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Enforceability Of Exclusives

As a follow-up to the February 1998 column titled "Exclusive Right Clauses," this month's Lease Language column focuses on the enforceability of such clauses. Although the issue of enforceability of exclusive right clauses in shopping center leases has not been litigated frequently, when it has been litigated, courts have generally upheld such language.

By its very nature, an exclusive right clause - whereby certain retailers are prohibited from operating in a shopping center - is a restraint of trade. Courts have generally looked to the Sherman Act, the federal antitrust law prohibiting certain restraint of trade, to determine whether such clauses are enforceable. In interpreting the Sherman Act to prohibit only unreasonable restraints of trade, the Supreme Court has adopted a rule of reason standard for analyzing potential restraint of trade due to exclusive right language.

The Rule of Reason. Application of a rule of reason standard typically has included consideration of several factors. Among them are:

* the relevant product and geographic markets in which the shopping center is located;

* the impact the exclusive provision has on competition in the relevant market;

* the market power of the landlord and the tenant agreeing to exclude other retailers;

* the availability of alternative locations for the excluded retailers to open their stores;

* the scope of the exclusive as to products prohibited and length of time; and

* the landlord's economic justification for the exclusive.

Relevant Market. The courts commonly analyze the size of the market in which the shopping center is located. The larger the market area, the less likely it is that an exclusive in one shopping center in the market area will limit competition in the entire market area. The courts also may examine the market for the tenant's product. A very specialized product, even in a large geographic market area, may lead to closer scrutiny by a court.

Impact on the Market. To determine the impact of exclusive language, courts look to both the availability of alternative sites for excluded parties and the amount of competition that would remain in the market if certain retailers were excluded from the shopping center. Where numerous properties in the relevant market are suitable as alternative locations for an excluded retailer, a court will be hard-pressed to hold that an exclusive provision unreasonably restrains competition. However, where alternative sites in the market area are unavailable, and thus, the shopping center at issue is the only location in the market from which the excluded retailer can compete in the market, courts may find it necessary to invalidate an exclusive provision.

Scope. Courts have generally upheld exclusive language that is narrow in scope (e.g., language prohibiting a distinct type of business from operating within the shopping center, or exclusive language where its application is limited to within the shopping center). Conversely, language that places broad restrictions on trade (e.g., a prohibition on department stores, appliance stores, toy stores, furniture stores, apparel stores and drugstores) very likely will be held to be unenforceable.

Economic Justification. Finally, courts will analyze and consider the economic justification for the landlord agreeing to exclusive language - for instance, landlord's inability to attract certain tenants without offering exclusive language, protection of landlord's interest in certain tenants, maximization of customer traffic and optimization of tenant mix.

Drafting Tips. Because the key to enforceability of an exclusive provision is whether the language is reasonable, landlords and tenants should consider the following in drafting such language:

* Limit the exclusive to only the shopping center, especially if the landlord has power in the market area (e.g., there are few other centers or few other landlords);

* Specify as narrowly as possible the use that is prohibited;

* Seek to restrict the applicability of the exclusive to the first several years of the term (the shorter the duration, the less likely an exclusive will be invalidated);

* Be conscious of the relevant market and the state of competition in the particular business to be granted the exclusive language; and

* Consider stating an economic justification for the exclusive in the lease (for example, state the purpose of the exclusive as encouraging a varied mix of tenants at the shopping center).

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