[Note: The substance of this article is adapted from Avoid Tenant Mix Problems When Giving Use Flexibility to Big Tenant, published in the June 1998 issue of Commercial Lease Law Insider.]
A major retail tenant of a shopping center has a lot of bargaining power. So much so sometimes that it has the power to change the tenant mix in a way which is detrimental to the entire center. The owner of the center sometimes has to make an unpleasant choice - to give the tenant the flexibility it seeks and put the viability of the center at risk or deny the tenant its desires and risk losing the tenant.
Fortunately, there are other alternatives. The first is to permit the tenant the widest use of its space but prohibit it from changing the use of that space to the then principal use of another tenant of the center (through change in business of the tenant or through assignment or subletting). Thus, for example, if the major tenant of the shopping center is a clothing store and the center later adds a florist, the lease will prohibit the clothing store from converting either itself or its space into a flower shop. This is particularly important if the size or location of the center is such that the center will be unable to support two businesses in direct competition and has two beneficial effects. It maintains tenant balance in the center while simultaneously giving some flexibility to the powerful tenant by allowing it to use some or all of its space for a business which, while present in the center, is an ancillary, rather than a principal, business of another tenant.
Another frequently employed technique is to permit the main tenant to use the space for one or more specific purposes (these being the purposes for which the tenant intends to use the space at the time of execution of the lease) and provide that the tenant may not use the space for any of a list of prohibited purposes, one of which is the principal use of another tenant. This limits both the use to which the original tenant may affirmatively put the property (that is, if a florist shop or a clothing store is permitted and a music store is not, the tenant may not open a music store even if it would otherwise be permissible) while simultaneously restricting uses which would be deleterious to the continued good health of the center.
The third common technique is to give the original tenant the broadest possible use of its own retail space, but restrict the purposes for which the original tenant may assign the lease or sublet the premises.
These strategies should not be applied without careful consideration of the needs both of the tenant and the shopping center. A major portion of our practice consists of helping our clients to give that consideration to proposed rentals of significant retail space. If you have a question about any aspect of commercial leasing, you really should give us a call.