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Considering Use Clauses

One of the most critical provisions of a shopping center lease is the use clause. What the tenant may sell or operate in its premises not only affects the tenant but also impacts the tenant mix of the center and the landlord's future leasing plans, as well as the center's profitability. Following are some issues to consider when drafting and negotiating use clauses in the shopping center lease.

Narrow or Broad Use Clause Any Lawful Use. Of course, the tenant will want the use clause to be as broad as possible. The broadest use clause for a shopping center lease permits the tenant to use the space "for any lawful use." This gives the tenant the right to use the premises for any use that does not violate the law. Indeed, it does not even require a retail or service use, and so does not preclude an office, industrial or manufacturing use that might be permitted by zoning. Changing this to "any lawful retail use" at least limits the use to something that's likely to be compatible with a shopping center.

Several consequences arise from such broad language. Although the landlord may be expecting this tenant to initially open for business for a particular use, the tenant is under no obligation to do so. As soon as the lease is signed, the tenant's business strategy might change, and it may decide that it does not want to open a store in this particular market for the contemplated use. Instead, it may move another division into the premises, or assign the lease or sublease the entire premises to another use the landlord neither expected nor wants.

Even if the store opens for the originally contemplated use, it can be changed at any time during the term. For a tenant with the leverage to negotiate broad assignment and subletting provisions, a broad and open-ended use clause gives the tenant an excellent "exit strategy" at any time during the term of the lease. It makes the tenant's leasehold interest more valuable, since a tenant may take advantage of the favorable rent terms under a long- term lease by assigning the lease or subletting the space for another use. It is particularly useful for the bankrupt tenant, which, by not being limited to its own use, can more easily assign its leasehold.

"Particular Purpose" Clause. Big-box tenants are most likely to be able to negotiate such a broad use clause. Landlords generally have greater leverage on leases for in-line spaces, and can limit the use to a "particular purpose." Generally, this means a list of specific merchandise and services that are permitted. Landlords will want to be very clear that the space may be used "for no other purpose or use whatsoever."

Additionally, the landlord will want to ensure that the tenant will offer for sale all the items of merchandise and services the landlord desires. Not only should these items be the only items or uses permitted, but all of the items or uses listed in the use clause should be required to be offered for sale. For tenants who balk at this distinction, the requirement could be limited to the primary uses, giving the tenant more flexibility on the incidental uses.

Flexibility Landlords are sometimes as interested as tenants in adding some flexibility into the use clause. If a tenant is a national or regional chain, the landlord will probably want to make sure that the store in its center has the same up-to-date merchandise being carried by the chain's other stores.

The use clause can permit the tenant to offer for sale other, unspecified merchandise or services that appear in other stores. To be sure that this particular store reflects the mainstream of the chain, the use clause should state that the merchandise or services are substantially similar to that offered for sale in substantially all (or at least a majority) of the other stores operated under the same trade name as the premises.

Protection for Exclusives Tightening the use clause not only helps the landlord keep control over its tenant mix and merchandise mix. It also protects the landlord against possible violations of exclusives the landlord has granted to other tenants in the center.

Additional protection comes when the lease prohibits the tenant from changing its use without written consent of the landlord, or if the lease includes a list of prohibited uses, including existing exclusives. A tenant with great leverage may retain the right to change its use, but permit the landlord a right to recapture the space if the use is unacceptable or violates a future exclusive.

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