Exclusive Use and Non-Compete Clauses in Commercial Leases

Orlando Real Estate Lawyer Offers Caution When Using Exclusive Use Clauses

Picture of a commercial lease signingWhether you’re a shopping center landlord or a would-be commercial tenant, consider – but use caution – adding an “exclusive use” clause or a “non-compete” clause to your commercial property lease in Orlando. These terms are sometimes used interchangeably but make more sense to me defined as follows:

“Exclusive use”

Exclusive use provisions are typically requested by the tenant and are intended to prohibit the landlord from leasing space in the shopping center to businesses similar to the tenant’s. The obvious reason is that the tenant wants to limit to the greatest extent it can competition from competing businesses. Thus, the landlord grants to the tenant the right to some “exclusive use” within the shopping center.

“Non-compete” clause

A non-compete provision is typically requested by the landlord and can limit the activities of the tenant in at least two ways. First, the provision can be used to prevent the tenant from selling products or services that compete with other tenants in the shopping center who may have exclusive use provisions in their leases that would be violated if such activities were allowed. Second, particularly where the tenant is going to be paying percentage rent (i.e. a portion of the rent is based on the amount of the tenant’s sales), the provision can be used to prevent the tenant from establishing a competing business or franchise within a certain geographic area that may cannibalize sales from the subject property, thereby reducing the percentage rent payable to the landlord. Thus, the tenant agrees that it will forego certain activities so as not to compete with other tenant’s sales or, in the percentage rent scenario, its own sales.

These provisions are sometimes difficult to negotiate (depending on the relative bargaining power of the parties) and are difficult to enforce in the event of a violation unless they are very clearly drafted by an Orlando real estate lawyer. For example, the use or service that is at issue is often hard to define, making it the subject of a potentially protracted negotiation on the front end or a potentially disputed matter later on. For instance, let’s say that you want to lease space to operate a cupcake shop. You certainly wouldn’t want a competing cupcake shop next door, but what about a chocolate shop? An ice cream store? Do you have the negotiating power to require the landlord to exclude all businesses selling desserts of any kind? Probably not, but you get the idea. The important point is that it’s an issue that has to be addressed when the lease is negotiated and the more clearly the use or service is defined the easier it is to categorize excluded or permitted competing uses.

The same issue arises in the context of non-compete provisions. Suppose you enter into a lease for the operation of a yogurt shop, you are paying percentage rent and your lease prohibits you from opening a competing store within two miles. The landlord certainly wouldn’t want you to open a competing yogurt shop close by, but could you open an ice cream shop? Snow cones? Italian ice? The same analysis could apply to electronics (which could include computers, computer games, computer parts, computer accessories, etc.), spa services (which could include spa treatments, skin treatments, manicures, pedicures, massages, maybe even a hair salon that offered some of these services) or any other broad category of uses or services. The answer depends on what was negotiated before the lease was signed. In the event of a violation and resulting litigation, the Court may ultimately have to decide what was intended to be excluded and what was intended to be permitted. Not a position you want to be in.

Another difficult issue to address is what happens when a violation occurs. How do you calculate damages if the damages are the amount of sales lost to a competing business if sales are also dependent on numerous other factors? If the landlord violates the exclusive use provision and allows a competing use, should the tenant’s rent be reduced? By how much? Should the tenant be entitled to terminate the lease and move elsewhere? Could the tenant obtain an injunction against the other tenant to stop the competing use? Could that tenant then sue the landlord? Sure they could. Almost anybody can sue almost anybody!

These and other concerns should be addressed and negotiated before the lease is ever signed. By involving your attorney early in the lease negotiation process you can improve your chances of obtaining an exclusive use provision or non-compete clause that you can live with, at minimum, or that protects your interests and maximizes your business prospects long term, at best. In addition, a clearly drafted exclusive use provision minimizes confusion and conflict when the question arises as to whether a particular use is excluded or permitted or an alleged violation occurs.

About Brad Hester

Former Florida dairy farmer turned real estate attorney; Architecture and MBA degrees from University of Florida ('87 and '90) (Go Gators!!); Law degree from University of North Carolina-Chapel Hill ('00) (Go Tarheels!!); Now practicing law at Frank A. Hamner, P.A., in Winter Park, Florida.

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