling coffee (because of Starbucks), but that tenant still assigns its lease or sublets its space to Caribou Coffee? You should try to negotiate with Starbucks to have the right to enforce the lease without Starbucks having any remedies against you, unless you fail to enforce Starbucks’ exclusive on its behalf. If that does not work, you could try to negotiate with Starbucks to allow Starbucks to enforce its exclusive directly against that rogue tenant.
5. Direct Competitors – Not surprisingly, your exclusive use holding tenant will want to ensure that you do not lease to its direct competitors. Make sure to define those well. For example, assume that your exclusive use holding tenant sells sporting goods. Make your tenant tell you who its direct competitors are and memorialize that in your lease. In our example, state in your lease that your tenant’s competitors include Sports Authority, Sport Chalet and Academy Sports if your tenant is Dick’s Sporting Goods. Furthermore, your tenant may view as its competitors other sports retailers that specialize only in a certain type of gear and equipment, like ski or golf. Make sure to provide that those specialty stores must exceed a certain square footage threshold, like 5,000 square feet, to be considered your tenant’s direct competitors. Finally, make sure to carve-out that other tenants in the shopping center are permitted to assign their leases or sublet their space to direct competitors of your new tenant if their leases predated your new tenant’s lease.
There are other unique considerations that could arise depending upon your specific facts. Be certain to assess what the exact circumstances of your particular situation and draft with those in mind. It is better than having a lease that fails to address those at all. Check back soon for more articles on other retail leasing topics.
See also: Five Ingredients for Negotiating Restaurant Leases in Office Buildings.