Don’t Fall Prey to Limitations on Exclusive Use

September 16, 2016
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Many tenants specialize in selling a particular product or in offering a specific service, and because that’s the sole way for them to turn a profit, it can be crucial to eliminate the chances for competing businesses to sell the same items, thereby diluting profits. While you don’t have any control over businesses in the general neighborhood as yours, you can try to capture the entire market for your product or service at the particular shopping center where you’ve set up shop. Wisely negotiating an exclusive use clause—a promise by the owner that only you, and no other current or future tenants, may sell or display a particular product or offer a certain service on the premises—can help you achieve this. However, an owner will try to limit an exclusive. Here’s one typical owner-proposed detractor—and a solution that you can try during your lease negotiations.

Exclusive Is Limited to Primary Use

Owners tend to limit exclusives to your primary use—that is, the activity that drives your overall business. They fear that offering overly broad exclusives for small or insignificant parts of one tenant’s business might deprive other tenants of a use that could be important to their business and discourage potential tenants from leasing space at the premises. Therefore, when defining “primary use,” consider what aspects of your business are vital, especially in the near term. Try to agree to a primary use that is broad enough to allow room for expansion as the need arises.

However, be aware that describing your primary use as a general category of space or type of store won’t necessarily protect you from competition. For example, if you sell consumer electronics, the owner may agree not to lease space to another consumer electronics store. This may seem to satisfy the exclusive use agreement, but there’s a loophole here that you need to watch out for.

If the owner agrees not to lease to any other consumer electronics stores, that won’t necessarily prevent it from leasing to other types of stores that also sell consumer electronics. For example, by leasing space to a furniture store that happens to sell consumer electronics, the owner won’t violate the exclusive use agreement, and you will still face competition—competition that should’ve been eliminated by the exclusive use clause.

There is a good solution, though. To avoid indirect competition, be very specific and firm about what products or services you want the exclusive right to sell and/or offer when negotiating the exclusive use clause. And don’t omit a product line or service that has potential for future success.

For a detailed explanation of the four other limitations you should beware of—and solutions to those pitfalls, see “Break Through Five Limitations on Your Exclusive Use Right,” available to subscribers here.