Exclusives Can Be a Mine Field. Don't Step on One...
Exclusives are certainly common enough at shopping centers, but they are also a common cause for dispute and litigation. Think very carefully and perform the necessary due diligence before giving an "exclusive" at your shopping center.
If granted, exclusives must be written as precisely as a map is drawn. In case of an error in either, you may find yourself in the wrong place. Exactly what does the "exclusive" cover? Is it a category or a specific product? One recent case makes the point. In it, a Wendy's franchise owner successfully sued to prevent a Michigan landlord from developing a Taco Bell at its center. Wendy's had an exclusive to sell "hamburgers" and "hamburger products." The landlord argued that the language was intended to only prohibit other hamburger restaurants, not a Taco Bell that was not a hamburger restaurant selling patties on round buns. The court said that if the exclusive was only for "hamburgers," the lease should have said so. By saying "hamburger products," the exclusive covered anything made with hamburger, so any fast food restaurant selling anything made with hamburger was prohibited. Did the landlord realize it was agreeing to such a broad restriction? Was that the intention? When business people sign a contract, the courts tend to rely on what is written. Courts do not often care what one side or the other says was "intended," because in times of dispute, recollections may be "convenient" or unreliable. The landlord won the case at first, but Wendy's ultimately won on appeal. Even if the landlord won on appeal as well, the development would still have been delayed for two years or more!
Besides carefully defining the product or service covered, there is the question of dealing with existing tenants that have broad use clauses. Many leases identify a specific permitted use for a particular tenant, but do not expressly limit it to that use or which may innocently, but dangerously, include the phrase "or any other lawful retail use." What if a current tenant's use is fine, but it wants to assign that lease, and the landlord also granted liberal rights to assign the lease? Is there any restriction on the assignee?
Not limiting the nature and scope of an exclusive or the uses of other tenants is inviting disaster. Consider the current retail environment in which appliance stores are now selling mattresses, furniture and home goods and in which furniture stores are selling televisions and sound systems. Consider bookstores with cafes and movie theatres with bars, bowling and billiards. Consider dollar stores that sell food products and everything else. The landlord is in the classic whip saw. One lease grants an exclusive. The other grants unlimited use. Is it enough to allow others to have the same use as the exclusive if it is only "incidental"? What does incidental mean? Is it 5%, 10%? 5% or 10% of what? Is it gross sales? Square feet of floor area? Lineal feet of shelf space? What if the products are mounted on the wall and the inventory is off site? Is it enough to simply prohibit others from having the same "primary" use as the exclusive? What does "primary" mean? Can a tenant have more than one primary use?
What about new technology and improvements of existing technology? Did an exclusive for records and movies cover cassettes, CDs, VHSs, DVDs and so forth? Did an electronics exclusive prohibit book stores selling e-books and download devices? Can a phone violate a camera exclusive? We do not even know what next year looks like. How do you protect yourself during a 10 year lease term? Option terms?
What of the tenant that opens a store at a nearby center, but uses its exclusive to block competition by continuing to pay rent at the old location. A well-crafted exclusive will automatically be void if the tenant is no longer operating at the center. Shopping centers succeed based upon a quality tenant mix and a synergistic environment that draws customers and keeps them there. It may not be enough that a tenant is paying its rent if it is also dark.
We have not even begun to consider the damages or remedies that could or should exist for a violation of an exclusive, the issue of how and when the a landlord can fix it or the "rogue tenant."
Suffice it to say that exclusives can be a mine field. Leases must be carefully written by attorneys, especially knowledgeable in the area of retail leasing, working in concert with their clients so you can avoid stepping on one.
If you have any questions about this topic, you may contact Paul Magy at 248.988.5844 or firstname.lastname@example.org . Paul is a Member of Clark Hill in its Real Estate Practice Group and specializes in commercial leasing.