Drafting Commercial Lease Use Provisions: Permitted, Exclusive, or Restrictive Use

Description

Commercial leases typically contain a provision setting forth how the space will be used. This limitation is sometimes categorized as a permitted use, which is usually more broad, an exclusive use, a narrow construction of the limitation that prevents other tenants from engaging in the exclusive use, and a restricted use, which falls somewhere in between, or it may include more than one of these.

When utilizing a permitted use provision, counsel must consider the client's needs and whether the clause is too narrow or excessively broad. Tenants' counsel must determine if a limited permitted use will restrict a later need to assign the lease or sublease the space. Landlords and their counsel have to evaluate how much competition they may want amongst tenants creating anti-competition concerns. At the same time, a narrow permitted use provision may unnecessarily restrict how a tenant operates in the space or decrease the perceived value of the property.

Exclusive use provisions flip the evaluation of use and are used commonly in large shopping centers with many tenants. An exclusive use provision essentially allows a tenant to use its premises for an intended specific use (for example, as a restaurant, sale of electronics, or sale of men's and women's clothing), and restricts other tenants in the shopping center from using their premises for the same or similar use. Exclusive use provisions place a burden on landlords to ensure an existing tenant is not currently engaging in the prohibited use and does not modify its use of its premises in the future in a way that would violate the new tenant's exclusive use provision (if the landlord has approval power over a change in the tenant's use of its premises).

The landlord must enforce an exclusive use provision against other tenants who violate the provision. To effectively enforce an exclusive use provision, new leases should contain a provision restricting the tenant from using its premises in violation of the exclusive use provisions granted to all other tenants. Tenants operating under an exclusive use provision may face limits on business innovation and expansion or pivots in business due to changing economic circumstances. Further, tenants lack privity to sue other tenants for violations of these provisions if the landlord refuses to step up.

Restricted use provisions are often used concerning other tenants when one tenant has an exclusivity clause but can also be used alone. If they are used as an extension of an exclusivity clause, they generally restrict tenants from engaging in conduct that would violate the exclusivity granted to the other tenant. Such provisions can restrict tenants from engaging in certain business activities that the landlord or other tenants may prohibit, and restrictive clauses can be imposed upon landlords and restrict the type of tenants a landlord may place in a shopping center that may act as a deterrent to other tenants.

Negotiating these provisions and understanding the limits of scope of each type are necessary for both landlord's and tenant's counsel to create a lease that clearly identifies what the tenant's and landlord's obligations and restrictions are.

Listen as our expert panel discusses the different use provisions, the pros and cons of each type, and best practices for drafting a provision that is just right for the situation.