Business Protection in a Commercial Lease:
Tenant and Landlord Perspectives of the Use Provisions
There is a natural tension between tenants and
landlords when it comes to the "use" provisions of a commercial
lease. Tenants want a broad use provision enabling them to have
the flexibility to change their business should the need arise.
Landlords, on the other hand, want a limiting provision to focus
a tenant on a particular category or type of business. Despite
this tension, both landlord and tenant can reach a compromise
that benefits both. A key to this compromise is to understand
both the tenant's and landlord’s perspectives.
Exclusive Use and Radius Clauses
Generally, neighboring tenants and direct
competition will be controlled by the tenant mix as established
by the landlord in shopping centers and multi-unit structures.
Direct competition by neighboring tenants can cut into revenue,
crippling small and medium size businesses. An exclusive use
provision is an agreement that the landlord will not lease space
in the property to another tenant whose business is similar to
that of the existing tenant. Similarly, a radius clause is an
exclusive use provision that prohibits leasing to a similar
business within an agreed upon area.
From the tenant’s perspective, an exclusive use
provision of a lease protects a tenant from competition from
neighboring tenants. Although a tenant wants a broad exclusive
use provision, a tenant should understand the basic nature of
his business and the space before negotiating an exclusive use
provision. A landlord will be more receptive and willing to
negotiate and agree to an exclusive use provision that is
carefully thought out to protect the tenant’s core business and
revenue, rather than a broad provision that encompasses almost
any business activity. For example, if your business is a
sundries store in a strip mall that gets significant revenue
from the sale of greeting cards or film, a tenant should ask,
and a landlord would be more willing to agree, to an exclusive
use provision as to the sale of these items.
From the landlord’s perspective, an exclusive
use provision limits the landlord’s flexibility in managing the
space and filling vacancies. Also, interpretations of exclusive
use provisions can be the cause of vicious disputes, which can
cost the landlord time and money. As a practical matter, smaller
tenants, who pay lower rents and who the landlord suspects may
not be in business for the full term of the lease, create little
incentive for the landlord to negotiate an exclusive use
provision or radius clause. Broad exclusive use provisions and
radius clauses are generally reserved for high-rent anchor
tenants who have the potential to bring in new tenants to the
property.
If the landlord, despite a tenant’s presentation
as to the need for an exclusive use provision, is reluctant to
grant an exclusive use provision, there are alternatives for the
tenant. A tenant can request that an early termination provision
be included in the lease. This would allow the tenant to get out
of the lease with minimal costs should a competitor move into
the property. However, as a practical matter, it can be very
costly to close down a business and move to a new location.
Restrictive Use Provisions
Another aspect for a tenant to consider when
negotiating a "use" provision is changes to the tenant's
business. The consumer market is often times driven by fads and
trends that can change rapidly, affecting the profitability of
small and medium sized businesses. A new tenant to a property
can never be certain that its business will be successful, and
an old tenant must be wary that its customers’ tastes may
change. A restrictive use provision is an agreement that the
tenant will only use the rented space for the agreed upon
purposes for the full term of the lease.
From a tenant’s perspective, an overly
restrictive use provision can affect a tenant’s flexibility to
change its business should the need arise. Also, a restrictive
use provision can limit a tenant’s options when it comes to
assigning the lease or subletting the space. Initially, the
tenant should ensure that the use provision is reasonably
compatible with the tenant’s business and all related
businesses.
From a landlord’s perspective, a major concern
is getting the most profitable and harmonious mix of tenants.
This means compatibility with the nature and character of the
property as well and the physical aspects of the property (i.e.,
the infrastructure and parking). Landlords may also want to
prohibit certain types of businesses that reflect poorly on the
property or attract undesirable customers. To do this, landlords
will want to make the tenant’s use as specific as possible,
while also including standard language that expressly prohibits
certain types of unwanted business.
Whether it is negotiating a new lease or
renegotiating an old lease, tenants should pay attention to the
use provisions of a commercial lease. When carefully thought out
and negotiated, use provisions can be beneficial to both the
tenant and landlord.
