In shopping center leases, retail tenants often negotiate for exclusive use covenants—i.e., agreements by the landlord not to lease, or otherwise allow the occupancy of, other space in the remainder of the shopping center for uses that compete with the tenant. The exclusive use rights are integral to the retail tenant’s conduct of its business, and to the value of its leasehold, within the center. If, for instance, an electronics retailer commits to paying rent on a location for five (5) or ten (10) years (or longer), and to investing significant capital in planning, permitting and constructing a new store site, it needs to have assurances that its investment and future sales will not be compromised by the landlord leasing an adjacent outlot (or inline space) in the center to another electronics retailer.

In order to enforce these rights, tenants commonly also negotiate to include special remedies if the landlord violates the tenant’s exclusive. Oftentimes these remedies are severe; depending on the size and leverage of the tenants, they can include significant reductions in rent (while the violation continues) and even termination of the lease. Accordingly, since violation of the protected tenant’s exclusive use rights can have severe consequence to the landlord, responsible landlords take care not only to avoid leasing other space in the center to tenants who would clearly violate the exclusives, but also to carefully draft the permitted use clauses in the other tenants’ leases to ensure that they do not permit future changes in use that could violate the protected tenant’s exclusive use rights. That part the landlord can control. What the landlord cannot control, however, is another tenant’s decision to nonetheless engage in a use that is not permitted under its lease—i.e., another tenant going “rogue.” If that rogue tenant’s non-permitted use also constitutes a use in violates the protected tenant’s exclusive use rights, the landlord would become exposed to the severe penalties for such violation.

For that reason, landlords often try to negotiate an exception to the protected tenant’s exclusive use rights for rogue tenants (a so-called “rogue tenant carve out”), on the premise that the landlord should not suffer the consequences for violations caused by a rogue tenant over whom the landlord has no control. From the protected tenant’s perspective, if its business is being severely affected by the rogue tenant’s competing business, it may not matter that the landlord itself is, in some sense, “innocent.” Rather, it may simply be a matter of allocating the risk between the landlord and the protected tenant. Both parties are “innocent,” but one of the parties has to bear the risk of the consequences of a rogue tenant, and if the protected tenant is large or otherwise has significant bargaining leverage, its response may well be that this is simply a risk that the landlord must bear. As a compromise, the parties might draft a rogue tenant carve out that is conditioned upon the landlord taking affirmative actions to stop the rogue tenant from continuing the violating use. After all, the rogue tenant’s actions are not entirely out of the landlord’s “control”; the Landlord will have its own remedies against the rogue tenant for breaching the terms of its lease, such as declaring the tenant in default, exercising default remedies if the rogue tenant fails to cure the default (e.g. by ceasing the violating use), seeking an injunctive or other equitable relief to stop the violating use by judicial action, or even seeking eviction of the rogue tenant. The protected tenant will expect the landlord to exercise those remedies, and to aggressively pursue them, as a condition to its forbearance on exercising its remedies for violation of the exclusive use rights. At the other end of the continuum, if the bargaining leverage is more equal, the landlord may negotiate for a more simple rogue tenant carve out that simply precludes the protected tenant from exercising its remedies at all if the violation is caused by a rogue tenant.

There are a myriad of other gradations in between these ends of the continuum, and many variants on how the rogue tenant carve out can be drafted. Accordingly, this is a ripe area for negotiation during the drafting of a shopping center lease, and well-represented parties will negotiate a variant that is appropriate and consistent with the business dynamics of the deal, the nature of the tenant’s business, and the size and location of the center.