Exclusive Use Clauses Explained

An ordinary lease says what you may do in your space. That is your use clause. An exclusive is different. It limits what the landlord may let others do in the rest of the property.

The clause is most valuable where customers choose by proximity. A retail shop in a strip center, a pharmacy, a restaurant or a medical or dental practice in a medical building may all lose real business if a direct competitor opens down the hall. A landlord filling a shopping center or medical building is also likely to have other tenants with their own exclusives, so these clauses shape who can go where.

They are less common and less useful in a general office tower, where a firm’s clients do not find it by walking past. If you are a professional firm with a real concern, such as a competitor’s sign above yours, the signage clause may address the worry better.

Before you sign, ask to see the exclusives other tenants already hold. A New England Real Estate Journal article by Vincent Pisegna of Krokidas & Bluestein notes that new leases often attach them and require the new tenant to comply. They can limit what you may do.

Pisegna calls clear definition the most important step in negotiating an exclusive, and the case law shows why. In Winn-Dixie v. Dolgencorp, decided by the Eleventh Circuit in 2014, a court had to decide whether an exclusive for "staples or fancy groceries" reached items such as soap and matches. A FindLaw article on use exclusives collects older disputes that turned on what words like "delicatessen" meant. Those fights are expensive, and they are mostly avoidable through drafting.

These are the choices that define what you actually have.

• Primary use or any use. Does the exclusive stop only tenants whose main business competes, or any sale of the product at all? A narrow version may let a competitor carry your product as a sideline.
• Product or service list. Listing products and services clearly is usually safer than a single general word that needs interpreting later.
• Area covered. The FindLaw article advises defining geographic scope as clearly as possible. Is it the building, the whole center, or adjacent land the landlord also owns or may later buy?
• Duration and conditions. Does the exclusive last for the entire term, including renewals? Does it depend on you staying open, not being in default, or continuing the same use?
• Transfer. Does it pass to an assignee or subtenant? If you sell the business, the buyer will want to know.

Landlords will want exceptions, and some of them are reasonable. The goal is to know each one and keep it no wider than needed.

• Existing tenants. The grandfather clause exempts uses already operating in the property when your lease is signed. Pisegna describes it as the main carve-out. Ask whether it ends when that tenant leaves and whether it covers their successors, a renewal, an expansion or a change in their use.
• Named use types. Pisegna gives a sit-down restaurant as an example of a specific use carved out of a food exclusive.
• Incidental sales. Many forms allow a competitor to offer the product as a minor part of its business. Define what "minor" means with a measure you could actually verify.
• Large tenants or anchors. Some leases carve out anchors from the exclusive. If an anchor could start competing with you, find out.

Also consider the other direction. Your lease may be subject to someone else’s exclusive, so check that your intended services are clear of them, including anything you may add in the future.

An exclusive with no remedy may leave you with a lawsuit as your only option. The FindLaw article notes that remedies may be stated in the lease, such as a rent reduction, and that otherwise a tenant is left with general remedies. Depending on bargaining strength, a tenant may also obtain a right to terminate after a cure period.

Pisegna describes liquidated damages as the typical remedy for a landlord’s breach, allowing the tenant to withhold a significant portion of rent while the violation continues. He also flags the catch: landlords often negotiate a substantial cure right, under which liquidated damages may be unavailable while the landlord actively pursues enforcement, including litigation.

This matters most when the competitor is a tenant who violates its own lease, not a tenant the landlord signed in breach of your exclusive. Your protection may be weaker in that case, so ask what the lease says about each.

• ✓Does the lease state the remedy, such as reduced rent, or leave us to sue?
• ✓When does the rent reduction start, and how much is it?
• ✓Do we have a right to terminate if the violation continues, and when?
• ✓How long is the landlord’s cure period, and does litigation against the other tenant suspend our remedy indefinitely?
• ✓Does the remedy differ if the landlord signed the competitor or if a tenant went outside its permitted use?
• ✓Does the landlord agree to put a use restriction in future leases that honors our exclusive?
• ✓Should a memorandum of the exclusive be recorded so a buyer of the property has notice? Ask your attorney.

Exclusives restrain competition by design, so antitrust can come up. The FindLaw article notes that use exclusives inherently restrain trade, while reporting that no Maryland court had held one to violate antitrust law or common-law limits on restraints at the time it was written. Other states and facts can differ. Leave this question to your attorney, particularly if your request is aimed at a specific competitor.

Interpretation also varies, as the cases above show. Have your attorney review the final wording, and make sure the use clause and the exclusive line up with each other.

Ask early. Put the exclusive in the letter of intent or proposal, in plain terms, while the landlord is still competing for you. A landlord may resist if it narrows who else can fill the property, so the broader your request, the more it may cost you elsewhere.

Be honest about what the protection is worth. A precise exclusive for the services that bring in most of your revenue is easier to win and to enforce than a broad one covering everything you might sell someday. Tenant Advisory Group represents tenants, and when we negotiate a lease we check existing exclusives at the proposal stage, so a problem surfaces before a client spends time and legal fees on a building that will not work.