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Should you add that exclusivity clause to your leasing contract?

| Jan 17, 2020 | Uncategorized |

If you are a landlord of commercial retail tenants, exclusive use clauses are going to become a factor at some point. From the tenant’s perspective, it makes good business sense to exclude competition in their own back yards. By inserting exclusive use clauses in the leases, your tenants can increase their profit margins.

The landlord or property owner has to weigh their tenants’ desires for exclusivity against their own needs to have a broad pool of potential commercial renters to fill their properties. When those desires and needs are badly misaligned, legal disputes and other problems can arise.

Should you grant the exclusivity clause?

Suppose you have a major anchor tenant like Safeway negotiating their lease. They want an exclusivity clause barring any low-cost bargain retailers like Dollar General on the premises of the strip mall. They don’t want shoppers only buying their perishable goods at Safeway and then strolling across the parking lot to fill the coffers of Dollar General by purchasing dry goods and staples at lower prices. That is a reasonable request, and acquiescing to it will likely yield you a generous leasing fee.

But suppose you have a general practitioner physician who wants to add an exclusivity clause to the lease that bars another physician from leasing space in your set of storefront office suites. Here, you have much more wiggle room, as you will not be as likely to net such a large leasing fee from a single physician tenant. You could argue that it would be an onerous burden on you to exclude all other medical professionals from your complex — most particularly if that is the clientele you are seeking as tenants.

Narrow the scope of the clause whenever possible

In this type of situation, it is generally better to get rather granular instead of using broader language in the contract that can be misinterpreted. Doing so will give you more flexibility in your leasing opportunities.

For instance, your tenant may be an ice cream shop that also seeks exclusive rights to sell frozen yogurt even when there is no frozen yogurt on their menu. But this clause assures the business owner that there will be no fro-yo shop moving in two doors down and diverting their clientele.

It would not, however, prevent a mom-and-pop operation from running a restaurant that served ice cream for dessert. A win-win for both parties.

Grandfathering in prior tenants

Another scenario in which you may need special language in the contract(s) is if you have a new client negotiating for an exclusivity clause but you have a pre-existing client doing business there in the same field or industry.

The prior tenant conducting business “for any lawful retail use” has rights as well that would not be subrogated by any new tenants’ exclusivity clauses.

A solid contract is worth its weight in gold

Savvy property owners and landlords know to arm themselves and their business interests with airtight contracts. Even then, when negotiating a new lease dependent upon an exclusivity clause, it’s wise to turn to your business counsel of record for advice and guidance.