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Exclusive Use Provisions in Commercial Leases

27th January 2012
By Laine T Wagenseller in Legal
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Tenants entering into commercial leases for retail shopping centers often request an exclusive use clause. An exclusive use provision is intended to protect a tenant from competitors who sell the same goods (i.e., no other bakeries in the shopping center, no other sandwich stores, no other drug stores). On the other hand, the exclusive use provision will restrict the landlord’s freedom to rent out space to other tenants who desire to be in the shopping center. While the tenant may want the clause, the landlord usually does not want their hands tied by an exclusive.

Real estate attorneys who represent retail tenants in lease negotiations should always consider whether an exclusive use provision is appropriate. A tenant may not consider the idea of an exclusive on their own, but when a competing business opens up next door, they will call their attorney asking whether the lease allows the landlord to do such a thing. Larger national credit tenants may have more leverage in lease negotiations to request such a clause but exclusives are used even in small neighborhood strip centers. The tenant’s real estate broker should address whether the landlord is willing to enter into an exclusive during the letter of intent stage of negotiations.

Litigation over the exclusive use provision usually results from a poorly written or unclear clause. Because it is usually the tenant who is using the exclusive against the landlord, landlords and their attorneys should make sure that the clause is as detailed as possible. A recent case we handled involved an exclusive use provision that stated that the landlord may not lease to a “Competing Business”. The tenant was a sit-down restaurant with red nagahyde booths and a menu of traditional New York deli fare. “Competing Business” was defined as “any delicatessen as it primary use within the retail shopping center”.

A “gourmet market” which sold wine and gourmet cooking items, had a cheese counter and prepared gourmet take-out food moved into the shopping center. The original tenant filed a lawsuit alleging causes of action for unfair competition under California’s Business and Professions Code §17200, breach of contract, intentional interference with contractual relations [against the new tenant], common law unfair competition [against the new tenant], conspiracy to defraud [against the landlord and the new tenant] and breach of the implied covenant of good faith and fair dealing. The issue of the case was whether the “gourmet market” was “primarily” a “delicatessen”.

Similar issues are easy to envision. A more common example has been large drug stores next to a supermarket that sells drug store items. Smaller retail centers may have an exclusive with a bakery but find that trouble arises when they lease to a Starbucks Coffee shop, which sells baked goods. Some other examples of our clients who have faced litigation on an exclusive involve a bakery with an exclusive for baked goods who complained about the Italian gelato store next door that used cookies to make ice cream sandwiches.
Another client, a sandwich store, was prudent enough to get an exclusive that prevented Subway, Quiznos and other sandwich chains from opening in the shopping center but found that a bakery that made sandwiches moved into the center.

The failure to draft a detailed and specific exclusive use provision led to extended and expensive litigation in each of these cases. Therefore real estate attorneys who are drafting exclusive use provisions in commercial leases should be careful to make the provision as specific as possible. Landlords and their leasing attorneys should make sure that their exclusive use clause is iron clad and not subject to ambiguities.

Real estate attorneys Los Angeles: Laine T. Wagenseller practices in Los Angeles, California and is the founder of Wagenseller Law Firm. Wagenseller Law Firm represents shopping center owners and tenants in business litigation over exclusive use provisions in commercial leases and other breach of contract and business lawsuits.
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