If you’re a retail tenant, you are inevitably working with a landlord.
How would you feel if that landlord allowed a competitor to set up shop right next door to you?
Or if they dictated what you could and could not sell?
That’s exactly what could happen if an unfavorable use clause made its way into your lease agreement.
Luckily and strategically, most enterprise organizations have both attorneys and lease administrators to ensure all parties are on the same page when it comes to the use clause.
Permitted Use Clause
During a presentation at the recent NRTA (National Real Estate Tenants Association) National Conference, Doug Stevens, Director of Corporate Counsel for Starbucks Coffee Company broke down the key elements of a commercial lease, including the use clause.
Stevens broke down “the spectrum of permitted use clauses.” The broadest example being a use clause that permits “any lawful use.” Meaning that as long as what the organization is doing is lawful, they are permitted to do business and retain use the space.
At the opposite end of the spectrum is a use clause that that Stevens referred to as “limited to specified use and tradename.” This can also be called a Particular Purpose Clause.
If it is a vague particular purpose such as “coffee shop” there is an element of flexibility. However, these clauses can get to a point where they are specific down to a list of items that the retailer must have for sale at all times.
For a developing business, this is obviously deeply restrictive. Stevens mentioned the evolution of his own organization when breaking down this topic.
“At our first store, we only served hot coffee,” Stevens said. Hypothetically, a very specific particular purpose clause could have stopped Starbucks in its tracks. Adding simple things like food and iced coffee drinks could have been completely off the table. Stevens specially referenced the stores where Starbucks briefly added alcoholic beverages to the menu and how those leases and landlords required special attention to detail to allow the change of product.
Exclusive Use Clause
There are two types of use clauses that are most relevant to retail tenants – exclusive and prohibited.
Exclusive use clauses are great news for your company. Prohibited use clauses can allow your landlord to play puppet master in your business decisions.
“Obviously, we don’t want another coffee shop to be able to open in the same shopping center,” said Stevens. An exclusive clause is very straightforward – it states that your business, within its venue, has exclusive rights to operate a certain type of business or sell a certain type of goods.
When you reflect on your own neighborhood, can you picture a space that has two burger joints or two ice cream shops? While it’s common to see rival restaurants, coffee houses, and stores across the street from one another, we rarely see them within the same shopping center, campus, etc. Business can thank exclusive use clauses for that.
Murkiness can occur with certain types of businesses. Let’s stick with Starbucks. Yes, no coffee shop can open in the same center but what about a tea shop? Or a pastry shop? These would be the types of hyper specifics that an retail tenant’s team would want to narrow in on.
Prohibited Use Clause
While the exclusive use clause places a restriction on the landlord, a prohibited use clause is a restriction on the tenant.
A prohibited use clause can encompass similar thing as particular purpose clause, but it can also get even more granular.
This type of clause could give a landlord say over an organization’s operating hours. It could be used to prevent a loss of property value by not allowing “nuisance” businesses. Night clubs for example would likely not be able to open next to a pharmacy.
When it comes to drafting the lease document, this type of clause would mean that the landlord would need to think up and list every possible item that they wanted to prohibit. For an exclusive use clause, the tenant would want to do the same.
What This Could Mean for Retail Tenants
A retail tenant should be using all the data available to them to find a location and a landlord that suits their business. If both parties can get what they need from these clauses, it’s likely that the landlord tenant relationship will be, at minimum, functional or, at most, pleasant.
However, these clauses can be incredibly contentious. That’s where attorneys like Doug Stevens come into the mix.
Despite potential conflict, no one benefits from an empty store front. These clauses can positive protect both parties and allow for a strong business relationship to flourish.
“Viewed through that lens, restrictive use clauses ultimately are not really about restrictions at all. They are about finding ways for all parties to benefit from a thriving commercial or mixed-use environment,” wrote attorney Dana Kriess Glencer (Chain Store Age, 2016).