When your commercial shopping center tenant wants marriage yet you still want to see other tenants!
I once heard someone use the comparison that Commercial Leases are similar to marriages. This may be true if your pre-nuptial agreement involves a set term, hours of negotiating, and enough legal jargon to ensure your attorney heads for an early retirement.
In negotiating any Lease it is imperative to know the consequential effects of each clause that is being requested or permitted. One such very important clause which is often under analyzed is the Exclusive clause (a.k.a. exclusivity clause).
Fundamentally, with the proper terms, the exclusive clause will generally allow one tenant the sole legal right to sell a specific item or conduct a specific type of business within your building or property. Although this term may sound fairly simple and reasonable, commercial investors will quickly admit this clause can have monumental and irreprehensible effects to your shopping center and income. This lone clause could very well limit your future chances of filling your vacancy, maximizing your income and could lead to costly attorney fees or a lawsuit.
Experienced tenants during preliminary negotiations will quickly demand this clause in commercial shopping centers where there is the potential for the Lessor to lease space to a business conducting the same type of business. The astute tenant will realize the financially detrimental effects of direct competition within the same shopping center and will often demand this clause to assist in financial success. Realizing the tenants justified concern the Lessor will commonly permit the exclusive clause.
During the Lease negotiations the Lessor holds the sole power to allow the exclusive clause. The prospective Lessee has the decision to accept the property with or without such clause. Although this may sound fairly simple, this clause can easily make or break your ability to maximize future income.
Prime example: You agree to enter into a long-term lease with a well known convenient store chain that demands an exclusive clause when obtaining a Lease. You are eager to enter into a Lease with this tenant because of their long-term stability, above market offer, and needed traffic flow that will be brought to your center. A problem occurs in negotiations when the tenant demands this exclusive clause, “Exclusive right to sale grocery items, beauty products, fountain, canned, and bottled drinks.”
Without consulting professional council and driven by the fear of loosing the tenant, the Lessor permits such a clause unbeknownst to the irreprehensible consequences.
The inconclusive wording leads for multiple ways of interpreting the clause. The tenant may interpret the clause as the exclusive right to sell all things sold in a grocery store, all beauty supply and related products and any kind of liquid beverages. This will be disastrous if you have or will have any time in the future such tenants as a restaurant, hair salon, general store, or anyone wanting to sell something to drink. This lone clause could potentially cause litigation over a soda vending machine in a doctor’s office. In addition to the potential disputes and litigation, this clause will drastically limit your future leasing to a small tenant base.
The single, most important set in negotiating the exclusive clause is to be extremely detailed in your exclusive items. If you tenant desires the right to sell beverages, find out exactly what type they intent to sell. Don’t allow the exclusive right to sell all beverages if your tenant only desires the right to sell a soy latte or a mango smoothie. Execute your Lease with the most detailed and precise wording to ensure your investment is secure when negotiating this problematic clause. Undoubtedly if you are remotely unsure with the exclusive clause and the terminology to use, the smartest thing to do is to consult with your legal counsel to assist with the situation. Good luck and may your years of marriage be as happy as the honeymoon.
Written by Brian Gordon
Brian Gordon (RE Lic#01302670) is the president and broker of record for Lotus Property Services, Inc., a property management company based in the San Gabriel Valley. Lotus Property Services, Inc. manages multi-unit residential and commercial properties throughout the greater Los Angeles area. Brian can be reached at (626) 582-8001 or email@example.com
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