The Pros and Cons of "Use" and "Exclusive" Commercial Lease Clauses
Once you’ve found suitable space, and you and the landlord have agreed on key terms, such as the rent amount, you still have a way to go before finalizing the lease. Two small but important clauses that sometimes pop up (most frequently in shopping center leases) are the “use” clause and the “exclusive” clause, in which the landlord and you agree that you will engage in certain activities and not others. The two clauses typically work together and come in various permutations.
The Use Clause and Exclusive Clause
Some landlords want to limit how you’ll use the rented space. The limitations can be as broad as what business you’ll conduct there, as narrow as what specific services or products you’ll offer, or as nebulous as the quality level of your operation. A use clause can be either a restriction on how you do business—telling you what you can’t do—or a prescription, telling you what you must do. In general, you’ll want to avoid strict restrictions on your use of the rented space, so count yourself lucky if the landlord’s lease doesn’t include a use clause.
An exclusive clause is a promise by the landlord that only you and no one else in the mall or building may engage in a particular type of business or carry a certain type of merchandise. Typically, only powerful “anchor” tenants get exclusives.
Restrictive Use Clause
A restrictive use clause states what you’re prohibited from doing, such as selling food (or even selling anything retail). You’re free to do anything that’s not on the list. If your landlord insists on a use clause in your lease, try for one that gives you the broadest rights to use the space, or that bars only a few, narrow pursuits. For example, you might happily sign off on a use clause permitting retail sales as long as it doesn’t specify the type of you may sell.
You may have to live with restrictive use clause if the landlord has granted another tenant (such as in a shopping mall) an “exclusive” clause—a promise that the landlord won’t rent nearby space to any tenant whose operations would compete with the major tenant (sometimes called an “anchor tenant”). Logically, if one tenant has the lock on a particular use—say, the sale of sports equipment—the other tenants on the property will be restricted from engaging in that use.
Permissive Use Clause
This type of clause enumerates what you can do and, by implication, makes any other activities out-of-bounds. It puts the burden on you to come up with every conceivable use you can think of wanting to engage in at the time you sign the lease. If you later want to do something that’s not on the list, too bad. A private post office, for example, might want to be free to offer photocopying, fax transmissions, and the retail sale of greeting cards, but if these activities aren’t listed among the permitted uses, they’re off limits. Clearly, this type of use clause can be very disadvantageous, since it can box you into a narrow line of business.
Use Clauses That Help Your Business
Use limitations can be a two-edged sword. You yourself may actually want protection from competitors or incompatible businesses. For example, if you’re a doctor or dentist renting space in a professional building, you understandably may want to protect your professional image by having the landlord agree to rent only to compatible tenants such as a pharmacy or home care equipment rental service. Restrictions that many tenants insist upon include a promise not to rent to check-cashing offices, fast-food restaurants, or video or music stores. It’s also common to see powerful tenants obtain the landlord’s promise not to rent to government entities (these tenants don’t want to have a welfare office, unemployment office, or probation department next door).
Getting Your Own Exclusive Clause
Most of the time, you’ll encounter a restrictive use clause that restricts you because another, powerful tenant in your mall or building has cornered the market on a particular type of business or merchandise. But what if you’re that attractive or powerful tenant? There’s no reason not to bargain for an exclusive clause for yourself. This is possible only if current tenants’ leases already have a restrictive use clause, prohibiting them from engaging in a particular (competing) activity, such as selling photography equipment in a shopping mall, for which you want an exclusive.
If you succeed in getting an exclusive clause, you’ll want to make sure that the landlord agrees to enforce it should another tenant breach its restrictive use clause (and thereby step on your exclusive). Your lease should spell out remedies for this type of situation—for example, the landlord might agree to give you reduced rent, an option to reduce the lease term, and no “cure” period (no time in which the neighbor gets to stop the offending activity without consequences). Most importantly, you’ll want an established amount of monetary damages that you don’t have to prove—the last thing you want is to go to court to prove how much business you lost because another tenant moved into your exclusive.
This article was excerpted from Negotiate the Best Lease for Your Business by Janet Portman.