Challenges in Drafting a Restaurant Exclusive Use Clause

An exclusive use clause is one of the most important and heavily negotiated business issues in a shopping center lease and therefore, it is usually negotiated by the principals or brokers in the letter of intent. In a typical shopping center lease, the tenant has committed to invest considerable sums to open its store, and expects to be able to recover such sums and earn additional profit based upon projections at that store. These projections are often built upon the anticipated demand for the tenant’s product in the particular location, and the location’s ability to support the demand.

Profit margins for retailers can be quite thin, particularly for restaurants and food-service tenants. Consequently, a restaurant tenant will contend that adding additional restaurants with overlapping cuisines or products could severely infringe upon its profits, thereby changing the tenant’s projections and the economics of the deal. The tenant, therefore, seeks to include broad, exclusive-use protection to preclude such overlapping and to afford the tenant the most likely path to success, which success benefits both the landlord and the tenant. Such protection, the tenant will argue, is baked into the rent as consideration for the deal.

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Conversely, the landlord will likely resist granting an exclusive use right or seek to narrow the scope of an exclusive use clause so as to limit impediments to leasing and provide objective guidance for future tenancies. The landlord will argue that the rent is consideration for the opportunity to be located in the shopping center, and that the landlord should not bear the burden of the tenant’s fear of competition. If the tenant’s product is good enough and properly priced, the other tenants in the shopping center should be irrelevant.