Exclusive use clauses are frequently found in New Jersey commercial leases, particularly standard contracts for retail space. Therefore, it is imperative for commercial tenants and landlords to understand the potential legal implications.
In basic terms, an exclusive use provision in a commercial real estate lease grants a tenant the right to operate a particular use exclusively within a defined building or shopping center. For instance, a children’s clothing store may negotiate a lease provision that prohibits the landlord from renting space to another business selling children’s clothing. Depending on the terms of the provision, it would likely not prevent the landlord from leasing space to a children’s toy store or an adult clothing store.
Exclusive use clauses are a benefit to the tenant because they limit competition in the same retail space.
Meanwhile, in a tenant’s market, a commercial landlord may want to offer exclusive use to secure an attractive tenant. Exclusive-use provisions can also benefit landlords where rent is based on the tenant’s profits because less competition often leads to greater sales.
How to avoid potential litigation
To avoid potential litigation down the road, tenants and landlords should avoid using standard contract language. Instead, they should tailor the definitions and terms to the particular circumstances of the lease. Here are a few things that should be considered:
- The length and transferability of the exclusivity. For instance, what happens if the lease is assigned to an entity in another line of business? What happens if the business goes dark for a certain period of time?
- The definition of competing use. Broad or vague exclusive use clauses are particularly hard to administer and can lead to litigation. For instance, what is the difference between a bakery that sells coffee and a coffee shop that sells baked goods?
- The clause should also include a clearly-defined remedy should the landlord violate the tenant's exclusive use. Common remedies include rent abatement for the duration of the competing use, and the right to terminate the lease if the competing use is not abated within a certain time period.
- Each exclusive clause may also provide for some leeway as to other tenants. For instance the child clothing exclusive may allow another clothing store to display not more than “50 square feet of display area for child clothing” for sale related to its prime purpose.
Of course, these are just a few issues that should be negotiated between the parties. If you find yourself thinking of entering into a commercial lease, it is wise to consult an experienced NJ commercial real estate law attorney.
Otherwise, if you're still unsure about exclusive use clauses and their role in a commercial lease or if you would like to discuss the matter further, please contact me, Victor Kinon.