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Exclusive use provision

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Robert Thorn

Exclusive use provisions (EUPs) in leases prohibit landlords from allowing other tenants in the center to engage in the same business/trade practice of the lessee to whom this provision is granted. If a landlord breaches an exclusive use provision, the tenant may have no obligation to pay rent for the period of time the violation occurs.

Examples of EUPS and Violations

In Medico-Dental Bldg. Co. v. Horton, the landlord agreed not to rent to another drug store in the same business center. He rented other space to some doctors who opened their own pharmacy in their space. The court found that the landlord violated the lease. Failure to restrict that kind of activity in the lease opens up the landlord to a horde of potential harms.

• The tenant can abandon the space or sue for a restraining order/injunctive relief to compel the landlord to enforce the exclusive use provision, and/or

• The tenant can sue the landlord for damages, which is usually the difference in rental value of the premises before the breach of the EUP and the value after, or losing the tenant's business profits resulting from the breach; or

• The tenant can allege the landlord and new tenant have engaged in a civil conspiracy to defraud or engaged in the tortious claim of interference with contract (which can carry high dollar exposure) and also allege violation of the implied covenant of good faith and fair dealing implicit in all lease agreements!

So, what's the problem? Can't the landlord just tell the competing tenant to stop competing or the tenant will be evicted? The answer is, "I hope so, it depends." A landlord can control the other tenant's competitive use only if the lease contains restrictions on the offending tenant's use of the space.

Preparing the EUP

Landlords considering granting a EUP to a tenant should first consult with an attorney. The simplest approach: refuse to grant EUPs. Small center/strip mall landlords should "Just Say No." EUPs are for large shopping centers managed by professionals with many years of lease expertise under their belts. Any landlord considering drafting a EUP should:

1. Define the criteria. Draft the provision specifically. If contracting that no one else will set up a competitive business in the center, describe precisely what the existing lessee's business does, who its customers are, what its hours of operation will be, the size of the business, its principal product or service and whether it is a partnership, limited liability company, corporation or sole proprietorship.

Specify whether other businesses in the center can engage in the same business if the business isn't exclusively the prohibited use. For example, if an ice cream store tenant wants an exclusive use provision, specify that other tenants in the center can sell ice cream if ice cream isn't their primary product/ This allows the grocery store, Chinese restaurant and gas station in the center to sell ice cream too since their sales of ice cream will be nominal.

2. Specify a remedy for violation of an EUP. A violation may "be the basis for landlord to seek injunctive relief, damages and/or termination of tenancy pursuant to California law."

3. Indemnify and hold harmless clause. The other tenants' leases should specify that if that tenant engages in activity alleged by the landlord or another tenant in the commercial project to violate an exclusive use provision, besides other landlord remedies, the tenant must indemnify and hold the landlord harmless against the claim of violation, including legal fees.

4. Exculpatory provision. Landlords should try to include an exculpatory provision that states that if the landlord inadvertently permits a tenant to engage in competing business practices or other activity violating the EUP that the sole remedy of the offended tenant would be vacating the premises without further liability under the lease while waiving all claims for damages, attorney's fees/costs or injunctive relief against the landlord (only) and agreeing to absolve and defend landlord in any claim filed against the landlord.

5. Exclusive and Prohibited Use Addendum. Landlords who grant EUPs should create an "Exclusive and Prohibited Uses Addendum" for all leases in the center. It will benefit both the landlord and the tenant. If it is made a part of the standard lease template, and updated as tenants vacate and new tenants are granted EUPs, it will serve as a reminder to the landlord of the exclusive use provisions in the center, and reduce the likelihood that the landlord would unintentionally violate an exclusive use provision. It also clarifies for the tenant the other exclusive uses given to other tenants in the center, particularly if the tenant is solicited to sublease or assign to a party that competes with the EUP holder.

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Kimball, Tirey & St. John LLP specializes in business and real estate law, landlord/tenant, and collections with offices throughout California. This article is informational only and should not be used as legal advice. If you have any questions regarding this article, please call (619) 231-1422.

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