What’s the Use? Use Clauses in Commercial Leasing

Most retailers and landlords will have seen the recent announcement by Loblaws wherein they stated that they were going to start selling fresh food in certain Shoppers Drug Mart locations, the perfect example of the evolution of a retailer.

In the lease context, the evolution of a retailer is not something that is necessarily a welcome phenomenon. Landlord’s and other tenants prefer the certainty of status quo. Evolution of a retailer’s use signals potential increased competition for other tenants and also challenges the landlord’s ability to lease other premises.

Getting the right tenant mix is important to both the landlord and tenant. However, this puts the landlord and tenant at odds over the use clause.

Landlord’s want fairly restricted use clauses to provide both certainty on the uses in the development and flexibility as the development evolves.

The tenant on the other hand wants a more expansive use clause, which permits the evolution of its brand while simultaneously protecting the brand from unnecessary competition.

Depending on the negotiating of the parties, the use clause will be negotiated to bring certainty to the landlord while providing the tenant with some flexibility to evolve and expand.

If only it were that easy. The fact of the matter is that there are many situations where the parties are initially aligned in what the use clause meant. But, when the facts and the world in general change since the initial alignment, the landlord and tenant find themselves at odds over what the use clause means.

Before finalizing a lease, both the landlord and tenant should keep the following in mind:

  1. Take the time and define the use well. Build in the ability to expand but allow for some flexibility for the landlord to lease other premises. This can be achieved by either allowing for competing uses to be limited to a definite area within premises or by limiting sales of a competing use to a certain percentage of sales. Whichever method of measurement you choose, make sure it can be determined whether a use is within the limitation or not.
  2. Evolution of the brand and not an individual store. Tenants, evolve as you must, but know that the evolution must be throughout your brand across all locations. You should not be allowed to evolve in one location only. This will be too restrictive to the landlord and will create uncertainty.
  3. Is an exclusive important or do you just want some space between you and your competitors? Sometimes all you need is to have some distance from your competitors. Landlords may prefer to not lease to a competitor within a certain distance from your store.
  4. Do your homework on pre-existing tenants. Watch for the ability of tenants to change their use.
  5. Focus on the primary use and ancillary uses usually tied to the primary use. This is where most evolution occurs.

When it comes time to lease retail premises it’s important that both landlords and tenants protect their current business and their business as it evolves. It’s a delicate balancing act for both the landlord and tenant. The intent is that the relationship will be a long and profitable one for both parties. Help that relationship to continue by taking the time and effort to be thoughtful about the terms in your lease and how they will impact you not just today but tomorrow as well.

 

 

 

Topics:  Commercial Leases, Contract Drafting, Landlords, Tenants

Published In: General Business Updates, Commercial Real Estate Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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