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Use Restrictions: Give and Take

Leases for space in strip, community and power centers often contain use restrictions. The landlord has an interest in maintaining a certain quality of tenant mix and therefore restricts the uses of its tenants. Tenants also want to impose restrictions on the operations of the landlord and the other tenants at the center.

At the same time, they want to retain unfettered rights to use their space to suit their current and future needs. These conflicting interests make use restrictions troublesome to draft and enforce.

Exceptions to the rule If a landlord grants a tenant the right to operate its space for any lawful use, it is wise to prohibit those uses not compatible with the type of shopping center the landlord is operating. Some typical prohibited uses are pawn shops, massage parlors, dance halls, second-hand or surplus stores, warehouses, manufacturing facilities, gambling establishments, sporting events, d rug paraphernalia stores and auto repair shops, to name a few.

But even some of these so-called noxious uses, which were standard exclusions in the past, are becoming legitimate. Landlords should consider carving out certain exceptions to give themselves flexibility in their leasing efforts. For instance, spas, health clubs and some mainstream health food operators are providing on-site massages. These uses should be excluded from the prohibition on massage parlors.

Tenants such as Once Upon a Child, Play It Again Sports and antique stores are essentially second-hand stores, which landlords should retain the right to include in the tenant mix in certain centers.

Tenant's perspective To ensure the center attracts customers who shop their store, a tenant will also want to restrict uses. For example, tenants often want to restrict the type and amount of non-retail uses in a center. But the landlord wants to retain the right to lease to typical non-retail tenants that provide service for the tenant's customer and attract the customer to the center. Examples include restaurants, banks and other financial institutions, insurance offices, doctors' offices and similar medical facilities.

The parties can agree to exclude certain typical uses. They can also limit the amount of GLA in the center that can be leased for non-retail uses.

Tenants also want to prohibit uses that place too great a burden on parking but don't attract customers to their stores - health clubs, gyms, spas, theaters and schools, for example.

In order to keep its leasing options open, a landlord will not want to prohibit these uses entirely. Instead, a landlord can agree to locate a venue with high parking requirements away from an objecting tenant, so that the objecting tenant's parking field is not overburdened. Or the landlord could position high-parking users in spots with sufficient accompanying parking.

Yet another tenant concern is unwelcome noise or odor. Tenants will want to restrict uses that might disturb customers: restaurants, bars, game rooms, beauty salons and bowling alleys. Again, a solution is for the landlord to agree not to lease space to such users in locations close to the objecting tenant. Or a landlord can agree not to lease to a restaurant whose alcohol sales exceed a certain portion of its overall sales.

Proceed with caution Both parties must be careful about how these restrictions are drafted. Tenants generally want to restrict the landlord not only from actually leasing space to another tenant for the restricted use, but also from permitting such uses. This places the burden on the landlord to assure that no other tenants in the center have the right to operate a restricted use, and to prevent a renegade tenant from doing so. Enforcing such restrictions can be costly.

Thus, before a landlord agrees to restrictions in any particular lease, it must carefully review its existing leases at the center. Tenants whose leases permit them to operate any lawful use are not subject to restrictions granted to a subsequent tenant, unless the lease specifically prohibits that use. Wise landlords negotiate their leases to restrict not only noxious uses but also uses that the landlord anticipates will be objectionable to other tenants.

Landlords should also consider the location of certain objectionable tenants. This strategy would give the landlord the greatest flexibility in leasing space to other users who may otherwise not want to lease space near certain types of uses.

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