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The Risks of Exclusive Use Rights

Granting exclusive use rights to any tenant can create substantial marketing and legal challenges for a landlord. Exclusives required by home improvement centers, supermarkets and certain other anchors are the most risky. They usually prohibit other occupants of a shopping center from competing with the anchor's primary use and from selling certain merchandise lines.

Here are a few hints for minimizing the risks associated with exclusive use rights.

1. Exclude other anchors Even if buildings occupied by other anchors are subject to the primary use exclusive, negotiations with those anchors can be simplified if their buildings are not subject to merchandise line exclusives as well. It's difficult, however, to convince home improvement centers and supermarkets to permit this distinction for smaller anchors (those with less than 75,000 sq. ft).

2. Carve out incidental sales The problem is that the concept is easier to agree upon than the details. Specific floor area thresholds for permitted merchandise line sales (usually in the range of 300 to 1,000 sq. ft.) may be too small for larger stores. Percentages (usually in the range of 5% to 10% of total store size) may be too small for smaller stores. On balance, percentages might be a more versatile test, and the larger stores are more concerned about (and have more leverage to deal with) these issues. In either case, consider using a higher threshold if the merchandise lines are aggregated.

3. Carve out certain types of retailers A home improvement center may not be concerned about a retailer whose primary business is in office supplies, arts and crafts, sporting goods, appliances or consumer electronics, even though some of their merchandise may conflict with protected merchandise lines. Similarly, a supermarket may not be concerned about a drugstore (unless the supermarket sells prescriptions), a convenience store associated with a gasoline station (if a size limitation is imposed) or a restaurant that sells food for on-premises consumption.

4. Define merchandise lines carefully With respect to the home improvement center exclusive, carpeting should not include area rugs, electrical supplies should not include electronic appliances, and cabinets should not include home entertainment units and other furnishings (or, even better, should be limited to built-in kitchen and bathroom cabinets). With respect to the supermarket exclusive, a delicatessen should not include a store selling sandwiches, even if prepared to order from delicatessen meat; and a bakery should not include a coffee shop, even if bakery items are the featured product.

5. Use it or lose it Provide that if the home improvement center or supermarket ceases the sale of a merchandise line for an agreed-upon period of time (perhaps nine to 12 months), subject to certain temporary cessation rights, the merchandise line exclusive will terminate. A variation on this approach is to provide that the exclusive does not terminate but is only ineffective as to leases signed while such merchandise line is not sold.

6. Streamline the consent process If the exclusive appears in an REA, make it clear that the anchor benefited by the exclusive and the developer are the only parties whose consent is required for any exceptions. Otherwise, an amendment to the REA might be necessary. This is useful even when the benefited anchor insists on a sole discretion consent standard.

7. Limit the remedy A notice and cure period is helpful to the landlord, as is language that protects the landlord if a violation is beyond its reasonable control. (Commercially reasonable efforts to enforce its rights against an offending tenant is a customary requirement.) A remedy that lowers minimum rent is sometimes satisfactory to a landlord if the landlord believes that percentage rent will make up the difference in a situation where perceived competition is arguably theoretical. The landlord will be even better served if it retains the option to require the beneficiary of a merchandise line exclusive to either forego the rent relief or terminate the lease after an agreed-upon period (perhaps one year).

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