September 14, 2018
Author: Erik Piazza
Organization: PHELPS DUNBAR LLP
EXCLUSIVES IN FAVOR OF TENANT
One of the more difficult drafting problems in a preparation of leases during the development of a shopping center project concerns the so-called \"exclusive\", which is a clause inserted at the tenant's request which limits or eliminates competition in certain lines of merchandise or prohibits the operation of a competing store by another tenant in the shopping center and possibly on other land within a specific radius of the center. However, competition among tenants is the lifeblood of the shopping center. The trend is away from requesting or granting exclusives, either for the type of store or for a specific line of merchandise. This is true for two reasons: (a) many shoppers wish to compare merchandise and values; (b) present-day methods of merchandising have led to an expansion of items carried by many chain stores, necessarily resulting in considerable overlap (supermarkets, drug stores and variety stores may compete with each other); consequently, an owner granting an exclusive is always in danger of breaching a lease covenant with one or more tenants.
Most chain tenants insist upon some protection against excessive competition. In the smaller shopping centers such protection generally consists of a complete restriction against a business which directly competes with the tenant in question. In the regional shopping centers the restriction may, for example, limit the competition to (i) not more than one additional department store or variety store, or (ii) not more than four additional shoe stores.
In view of the fact that many retail stores have consistently expanded and broadened the items and lines of merchandise, it is most important that the exclusive be limited as narrowly as possible. For example, many problems can be created for a developer if a food supermarket is given an exclusive for the sale of food for off-premises consumption in the shopping center in lieu of an exclusive for a food supermarket. A recent trend is for businesses to be a “one-stop-shop” including a grocery, pharmacy, liquor store and hardware under one roof. Dues to this trend, the exclusive clause may be restricted to limit the competition to the primary line of business only (rather than the incidental items that may also be sold). This clause may also be negotiated to only limit a certain number of competitors in an area (Ex: No more than three shoe stores).
EXCLUSIVES IN FAVOR OF LANDLORD
The opposite of the exclusive is the so-called \"radius clause\" by which the landlord receives protection against the tenant competing with itself by means of a clause wherein tenant agrees not to own or operate another store within a defined geographical area. The theory behind such a prohibition is that when the rent to be paid by the tenant is at least in part based upon a percentage of sales, it is necessary to prevent any dilution of its sales by means of a competing business.
The two primary factors to be considered in establishing the area in which the tenant is to be restricted are the location of the shopping center and the type of business engaged in by the tenant. One should examine the already established competing business areas and the possibility and availability of new ones being established, as well as the zoning patterns present in the community. A larger radius would be appropriate in a rural area. A supermarket chain will agree to a much smaller radius restriction than a highfashion ladies ready-to-wear store or a department store.
It would be a rare situation indeed if a radius restriction were in excess of five miles; three miles is probably more common.
A radius clause should include: (a) the persons restricted, (b) the type of business restricted, (c) the area restricted, (d) the period of time during which the restriction is to be effective, (e) a prohibition against direct or indirect competition or financial investment, and (f) any exceptions thereto. The persons restricted might include the tenant and, if a corporation, its affiliates, subsidiaries, parent and stockholders; if a partnership, all members of the partnership and their families.