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Why Use an Exclusive Use Clause?

If you are a business owner and in the process of negotiating the terms of your commercial lease, you will want to be sure to include an exclusive use clause to the document and negotiate the terms with the landlord. Exclusive use clauses are intended to protect a tenant’s business by ensuring that the named tenant is the only tenant in a particular shopping center that can sell or offer to sell specific products or services. In some cases (generally, where a tenant has more bargaining power), an exclusive use clause may extend to any other properties owned by the landlord or an affiliate of the landlord within a certain radius.

The scope of the exclusive clause greatly depends on the nature of the business. Narrowly-focused businesses can be served with narrow clauses; however, if a business offers a wide scope of products or services, then the clause will have to be carefully considered by both parties. For instance, a national retailer that sells coffee for on-site consumption may have an interest in protecting against another store selling any kind of hot beverage, even though it only derives minimal profit from its hot tea and hot chocolate sales. A clause that prohibited another store from selling any hot beverage would significantly restrict the landlord’s options for possible tenants. Bookstores that offer hot chocolate or even a gas station that offers self-serve coffee would be prohibited from leasing in the same retail space even though these places are not in direct competition with the coffee chain. Landlords will be reluctant to restrict its other spaces from ancillary uses that do not directly pose a threat to the tenant’s primary business.

A landlord and tenant could reach a compromise when it comes to the scenario above by agreeing to place a capped amount on the sales that another tenant may derive from the ancillary uses of the negotiating tenant (i.e., the sale of hot beverages). Alternatively, the parties could agree to restrictions on advertising or display areas that other tenants would have to abide by if leasing the space. When it comes to exclusive use clauses, there are several ways to help both landlord and tenant strike the right bargain. A well-drafted clause offers the tenant adequate protection from competition without stifling the landlord’s ability to attract other compatible businesses for the retail area.

If you are considering entering into a commercial lease and need assistance in reviewing or drafting provisions, contact a McBrayer real estate attorney today.

CRichardson

Christopher A. Richardson is an associate at McBrayer, McGinnis, Leslie & Kirkland, PLLC in the Louisville, KY office. Mr. Richardson concentrates primarily in real estate, where he is experienced in residential and commercial closing transactions, landlord/tenant relations, and mortgage lien enforcement/foreclosure. Mr. Richardson has closed innumerable secondary market and portfolio residential real estate transactions and his commercial practice ranges from short-term collateralized financing and construction lending to development revolving lines of credit. He can be reached at 502-327-5400 or crichardson@mmlk.com.

This article is intended as a summary of  federal and state law and does not constitute legal advice.

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