Don’t Agree to Weaken Exclusive Use Right

Don’t Agree to Weaken Exclusive Use Right



Exclusive use clauses can be formidable for owners, so it’s not unusual for them to agree to give this right to a tenant but weaken it by adding a “gross sales drop” requirement, which can kill an exclusive for the tenant. That’s because it puts the onus on you if there’s a violation.

For example, if there’s a gross sales drop requirement in your lease and a tenant in the center violates your exclusive, you’re entitled to resort to your lease remedies only if you can prove that your gross sales dropped by more than a set percentage—for example, 10 percent—over a set time period—typically 90 days or more—as a result of this violation. If you can’t prove that the violation hurt your gross sales to that extent, you can’t exercise your remedies. If the owner suggests the gross sales drop requirement, try any or all three of these arguments.

Argument #1: Risks setback. Even if your gross sales don’t drop much or at all, your business could still be hurt by the exclusive violation. Suppose that before the violation your store experiences annual gross sales increases of 10 percent. But after the violation occurs, your gross sales remain flat or increase by only 3 percent. This means that you’ve lost out on the gains you’d been making in prior years.

Even if your business hasn’t been doing steadily better and better, this year might have been a crucial turning point for you—except for the exclusive violation. And meanwhile, even if your gross sales are flat, your other costs—such as labor costs, utilities costs, CAM costs, and merchant costs—probably have increased. When you factor in those costs, you may experience a losing year overall.

Argument #2: Imposes unfair waiting period. Also, it’s unfair to make you wait 90 days or more after the exclusive violation occurs to prove a gross sales drop. By the time the waiting period is over, the harm to your business could be irreparable. Instead, you should be entitled to exercise your remedies as soon as the owner’s period to “cure”—that is, correct—the violation ends.

Argument #3: Weakens incentive. The gross sales drop requirement takes away the owner’s incentive to cure the exclusive violation promptly. For example, without a gross sales drop requirement, when a violation occurs, an owner would be likely to take immediate action to force the tenant that caused the violation to stop selling the competing item. But with a gross sales drop requirement, an owner might decide to put this off until you show that your gross sales have dropped. And then the exclusive violation could continue hurting your business indefinitely.

Keep in mind that, if you’ve gotten an owner to give you a cotenancy right, the owner might demand a similar gross sales requirement before you can exercise it. You can try these arguments in response to this demand, too.

 

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