October 21-November 3, 2015 —
COLORADO REAL ESTATE JOURNAL
— Page 21
Law & Accounting
To avoid issues, covenants
and leases should narrowly tai-
lor the use provisions, whether
prohibited uses, permitted uses
or exclusive uses, so that the
intent is clear and the provi-
sions are not overly broad so
that uses and potential retail-
ers are not inadvertently lim-
ited. Thoughtfully drafted
exclusive-use provisions will
specifically grant the exclusive
use in the project, but in a lim-
ited manner. For example, the
document should be clear that
the exclusive use will not apply
to other premises in the project
that sells pasta or noodles in
no more than 25 percent of
floor space for retailers and no
more than 25 percent of gross
sales of restaurants. With this
limitation however, a landlord
will want to require in its leases
with future tenants a require-
ment to provide landlord with
itemized gross sales reports by
product and floor area to avoid
a default of the exclusive grant-
ed to the noodle restaurant and
to be able to document the
amount of pasta being sold by
other tenants.
The exclusive use should
also only apply if the original
tenant is in the premises and
operating the business relat-
ed to the exclusive use. The
exclusive use also should carve
out previously leased prem-
ises and any future uses of
those already leased spaces so
that the landlord does not have
future issues with releasing or
subleasing those premises. If
the use of the premises chang-
es, the exclusive should auto-
matically terminate. A grant of
use restrictions in a recorded
document also should termi-
nate if the original party to the
document no longer operates
the exclusive use on the prop-
erty.
The lease should also clearly
state that the granted exclusive-
use provision does not pro-
hibit the landlord from leasing
to similar but not exactly the
same use. For example, if the
exclusive use is for a “full-ser-
vice health and fitness studio,”
does that exclusive prohibit a
spa, a yoga or Pilates studio,
or a retailer that sells vitamins?
Related uses that the landlord
wants to ensure are permitted
without violating the exclusive
use should be clearly stated
as permitted uses under the
exclusive use. Landlords also
may want to have a provision
in the lease that requires the
tenant to reasonably approve
related uses but do not violate
the exclusive use in an estop-
pel or other document prior
to leasing to the related-use
tenant.
Also tricky for the landlord
in defining to which proper-
ty the exclusive use applies.
At a minimum, the landlord
should be clear that the exclu-
sive only applies to property
owned by the landlord in the
specific project and permits the
landlord to sell portions of the
project unencumbered by the
exclusive use. The developer/
landlord may want to define
limited areas that the exclusive
use applies to that is less than
the entire project to maximize
flexibility. Prohibited uses also
may only apply to certain lim-
ited areas that are defined in
the lease or the recorded cov-
enants.
Tenants also must be clear
on the portions of the proj-
ect the exclusive covers. If the
landlord is a pad site owner or
only owns a portion of the proj-
ect, the exclusive would not be
binding on the developer or
the project but only the portion
owned by the landlord. The
tenant may want to limit the
developer’s ability to finesse
the exclusive use by transfer-
ring the property to a separate
entity owned by the landlord
or its affiliates by including a
provision that binds the affili-
ates of the landlord in the lease
to the exclusive-use grant. Ten-
ants should also consider that
if the exclusives, permitted and
prohibited uses that a tenant
wants to protect are not in a
recorded document, it would
not bind a future landowner
if part of the project is sold to
a different owner unencum-
bered.
The remedy provisions in
the documents also require
careful drafting. Whether in a
lease or recorded covenants,
the property owner must have
notice and the opportunity to
cure prior to the tenant hav-
ing any available remedies. In
some cases, a cure may not
be available and, as a result,
landlords will want to limit
the remedies available to the
tenant to the right to termi-
nate the lease and avoiding
injunctive relief, and all forms
of damages. For example, if in
the project with the “no pasta
may be sold” lease the land-
lord failed to consider that a
permitted use of “Middle East-
ern restaurant and any other
lawful use” includes the sale
of pasta unless specifically pro-
hibited or limited by that lease,
then the landlord would be in
a situation that if pasta were
sold by the Middle Eastern res-
taurant the tenant of that lease
would not be in default of its
lease, despite creating a default
for the landlord under the “no
pasta may be sold” lease, thus
prohibiting landlord from cur-
ing the exclusive-use default
under the noodle lease. How-
ever, tenants may resist hav-
ing a sole remedy to terminate
the lease, as this may not be a
practical remedy for a tenant,
particularly if the tenant is a
franchisee and that location is
critical to its franchise agree-
ment.
The parties involved in the
retail transaction should care-
fully consider the consequenc-
es of the use provisions in the
documents for long-term plan-
ning in addition to the short-
term consideration of closing
the transaction.
s
Landlords also
may want to
have a provision
in the lease
that requires
the tenant to
reasonably
approve related
uses but do
not violate the
exclusive use in
an estoppel or
other document
prior to leasing
to the related-
use tenant.
