What's An Exclusive Use Clause?

If you're about to negotiate your first lease as a commercial tenant—congratulations! That means that your small business is finally off the ground and your hard work is about to pay off.

However, commercial real estate leases are very different than residential ones. When you sign a residential lease, there are numerous consumer protection laws in place that protect your rights. It's generally assumed that consumers don't usually have the knowledge to protect themselves.

This is not the case with commercial leases. You're on your own. If you make a mistake, it could be very costly to your business and your future. One of the biggest mistakes new business owners make is neglecting to get an exclusive-use provision in their lease.

What is an exclusive-use clause?

Exclusive-use clauses are commonly used when a renter is going to lease a spot in a shopping center or plaza. Essentially, this clause allows the renter to restrict other tenants who offer a similar product or service from renting space in the same plaza. It also allows the tenant to restrict what current tenants might do in the future.

For example, imagine that you own a Japanese restaurant. An exclusive-use contract might allow you to prevent any other Japanese restaurant from opening in the same plaza. That protects your interests and keeps you from having to split your customer base with another restaurant. 

However, what if you neglect to be specific enough in your lease to restrict all other tenants from offering the same kind of food that you offer? If you do that, the Chinese restaurant on the other end of the plaza could start making its own version of sushi and selling it. Even though their sushi may be vastly inferior to the sushi you offer, a certain percentage of your customers may still be willing to compromise because of the lower price the Chinese restaurant offers. That could seriously hurt your business.

Why do you need help from a real estate attorney?

A lot of tenants overlook potential problems with an exclusive-use provision in their lease. They may not ask for one at all or ask for one that is worded so vaguely that it doesn't really protect them. They may not know how to bargain for provisions that will allow them to exert real power over their landlord.

Even if you have an exclusive-use clause in your lease, it's important to make sure that you are putting obligations on your landlord to enforce your exclusive-use clause and giving yourself remedies if the landlord fails to do so.

For more information on crafting a good commercial lease, talk to a real estate law specialist today.