With the holiday season in full swing, retailers are enjoying the rush of last-minute shoppers. At the same time, however, the end of the year provides shopping center owners and landlords with a time to review their leases to ensure they are protected from unexpected liability, particularly resulting from “exclusive use” provisions.

An exclusive use provision is a clause in a lease that prohibits the landlord from leasing other space in its shopping center for a use that competes with the permitted use of a specific tenant. Most sophisticated tenants who lease space within larger shopping centers will require their lease to provide them with the exclusive right to conduct their specific business operation in the shopping center.

Much time is spent negotiating the terms of the exclusive use, including the scope of the exclusive, what the remedies are if the exclusive is violated, and who is exempt from the exclusive. It is worthwhile to examine common exemptions and discuss how, if the exemption language is not carefully crafted, a landlord could be far less protected than it might have initially expected.

Common Exemptions to an Exclusive Use

In most cases, even if a landlord agrees to grant to a tenant the exclusive right to operate a particular business in a shopping center, those leases that existed prior to the lease in question will be exempt from the restriction. For example, if Tenant A’s lease predates Tenant B’s lease, then Tenant A would not be subject to the exclusive use granted to Tenant B. Similarly, if Tenant A violates Tenant B’s exclusive use, the landlord in this case would not be liable to Tenant B. This makes sense because when Tenant A and the landlord entered into Tenant A’s lease, they could not have known what conditions would be requested by a future tenant.

It is worth noting that landlords can sometimes negotiate to require a tenant to honor exclusives granted to subsequent tenants, so long as the subsequently granted exclusive does not interfere with the prior tenant’s permitted use.

Therefore, a landlord must at least make sure that any lease in which it grants to a tenant an exclusive right to operate for a particular purpose, exempts from such exclusive any existing leases of the shopping center.

This seemingly simple concept raises several important, although often overlooked, considerations. For instance, is an assignee or sublessee of an existing tenant exempt from a subsequent tenant’s exclusive? What if that existing lease is extended or amended? Is that pre-existing lease still exempt?

Most landlords would take the position that as long as a lease in which it granted to a tenant an exclusive use exempts existing tenants, the exemption remains even if the lease is amended, extended, or assigned, or the space that it covers is subleased.

Continuing the example above, Tenant A’s lease does not preclude Tenant A from violating Tenant B’s exclusive. Therefore, it makes sense that Tenant A should be exempt from Tenant B’s exclusive. If Tenant A assigns its lease or sublets the whole or a portion of its premises, such assignee or sublessee is entitled to all of the rights of Tenant A under the Tenant A lease, including the exemption from Tenant B’s exclusive. Moreover, any amendment or extension of Tenant A’s lease does not change its status as being prior in time to Tenant B’s lease.

Examining Excerpts from Actual Leases

Strikingly, however, in many cases, even where a landlord has attempted to exclude existing leases from exclusives granted to a subsequent tenant, the language used falls remarkably short and could expose a landlord to liability.

Consider the following excerpts from actual leases:

• Example #1: “Notwithstanding the foregoing, the foregoing prohibition shall not apply to existing tenants of the Shopping Center as of the date of this lease.”
• Example #2: “Notwithstanding the foregoing, the foregoing prohibition shall not apply to tenants of the Shopping Center as of the date of this lease which are listed on Exhibit C attached hereto.”
• Example #3: “Notwithstanding the foregoing, the foregoing prohibition shall not apply to leases existing in the Shopping Center as of the date hereof, provided, however, that if Landlord has discretion over modifications to permitted uses under such existing leases, Landlord shall not permit any use that violates Tenant’s Exclusive Use.”

The problem with Example #1 is that it only references “tenants” existing as of the date of the subject lease, and not “leases”. A tenant whose exclusive has been violated could argue that the only exempt parties would be those specific tenants that were operating in the shopping center when its lease was signed, and not any assignees or sublessees of those tenants.

Example #2 is even worse than Example #1 because it references a specific list of named tenants who are exempt. A subsequent tenant whose exclusive use is violated would have a strong argument that the parties intended to exclude only those tenants specifically named in the exhibit and not any assignees or sublessees.

Example #3 is better because it exempts “leases” rather than “tenants.” It goes on to say, however, that if the landlord “has discretion” over changes to the permitted use in such existing leases, then the landlord will not permit a use that violates the tenant’s exclusive. The problem is the use of the word “discretion.” If the existing lease states that the tenant thereunder may change its use with the landlord’s consent, not to be unreasonably withheld, then the landlord in this case will be in a lose-lose situation.

On the one hand, the landlord will be in default of the subsequent lease if the landlord consents to a use that violates such subsequent tenant’s exclusive. On the other hand, if the landlord does not consent to such use, the landlord will find itself in a dispute with the tenant or its assignee under the existing lease. In such a case, the landlord would have to argue that it is reasonable to withhold its consent to the proposed change in use to a use that violates a subsequently granted exclusive. The tenant under the existing lease, however, will argue that the landlord is being unreasonable because its lease pre-dates and is not subject to the exclusive granted to a subsequent tenant. The way to avoid this dilemma is to change “discretion” to “sole discretion.” In that case, the landlord would not be liable to the subsequent tenant because the landlord does not have the right to withhold its consent in its sole discretion to the proposed change of use.

Clarifying Exclusive Use to Better Protect Shopping Center Owners

An example of language that better covers the issues and challenges discussed above is as follows:

“Notwithstanding the foregoing or anything contained herein to the contrary (and without intending to broaden the foregoing restriction), the foregoing restriction shall not, in any event, apply to and shall not be construed to restrict the rights of tenants or other occupants of the Shopping Center or any portion thereof under leases in effect as of the Effective Date (as the same may be extended, amended, renewed or amended and restated after the date hereof) and any sublessees, assignees or mortgagees of such tenants and occupants.”

This language clarifies that the exemption applies to assignees or sublesees of existing tenants and to any extensions or amendments of such existing leases. A consideration not addressed in the above language, but which can be important depending upon the nature of the shopping center, is exempting present and future mortgagees, purchasers at foreclosure, and purchasers of any portion of the shopping center in the event that an existing tenant or its designee exercises a right of first refusal or other purchase option.

In sum, it is critical for shopping center owners to adequately exempt existing leases from subsequently granted exclusive uses in order to avoid potential liability. Shopping center owners are encouraged to examine their existing lease forms to ensure that the exemption language being used comports with their expectations and protects them from unexpected liability. In doing so, shopping center owners can also ensure that their relationships with tenants are in good standing during this holiday shopping season and for years to come.

— By John R. Pariseault, Hinckley Allen

John Pariseault is a partner in Hinckley Allen’s Providence, Rhode Island, and Boston offices.

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