Hunton Retail Law Resource

When developing a retail shopping center, landlords have a vision for what that shopping center will look like. This vision comes to life as the shopping center is leased up and tenants open for business. In order to preserve that vision, and ultimately the marketability of the shopping center, landlords will craft permitted use, prohibited use and exclusive use concepts into their leases to ensure that the shopping center occupants continue to operate in the shopping center throughout the term of their leases in accordance with the landlord’s vision.

The focus of this article is on exclusive use provisions and what tenants and landlords need to consider (and avoid) when drafting these provisions into their leases. An exclusive use provision allows a tenant to use its premises for a specific use (i.e., a sandwich shop), and prohibits or restricts other tenants in the shopping center from using their premises for that exclusive use. While this is a fairly simple concept to grasp, landlords and tenants often fail to give these provisions the depth and clarity needed to avoid future disputes. A well drafted exclusive use provision is clear and provides specificity to both parties’ rights and obligations. A poorly drafted exclusive use provision can lead to a costly and messy dispute ending in a court answering the question “is a taco a sandwich?” [1]

Tenant Considerations

On its face, a broad exclusive use provision may sound great to a tenant; however, it is important to remain as clear and specific as possible even if at the time you are negotiating your lease you think both parties understand the general agreement. For example, a broad exclusive use provision that is intended to prevent any other tenants from serving breakfast in the shopping center may sound great, but it may also lead to issues down the road when the landlord begin to test the limits of that provision when entering into new leases. A more clearly defined exclusive use provision leaves less room for interpretation and provides a better deterrent to the landlord when entering into new leases. A tenant should consider exactly what it wants to restrict other tenants from doing and precisely draft the provision accordingly.

Most exclusive use provisions are forward looking, meaning that the exclusive use provision will prohibit the landlord from entering into new leases at the shopping center that violate the tenant’s exclusive use. In addition to the prohibition on new leases that violate the exclusive use, a tenant should also request that the landlord provide: (i) a representation and warranty that no current leases violate the exclusive use provision and (ii) a covenant that the landlord will not amend any existing lease, or approve any assignment or sublease, that would ultimately violate the exclusive use granted to the tenant.

It is important that the exclusive use provision provides a tenant with the ability to enforce the terms of the lease, and remedies in the event a landlord does violate the terms of the exclusive use provision. An exclusive use provision should contain (i) a prohibition against the landlord entering into leases in violation of the tenant’s exclusive use, (ii) a requirement that the landlord notify new tenants (in their lease) of the existing exclusive uses in the shopping center, (iii) a requirement that the landlord shall take actionable steps to remedy a violation of the tenant’s exclusive use, and (iv) remedies if the landlord does violate the exclusive use provision.

Some common remedies for a landlord’s violation of an exclusive use provision are reduced rent following a grace period to allow the landlord to remedy the violation, and ultimately if the landlord cannot, or refuses to remedy the violation, the express option to terminate the lease. Without these remedies expressly provided in the lease, a tenant will have to file a lawsuit for the court to determine the proper damages and remedies.

Landlord Considerations

By granting an exclusive use to one tenant, the landlord is shrinking the pool of potential new tenants at that shopping center. As a landlord, the right tenant mix is crucial to a successful shopping center, so granting too many broad exclusive uses could severely limit a landlords ability to strategically lease its shopping center in the future. Landlords should always be thinking well into the future when granting a tenant an exclusive use, because what might not be an issue right now could become a major problem in 5 or 10 years when that exclusive use is handcuffing a landlord from entering into new leases.

Another obvious consideration is that Landlords should avoid granting any exclusive use right that is overly broad. For example, an exclusive use provision that prohibits a landlord from entering into new leases with a tenant that sells bagels could be interpreted to prohibit a leases with any tenant who sells bagels, even if a very small part of their sales. While the intent may have been to only prohibit the landlord from entering into new leases with bagel shops whose sales come predominately from bagels, the consequences of this broad provision could prevent the landlord from leasing space in the shopping center to a coffee shop that also happens to sell bagels on the side. 

Landlords should also protect themselves in situations where an exclusive provision is breached by a “rogue” tenant who violates the terms of its lease. In these situations, tenants should be precluded from enforcing remedies against the landlord so long as the landlord is diligently pursuing remedies against the rouge tenant.

Conclusion

Exclusive use provisions are important to both landlords and tenants. Tenants want to eliminate competition as much as possible to maximize sales and landlords want a harmonious tenant mix that attracts as many customers as possible. While intentions usually start out clear and well-meaning, a poorly drafted exclusive use provision may create major issues for the parties involved.  When negotiating exclusive use provisions in a lease, it is important that landlords and tenants craft language that is clear and specific, or you might just end up with a court deciding for you whether a taco is a sandwich.
 

[1] In Martin Quintana v. Fort Wayne Plan Commission, No. 02D02-2212-PL-414 (Ind. Super. Ct. May 13, 2024), a Superior Court judge in Fort Wayne, Indiana, issued a ruling that determined that tacos and burritos are considered sandwiches and therefore fall under the exception to the use restriction in the lease.