Exclusivity in shopping centres

Commercial leases outline the terms of occupancy between landlords and tenants. Among the many clauses and provisions, exclusivity is a crucial element, offering tenants protection and competitive advantage within their chosen niche. From the tenant’s perspective, exclusivity clauses can be a double-edged sword, offering both opportunities and challenges.

Exclusivity clauses grant tenants the exclusive right to conduct certain types of business within the leased premises, prohibiting landlords from leasing adjacent spaces to competitors. For tenants, this provision holds significant value, safeguarding their market share and ensuring they operate in an environment conducive to success to reduce competition on the land. By securing exclusive rights to their particular trade or service, tenants can foster customer loyalty and capitalise on a captive market. For instance, a specialty coffee shop nestled within a commercial complex can thrive knowing that no other coffee vendor will set up shop nearby, bolstering its chances of becoming the go-to destination for caffeine enthusiasts in the area.

Securing exclusivity is particularly advantageous for business owners intending to sell their enterprise as it enhances its marketability and perceived value to potential buyers. Prospective investors or buyers are more inclined to invest in businesses operating within a protected market space, as exclusivity guarantees a certain level of insulation from immediate competition, thereby ensuring a stable revenue stream and customer base. This assurance can significantly bolster the attractiveness of the business and increase its salability, ultimately facilitating a smoother transition for both the seller and the buyer while safeguarding the business’ profitability and long-term sustainability.

However, the pursuit of exclusivity comes with challenges and considerations for tenants. Negotiating exclusivity clauses should be done with the assistance of a legal advisor that specialises in leases. The exclusivity clause must meticulously define the scope of exclusivity, specifying the types of businesses or services covered under the agreement to prevent ambiguity and loopholes. Caution should be exercised to ensure the tenant’s use is still able to be wide enough to adapt to evolving market trends or diversify their business offerings. Striking a balance between exclusivity and adaptability is essential.

A lawyer can help with the wording to protect the tenant’s rights. In a case involving a fruit and vegetable store in a shopping centre, the lease contained an exclusivity clause that stated that they would be “the sole independent fresh fruit and vegetable operator”. The wording here unfortunately did not stop a major supermarket selling fruit and vegetables as the court held that they were not independent and therefore not covered by the exclusivity clause. The tenant, in this case, lost hundreds of thousands of dollars due to the clause not being drafted correctly.

Another consideration for tenants is the enforcement and compliance of exclusivity clauses throughout the lease term. Tenants must vigilantly monitor neighbouring businesses and promptly address any breaches or infringements of their exclusive rights. Establishing clear protocols for dispute resolution and recourse mechanisms can mitigate potential conflicts and uphold the integrity of the exclusivity agreement.

Tenants should obtain legal advice from a lawyer who specialises in leases at the start of negotiations to get the best possible deal and ensure their interests are safeguarded. This can include a well drafted exclusivity clause that protects the tenant and gives them flexibility to grow their business.

This article was written by Marianna Idas, Principal of eLease Lawyers, for the April/May edition of C&I Retailing magazine, which can be read in full here.

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