The Dirt Dictionary—E is for Exclusives
There is a special symbiotic relationship between shopping center landlords and tenants, with each looking to the other to promote the “product.” But negotiations of lease terms are often contentious. With NY’s National ICSC in full swing, let’s look at one unique-to-retail hot-button benchmark: exclusives.
Now, how do you define “exclusive?” It’s when the tenant is granted the exclusive right to sell certain merchandise lines and items in a shopping center. It is one of the most valuable rights a tenant can have, and typically the prerogative of the majors. It gives great bang for the buck in both short and long term ways: protecting and promoting the tenant’s sales from day one and, down the road (as part of tenant’s all important exit strategy) the lease with an exclusive is deemed more marketable to a potential successor tenant or subtenant.
Landlord’s hate these clauses, as do any number of anchors and co-tenants. It is by definition an anti-competitive clause. But it’s a long-standing reality of shopping center leasing. To attract the majors, exclusives had to be given.
So in our scenario, the exclusive has to be given to make the deal, how can a landlord ameliorate the harsh realities of having “voluntarily” tied its own hands when it comes to leasing other space in the shopping center?
Here are a few suggestions: provide other tenants with some limited rights to sell the excluded items (so-called “incidental sales”), i.e., the right to sell the restricted products but not using more than x percent of sales floor area or no more than y percent of sales to come from these items; control the scope of the exclusive–be specific. (For example, the exclusive would not cover all “women’s shoes,” rather the more specific “better women’s sports/athletic shoes”); word the exclusive so it refers to a tenant’s primary business; this gives a landlord more wiggle room when it comes to granting other tenants the right to engage in uses which are ancillary to that of the tenant holding the exclusive; provide a carve out for existing tenants and expanded or new anchors; have the exclusive automatically terminate under the following conditions: Tenant is in rent default, an option to extend is exercised, the lease is assigned or subleased (especially if new space use does not include the exclusive use) or if Tenant goes dark or stops selling the exclusive item. Lastly, limit liquidated damages for your violation by making cancellation of lease Tenant’s sole remedy.
Tips and Traps for Tenants: focus on broad-use categories, rather than specific products (but don’t overreach: ok to seek an exclusive for your sushi restaurant, but don’t look to ban all restaurants. That’s bad for everybody’s business); consider the real estate to be burdened: make this as all-encompassing as possible. For example, the exclusive shall apply to the ”entire shopping center”, to include outparcels and all other adjacent land owned by Landlord or related entities; Landlord to be penalized if it disregards exclusive: penalties to include rent abatement, fixed sum liquidated damages, damages per percentage decline in business; also tenant released from other restrictions (e.g., radius clause); Landlord to include covenant and warranty from all new tenants acknowledging the exclusive and agreeing to honor it, with Tenant holding exclusive to have injunctive rights. Last pointer: include right to record short form memo of lease putting all third parties on notice as to the exclusive.
While the above amply illustrates a natural antipathy between Landlord and Tenant as to the scope and operation of exclusives, the common thinking is that judicious use of the exclusive is in the interest of both parties, as bringing traffic to the center is their shared goal.
Top “exclusives” tips: clear drafting, narrow definitions, and allowing for reasonable incidental sale carve outs.