Once you’ve located that “perfect” space and location, and you and the landlord have agreed to a Letter of Intent on the key terms, such as the rental amounts, you still have much to do before finalizing the lease. Two important clauses (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 services and activities and not engage in others.
The Use Clause and Exclusive Clause
Landlords typically want to limit how you’ll operate from the rented space. The limitations can be as broad as what type of business you’ll conduct there, as narrow as what specific services or products you’ll offer, or as subjective as the quality level of your operation. A use clause can be either drafted as a restriction on how you do business—stating what you can’t do—or drafted as prescription, describing what you must do. In general, a tenant wants to avoid strict limitations on the use of the leased premises and keep flexibility and optionality available for growth and business changes, etc.
An exclusive clause in your favor is a commitment by the landlord that only you and no one else in the shopping center or the building may engage in a particular type of business or carry a certain type of merchandise or at least the clause limits the square footage area and gross sales of other tenants on the sale or offering of certain “exclusive” items in order to protect your use and operations.
Restrictive Use Clause
A restrictive use clause states what the tenant is prohibited from doing, such as selling food (or using the space for office purposes). You’re free to do anything that’s not on the list usually subject to any existing exclusive uses at the Shopping Center.
You may be subject to other restrictive use clauses e.g. if the landlord has granted other tenant(s) an “exclusive” clause—a promise that the landlord won’t rent any space to another tenant whose use would compete with the tenant.
Permissive Use Clause
The Permissive use clause states in the Lease what you can do and, by implication, makes any other operations not permitted. It puts the burden on the tenant to carve out every conceivable use at the time you sign the lease. This type of use clause can be very problematic to a tenant, since it can restrict you to a narrow line of operations.
Use Clauses That Help Your Business
Use limitations and provisions are important to negotiate carefully and draft in a very concerted way. Most tenants want protection from competitors or incompatible businesses. For example, an ice cream parlor business could be negatively affected by an ice cream store that opens for operations next door or if you’re a doctor leasing space in a professional building, you want to protect your professional image by having the landlord agree to rent only to compatible tenants such as other professionals or pharmacy or home care equipment rental services.
Obtaining Your Own Exclusive Clause
There’s no reason not to negotiate for an exclusive use clause for yourself. Please keep in mind any existing tenants operating at the Shopping Center will not be subject to your exclusive use since your lease is signed post the other existing tenant leases.
An exclusive use clause is only strong as its remedies, you’ll want to ensure that the landlord agrees to promptly enforce it should another tenant breach its restrictive use clause (and thereby violate your exclusive). Your lease should spell out remedies against the landlord for this type of situation—for example, reduced rent, an option to reduce the lease term or terminate the lease. Please note the landlord will want a cure period and you should insist on a very limited “cure” period. 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. Please note that most landlords will want to carve out “rogue” tenants from these exclusive use remedies and tenant should do it best to keep the time frame to cure limited and damages strong as it is very likely a competing business will have a negative financial impact to your operations.