drafting and reviewing commercial leases ...drafting & reviewing commercial leases, part 2...

DRAFTING AND REVIEWING COMMERCIAL LEASES, PART 1 & PART 2

First Run Broadcast: December 15 & 16, 2015

1:00 p.m. E.T./12:00 p.m. C.T./11:00 a.m. M.T./10:00 a.m. P.T. (60 minutes each day)

Office and retail space leases are complex and lengthy instruments. The recent aftermath of the

real estate crisis have also highlighted the risks and costs of poorly drafted leases for both

landlords and tenants. Economic provisions need to reflect changes over time, including rent

escalators for landlords, but also flexibility for the tenant to return or sublease space it can no

longer use. There are subtle tradeoffs among exclusivity rights in retail leases, rents and the term

of the lease. Common area maintenance expenses, whether in an office building or retail center,

are also fertile sources of cost estimate overruns and disagreements. This program will provide

you with a practical guide to negotiating and drafting real office and retail space.

Day 1 – December 15, 2015:

Drafting and reviewing office and retail space leases in a strong real estate market

Letters of intent and term sheets – necessary inclusions, permissible exclusions

Detailed review of major provisions and key negotiating points of office and retail leases

Underlying economics of leases, including rent escalators over time, cost containment

and recovery

Marketing, subletting space and its complications

Building services, including telecommunications and data bandwidth issues

Day 2 – December 16, 2015:

Common area maintenance issues – rates, limits, and capital improvements

Protecting against landlord or tenant default and drafting effective remedies

Exclusivity – no competition in the retail development and related issues

Special issues when negotiating retail co-tenancies

Renegotiating existing office and retail space issues

Make-ups and give-backs: Lease renegotiation strategies for tenants and practical

responses of landlords

Speaker:

David C. Camp is a partner in the Denver office of Senn Visciano Canges, PC, where he

represents clients in all aspects of real estate transactions. He has extensive experience in

leasing, development, construction, financing, and ownership issues. He also has substantial

experience in commercial finance matters, most frequently corporate and real estate financing,

including mezzanine loans, construction loans, and traditional loan matters. Mr. Camp received

his B.A. cum laude from Middlebury College and his J.D. from the University of Pennsylvania

Law School.

VT Bar Association Continuing Legal Education Registration Form

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Drafting & Reviewing Commercial Leases, Part 1

Teleseminar December 15, 2015

1:00PM – 2:00PM 1.0 MCLE GENERAL CREDITS

PAYMENT METHOD:

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VBA Members $75

Non-VBA Members $115

NO REFUNDS AFTER December 8, 2015

VT Bar Association Continuing Legal Education Registration Form

Please complete all of the requested information, print this application, and fax with credit info or mail it with payment to: Vermont Bar Association, PO Box 100, Montpelier, VT 05601-0100. Fax: (802) 223-1573 PLEASE USE ONE REGISTRATION FORM PER PERSON. First Name ________________________ Middle Initial____Last Name___________________________

Firm/Organization _____________________________________________________________________

Address ______________________________________________________________________________

City _________________________________ State ____________ ZIP Code ______________________

Phone # ____________________________Fax # ______________________

E-Mail Address ________________________________________________________________________

Drafting & Reviewing Commercial Leases, Part 2

Teleseminar December 16, 2015

1:00PM – 2:00PM 1.0 MCLE GENERAL CREDITS

PAYMENT METHOD:

Check enclosed (made payable to Vermont Bar Association) Amount: _________ Credit Card (American Express, Discover, Visa or Mastercard) Credit Card # _______________________________________ Exp. Date _______________ Cardholder: __________________________________________________________________

VBA Members $75

Non-VBA Members $115

NO REFUNDS AFTER December 9, 2015

Vermont Bar Association

CERTIFICATE OF ATTENDANCE

Please note: This form is for your records in the event you are audited Sponsor: Vermont Bar Association Date: December 15, 2015 Seminar Title: Drafting & Reviewing Commercial Leases, Part 1 Location: Teleseminar - LIVE Credits: 1.0 MCLE General Credit Program Minutes: 60 General Luncheon addresses, business meetings, receptions are not to be included in the computation of credit. This form denotes full attendance. If you arrive late or leave prior to the program ending time, it is your responsibility to adjust CLE hours accordingly.

Vermont Bar Association

CERTIFICATE OF ATTENDANCE

Please note: This form is for your records in the event you are audited Sponsor: Vermont Bar Association Date: December 16, 2015 Seminar Title: Drafting & Reviewing Commercial Leases, Part 2 Location: Teleseminar - LIVE Credits: 1.0 MCLE General Credit Program Minutes: 60 General Luncheon addresses, business meetings, receptions are not to be included in the computation of credit. This form denotes full attendance. If you arrive late or leave prior to the program ending time, it is your responsibility to adjust CLE hours accordingly.

PROFESSIONAL EDUCATION BROADCAST NETWORK

Speaker Contact Information

DRAFTING AND REVIEWING COMMERCIAL LEASES, PART 1 & PART 2

David C. CampSenn Visciano Canges P.C. – Denver(o) (303) [email protected]

Richard GoldbergBallard Spahr, LLP - Philadelphia(o) (215) 864-8730(m) (215) [email protected]

INTERNATIONAL COUNCIL OF SHOPPING CENTERS

LAW CONFERENCE

October 21-24, 2009Phoenix, Arizona

EXCLUSIVE CLAUSES

&

RADIUS CLAUSES

or

Monogamy or Monopoly? Navigating the Minefield of Exclusives and Radius Clauses.

Materials Prepared By:

Joel R. HallLaw Office of Joel R. Hall

1843 Cherry Ave.San Jose, CA 95125(o) (408) 723-1964

[email protected]

Joel R. Hall, Esq.©All Rights Reserved

Exclusives andRadius ClausesICSC Law ConferenceOctober 21- 24, 2009

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TABLE OF CONTENTS

§1.00 EXCLUSIVE CLAUSES

§1.01 Challenges in Exclusive Clause Drafting.…………………………………………... 1a. Prevalence of Exclusives in Shopping Center Leasing …….…...................... 1b. Effects of Exclusives – Problems For the Landlord....……………………… 1c. Effects of Exclusives - Problems For The Incoming Tenant .…..….……......2d. The Approach to The Problem. .....…………..………………….…………...2

1.02 Drafting A Proper Exclusive - A Guide For The Landlord.......................................2a. The Exclusive Must Protect Only The Principal and Primary Use of

the Tenant And Must Be Specifically Defined…..………………………….....3b. The Other Tenant’s Merchandise Must “Compete” With the Exclusive

Holder’s Merchandise……………………………………………….................5c. The Protected Merchandise Or Use Must Allow An Encroachment

To An “Incidental” Extent Unless The Exclusive Is Limited In Distance……8d. Existing Leases (“Prior Lease(s)) Should Be Exempted .................................9e. The Burdens Of A Tenant’s Exclusive Should Not Be Expanded

Or Enlarged Vis-À-Vis A Subsequent Tenant….....……..………….……..... 10f. Stores Of A Certain Size Should Be Exempted ..……..…..…………………..10g. A “Rogue Tenant” Should Not Trigger a Violation For A Period Of Time…10h. A Tenant Permitted to Assume a Lease by an Order of a Court Should

Not Trigger An Exclusive Violation . ………………….……………………..10i. Exclusive Personal to Original Tenant……………….………………………10j. Consequences of Exclusive Holder’s Default ………………………………..11k. “Use It Or Lose It”………………………………….…………………………11l. Consequences of The Exclusive Holder “Going Dark”……………..……….11

§1.03 The Incoming Tenant Confronting The Exclusives of Others – LeaseDrafting Considerations With The Landlord……………………………..............................12

a. Flushing the Landlord Out ……..………………………………………….12b. The Incoming Tenant Must Receive Exact Copies of the Exclusive………..13c. Landlord’s Offer of Indemnification In Lieu of Disclosure …..……………13d. Exclusive Holder’s Remedy - Absolute Prohibition

or Monetary Remedy?......................................................................................13e. Landlord’s Failure to Disclose All Exclusives………………………………15

§1.04 Exclusive Holder’s Remedies if Exclusive Violated………………………………..15a. Specific Remedies or General Default? ..........................................................15b. Monetary Relief and Termination…………………………………………...15c. Sales Test As A Prerequisite For Enforcement……………………………..16d. Exclusive May Not Be Violated

§1.05 Antitrust Implications……………………………………………………………….16

Exclusives and iiRadius ClausesICSC Law ConferenceOctober 21- 24, 2009

§2.00 RADIUS CLAUSES

§ 2.01 In General ………………..………………………………………………………..19

a. Meeting The Competition…………………………………………………19b. Maximizing Points of Distribution………………………………………..19c. Percentage Rent Leases…………………………………………………...20d. Tenant Closes The Store To Open Another. ……..………………………20

§ 2.02 The Landlord's Traditional Arguments In Support of A Radius Clause(and Tenant's Response) ………………………………………………………... 21a. Direct Effect on Percentage Rent… ……………………………………..21b. Loss of the Tenant's Synergy……………………………………………..21c. General Ruinous Effect On Entire Center……………………………….21d. Better Economics Elsewhere……………………………………………...21

§ 2.03 Elements of Radius Clause…………………………………………………….…22

§2.04 “By The Tenant”……………………………………………………………….…..24

§2.05 Radius Period…………………………………………………………………..….25

§2.06 Restricted Area……………………………………………………………………25

§2.07. Competing Store…………………………………………………………………...25a. Identical Tradename……………………………………………………..27b. Identical Merchandise Is The Protected Merchandise……………….…28c. “Primarily Carried”..….………………………………………………....29d. Size of the Other Store…………………………………………………...30

§2.08. Landlord's Remedy – Prohibitive or Compensatory?..........................................30a. Rent Stabilization………………………………………………………...30b. Gross Sales Inclusion ……..………………………………………….…31c. Rent Stabilization and Gross Sales Inclusion Combined……………….31

§2.09 End Of The Radius Violation …………………………………………………..32

§2.10 Exemptions and Exclusions…………………………………………………… .32a. Existing Stores…………………………………………………………...32b. Changing The Tradename At The Premises……………………………32c. Divisions With a Similar Core Name… ………………………………...32d. Specific Businesses Excluded…………………………………………...33

§2.11 Diversion of Business and "Maximizing Profits" Clauses……………………33

§2.12 Antitrust Considerations ………………………………………………………..33

§1.00 ExclusivesICSC Law Conference - Scottsdale, ArizonaOctober 21- 24, 2009

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1.00 EXCLUSIVE CLAUSES

§1.01 Challenges in Exclusive Clause Drafting.

a. Prevalence of Exclusives in Shopping Center Leasing.

Malls and Lifestyle Centers. In the past exclusives for in-line stores in enclosed mallsdid exist and while they were relatively uncommon, given the size of such centers and the sophisticationof center owners, the havoc which would result from granting exclusives in use categories that wereclosely related to one another, were well understood and usually avoided. Where exclusives did exist,they were likely to be reserved for special uses with a one-of-a-kind appeal or where the center could notsupport more than one or two tenants of the particular use category and still maintain a balanced anddiversified tenant mix. In lifestyle centers, whose occupants closely resemble the quality of tenants foundin enclosed malls, the prevalence of exclusives would be comparable to the malls.

In the current economic climate, exclusives are appearing in greater numbers as developers arefacing increased vacancies and renegotiated rentals and retailers have correspondingly acquired increasedleverage. In addition, retailers are seeking much broader and stricter exclusive protection than was true inthe past as each retailer desperately competes for the vanishing consumer dollar.

Since the late 1990s, retailing has moved away from the original assumptions upon whichexclusives had been based – strict boundaries created by tightly drawn use clauses which would enableretailers to keep out competition and at the same time allow the developer to maintain a balanced anddiversified tenant mix. However, individual retailers have expanded product lines and services, whichhas resulted in the blurring of the tight limits historically imposed by use clauses. Tenants areincreasingly broadening their merchandise lines, offering the same or similar products as their neighborsand offering consumers a diverse selection of fashion, quality and choice. As each retailer now sellssome merchandise which is duplicative of some of the other fellow’s goods, the demands of retailers forbroader use clause provisions and at the same time broad exclusive protection requires some deftmaneuvering skills on the part of the landlord to navigate between the two.

Power & Strip Centers. Traditionally, exclusives are abundant in power and strip centers.The balance of power between landlords and tenants in these centers tips towards the tenants; therefore,tenants can insist upon, and receive, exclusive protection. Exclusives are very common among “big boxcategory killers”. Some small or service-oriented tenants are also able to secure exclusives chieflybecause strip centers cannot support more than one of their category (e.g., a beauty salon or shoe repairshop) and therefore, the exclusive is not a significant concession by the landlord.

b. Effects of Exclusives – Problems For the Landlord. While exclusives may be justifiedin the case of specific uses (e.g., big box linens and housewares users, big box book sellers or smallerspecialty uses), granting exclusives with respect to more general and closely related classes ofmerchandise, such as apparel, electronics and entertainment categories is extremely perilous. Anexclusive applying to such general classes of merchandise, given the breadth of such a restriction, willplace immense power into the hands of the exclusive holder; and because of its potential to limit the


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landlord’s ability to enter into leases with others in the future, it will give the exclusive holder atremendous leverage over the landlord.

Even with respect to exclusives granted to “category killers,” extreme care must be taken indrafting. A well drafted exclusive will give the tenant substantially all of the protection it needs whileallowing the landlord sufficient flexibility to lease to other acceptable retailers whose normal merchandiselines may include some of the goods of the protected party. A badly drafted exclusive will (i) subject thelandlord to the sole discretion approval by the exclusive holder every time the landlord desires to sign alease with another party who may carry some of the exclusive holder’s goods, and (ii) in the case of anassignment or sublease by an existing tenant, subject an assignee or subtenant to the sole discretionconsent of the exclusive holder if the proposed tenant carries (or may in the future carry) some of theexclusive holder’s protected merchandise.

c. Effects of Exclusives - Problems For The Incoming Tenant. An effectcorresponding to that felt by the landlord is that produced upon a tenant desiring to come into the center.A poorly drafted exclusive is a significant problem for the incoming tenant who is negotiating a lease.Where an exclusive has been granted to a tenant which covers not only that tenant's principal or “core”business, e.g. books (in whatever format) but collateral lines of merchandise – such as music in CDformat or movies in DVD format- the result is the exclusion of the retailer whose principal or corebusiness is that of the collateral merchandise of the existing exclusive holder. This cripples theincoming tenant’s ability to enter the shopping center.

Even if the incoming tenant’s principal or core business is not affected by the exclusive,the exclusive may significantly impact the collateral merchandising lines of the incoming tenant to such adegree that it cannot justify “doing the deal.”

The problem of a badly drafted exclusive is often ignored by landlords and incomingtenants. During negotiations tenants often do not ask about existing exclusives and very few landlordsbring up the subject. In many cases, nothing bad happens, which further anaesthetizes the landlord’s (andtenant’s) leasing representatives to the potential problems which could arise. All too often, problemspresent themselves when it is too late to solve them rationally, after the incoming tenant’s lease has beensigned, construction has commenced or the tenant has, in fact, opened for business and an existingexclusive holder has brought an action to enjoin the incoming tenant from proceeding, alleging significantdamages.

An incoming tenant who assumes that an existing exclusive, even if poorly drafted, willbe declared unenforceable as an unreasonable restraint on alienation and who makes a significantcommitment to the deal in reliance thereon is pursuing a naïve and dangerous business course.Exclusives are scrutinized by the courts under the rule of reason – they are upheld if under the particularfacts and circumstances they are reasonable in scope and purpose.

d. The Approach to The Problem . The problem should be approached by the landlord andthe incoming tenant from the following viewpoints:

(i) for the landlord, the ability to draft a sensibly - worded exclusive in the firstinstance.


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(ii) for the incoming tenant confronted with an exclusive, the ability (a) to extract from thelandlord disclosure of the present exclusive, (b) to know how much to ask for, what toexpect and what to accept from the existing exclusive holder, and (c) to seek protectionfrom the landlord if the exclusive holder and the incoming tenant cannot resolve aconflict between them.

The provisions that follow will discuss these concepts.

§1.02 Drafting A Proper Exclusive - A Guide For The Landlord.

A landlord who creates a well crafted exclusive should expect little in the way of acomplaint from its existing exclusive holder and should have the reasonable flexibility it needs toproperly operate and lease to others in its center.

The elements of a properly drafted exclusive are:

a. the exclusive must protect only the principal and primary use of the exclusive holder(unless the exclusive is limited in distance) and must be specifically defined;

b. the other tenant’s merchandise must “compete” with the exclusive holder’s merchandise(unless the exclusive is limited in distance);

c. the protected merchandise or use must allow an encroachment or overlap to an “incidental”extent (unless the exclusive is limited in distance);

d. existing leases and their renewals (under certain conditions) should be exempt so long astheir use clauses are not expanded or enlarged to encroach (or further encroach) upon theexclusive holder’s goods;

e. with respect to future incoming tenants, future expansions or enlargements of the burdensof an existing exclusive should not be binding on such incoming tenant;

f. stores of a certain size, present or future, should be exempt (unless the exclusive is limitedin distance);

g. any “rogue tenant” activities would not trigger a violation until the Landlord has failed tocure the violation after a reasonable period of time (to be negotiated);

h. any tenant or occupant permitted to assume a lease or operate a business based as a resultof bankruptcy, insolvency or as the result of an action or order by a court should be exempt;

i. the exclusive should remain personal to the original tenant but may also pass to assigneesor subtenants in a transfer where landlord's consent is not required; otherwise it wouldbecome void upon an assignment or sublease (this is negotiable);

j. the exclusive becomes null and void (or suspended during the default period) if theexclusive holder is in default beyond the applicable notice and grace periods;


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k. the exclusive becomes null and void if the exclusive holder is not engaged in the protecteduse or merchandise for a period of time (to be negotiated);

l. the exclusive becomes null and void if the exclusive holder is not open for business,whether or not prolonged closures are permitted under the lease (to be negotiated).

a. The Exclusive Must Protect Only The Principal and Primary Use of the Tenant AndMust Be Specifically Defined. An understanding of some of the cases that have examined exclusives willassist the parties in this effort. The exclusive holder’s protection should extend only to its principal andprimary business and not to everything it carries in its store. The type of protected merchandise should bedescribed as specifically and with as much detail as possible. Accordingly, exclusives for “a gift store” or“men’s and boy’s items” are fatal to a landlord. In cases where even a specific description results in anexclusive that is still too broad – e.g “women’s dresses” – then additional qualifiers, descriptions orlimiting words should be added to the extent possible. See the discussion of the Weinberg case, infra.

If it is practical to express the concept of “principal and primary” this way, the clause shouldprovide that in order to qualify for protection, the exclusive holder must carry the protected merchandisein excess of a certain percentage of its total merchandise or floor area. The protection should be void if itfalls below those levels.

The drafter should be aware of two broad categories of exclusive. One type grants theright to conduct a particular business without reference to particular products and is often referred to as alimited exclusive. Examples would be a “drug store” or a “sporting goods store”. The other type grants

the exclusive right to sell specific products and is sometimes referred to as a true exclusive.1

A limited exclusive for a general type of store, e.g. a “drug store”, will not exclude allcategories of merchandise carried in that store but rather, will often only protect the merchandise oroperation considered to be the “core” of that business – the operation of a pharmacy for the sale ofprescription drugs in the case of a drug store exclusive. It would not prevent the sale by another tenant of

health and beauty aids, cameras, film, toys, etc.,2

items which are also carried to a significant extent inmodern drug stores. In Rite Aid of Ohio, Inc. v. Marc’s Variety Store, Inc., 638 N.E.2d 1056 (8th Dist.Cuyahoga County 1994), the use clause of the lease of the exclusive holder, Rite Aid, permitted the saleof:

“Proprietary and ethical drugs, health and beauty aids, sundries, tobacco productsand smoking supplies, liquor, beer and wine, school supplies, housewares, small electricalappliances, toys, recreation equipment, cameras, photographic supplies and film processing,

1Patrick A. Randolph, Jr., Esq. and Mark A. Senn. Esq. An Examination of Use And Exclusive Use Clauses, Crafting Lease

Clauses – Volume III. International Council of Shopping Centers (“ICSC”), Selections From ICSC U.S. Shopping Center LawConferences, 1999 – 2001, p. 165, at page 166 (hereinafter, Randolph and Senn).

2Randolph and Senn, supra, note 1, at p. 166,167.


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food for off premises and on-premises consumption, books, newspapers and magazines anditems kindred to the foregoing.”

3

However, Rite Aid’s exclusive clause provided simply for “the exclusive privilege for the

operation of a Drug Store in the Shopping Center”.4

When a general merchandiser came into thecenter selling, among other things, health and beauty aids, Rite Aid brought suit since prescription drugsand health and beauty aids constituted ninety percent (90%) of its sales. Rite Aid argued that the term“drug store” should be given a “broad meaning” so as to include most of the items in its use clause. Thecourt found that dictionary definitions, the Ohio regulatory statutes and common parlance of the Englishlanguage contemplated that the distinguishing characteristic of a “drug store” is one where prescriptionsare filled; therefore, the general merchandiser’s operation was not a drug store since it lacked a pharmacy.To hold otherwise would give Rite Aid the power to exclude retailers which sell some combination offood, general merchandise and health and beauty aids, regardless of whether there was a pharmacy in thepremises. The harm to the shopping center owner would be substantial.

5A witness testified that the

defendant was a merchandise discount operation and that the two businesses would be considereddifferent, regardless of whether the defendant operated a pharmacy, because of their different

merchandise mix.6

A better drafted clause would be a true exclusive that focuses on specific merchandise orproduct lines, although Randolph and Senn point out that they are more difficult to draft and require more

thought and precision.7

In Marini v. Pyramid Centers of Empire State Co. 609 N.Y.S.2d 722 (4th Dep’t 1994),the landlord, Pyramid, entered into a lease with the tenant, d/b/a Mama Gina’s Pizza for the operation of apizza shop. Mama Gina had an exclusive restricting Pyramid from leasing space in the shopping centerto a tenant “whose primary business was the sale of pizza and/or Italian dishes.” Prior to the leasewith Mama Gina, Pyramid had leased space to K-Mart whose assignment clause allowed K-Mart toassign the lease or sublet the whole or any part of its premises. In the K-Mart premises there had been anarea designated for an “eatery express” and there had always been a small restaurant operation in thatarea. Later K-Mart subleased the “eatery express” area to Little Caesars for a pizza restaurant. In anaction brought by Mama Gina against Pyramid, the court ruled for the landlord holding that K-mart’sprimary business was not the sale of pizza or Italian dishes. While Mama Gina had a true exclusive, the

3Randolph and Senn, supra, note 1, at p. 167. See Rite Aid of Ohio, Inc. v. Marc’s Variety Store, Inc., 93 Ohio App. 3d 407,

at p. 409; 638 N.E.2d 1056, at p. 1058 (8th Dist. Cuyahoga County 1994) (hereinafter Rite Aid).

4Rite Aid, supra note 4, 93 Ohio App. 3d 407, at p. 409; 638 N.E.2d 1056, at p. 1058.


6Rite Aid, supra note 4, 93 Ohio App. 3d 407, at p. 416-417; 638 N.E.2d 1056, at p. 1062.

7Randolph and Senn, supra, note 1, at p. 167.


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alleged violator, K-Mart, had not violated the exclusive as the sale of pizzas was not K-Mart’s primarybusiness.8

b. The Other Tenant’s Merchandise Must “Compete” With the Exclusive Holder’sMerchandise. Adding the requirement that the offending tenant’s merchandise9 “compete with” theexclusive holder’s merchandise in order to trigger a violation will add an essential measure of protectionto the landlord (and, derivatively, the incoming tenant) . Unless it was intended that the exclusive holderbe the only one who could sell dresses, for example, regardless of fashion type, style, target customer,price point, etc.,10 the fact that two retailers sell similar garments should not be enough to trigger anexclusive clause. Restrictive covenants have not been enforced by the courts when articles protected bythe covenant and articles sold by a defendant do overlap.11 Accordingly, even if the “offending” tenant’smerchandise exceeds the principal and primary levels of the exclusive holder’s business, there is noviolation if the offending tenant’s goods do not compete with those of the exclusive holder (if that’s whatthe exclusive clause requires in order to be actionable).

An example of how detailed the inquiry can be to determine whether the element of“competition” is present, the court in Weinberg v. Edelstein, 201 Misc. 343; 110, N.Y.S. 2d, 806 (N.Y.Sup. Ct. 1952) (hereinafter Weinberg) had to distinguish between “ladies dresses” on the one hand (theexclusive holder’s merchandise) and “matched skirts and blouses” on the other (the “offending” party’smerchandise) and found that the merchandise comprised two separate apparel categories and thus did notcompete with one another. The exclusive of the plaintiff provided that the landlord could not rent toanother store in the building for the retail sale of “ladies dresses, coats and suits”. The plaintiffexclusive holder in that case claimed that selling a blouse or other top and a skirt would, in combination,constitute a “dress”, especially if they were made from the same material or were otherwise coordinated.

The Weinberg court found that two-piece dresses were sold as a single unit and at a single priceand having almost complete unification of style. On the other hand, skirts and blouses weremanufactured by unrelated sportswear houses and retailers charged a separate price for each. They couldbe purchased separately and worn together or in combination with other blouses and skirts. In the wordsof the court:

“However incongruous it may seem to purists in the spheres of lexicography and logic, thelegal conclusion may well be that, under certain conditions, a matched skirt-and-blousegarment, although identical with a two-piece dress of the same material, does not comewithin the restriction and so, theoretically, a ‘dress is not a dress’”.

12

8Whether or not such sublease would have been exempt as being a part of a pre-existing lease was not discussed. See

subparagraph (d) below.

9I.e., the tenant whose merchandise is alleged to conflict with that of the exclusive holder.

10A doubtful assumption.

11Peoples Trust Co. v. Schultz Novelty & Sporting Goods Co, 244 N.Y. 14, 20-21; 154 N.E. 649.

12Weinberg, 201 Misc. 343, at 345; 110 N.Y.S. 2d, 806 at p. 808.


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The Weinberg court even examined custom and usage in the industry and found that the two typesof garments were manufactured by two separate segments of the apparel industry, with different tradeassociations and employee unions. The court noted that the plaintiff’s use clause was broader than itsexclusive clause. While the plaintiff was entitled to sell “ladies dresses, coats and suits and ladiessports clothes”, the exclusive only restricted “ladies dresses, coats and suits”. The omission of “ladiessports clothes” from the exclusive was significant in the eyes of the court, especially since the defendanthas altered its use clause after discussion with the plaintiff-exclusive holder during defendant’s leasenegotiations.

13Although the plaintiff’s exclusive did not have the additional (and limiting) requirement

that another’s business must “compete” with it in order to be actionable, the finding that the two types ofgarments were not the same was tantamount to the court judicially adding that requirement.In Utica Square, Inc. v. Renberg’s, Inc., 390 P. 2d 876 (Okla. 1964) the court held that the fact that twobusinesses carried men’s and boys’ wear – i.e. articles of the same general type – was not of itselfsufficient to deem an exclusive to have been violated unless they were also found to be in competitionwith one another (which was a requirement of the exclusive holder’s lease). Although the court upheldthe restrictive covenant, it conducted a detailed comparison of the similarities and differences between thetwo businesses, the quality of the merchandise offered, the difference in price points in some of themerchandise and even the quality of the build-out of the two stores to determine the issue of“competition”. The court held that inclusion of the words “in competition with” and “compete moredirectly” that were present in the exclusive holder’s lease were of critical importance in its decision andmeant more than merely selling articles of the same general type.14

The court in the Rite Aid case, aside from its reliance on the customary definition of a “drugstore” and the use of those words in the Rite Aid exclusive, found that ninety percent (90%) of Rite Aid’sbusiness was derived from the sale of prescription drugs and health and beauty aids as compared to thedefendant’s business in health and beauty aids which comprised thirty-three percent (33%), of its salesand 14.5 % of its floor area.

15In so doing, by implication, the court was saying, in effect, that the two

businesses were not in competition with one another (although one could argue that 33% of thedefendants’ business in the category of health and beauty aids was more than “incidental”).

To the exclusive holder, it may be the price point or manner in which the other tenantsells its merchandise that distinguishes the two operations for it. For example, a large specialty apparelretailer who sells dresses at a marked discount or what is commonly known as “off-price” should notobject to another apparel retailer who sells its merchandise at regular retail prices and vice-versa – thetwo lines do not compete with one another. Or, restaurant tenants should not object to incidental café orfood uses conducted by other non-food businesses. In all of these instances the factors which will triggerthe exclusive clause must be defined as precisely as possible with the intention that only the principal andprimary business of the exclusive holder be protected from competition from another.

13Weinberg, 201 Misc. 343, at 346-347; 110 N.Y.S. 2d, 806 at p. 809-810.

14Utica Square, Inc. v. Renberg’s, Inc., 390 P. 2d 876, at Par 18 (Okla. 1964).



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The case of Hibbet Sporting Goods, Inc. v. Biernbaum, 391 So. 2d 1027; 1980 Ala. LEXIS 3301;1980 Trade Cas. (CCH) P 63,755, was an aberration from the logic of the previously cited cases. In thatcase the landlord agreed with an exclusive holder that landlord would not lease to another “sportinggoods business or sporting goods store”.

16After it signed its lease with the exclusive holder the

landlord later wanted to lease another premises to Athlete’s Foot. The exclusive holder claimed thatitems such as shoes, warm-up suits and socks were “sporting goods”. The landlord and Athlete’s Footregarded these items as “apparel or sportswear”. Rather than comparing the two businesses intrinsicallyto determine whether there was a difference in those terms (or whether they were competitive, in fact, intheir merchandise mix), the court ruled for the exclusive holder solely on the basis of the subsequentconduct of the landlord as evidence of its intent when it signed the earlier lease with the exclusive holder.During the Athlete’s Foot negotiations the landlord had tried to limit Athlete Foot’s use clause to the saleof “sneaks and flats”. Athlete’s Foot refused to so limit itself and the parties signed a lease anyway. Thecourt held that both Hibbet (the existing exclusive holder) and the landlord understood, at the time theynegotiated the earlier Hibbet’s lease, what was meant by a “sporting goods store” based upon thelandlord’s conduct during the subsequent Athlete’s Foot negotiation. The court also observed that “Weobviously do not decide whether Athlete’s Foot would be a “sporting goods store” or a “shoe store” undera different factual setting”.17

Cautionary Note. An exclusive should not restrict all aspects of the exclusive holder’s business.Some retailers attempt to extend exclusive protection to merchandise lines or businesses beyond their corebusiness, e.g. book sellers who want the exclusive right to operate a café, sporting goods stores who wantexclusives for sports apparel. This is overreaching. These tenants may find, to their surprise, that thecourts, in interpreting the breadth of the exclusive may be unwilling, on unreasonable restraint of tradegrounds, to permit the prohibition of two or more major industry segments from the market when only thecore business of the exclusive holder was entitled to protection, regardless of the wording of theexclusive.

Special Treatment When Exclusive is Limited in Distance. The principles discussed above willchange significantly if the scope of the exclusive is limited in distance. See the discussion under (c)below.

c. The Protected Merchandise Or Use Must Allow An Encroachment or Overlap To An“Incidental” Extent Unless The Exclusive Is Limited In Distance. For an infringement to occur,the other tenant must be guilty of devoting floor area to the protected goods in excess of a certainthreshold amount. That threshold must be a reasonable one.

Exclusives are often drafted using the descriptive words “primary” and “incidental”. In theirsimple dictionary meanings “primary” means “principal,” “predominant,” “main” or “chief.” “Incidental”means “secondary” or “minor.” If the protected goods are not the exclusive holder’s principal andprimary business, then a more precise and quantitative measure is needed. In such a case, the thresholdsof the protected goods and that of the allowable “incidental” encroachment should each be expressed interms of a reasonable percentage of floor area. As noted in (a) above, the quantum of protected

16391 So. 2d 1027 at p. 1028; 1980 Ala. LEXIS 3301; 1980 Trade Cas. (CCH) P 63,755.

17391 So. 2d 1027 at p. 1028, at p. 1030.


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merchandise need not constitute the exclusive holder’s primary or principal business – it can be less but itshould be expressed in a clear measurable amount, e.g. 35% or 40% of floor area as the case may require.Formulas to express the permitted “incidental’ encroachment are commonly written as the lesser of (i)some percentage of the encroaching tenant's sales area (e.g. 10% - 25%) or, (ii) a specific maximum floorarea.

Defining the permissible incidental encroachment in terms of a percentage of the encroachingtenant’s sales should be avoided as it is almost impossible to implement. Although at first glance theconcept seems to make sense, it is difficult to administer and difficult for the other tenant to avoid aninfringement. A tenant cannot know if it has exceeded the percentage limit until the lease year is over, itsgross sales are totaled and the percentage calculated. But by then it is too late - the year is over and thedamage is done.

Further, assuming the tenant can project the components of its expected annual sales for thecoming year, it will take some pretty deft inventory control to stay clear of the limit. And if there isremaining stock of the protected merchandise left over after the encroaching tenant hits the limit, what isto be done with it? It cannot be sold and it may not be able to be stored if it is very seasonal or not likelyto be in fashion in subsequent years. Randolph and Senn confirm that it is impractical to limit a tenant’s

success by prescribing sales volumes.18

Special Treatment When Exclusive is Limited in Distance. The principles discussed above willchange considerably if the scope of the exclusive is limited in distance. A retailer may want completeexclusive protection for a host of merchandise lines it carries, incidental or not, as it may not want acompetitor selling any of the protected merchandise too close to the tenant's store. For example, this hasbecome apparent in the electronics industry, particularly in the areas of computers and cell phones. Inmodern malls, computer and cell phone kiosks and in-line stores have proliferated as eachtelecommunications carrier aggressively competes for the consumer dollar.Following is an example of such a clause:

Figure 1-1

Exclusive Limited by Distance

Landlord agrees that it shall not lease or permit the use any space, whether (a) in-line storesor (b) kiosks or carts within the common areas of the Shopping Center, within an area thatis 100 feet from the Premises for the sale of the Protected Merchandise. The term“Protected Merchandise” mean any or all of the following” [HERE LIST IN DETAIL THETYPES OF PROUCTS TO BE EXCLUDED FROM THE 100 FOOT AREA].”

In such a case, it does not matter whether (i) the protected merchandise is the principal and primarybusiness of the exclusive holder, or (ii) the incoming tenant’s merchandise “competes” with the protectedmerchandise, or (iii) the incoming tenant is only engaged in such sale of the protected merchandise to an“incidental” extent. Within the agreed upon zone, none of the protected products may be sold byanother. Beyond that zone, there is no restriction upon anyone whatsoever.

d. Existing Leases (“Prior Lease(s)) Should Be Exempted. The rights of tenants underpre-existing leases should be respected so long as the permitted use is not changed to permit (or expand)



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encroachment upon the exclusive holder’s protected products subsequent to the execution of the exclusiveholder’s lease. In the latter case, the exclusive holder, nor its assignees or subtenant would be bound bysuch changes.

What about the case where the prior lease is coming to an end but the tenant thereunder and thelandlord desire to renew that lease? The incoming exclusive holder may attempt in its exclusive torestrict the landlord’s ability to renew that pre-existing lease, intending that any exemption that did existwill now expire.

On the one hand, this is not fair to the pre-existing tenant who has been in operation in reliance on theimmunity of its use clause from any future exclusive which came into existence after the prior lease hadbeen signed. When the pre-existing tenant entered into its lease, it did so in reliance upon its freedom toconduct its permitted use in the retail environment as it then existed. The existing tenant's status shouldbe continued, if it and the landlord are willing, so long as the circumstances don’t worsen for theincoming tenant seeking exclusive protection and who came in subject to the prior tenant's use rights. Inother words, the pre-existing tenant's use clause should not be amended in such a way so as to permit (orexpand) encroachment upon the incoming exclusive holder’s protected products.

On the other hand, the incoming tenant seeking exclusive protection, as part of its motivation forsigning the lease in the first place, may have agreed to accept the existing retail environment and acceptthe pre-existing tenant's immunity for a limited time only, i.e. until the pre-existing tenant’s lease expired.For example, if the pre-existing tenant's lease would expire soon with no options to extend, the incomingexclusive holder may have agreed to tolerate the pre-existing tenant's immunity with the expectation thatthe pre-existing tenant's lease would soon expire.

A fair resolution would be that extensions or renewals of those prior leases should not lose theirimmunity provided the party who is renewing or extending is the party who was in possession of that pre-existing space (including assignees or subtenants of such party) during the original term of the prior lease,including any options to extend that were contained in such prior lease before the incoming exclusiveholder’s lease was signed. Further, and as stated above, upon such renewal, the pre-exiting tenant's useclause rights should not be increased beyond that which the incoming exclusive holder encountered whenit signed its lease such that the exclusive holder’s exclusive would be violated (or an existingencroachment made worse).

e. The Burdens Of A Tenant’s Exclusive Should Not Be Expanded Or Enlarged Vis-À-Vis A Subsequent Tenant. As a corollary to the discussion in subparagraph (d) above, the provisions ofan exclusive holder’s rights should not be subsequently expanded or enlarged such as to increase theburden of its restrictions against a subsequent tenant who agreed to be bound by the terms of the exclusiveas it then existed at the time the subsequent tenant came into the center. Just as the exclusive holder itselfwas required to respect the rights of pre-existing tenants when it acquired its exclusive clause (so long asthose pre-existing tenants’ use clauses were not expanded to encroach (or further encroach) upon theexclusive holder’s rights), then by the same token a subsequent tenant cannot be expected to suffer adiminishment of its use rights which it acquired when it signed its lease by the later enlargement of theexclusive holder’s restrictions.

f. Stores Of A Certain Size Should Be Exempted. The exclusive clause should excludefrom its operation stores of a certain size which (1) are deemed to pose no threat to the protected tenant(because they are too small), or (2) are not appropriate to be subject to the exclusive (because they are too


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big). If the exclusive holder is a large tenant, then there should be exempted smaller stores of less than acertain threshold size since such small operators would present no threat to the larger tenant. On the otherhand, if the exclusive holder is a small tenant, then there should be exempted from the exclusive largestores above a certain threshold size. This is not because such large stores do not threaten the smallertenant - they will - but because the small tenant has no negotiation strength to preclude the entry into thecenter of a large tenant, even if that larger tenant is a “category killer.”

g. A “Rogue Tenant” Should Not Trigger a Violation For A Period Of Time. Any tenantwho commits an exclusive violation in breach of its lease should not trigger a violation for which thelandlord should be liable provided the landlord takes proactive, commercially reasonable and diligentefforts to cause such violation to cease, including bringing an action or proceeding for breach of the roguetenant's lease or occupancy agreement and injunctive relief within ten (10) days following receipt fromthe exclusive holder of such violation. So long as the landlord undertakes such efforts and maintainsthem with diligence, no exclusive violation should be declared until a reasonable time has passed,typically 120 days from first receiving the exclusive holder’s notice of the violation.

h. A Tenant Permitted to Assume a Lease by an Order of a Court Should Not Trigger AnExclusive Violation . If a tenant’s space has been vacated in an insolvency proceeding and the courthaving jurisdiction approves the assumption by another tenant who will violate the terms of the exclusive,then that circumstance should not render the landlord liable for a breach of the exclusive since thelandlord has no choice in the matter.

i. Exclusive Personal to Original Tenant. The landlord can argue withjustification that the exclusive properly addresses the originally named tenant’s specific merchandisingand business needs but that the exclusive should not pass to assignees or subtenants. The landlord’sposition is that it granted the exclusive to the specific tenant because of the landlord’s confidence in thattenant’s ability to succeed in the premises; as a result, it had agreed to forgo other tenants dealing insimilar merchandise (whether in lieu of the tenant or as potential neighbors to that tenant). The tenant’sposition is that making the exclusive personal to the tenant will seriously impair its ability to assign thelease or sublet the premises to another user in the same business as it will significantly diminish the valueof the lease to be assigned or the premises to be sublet under it.19 This is purely a matter of negotiation.

In any event however the exclusive should remain viable and pass with an assignment orsublease in any transfer that does not otherwise require the landlord's consent.

j. Consequences of Exclusive Holder’s Default. Many landlords take the position that adefault under the lease by the exclusive holder voids the exclusive. A tenant will argue that if there beany consequence at all, the exclusive should be merely suspended until the default is cured. Otherwise,the tenant could lose a very important right because of a technical breach of a relatively minor leaseobligation. In the interval between default and cure, the Landlord is entitled to lease to others free of theburden of the exclusive. As the interlude between the commission of the default and its cure is usuallyvery short, this is not a huge concession for the exclusive holder and is a fair result to the landlord.



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k. “Use It Or Lose It”. If the exclusive holder ceases to engage in the protectedmerchandise for a period of time, the landlord will argue that the tenant has lost interest in and hasabandoned the benefit of the exclusive. This may or may not work an unfairness to the tenant if thecessation of use is due to seasonal factors of the merchandise in question. Allowance should be made forthis in the negotiation. Aside from such factors, a reasonable time limit should be provided before theassumption is made that the tenant has relinquished its need for exclusive protection.

In addition, cessation for force majeure reasons should not result in the forfeiture of exclusiveprotection. For example, the protected merchandise might be delayed because of a strike or disaster in theplace of manufacture or point of shipment, making it difficult or impossible to keep that merchandise insupply.

l. Consequences of The Exclusive Holder “Going Dark”. This is purely a matter ofnegotiation. A larger tenant, who intends to relocate to a nearby location, will assert that it will still needprotection of the exclusive in the original location if the original lease remains in effect.20

In other cases where the tenant has completely gone dark for more than a specific periodof time, e.g. 120 days, a fair provision would be that the exclusive should be suspended (rather thanvoided) and would not apply to any leases that were entered into during the interval after the expiration ofthat time period and before the reopening by the exclusive holder of its business. Allowance should alsobe made for extended bona fide closures for remodeling or repairs due to casualty, eminent domain orforce majeure.

§1.03 The Incoming Tenant Confronting The Exclusives of Others – Lease DraftingConsiderations With The Landlord.

a. Flushing the Landlord Out. The lease should contain a covenant in the use clause that thelandlord will not do anything to impair or limit the incoming tenant’s ability to conduct the permitteduse. In the quiet enjoyment clause, the landlord should represent that (i) except as may be disclosed in anexhibit to the lease, there are no restrictions or other agreements that affect the incoming tenant’spremises or the incoming tenant’s ability to conduct the permitted use, and (ii) that increase the tenant’sobligations or diminish the tenant’s rights. In addition, to the extent the present exclusives are disclosedby the landlord, the incoming tenant’s lease should provide that any expansion or increase in the burdensof the existing exclusives (or renewals, except under certain conditions) will not affect or apply to theincoming tenant’s premises.

The following clauses accomplish this purpose:

Figure 1-2

Landlord’s Covenant



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“Use Clause. Landlord acknowledges that Tenant is entering into this Lease inreliance upon its ability to conduct the Permitted Use. Further, Landlord agreesthat it shall take no actions which would impair or limit Tenant in the conduct ofthe Permitted Use.

Covenant of Quiet Enjoyment.

Landlord represents and warrants to Tenant that

(a) except with respect to those set forth on Exhibit “X”, neither Landlord, nor theholder or mortgagee of any mortgage, nor a Superior Lessor or any other lessor under agroundlease nor any party to an REA nor any other occupant of the Shopping Center northeir predecessors in interest have imposed or created with respect to the Shopping Centeror entered into a lease or other agreement with any tenant, subtenant, assignee or otheroccupant in the Shopping Center, which has imposed any restrictive covenants, exclusive userights, prohibited uses or other encumbrance (collectively, a “Restriction” or “Restrictions”)that affect the Premises;

(b) Landlord agrees that, other than with respect to those Restrictionslisted in Exhibit X (subject to the conditions hereinafter provided), neither Tenant nor anyassignee or sublessee of Tenant shall be bound by:

i. any Restriction in any lease or other occupancy or other agreement hereaftergranted or entered into by Landlord with any tenant, subtenant, assignee or other occupantof the Shopping Center and the same shall have no applicability whatsoever to the Premisesor to Tenant for the Term of this Lease, regardless of the use conducted in the Premises;

ii. any amendment of the Restrictions set forth in Exhibit X which increases theburdens thereof;

iii. any extensions or renewals of the leases (“Prior Lease(s)”) containing theRestrictions set forth in Exhibit X except:

(x) with the party who was in occupancy of such premises during the original termof the Prior Lease (including any options to extend the term of the Prior Leasethat were contained in such lease at the time of the execution of this Lease), and

(y) the terms of the Restriction are not amended to increase the burden thereof, asaforesaid.

Landlord shall indemnify, defend and hold harmless Tenant and any assignee orsublessee from any claims or damages suffered or claimed to be suffered by Tenantor its assignee or subtenant as a result of any breach or alleged breach ofLandlord’s representations, warranties or agreements set forth in this Section.”

If the landlord breaches these representations and warranties, the tenant has recourse against thelandlord for indemnification and hold harmless protection. As a practical matter, the tenant should insiston receiving the text of the actual exclusive clauses before it signs the lease (see discussion below).


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b. The Incoming Tenant Must Receive Exact Copies of the Exclusive. The incoming tenantshould insist on receiving photocopies of the actual exclusive clauses. Often a landlord will resist aliteral, verbatim disclosure of the existing exclusive, citing confidentiality clauses in the exclusiveholder’s lease and offer an “executive summary” or a prohibited use list in lieu thereof. However, theincoming tenant should not be required to rely on landlord-prepared “summaries,” which are sometimesinaccurate, incomplete or tend to be broader in scope than the actual exclusive provisions. Further, anexclusive restriction in an existing tenant's lease (which may have a shorter remaining life span than theterm of the incoming tenant's lease) should not be elevated to the status of a permanent use prohibitionwhich would apply to the incoming tenant’s lease long after the exclusive holder’s lease has expired. Inthe end, when landlords do agree to provide photocopies of the actual exclusive, they will want to excisethe portions thereof that deal with the remedies for a violation thereof, for reasons that are explained insubparagraph (d) below.

c. Landlord’s Offer of Indemnification In Lieu of Disclosure. Reluctant landlords will sometimesoffer the incoming tenant an “indemnification” in case a problem arises with an existing exclusive. Neverhas the phrase “an ounce of prevention is worth a pound of cure” been more appropriate. Theincoming tenant is interested in avoiding lawsuits, not winning them or being reimbursed for its trouble.

For a tenant to accept such an indemnity could be disastrous, particularly with respect to an exclusiveof which it had no, or only a vague, awareness, and which it never had the opportunity to read. It issobering to contemplate a tenant investing significant sums in leashold improvements, merchandise andlending commitments, only to have its store shut down by an injunction in favor of a present exclusiveholder. The tenant’s losses, in terms of defaulted loans, lost profits and other consequential damageswould be enormous. Given that almost every lease contains a “non-resourse” provision, there may not besufficient equity in the landlord's property to ever compensate the tenant for its losses. Certainly, nolandlord will pledge its other assets to cover such an indemnity. Such an offer is a sorry substitute forsimply disclosing the existing exclusives at the time of negotiating the lease. If problems appear uponsuch disclosure, the incoming tenant can deal with them up-front, or failing that, walk away from the deal.

d. Exclusive Holder’s Remedy - Absolute Prohibition or Monetary Remedy? The disclosureshould include the exclusive holder’s remedies for violation of the exclusive (i.e., whether the existingexclusive holder may pursue all of its legal remedies and prevent the incoming tenant from entering thecenter, or simply receive other concessions in the form of minimum rent reductions, conversions tostraight percentage rent or the ultimate right to terminate. This additional information will oftendetermine who takes the risk of violation, i.e. whether the landlord is to seek a waiver for the benefit ofthe incoming tenant or for itself. For example, if the exclusive holder’s sole remedy is the reduction ofrent, a right to terminate the lease, or both, the incoming tenant may insist that it be free to conduct itsbusiness without restriction and place upon the landlord the risk of enforcement by the exclusive holder(in the form of a rent reduction and/or lease termination). A landlord may agree to accept this risk if (i) itwants the incoming tenant badly enough, (ii) considers enforcement by the exclusive holder as unlikely(or views that possibility with indifference), or (iii) the term of the existing exclusive holder’s lease maybe expiring soon and the landlord does not intend to renew that party’s lease. Following is a suggestedclause for the protection of the incoming tenant:

Fig. 1-3

Rent Reduction Clause Sole Remedy

“Existing Restriction. The parties acknowledge that Landlord and_______(“Designated Exclusive Holder”), have entered into a lease (the “DesignatedExclusive Holder’s Lease”) for certain other space in the Shopping Center. The


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parties further acknowledge that Article ___ of the Designated Exclusive Holder’sLease (the “Designated Exclusive Clause”) provides for a rent adjustment as betweenLandlord and the Designated Exclusive Holder, or alternatively, a right of theDesignated Exclusive Holder (under certain circumstances) to cancel the DesignatedExclusive Holder’s Lease in the event that other occupants of the Shopping Centerengage in [the sale of the “Protected Merchandise”] [or] [the conduct of the“Protected Use”] [EXCLUSIVE LANGUAGE IS QUOTED VERBATIM.

Landlord expressly acknowledges that Tenant intends to fully conduct thePermitted Use without any restrictions whatsoever, which use may include the saleof merchandise of a kind and quantity which may cause Tenant to engage in theProtected Use or engage in the sale of the Protected Merchandise. Landlordrepresents and warrants to Tenant that (i) the exclusive clause(s) listed in Exhibit Xare true and correct copies of all of the restrictions in the Shopping Center; (ii) theDesignated Exclusive Clauses identified above are not prohibitions against norprevent the sale of merchandise in the Premises that would render Tenant inviolation of the respective Designated Exclusive Clause; and (iii) said DesignatedExclusive Clauses provide, as the Designated Exclusive Holders’ sole and exclusiveremedy, for a reduction or adjustment of rent (or alternatively, a right to terminateits lease) as between Landlord and the Designated Exclusive Holder in the event thatTenant is in violation of the respective Designated Exclusive Clause.

Without limiting the generality of the indemnity contained in [SEE FIGURE 1-2 OFTHESE MATERIALS], Landlord hereby agrees to indemnify, defend and holdTenant harmless from and against all liability, obligation, claims, suits, costs andexpenses (including reasonable attorney’s fees), damages or loss, any civil or (to theextent permitted by law) criminal fine or penalty incurred or suffered by Landlordor Tenant by reason of (i) the breach of Landlord’s representations or warrantiesherein, or (ii) any actions brought against Tenant by the Designated ExclusiveHolder or against Landlord in which Tenant is made a party, or (iii) any other lossthat is suffered or incurred by Landlord or Tenant as a result of the DesignatedExclusive Clause, including, without limitation any loss of or diminution in rentreceived by Landlord from the Designated Exclusive Holder or the amount of anyimprovement costs incurred by Landlord in connection with (x) the Tenant’s Premises(if Tenant terminates or is prevented from operating by reason of the DesignatedExclusive Clause) or (y) the Designated Exclusive Holder’s premises that Landlordmay suffer, as a result of said Designated Exclusive Holder Lease or the DesignatedExclusive Clause, or (iv) the reimbursement of the cost of Tenant’s leaseholdimprovements and (v) other damages suffered by Tenant by reason of the breach ofLandlord's representations and warranties or actions brought by the DesignatedExclusive Holder.”

Although the incoming tenant has been cautioned against accepting the Landlord’s indemnity (i.e.in lieu of disclosing the text of the exclusive), in the clause above it is assumed that the incoming tenanthas reviewed the exclusive, determined that it is a “rent reduction” provision rather than an absoluteprohibition of the incoming tenant’s business and takes the landlord’s indemnity as an additionalprotection.


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e. Landlord’s Failure to Disclose All Exclusives . Having read the exclusives and received theappropriate waivers or modifications, the tenant would agree to honor all disclosed exclusives or to seek awaiver to the extent needed. If the landlord fails to furnish the incoming tenant with an exclusive, it mustindemnify and hold the tenant harmless from all liability, loss, damages and suits suffered by the landlordand the incoming tenant by reason thereof. Although, as discussed above, this is far from the bestsolution, in the circumstance of a forgotten or overlooked exclusive, there is no alternative.

§1.04 Exclusive Holder’s Remedies if Exclusive Violated.

a. Specific Remedies or General Default? The more aggressive exclusivesauthored by exclusive holders would permit the aggrieved party to (i) convert to a reduced rental, (ii)terminate the lease if the violation was not cured after a specified period of time, and (iii) pursue all otherrights and remedies for a breach of covenant, including recovery of provable damages, termination formaterial default (if not terminated already) and if appropriate and available, injunctive relief against thelandlord and perhaps the encroaching party. This is purely a matter of negotiation. If the exclusiveholder wants the full measure of protection, then the wisest course for it to follow is to record amemorandum of lease with the exclusive quoted verbatim therein. Absent recordation by the exclusiveholder, a policy of enforced vigilance on the landlord's part as a deterrent is required, failing which a rentreduction would ensue and eventually the ultimate remedy of lease termination by the exclusive holder ifthe violation endures for an extended period.

b. Monetary Relief and Termination. The landlord is granted a brief period oftime to cure a violation before the exclusive holder may avail itself of any remedy. A period of 30 – 60days is a typical period before a rent reduction arises. While this may not be enough time given thecumbersome nature of litigation against the offending tenant, the exclusive holder should not beunreasonably delayed in receiving its relief for an injury not of its making. After affording the landlordan opportunity to cure the violation, the exclusive holder should be entitled to pay a reduced rental –typically fifty percent (50%) of the rent. While such a rent reduction can be viewed as far exceeding anyconcept of compensatory damages, the object here is to deter the landlord from violating the exclusive inthe first place or to incentivize the landlord to vigorously enforce the exclusive against a rogue tenant whois violating it. If the violation is not cured after an extended period of time – typically six months – thenthe exclusive holder should also be granted the continuing right to terminate the lease in addition topaying the reduced rent.

In many cases the landlord will require the exclusive holder to “fish-or-cut-bait” after thepassage of some period of time, typically a year, after which the exclusive holder will be required toeither terminate the lease or resume the payment of full rent and perhaps lose the exclusive protectionentirely with respect to that violation. This is also a matter of negotiation. If the landlord willfully ornegligently violated the exclusive, there is little sympathy for imposing a “fish-or-cut-bait” decision uponthe injured exclusive holder. One alternative may be that (i) following the exclusive holder’s decision notto terminate, it may continue to pay a reduced rent but at a higher rate than the initial reduction, e.g. 80%– 90% of the rent thereafter until the violation ceases, if ever, and (ii) the exclusive holder would alwaysretain the termination right for as long as the exclusive violation endures. The extent its business hassuffered over time will determine when that tenant terminates.

c. Sales Test As A Prerequisite For Enforcement. Some landlords attempt toimpose a “sales drop” test before the exclusive holder can claim a violation. This should not beacceptable to the tenant. The exclusive holder had determined that it would be injured by the entry of a


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competitor into the center who sold the protected merchandise in excess of a threshold “incidental”amount or otherwise violated the exclusive (if the “zone” concept is employed) and negotiated a clause ingood faith with the landlord to achieve that result. The injury to the exclusive holder may not only bereflected in a drop in sales (which is capable of measurement) but also in the impairment of the futuregrowth of the exclusive holder’s business (which is difficult, if not impossible, to measure). The notionof a sales test is particularly offensive when it was the landlord's negligence that created the violation inthe first place – which is often the case as leasing agents come and go and data bases of existing leases arerarely kept up to date by developers. The exclusive holder should not have to justify entitlement toprotection under a clause already designed to protect it which has already been violated.

Some relief in the form of a longer moratorium may be agreed to if the violation wasperpetrated by a “rogue tenant”, as discussed in §1.02 (g) above.

d. Exclusive May Not Be Violated. At least one innovative developer advanced the conceptthat if following litigation it is determined that the exclusive was not violated after all, then any rentreduction taken by the exclusive holder should be repaid. If the exclusive is drafted clearly enough inaccordance with the foregoing principles, this is not likely to happen. But if it does, there is justificationfor the landlord's position. But what if the exclusive holder has already terminated its lease by reason ofthe alleged violation? Must it return? Hardly a practical solution and even this developer recognized thatto be an unattainable result. If there is any doubt on the landlord's part whether the exclusive wasviolated, the proper course of action would be to seek (i) to enjoin the exclusive holder from terminating,(ii) declaratory relief to determine if the exclusive was violated. and (iii) to require the exclusive holder toplace in escrow the rent (or half rent) received pending the outcome. The downside of that procedurefrom the exclusive holder’s viewpoint is that if it ultimately prevails, then what damages should it receive(in addition to the refund of the escrowed rent) if it was prevented from terminating the lease during along litigation when it was entitled to do so in the first place?

§1.05 Antitrust Implications. Although reliance on the assumed illegality or unenforceability of anexclusive clause should never be a driving factor for a landlord to agree to one (or for an incoming tenantto ignore one), an understanding of the antitrust principles involved is helpful in making those decisions.

In the past there was a widely held belief in the industry that these exclusives were illegal as perse violations of the anti-trust laws. In the vast majority of cases they are not. Rather, exclusives will beupheld if they are “reasonable” and will be deemed invalid if they are not. Whether they are reasonableor not will depend upon the facts of each particular case.

The notion that they were illegal stemmed from a flurry of activity in the 1970’s and early 1980’swhen the Federal Trade Commission (“FTC”) went after a number of large department store tenants (anddevelopers) of large regional malls who had retained the power to (a) exclude certain competitors fromthe center by means of “right of approval” or “no-discounter” clauses, and/or (b) set specific price rangesto define acceptable competing stores in the center.21 While the FTC initially took the position that thesespecific practices were per se violations and was successful in obtaining consent decrees against the

21See, e.g., Tysons Corner Regional Shopping Center, 3 Trade Reg. Rep. (CCH) ¶ 20,933 (F.T.C. 1975).


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department stores, the issue of whether they were per se violations de jure was never actually litigated.22

In fact, the FTC actions also affirmed the general common law principle that exclusives would be viewedunder the “rule of reason,” i.e. that such clauses would be upheld if the resulting restraint on trade was notunreasonable. This is especially true when the tenant is a small satellite store as distinguished from alarge anchor department store - the potential impact on competition is less significant.

The U.S. Supreme Court, in construing Section 1 of the Sherman Act, which proscribes allcontracts “in restraint of trade”23, has held that this section outlaws only those contracts that pose anunreasonable restraint of trade.24 In the context of analyzing exclusivity clauses in shopping centerleases, the federal courts have continued to apply a rule of reason analysis.25 This is not to rule out,however, the possibility that per se illegality may still be applicable in instances where a restrictivecovenant in a shopping center lease effectively amounts to price fixing, group boycott, horizontal divisionof markets, or other such practices.26

The factors that are considered in determining whether an exclusive is an unreasonable restraintof trade include (among others):

5.03-1 a. The Relevant Market Area - i.e. the geographic area served by the shopping center inquestion and whether it includes competing shopping centers or free-standing sites as alternativesto the excluded party. The anticompetitive effects of exclusives in larger shopping centers aregreater than those in smaller centers. A smaller center faces more competition from other smallcenters and free-standing sites and thus an exclusive in such a center is perceived to have minoranticompetitive effects and is generally upheld;

5.03-2 b. Whether the protected party has “market power” or “dominance” in the market;

5.03-3 c. The impact on competition in the relevant market - i.e. what is the impact on consumerchoices in the ability to purchase the merchandise in question?

5.03-4 d. Whether the clause has economic justification. The courts have recognized that shoppingcenters require a balanced and diversified tenant mix for its success. Exclusives are one of theways that goal is accomplished and therefore a valid business justification has beenacknowledged.

22Original Sears Consent Order entered on April 20, 1977, 89 F.T.C. 240. See also Jay Conison, Restrictive Lease Covenants

and the Law of Monopoly (1990), citing Tysons Corner Regional Shopping Center, 85 F.T.C. 970 (1975).

2315 U.S.C. §1

24See, e.g., Continental T.V., Inc. v. GTE Sylvania Inc, U.S. 433 36 (1977).

25Optivision, Inc. V. Syracuse Shopping Center Associates, 472 F. Supp 665 (N.D.N.Y. 1979).

26See Milton R. Friedman, Friedman on Leases, Practising Law Institute, Antitrust Implications of Covenants Against

Competing Uses, 1997, §28.8, citing Optivision at 675.


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5.03-5 e. In addition to the foregoing, state courts have utilized other considerations in determiningreasonableness. A prime example is the test enunciated by the New Jersey Supreme Court inDavidson Bros., Inc. v. D. Katz & Sons, Inc., 121 N.J. 196 (1990). In considering thereasonableness of a restrictive covenant, the court urged its lower courts to consider the followingfactors:

5.03-6 1. the intention of the parties when the covenant was executed and whether suchpurpose violated antitrust laws or public policy;

2. whether the covenant had an impact on the consideration exchanged by theparties;

5.03-7 3. whether the covenant clearly and expressly sets forth the restrictions;

5.03-8 4. whether the covenant was in writing and recorded;

5.03-9 5. whether the covenant was reasonable in area, time and duration;

5.03-10 6. whether the covenant imposes an unreasonable restraint on trade or secures amonopoly for the covenantee;

5.03-11 7. whether the covenant interferes with the public interest; and

5.03-12 8. whether changed circumstances now make the covenant unreasonable.

________________

§2.00 Radius ClausesICSC Law Conference - Scottsdale, ArizonaOctober 21- 24, 2009

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2.00 RADIUS CLAUSES

§2.01 In General. Radius clauses persist in modern commercial leasing transactions despitedramatic changes that have occurred in the manner in which retail practices and businessconditions have evolved since the late 1990's.

To survive in this competitive environment, each retailer must be aggressive in meetingits competition in the marketplace to preserve or increase its market share by either:

i. beating its competitor to a prime location, or, at the very least, being everywherehis competitor is to effectively compete for the consumer dollar;

ii. expanding its own points of distribution (i.e. opening other stores), regardless ofwhether its competitor is in the same market, to allow its business to grow.

a. Meeting The Competition. Retailers need to be where their rivals are in order toeffectively compete with them. Retailers no longer avoid territories dominated by theircompetitor because the available alternative markets, where one can own all of the business in thearea, are becoming scarce. One must either access a new market first, before its competition, orat least meet them upon the same turf. Otherwise, a retailer's success will begin to stagnate.

The most negative effect of a radius clause upon a tenant is that it prevents it fromeffectively meeting its competition in the marketplace. If the tenant is held captive by a radiusclause, the competitor will be guaranteed a monopoly in the new location and the tenant's abilityto grow its business will be stifled. Although every retailer would like to perceive itself aspossessing such power, customers living closer to a competitor’s location within the radius areawill simply patronize the competing operation rather than make a special trip to the existingcenter just to shop in the tenant's store. There is untapped market potential in the new locationand if the tenant doesn't capture or take a share in it, someone else will.

In the context of a rival shopping center within the radius area, the sales at the originallocation will suffer anyway because of the effects of the competitor's presence in the other center,whether or not the tenant is allowed to open at the new location. Indeed, the sales all of all of thetenants of the original center will be impacted by the opening of a new center, whether or not anyof those tenants have radius restrictions in their leases. If the tenant is allowed to open in the newlocation, at least it can capture those sales and contribute to the continued health of its business atboth locations.

b. Maximizing Points of Distribution. Highly successful companies in a constantgrowth mode must continually find new locations to "maximize their points of distribution". Thisis essential to grow the business and the brand-name.

In fact, national retailers today acknowledge that the opening of another store in the tradearea will affect the sales of the original location; this effect is referred to as "cannibalization".The only question is how much? In a shopping center context, the creation of a new shoppingcenter is the means by which one taps into additional market share and generates sales whichwere previously untapped and not being addressed by the original center. To stay healthy, thetenant must be able to capture those sales; and while it may reduce the sales of the original store,


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the tenant's overall revenue from both stores will be substantially increased and the tenant willthrive at both locations. The cannibalization effect is always taken into account by the tenant inmaking its decision to open another store in proximity to its original store.

From the landlord's viewpoint, such considerations are secondary. When anothershopping center is within the area, the landlord's real motivation for the radius clause is to stiflethe competing developer’s success by holding the prime retailers captive in the original center.As far as the tenant's general performance is concerned, landlords only think about theperformance of the tenant at their particular shopping center and don't consider whether thetenant's inability to open additional stores within the trade area will adversely affect the tenantoverall. This is a shortsighted viewpoint.

c. Percentage Rent Leases. The main justification for a radius clause in terms ofthe tenant's own performance at the center is if the lease has a percentage rent clause in it. This istrue whether another shopping center is within the radius area or the tenant is just consideringanother location elsewhere.

Another justification of a radius clause is the presence of a sales kickout clause in thelease. If the tenant's sales are below a certain threshold during a given annual period (referred toas the “measuring period”), then the tenant acquires a right to terminate the lease. The functionof the radius clause here is to protect the sales of the premises lest the opening of another storewithin the radius area will siphon off enough sales from the premises to drive the tenant's saleslevels below the kickout threshold.

Radius clauses in leases without percentage rent provisions or kickout clauses have nojustification for their existence other than:

1. making it impossible, in the shopping center context, for another developer tosuccessfully open a competing center with the same good retailers. This is a somewhathostile tactic which benefits only the original landlord, to the substantial detriment of thetenant and has less to do with preserving the income stream from the tenant's lease.

2. protecting the tenant “from itself” under the theory that the tenant's new locationwould substantially hurt the tenant's existing business to the point where the tenant could nolonger afford to pay the rent at the original location. This is an antiquated notion. It is theinability of the tenant to open another store in the new location which will hurt the tenant at theoriginal location, not the reverse.

d. Tenant Closes The Store To Open Another. The discussion above demonstratedthe undue hardship and inequity that is suffered by the tenant if it is unable to open anotherlocation while the tenant continues to operate the store at the original location. However, if thetenant closes its store at the original location (assuming it has the right to do so) and opens in thecompeting location - in effect, relocating the store - then there are inequities on the landlord's sideto be addressed and which would justify some limitations upon the tenant. It may be appropriate


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to provide that if the tenant closes the store at the premises and reopens at the competing locationwithin a given period of time, then the principles discussed in §2.03 et seq. would be applicable.

§2.02 The Landlord's Traditional Arguments In Support of A Radius Clause (andTenant's Response Thereto).

a. Direct Effect on Percentage Rent. If the tenant opened a competing store withina certain distance from its present location, the tenant's sales in its original store would dropcausing a corresponding decrease in the landlord's percentage rental income.

Tenant's Response. The opening of another shopping center within the trade areawill initially affect the sales of the existing shopping center as a whole, not merely thespecific tenant's store, whether or not the specific tenant opens a second store in the newshopping center. In fact, restricting the tenant from opening a second store within theradius area, whether or not in a rival shopping center, merely allows the tenant'scompetitor to enjoy a monopoly in the new location. When the tenant opens a store inanother location other than a shopping center, it will also be done to meet competition inthat area, increase the tenant's market share and in any case the effect of cannibalizationwill be factored into its decision with the intent that both stores will be viable.

b. Loss of the Tenant's Synergy. Other tenants in the original shopping centerwould also be adversely affected since they would lose the synergistic benefits of the drawingpower of the specific tenant; moreover, the tenant's opening of the second store will actually drawcustomers away from the stores of the other tenants.

Tenant's Response. That argument assumes that the tenant will close the originalstore. If the tenant remains open at the premises, there is no loss of drawing power. Noone tenant has sufficient draw to entice established mall customers away from theoriginal center over to the new location, particularly where the specific tenant continuesto operate the original store.

c. General Ruinous Effect On Entire Center. The original shopping center as awhole would be economically impacted if a significant number of tenants were free to openadditional stores in a new shopping center or within the same general market.

Tenant's Response. In addition to the tenant's arguments of paragraphs (a) and(b) above, it is obvious that the development of a new shopping center in proximity to theexisting center is proof that the trade area can support two centers without substantiallyhurting either one. No developer would risk a costly venture of a new shopping centersolely upon the assumption that it could induce the tenants of the original center toeffectively abandon their stores (as distinguished from simply increasing their points ofdistribution). Rather, it is a demonstration that there is an untapped customer base in thatmarket which had not been reached by the original center. Providing a place for newoutlets for the tenants of the original center will enable those tenants to thrive in bothlocations.


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d. Better Economics Elsewhere. In the case of a store subsequently opened by thetenant in which it pays lesser (or no) percentage rent, e.g. a street deal, the tenant will divert salesaway from the original store to the landlord's detriment.

Tenant's Response. No retailer with a sizeable investment in the original storewill open a second store nearby with the intention of hurting the original one by divertingbusiness to the new location because the occupancy costs there are lower. Rather, thetenant is motivated by (i) the expectation of profits in both locations based upon itsbusiness judgment that the trade area can support two stores, (ii) its desire to head off ormeet the competition, and (iii) the need to continue to generate income at the originalstore to offset its higher occupancy costs.

If a tenant is unable to fend off a radius clause in its lease, then the following principleswill aid the tenant in the negotiation and drafting of the actual clause. If preventing the tenantfrom competing with the existing center location is the stated goal, then the tenant must ensurethat the radius is tightly focused on an operation which is truly competitive, i.e. another storewhich is identical to the operation at the premises.

§2.03 Elements of Radius Clause. The following is an outline of the various concepts thatmust be addressed when crafting a precise radius clause.

Defining A Radius Violation. A “Radius Violation” must include the followingelements: it must be the conduct by the “Tenant” during the Radius Period of a Competing Storewithin the Restricted Area (emphasis added). Each of these terms, all of which must occur inorder to trigger a radius violation, will be discussed below.

“By the Tenant”. This simply includes the Tenant who signs the lease and its affiliates.See §2.04.

“Radius Period”. This will be the duration of the radius. A landlord should not assumethat the radius will apply for the whole term. Often, the tenant will negotiate a clause thatoperates for a limited time only - three years is typical. See §2.05.

“Restricted Area”. This is the actual distance of the radius. Typically it will be 2-3miles. This is one of the most critical elements of the radius. See §2.06

“Competing Store”. This is an essential ingredient of the clause. See §2.07.

“The Landlord's Remedies” – Prohibitive or Compensatory?. From the landlord'sviewpoint it should be prohibitive in nature and a disincentive to open the other store. From thetenant's viewpoint the clause should be compensatory in nature, it should not prevent the openingof another store and should limit the landlord's remedies to either (or both) rent stabilization anda limited amount of gross sales inclusion. See §2.08

The Kickout Clause. If a radius clause is in the lease to protect the landlordagainst the siphoning off of the tenant's sales by the opening of another location to a level


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which is below the kickout threshold amount during the measuring period, then one oftwo remedies is available to the landlord:

a. the loss by the tenant of the kickout clause; orb. an inclusion of gross sales from the violating store to offset the drop insales in the original store which might otherwise drive the tenant's sales belowthe kickout threshold.

End of Radius Violation. The clause should expressly provide that at the end of theradius period (or a cessation of the radius violation conditions, if earlier), the landlord's remediescease and the rents and percentage rent computation revert to what they would be at that timewithout a radius violation. See §2.09.

Exemptions and Exclusions. The clause should expressly exclude the followingsituations which are discussed in §2.10. These include:

1. Existing Stores.

2. Changing The Name of The Premises.

3. Other Divisions of the Tenant. These must be excluded or exempted even thoughtheir tradename may share some common elements with the “core” name of the tenant'sstore at the premises (e.g. “The Limited”, “Limited Express”, “Gap” and “GapKids”,“Ann Taylor” and “Ann Taylor Outlet”);

4. Specific Exclusions. Specific business are exempted by name. Thus, otherconsiderations such as similarities in name, signage, merchandise and labeling are simplyignored or are simply deemed to be irrelevant.

5. Other Exceptions and Exclusions.

a. The clause should not apply to:

(i) relocation of a freestanding store presently outside the radius to amaximum distance inside the radius area (unless such freestanding stores areexcluded altogether - see item (iii) below);

(ii) a certain maximum number of stores within the radius area;

(iii) freestanding stores;

(iv) shopping centers containing less than a minimum number of square feetor less than three (3) major department stores having a minimum size in excess of100,000 square feet each;

(v) a specific project.


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b. Other Limitations.

The radius clause should become null and void if:

(i) the opening co-tenancy requirements in a new shopping center are notmet within one (1) year from the store's opening;

(ii) a department store closes and does not reopen or is not replaced withintwelve (12) months by a suitable replacement department store;

(iii) the operating co-tenancy levels of the non-department store grossleasable area fall below a certain amount during the term and remain so for anegotiated period of time;

(iv) the landlord leases space in the same shopping center or within the same

radius area to a "competing" store;27

The operation of the radius clause:

(v) should not apply to any stores which open during the closure of thedepartment store described in (ii) above;

(vi) should be suspended with respect to a previous violating store during theclosure of the department store described in (ii) above.

The discussion which follows will focus on the apparel business as that is the most prolificbusiness in a shopping center and has the most variables. However, the principles discussedbelow are relevant and essential, perhaps to a less varied and complex degree, to any otherbusiness facing the prospect of a radius restriction and the following elements should be adjustedto fit the needs of the particular business involved.

§2.04 “By The Tenant”. This is the "Tenant" who signs the lease and its affiliates, i.e. entitieswhich control, are controlled by or under common control with the tenant. Some clauses attemptto reach businesses operated by the shareholders or other owners of the tenant. Such clauses areoverbroad. They must be limited to parties that realistically exercise control over the tenant.Most landlords will agree to narrow the concept to that of the activities of the controlling ownerof the tenant. Additionally, if the other factors discussed below are in place, this element of theclause will not be that problematical.

27“He who lives by the sword shall die by the sword”.


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Given the possibilities in the formation of related entities, the tenant can agree to extendthe reach of the clause in the following manner:

5.03-13 Figure 2-1

“For purposes of this Article and for no other purposes or purposes,‘Tenant’ includes the operation of such Competing Store by Tenant or itscontrolling owners directly or indirectly as a stockholder in a corporation,partner in a partnership or in any entity in which Tenant or such ownershave a controlling ownership or financial interest or otherwise [DELETETHIS]". [Emphasis added]

The phrase “or otherwise”, which often appears in these clauses, is shown as deleted toemphasize that it would be unacceptable to a tenant for vagueness reasons.

5.01-2 §2.05 Radius Period. A typical landlord-drafted radius clause will restrict the tenantfor the entire term of the Lease. The tenant often negotiates for a clause that is limited induration, three years being typical. If there is a kickout clause in the lease, then the radius shouldexpire at the end of the measuring period of such clause. At the end of the time period the radiusand all penalties cease to operate as if the radius had never existed in the first place. The purposeof such a provision is to (i) give the landlord some protection during the early years of the leaseterm while the landlord is building momentum at the shopping center, and (ii) in the case of akickout, protect the landlord from the siphoning off of tenant's sales to a level below the kickoutthreshold. See "Landlord's Remedy" in §2.08 below.

A landlord may argue that if a radius violation occurs during the radius period, then thepenalties should continue even beyond the radius period so long as the competing store exists.This would not be acceptable to a tenant. The concept here is that the landlord will receiveprotection for the limited time period only; after that, the effect must be the same as if acompeting store had opened after the radius period had expired.

5.01-3 §2.06 Restricted Area. The radius distance is one of the most critical elements of theclause and has a significant impact on the effect of a radius restriction on the tenant, regardless ofwhether the other elements of a violation are present. If the radius distance is a nominal amountto the tenant, then it will care less about the other elements since the tenant does not expect toever violate it in the first place. However, the tenant should guard against being too cavalier onthis point. A business opportunity may arise within the radius area that the tenant nevercontemplated when it signed the lease and the tenant would be foreclosed from opening there.Also, the tenant may someday wish to sell the business to another party who, because of theradius distance and the existence of other stores of that party within the radius, may not be able toproceed with the purchase.


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The tenant should not agree to anything larger than 2-3 miles.28

In street deals (wheresuch clauses are extremely rare) a “radius” area is usually expressed in city blocks, named streetsor named districts rather than "miles".

The distance the tenant agrees to is one within which it does not think it will ever want tooperate an identical store. The landlord on the other hand will push to extend the radius forseveral miles regardless of whether another store opened by the tenant at such distance will haveminimal impact.

On occasion, the restricted area will simply be another specific project nearby that thelandlord is worried about.

5.01-4 §2.07 Competing Store. Although the notion of "competing" lies at the core of therationale for a radius clause, no attempt is made to define the concept in any of the landlord leaseforms; it is stated merely as a conclusion. The following is representative:

5.03-1

5.03-2 Figure 3-2

“During the term of this Lease Tenant shall not engage in any businesswithin the Restricted Area which is “similar to” or “in competition with” thebusiness conducted by Tenant at the Premises”. (Emphasis added)

This is a serious flaw in all radius clauses. Under this language several interpretations arepossible, all of them very plausible and reasonable to a third party unfamiliar with retailingconcepts (like a judge). Within this concept are multiple issues, all of which should be directed atdefining with precision just what is meant by "competing". In brief, a competing store is onewith the identical tradename and primarily carrying identical merchandise to that primarilycarried in the premises and which is substantially similar in size to the premises. In the case ofapparel retailers which operate several different apparel divisions, the following are examples ofthe possible assumptions by landlords:

i. that divisions with different tradenames nevertheless compete with one another,because they each sell apparel, and similar apparel at that, such as pants, jeans, shirts,tops, skirts, sweats. Examples are “Gap” vs. “Banana Republic” vs. “Old Navy”. Thisignores very real differences in style, price, fabric and the fact that the core targetcustomer is different for each division. There are a few landlords who subscribe to thisbroadest interpretation of “competing”;

ii. that an outlet division of the retailer competes with the "regular" division of theretailer under the same tradename because they carry the same merchandise under

28Radii of 5 miles are not that uncommon in landlord lease forms and historically seem to represent the outer

limit of “reasonableness” in the court cases dealing with these non-compete clauses. However, in the present climate,where urban scrawl and densely populated business districts dot the landscape, even three miles may be too restrictive.In very rural areas larger radii can also be reasonable.


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identical labels as is carried in the main store but at clearance prices. Price competition,especially between identical garments, they argue, is the classical and purest form ofcompetition. In truth, outlet stores of many apparel retailers are not "dump" stores forclearance goods from their regular division but instead carry value priced merchandisespecially manufactured for it. The merchandise and customer base are different and thecannibalization effect is minimal;

iii. that a children's or kid's division of the retailer competes with its adult divisionwhich also has a significant kid’s department.

Any of these arguments presented to an uninformed judge can be very persuasive; theyare debatably consistent with the spirit of a radius clause. Therefore, it is necessary to zero in onjust what is meant by "competing". To do this, the clause must specify in detail the elements thatdescribe what the "protected store" is so that a clone of that store can be recognized.

To be a competing store the other store must:

(a) operate under an identical (not merely similar) tradename; and

(b) carry merchandise which is identical (not merely similar) to the protectedmerchandise being carried in the premises;

(c) be primarily carrying such identical merchandise at the same time that the tenantis primarily carrying it in the premises.

(d) be of a size similar to that of the protected store (even if all other elements arepresent).

Each of these elements shall be explored.

a. Identical Tradename. The “same tradename” requirement means another storeis deemed to violate the radius if it operates under the same tradename as is then being conductedat the premises. This test has almost universal acceptance by landlords, giving recognition to theconcept that two stores under two different names are not considered to compete with each other.

If the landlord drafts the exemption, it usually states that the radius clause only applies tostores of the tenant operated under “the same or similar tradename” or “deceptively similartradename”. This should not be acceptable to the tenant because the “similarity” of the nameswill have little to do with the concept of competing, which is to vie for the same customer andsecure him at the expense of a competitor. Many retailers, especially apparel retailers, operatedifferent merchandising divisions within the general category of apparel and under names thatshare the same core name - i.e. the name that made the retailer famous in the first place.Examples are “The Limited” and “Limited Express”, “The Gap” and “GapKids”, “Toys R' Us”


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and “Kids R'Us”, “Gap Men's” and “Gap Women's”.29 Nevertheless, these divisions areunquestionably different from each other. Other examples are outlet divisions, regular price,value priced and off-price divisions of that retailer, all of which are separate businesses.

Therefore, the clause should provide that the tradename of the other store be identical tothe name conducted at the premises. Further, when speaking of the “tradename" under which thetenant conducts its business, it is meant the name on the overhead, exterior store sign. It does notmean any of the internal signage, graphics, advertising or labeling on the inside of the store or onthe merchandise.

To illustrate the importance of the tradename test, consider the following anecdote. Onelarge retailer (Retailer A) once offered to buy another chain in a similar business (Retailer B),intending to continue to operate the Retailer B stores under its traditional “B” name withoutchange. Many of Retailer B's leases had radius clauses in them but Retailer B failed to negotiatefor the tradename exclusion in any of them. Retailer A had many stores under its “A” namewithin the radius area of Retailer B's radius clauses, which were “A” stores that had opened afterRetailer B's leases had been signed; thus those Retailer A's stores were not exempt as pre-existingstores. Therefore, if Retailer A had completed the purchase and thus became the “tenant” underthe Retailer B leases, it would immediately violate the Retailer B radius clauses. Consequently,one would have had two stores under different names operating within the radius area sellingdifferent apparel merchandise with no effect upon one another but because of an invisible changeof ownership of the Retailer B stores into ownership by A of both groups of stores, a radiusviolation suddenly would have occurred. The Retailer B landlord would then be presented withthe appetizing opportunity to include 100% of Retailer A's gross sales into the sales of the “B”stores, which Retailer A would have then owned! The transaction never closed, principally forthis reason.

Necessity of Other Tests. One could argue that if the clause has the tradename exclusionproperly written, one doesn't need all of the other intricate tests described below and can stophere. In theory, one could carry identical merchandise in the other store and still not violate theradius because the tradename on the storefront sign is different.

However, this would be an imprudent course for the tenant to follow. The same-tradename test, while extremely important, only goes part-way in defining what is competing andwhat is not. If this were the only exemption and the tenant opened a store nearby under adifferent name but identical merchandise (whether or not at reduced prices), the landlord couldmake a strong argument that the other store violates the spirit of the radius clause and that thetenant acted in bad faith. Despite the disfavor in which covenants not-to-compete are generallyheld by the courts, a judge may be irritated by an obvious circumvention tactic on the tenant'spart. Therefore, the clause has to further isolate with clarity the type of store with respect towhich the landlord is granted protection.

29These retailers are offered as examples only of businesses who operate various divisions with similar names

in them but which divisions are not considered to be in competition with one another. No assumption is made that anyof these retailers will agree to a radius clause.


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b. Identical Merchandise Is The Protected Merchandise. Not all merchandise isaffected by the radius. To violate the radius, the new store must carry substantial amounts of (i.e.primarily sell) merchandise which is identical to that which constitutes the core of the tenant'sbusiness in the premises; this "core" merchandise carried in the premises is referred to as the“protected merchandise”. This core merchandise should be described with particularity. Forexample, in the case of an apparel retailer, it may be identified as “men's tops and bottoms inany combination of tops as against bottoms”. Therefore, women’s or children’s apparel wouldbe excluded.

In the women's or children's division of that retailer, “women's or children's apparel”will constitute the "protected merchandise".

Cautionary Note. Describing the protected merchandise in the apparel business is verytricky because of the gender issue. Apparel retailers retain the right to operate exclusively orprimarily one gender-specific division with the privilege or switching genders or combining bothgenders in one store. Therefore, it is essential that the protected merchandise be gender specific -otherwise a women's store will be deemed to "compete with" a men's store! See also thediscussion under “Primarily Carried” in subparagraph (c) below).

Identical vs. “Similar”. The tenant cannot allow itself to be fall into the trap of a radiusviolation merely because it operates separate divisions near each other which carry very similarbut not the same merchandise. Differences in quality and price must be recognized. In somebusinesses, this difference can be easily stated in terms of price alone. A high-end stereo storeselling designer label amplifiers costing thousands of dollars each does not compete with “mid-fi”stores selling receivers from large electronics manufacturers for $200. In the area of apparel, thedifferentiation must be more specific.

Therefore, in the apparel context "identical" means that the merchandise in questionmeets all of the following characteristics:

(i) the style of any garment is indistinguishable from that same garment carried in thePremises. “Style” shall mean the design of the garment in its look, cut and trimming as wellas the fabric used in its manufacture;

Comment. To be the same, the garment not only has to look exactly thesame but be made of the identical fabric (e.g. 100% cotton and ofidentical weight). The two division's garments may both be 100% cottonbut look different. They may have a different feel (or “hand”) if both are100% cotton but of different weights and thread count. One division'sgarments may be cotton/polyester blends with cheaper buttons but lookvery similar. Any or all of these differences will justify a difference inprice. If the merchandise is not identical, it cannot be said that twogarments “compete”.

(ii) the label attached to the garment in question is indistinguishable from the label used bythe tenant in the same garment in the premises;


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Comment. Everyone recognizes the distinction created by brandidentification - the different label the goods may carry, even with respectto goods which are otherwise identical. In order to violate the radius, thelabels must also be literally identical.

(iii) the regular retail price charged for such garment is the same as, or within ten percent(10%) of, the price of that same garment in the premises.

Comment. Potentially, this is the landlord's most convincing objection.Selling similar merchandise at reduced prices under a similar tradenameis the most classic example of competition. However, it is a fact that thetwo operations are different. The merchandise is different in style, fabricand target customer base and that is reflected in the price. The physicallook of the store may also be different, creating yet another distinction.

However, most landlords also realize that it is the practice of specialtyapparel retailers to operate discount or value-priced divisions and theygenerally accept the presence of both in close proximity.

c. “Primarily Carried”.

At the Premises. It is not enough that the two stores carry identical merchandise,even if it is the kind that was identified as “protected merchandise”. In order for the landlord tobe entitled to protection against duplication by the retailer in another location, the premises mustcarry the "protected merchandise" in significant amounts, which is expressed in terms ofmerchandise units, i.e. one man's suit is one unit, one women's skirt is another unit. Significantamounts or “primarily carried” means more than a negotiated percentage of the store’s totalmerchandise, in terms of merchandise units, consists of the protected merchandise. Alternatively,“primarily” can be measured in terms of floor area devoted to the protected merchandiseexpressed as either a percentage or actual square feet. However, no tenant should agree to both.

At the Other Store. Once it is established that the premises carries the protectedmerchandise in sufficient amounts to entitle the landlord to protection against duplication by thetenant in a competing location, then in order to violate the radius the other store also has to carrythe identical merchandise in significant amounts. This is also a negotiated quantum but can belower in order to trigger a violation of the radius.

The reason is that in all businesses, but especially in the apparel business, there is overlapin merchandise lines which must be allowed. This important factor is often overlooked with theresult that the landlord will be declaring a radius violation when the tenant's other store may becarrying (1) a small amount of what is significantly carried in the premises, or (2) a large amountof what is barely carried in the premises. The most compelling example of why this element isessential is where the radius clause applies to the stores operated under “the same or similar”tradename.


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d. Size of the Other Store. This element requires that in order for a store to beconsidered competing with the original store, it must be substantially similar in size to theoriginal store, typically 70% or more. The rationale here is that stores smaller than that do nothave a significant enough impact on the original store to trigger a radius violation, especially ifsuch smaller stores are carrying other, non-protected goods, which further dilutes the competitiveeffect. If a small second store opens near the tenant's much larger original store, it is not fair todeclare a violation where the effect is de minimis.

§2.08 Landlord's Remedy – Prohibitive or Compensatory? The typical landlord-draftedradius clause operates as a complete prohibition. A violation by the tenant brings on thefollowing consequences:

i. It is a breach of covenant entitling the landlord to all of its default remediesincluding lease termination and eviction, with resulting damage penalties;

ii. As a breach, the landlord can get an injunction against the tenant preventing itfrom opening the other store or perhaps even compelling the tenant to close it. Thiswould be catastrophic to the tenant, having spent large sums in investing in the new store,not to mention the jeopardy in which it would be placed with respect to its other landlord;

iii. The landlord retains the right to include 100% of the gross sales made in theother store as part of the gross sales of the premises and to compute the tenant'spercentage rent on the basis of those augmented sales. The theory here is that all of thesales of the competing store would have been made at the premises but for the opening ofthe competing store (but see the discussion below).

A radius violation should not be regarded as a breach of covenant or as an act ofwrongdoing. It must be viewed simply as a contractual option that is available to the tenant, withmonetary consequences if the tenant exercises that option. In other words, if the tenant elects toopen another store within the radius area which meets the criteria for a competing store, it willpay the landlord a certain amount of money or attribute a portion of the sales earned at thecompeting store to compensate the landlord for any loss the landlord might suffer by reason of thetenant's action. Thus, the approach to the landlord's remedies is compensatory in concept,intended to make the landlord whole. The landlord's approach, on the other hand, is punitive,deliberately designed to prevent the tenant from opening the other store.

A tenant can offer the landlord one, or both, of the following remedies:

a. Rent Stabilization. This simply means that if the tenant was paying the landlord$30 per square foot in minimum rent and $5 in percentage rent, then the tenant would raise itsguaranteed minimum rent to $35, and the percentage rent breakpoint would increaseproportionately. Thus, the rent the landlord would receive will never fall below the effective rentit was then receiving - $35 - immediately prior to opening the other store. This is intended topreserve the status quo for the landlord.


33

However, if the tenant's sales were not at the breakpoint and it was not paying anypercentage rent, then the minimum rent stays the same: $30 + 0 = $30. The tenant's argument isthat the landlord is no worse off than before. The landlord's argument is that the possibility of thetenant ever reaching the breakpoint has now been rendered hopeless and the landlord has beenhurt in the long run.

b. Gross Sales Inclusion. Alternatively, the tenant can offer the landlord areasonable inclusion of the sales of the second store to the gross sales of the premises and thepercentage rent for the premises would be then be calculated upon this augmented total amount ofsales.

Landlord-drafted radius clauses provide for 100% gross sales inclusion based upon theassumption that all of the sales of the new store would have been made in the original store butfor the opening of the second store. This argument ignores business reality. If the tenant decidesto open a second store within a given market, that means that the tenant has determined that themarket will support both stores profitably. There is additional customer base to be tapped in thesecond location which was not being realized by the tenant operating in the premises alone.

In fact, the opening of another shopping center within the trade area will initially affectthe sales of the existing shopping center as a whole, not merely the specific tenant's store,whether or not the specific tenant opens a second store in the new shopping center. As mentionedin Section 2.02 supra, restricting the tenant from opening a second store will allow the tenant'scompetitor to have a monopoly in the new shopping center or market area as customers of thenew center or other area will not make a special trip to the existing center just to shop in thetenant's store.

Consequently, the radius clause should provide for a reasonable amount of gross salesinclusion, in percentages which decrease as the distance from the premises increases, under thetheory that the farther away the other store is, the less impact it has on the premises. Thesuggested percentages are as follows:

within one (1) mile - 20%within one (1) to two (2) miles - 15%

within two (2) to three (3) miles - 10%

c. Rent Stabilization and Gross Sales Inclusion Combined. A tenant may agreethat to compensate the landlord for its perceived loss, a combination of the rent stabilizationremedy and gross sales inclusion remedy is appropriate.

Here, when the rent is stabilized to a higher amount, there is a proportionate increase inthe breakpoint. Then the negotiated inclusion percentage of gross sales from the other store isadded to the gross sales of the premises and the tenant's percentage rent is computed upon theaugmented gross sales, using the increased breakpoint.

Critical Issue: Landlord's Sole And Exclusive Remedy. These remedies must expresslybe declared to be the landlord's sole and exclusive remedies. The landlord may not treat the


34

opening of a competing store as a breach of covenant nor may it seek an injunction to prevent theopening of the other store.

§2.09 End Of The Radius Violation. If any of the numerous elements which establish aradius violation fail, the radius violation ceases and all remedies cease as well, unless and until allof the conditions occur again later. In any event, if a radius violation had been occurring, suchradius violation and all remedies permanently cease at the end of the radius period. If rentstabilization and/or gross sales inclusion were in effect, then the minimum rent and breakpointrevert to what they would have been at that time in the absence of a radius violation and any grosssales inclusion stops. A proration is made for the month (and lease year) in which such cessationoccurs.

§2.10 Exemptions and Exclusions. There are numerous situations that are exempted fromthe operation of the radius clause.

a. Existing Stores. Any store which would otherwise be a “Competing Store” under thisdefinition is exempt if it is open or a lease has been signed for it before the lease was signedfor the premises. This exception extends to renewals or expansions of that store orrelocations within the other shopping center or within the radius area. It also applies wherethe tenant subsequently purchases the other property.

b. Changing The Tradename At The Premises. Assume the tenant opens its main store atthe premises, e.g. “Bill’s Emporium”, then later opens a “Bills Discount” store nearby andstill later decides to change the store name at the premises from “Bill’s Emporium” to “Bill’sDiscount”. Or, after the tenant opened the premises it later acquired another chain of storeswhich continue to operate under a different name but eventually the tenant decides to changethe name at the premises to that other name used in those other locations. Neither of theseshould constitute a violation.

Rationale. Although the landlord could argue with some justification that thetwo stores meet every test for a Radius Violation (identical name andmerchandise), the theory of the radius clause is to protect the landlord againstactions the tenant takes at another store which hurt the original premises. It isnot intended to restrict the tenant from taking actions at the original premises,which it has the legal right to do under the lease (e.g. change the premisestradename, assuming the lease is otherwise complied with) but which may lookjust like a Radius Violation in relation to another store if one didn't know whatthe sequence of events was. It is not likely that changing the name at thepremises to the same name as another store will harm the original premises; itsmore likely that this was done to improve the sales of the original premises if thestore was performing poorly under the old name.

c. Divisions With a Similar Core Name. As mentioned in §2.07 (a) above, many retailers,particularly apparel retailers, have multiple divisions selling different categories of a singlemerchandise classification (i.e. apparel), all of which use as its core, the name by which it ismost widely known. If the tenant operates in a similar manner, it must ensure that these


35

distinctions are respected by the landlord and excluded from the operation of the radiusclause.

The landlord may object if there is substantial overlap of identical merchandise in thetwo stores, e.g. a women's store opened within the radius area where the premises carries a largewomen's department. An acceptable balance can be achieved by using the definitions of “primarybusiness” described above. For example, if less than 50% of the merchandise at the premises iswomen's merchandise, then it is not the "protected merchandise" of the original premises and theother store may engage in the sale of women's apparel without impact to the tenant. Conversely,if women's merchandise is the predominant merchandise at the original premises and tenant opensa multi-gender store at another location, then so long as the women's line at the other store is nota primary line (e.g. it constitutes less than 35% of that stores merchandise), there is no radiusviolation.

d. Specific Businesses Excluded. Even though opening another division of the tenantwould probably not be a radius violation under this complex analysis, the tenant might wantto expressly exclude certain operations by name just to be safe and to ensure that no landlordcould ever argue that the "spirit" of the radius had been violated. Thus, similarities in name,signage, merchandise and labeling are simply ignored.

It is vitally important for the tenant to preserve these distinctions when negotiating theradius clause even where the tradename exception is present. Otherwise, in a case where onestore operating under a similar tradename carries a substantial amount of identical or similargoods, there is a potential for the landlord to argue that the tenant acted in bad faith and violatedthe spirit of the radius - that it was never intended to permit another store that substantially sellsidentical or very similar goods but under a slightly different tradename. These exclusions serveas an acknowledgement by the tenant that it intends to do exactly that.

§2.11 Diversion of Business and "Maximizing Profits" Clauses. Hidden away in the"operational requirements" portion of the lease (and sometimes in the percentage rent section) is alittle noticed clause which reads like this: “Tenant agrees not to divert business away from thePremises”.

Even if the lease has no radius clause at all, would this provision be violated if the tenantopened another store (any store) nearby? This clause does not even specify distance. It wasprobably included in the landlord's lease form without any thought of the radius issue (which isusually dealt with by a clause of its own). However, to a landlord attempting to stop a tenantfrom opening in another location, this would be a convenient and easy argument to make.

These same considerations must also be given to another common clause in the leasewhich require the tenant to operate its business “...in such a manner as to maximize gross salesof the Premises” or “...to produce the highest amount of gross sales possible in thePremises”. These clauses must be deleted in all events as a source of a potential restriction byimplication.


36

§2.12 Antitrust Considerations. As discussed under §1.05 of these materials with respectto exclusive clauses, the law with respect to restraint of trade cases (e.g. involving radius andexclusive clauses) has remained unchanged. The "rule of reason" states that radius clauses willbe upheld if they are reasonable and struck down if they are not. Whether or not a radius isreasonable or unreasonable will depend on the facts and circumstances of each case - the distance,the penalty, etc.

The model radius clause discussed in these materials would probably withstand anantirust attack because the tenant has made it one it could live with, i.e. it has been rendered“reasonable”. This is still the preferable course to follow even though a landlord's original clausemay be so egregious (10 mile radius, 100% gross sales inclusion) as likely to be struck down asan unreasonable restraint of trade. However, it's far better for the tenant to negotiate a clause itcan live with than to rely solely on the hope that the landlord's original clause will be declaredvoid. To test that theory the tenant would have to invest substantial sums to open another storeand then win a lawsuit. A very dangerous course.

Although it is over thirty years old, an excellent discussion on the economic and legalimplications of radius clauses can be found in Lentzner, The Antitrust Implications of RadiusClauses In Shopping Center Leases, 55 University of Detroit Journal of Urban Law 1 (1977).

__________________________

JOEL R. HALL is a sole practitioner in San Jose, CA with extensive experience incommercial leasing transactions for both developers and tenants with national and internationalpresence. He is a former shareholder in the law firm of Miller Starr Regalia in Walnut Creek,CA and an Assistant General Counsel for Gap Inc. in San Francisco. He is recognized as anaccomplished negotiator and a frequent speaker and author of numerous materials on commercialleasing topics on behalf of ICSC, the Georgetown University Law Center Advanced CommercialLeasing Institute (where he serves on the Advisory Board) and several other professional leasingprograms. He has been selected as a Superlawyer in the area of real estate for Northern Californiafor 2012 and is a member of the American College of Real Estate Lawyers In 1988-1989, he wasa contributor to the California Law Revision Commission with respect to changes in assignmentlaw in California. His materials have been cited as secondary authority in state and federalopinions. His clients have included Gap Inc.,Apple Inc., Chico’s FAS/Inc., Ross Dress for Lessand Milos Estiatorio Greek Restaurants. He is a graduate of Pennsylvania State University andthe Villanova University School of Law.

i

CO-TENANCY ISSUES

&

COVENANTS TO OPERATE

or

"Is There Anybody Out There?/Dancing In The Dark."

The Kiss And Promise Of Co-Tenancy Protection, Covenants To OperateAnd The Dark Consequences of Their Failure

By

Joel R. HallLaw Office of Joel R. Hall

1843 Cherry Ave.San Jose, CA 95125(o) (408) 723-1964

[email protected]

Joel R. Hall, Esq.©All Rights Reserved

ii

TABLE OF CONTENTS

§1.00 CO-TENANCY ISSUES

§1.01 In General…………………………………………………………………………....1

§1.02 Deal Contingency/Initial Signing Requirements…………......................................2

§1.03 Delivery of Possession Requirements .…………………………………………..…2

§1.04 Initial Opening Requirements….…………………………………………………..2

§1.05 Full Rent Requirements ……..……………………………………………………...2

§1.06 On Going Co-Tenancy Requirements …….…………………………...................2

§1.07 Who Are The Co-Tenants?..........…………………………………………………...3

§1.08 The Anchors………………………………………………………………………….3

§1.09 Definition of Department Store …………………….……………………………....6

§1.10 Replacing Department Store Anchors …………………………………………......7

.§1.11 The Satellite Stores .….……………………………………………………...............8

§1.12 Ongoing Co-Tenancy Requirements..……………………………………………....9

§1.13 Remedies For A Co-Tenancy Failure. …………………………………………….10

§1.14 Forms of Rent Relief.…...……………..…………………………………………...13

§1.15 Right to Go Dark….………………………………………………………………...14

§1.16 Sales Test As a Prerequisite to Any Co-Tenancy Failure Relief .……..……..….15

§1.17 Effect of Options to Extend………………………………………………..…….…16

§1.18 Transition From Opening Requirements to Ongoing Requirements .................16

§1.19 Unavoidable or Justifiable Closures of the Co-Tenants………………….………17

§1.20 Other Drafting Considerations….………………………………………..…….….18

§2.00 COVENANTS TO OPERATE

§ 2.01 Covenant to Operate/Express v. Implied…………………………………..……..20

§ 2.02 The Obligation: General Obligation vs Specific Hours Requirement………….20

§ 2.03 Tying Tenant’s Obligation to Operate to Minimum Co-Tenancy .……………..21

§2.04 Operation During Additional Hours ….………………………………………..…22

ii

§2.05 Excused Closures…………………………………………………………………...22

§2.06 Landlord's Remedies for Violations of Operating Covenant …………………......23

§2.06-1 When Has The Tenant Violated The Covenant?......................................23

§2.06-2 Lease Termination ……………………………………………....…….....23

§2.06-3 Remedies Without Termination………..…………………………….….24

§2.06-4 Other damage Issues (Other than Rent)…………………………….….24

§2.06-5 Specific Performance or Injunctive Relief…………………………........26

§2.06-6 Landlord's Express Reservation of the Right to Injunctive Relief....... 27

1

§1.00 CO-TENANCY ISSUES

§1.01 In General. One of the most contentious subjects in shopping center leasenegotiations today is the co-tenancy clause. Whether the topic is being discussed in the context of (i) a dealcontingency, (ii) a possession requirement, (iii) an initial opening requirement, (iv) an initial full rent

requirement, or (v) an ongoing co-tenancy requirement that applies during the entire term,1

the topic carrieswith it enormous risks for the landlord. While landlords can often extract operating covenants from in-linespecialty retailers, a landlord will be less successful in obtaining one from big box retailers or departmentstores. Thus, a landlord's ability to keep the shopping center open and operating as a financially successfulcenter and to generate the expected rent stream for the landlord, its investors and lenders will depend purelyupon the arbitrary decision of a department store or big box tenant to remain open or to close.

Further, where the landlord may have secured an operating covenant from a specialty retailer, thatobligation is itself interlocked with the ability of other retailers constituting a minimum percentage of gross

leasable area (“GLA”)2

to be open and operate. A closure (whether or not in violation of the lease) of oneor more of those specialty retailers will precipitate the domino effect of a series of closures and theimplosion of the center.

There are those within the landlord community that argue that the tenant's entry into the shopping

center is a marketplace risk and not a developer risk and there should be no co-tenancy protection at all.3

They argue that the tenant had sufficient time and resources to analyze the center and the surroundingdemographics and the tenant's location within the center. As a marketplace risk, the burden of a downturnof the center should be shouldered by the tenant and not the landlord.

Nevertheless, specialty tenants (at least those of a national stature) are able to secure co-tenancyprotections to ensure that the shopping center in which they currently find themselves remains consistentwith the one originally marketed to them by the landlord. From the tenant's respective it is a question ofrental value - what rent should the tenant pay for a half empty center as compared to a fully open andoperating one, or for a center anchored by a high end department store vs. one anchored by a big boxdiscounter or theater? This has little to do with whether the tenant's sales have remained strong despite theclosure of a significant number of stores or the replacement of original anchors by those of lesser stature.A tenant would not expect to be paying the same rentals for locations of disparate quality regardless ofwhether its level of sales were the same in both locations. In the same way that a landlord seeks anincrease in a tenant's rental when another department store opens in the center or when the center isexpanded by a certain amount of GLA - upon the theory that the rental value of the center has increased – atenant should expect to pay less when the department store or satellite store population diminishes ordeteriorates and the retail climate is less than that promoted to the tenant when it first signed its lease.

On the question of a marketplace risk, it must be remembered that the shopping center itself is the“market”, one created by the landlord. A landlord cannot conveniently ignore, when a shopping centerbegins to fail, that it is a universe unto itself assembled by the landlord and marked by the quality of tenantsin it. Otherwise, if a tenant were merely concerned about the surrounding marketplace in which theshopping center itself was located, there would be no compulsion to go into the landlord's shopping center.A tenant could find a street location in that marketplace and only be required to pay minimum rent andtaxes and be free from the following concerns: percentage rent, CAM charges, central HVAC costs,merchant's association dues, obstructive kiosks, relocation clauses, intrusion by columns or conduits, useclauses, tradename restrictions, limits on assignability and an operating covenant. It is the retail

1These terms will be explained in these materials.

2E.g. 75% or 85% of the non-anchor GLA being open and operating.

3Mark S. Hennigh, Esq., Greene, Radowsky, Maloney, Share & Hennigh, San Francisco, CA, Elizabeth H. Belkin,

Esq., (currently) Belkin Law Offices, Chicago, ILL, and Joel R. Hall, (currently) Law Office of Joel R. Hall , San Jose,CA :“Lease Clauses That Will Always Be Debated” ICSC Law Conference 1991).

2

environment created by the shopping center that a tenant bargains for (and that the landlord held out to the

tenant), not merely the marketplace in which the center itself is located.4

§1.02 Deal Contingency/Initial Signing Requirements. This clause, which usually arises in a newcenter or an expansion of an exiting center, conditions the very lease on the landlord securing leases withspecified co-tenants, with attendant obligations of those co-tenants to open for business at a time whichcoincides with the tenant's expected opening, usually the grand opening date. If a tenant is arriving uponthe scene too late to make the grand opening, the contingency may require that the specified co-tenants beactually open before the lease becomes non-contingent.

§1.03 Delivery of Possession Requirements. Once the tenant has committed itself to the deal, it isnevertheless not required to take possession of its premises nor start construction and trigger the running ofthe free-rent construction period unless and until one of the following has occurred, depending upon theparticular deal:

a. the landlord has secured leases with specified co-tenants with an obligation to open on orbefore a certain date, or

b. the specified co-tenants have begun construction in their respective premises, or

c. the specified co-tenants have actually opened for business in their respective premises.

Often “delivery of possession” clauses are written to state that the co-tenants are required to beopen by the grand opening date or within thirty (30) days thereafter. Although the landlord may technicallymeet the delivery requirement when it produces such leases on the delivery date, one cannot know whetherall of the co-tenants in question will actually open until that thirtieth day following the grand opening date.By then the tenant may have opened and begun paying the full minimum rent if the lease so required. If allof the co-tenants are not open on that thirtieth day, then the tenant would pay rent at a reduced level(“alternate rent”). The tenant should also receive a refund for the difference between the regular rent andthe alternate rent for the interim 30-day period.

§ 1.04 Initial Opening Requirements. These clauses are found in new centers under construction or inexpansions of existing centers, where a grand opening or “grand re-opening” of the center is contemplated.They can often be used in tandem with contingency clauses (§1.02 above) or delivery of possessionrequirement clauses (§1.03 above) where the specified co-tenants were required to have signed leases orhave taken possession of their premises. Once these preliminary hurdles have been met, the tenant is notrequired to open for business until the specified co-tenants have also opened for business in their respectivepremises. If the tenant elects to open before the initial opening requirements are met, then the tenantwould pay a negotiated alternate rent rental - usually 50% of the regular rent - until the conditions are met.

§1.05 Full Rent Requirements. Frequently, the tenant is required to open regardless of the status ofthe co-tenancy requirements but may be entitled to pay alternate rental until the conditions are met. If theconditions are not met for a long time, the tenant may also acquire a right to cancel the lease. However, thisis an empty remedy and hardly beneficial to the tenant after it has invested considerable sums in buildingout the tenant finish work, allocating inventory to the store and hired personnel (unless the landlord agreesto repay the tenant for some or all of these costs upon such cancellation).

§1.06 Ongoing Co-Tenancy Requirements. While a landlord may have to risk compliance with thepre-opening co-tenancy requirements described above for a limited time, the ongoing co-tenancyrequirements, which condition the tenant's obligation to remain open and operating, constitute an ongoingrisk for the landlord throughout the term of the tenant's lease.

4Ibid.

3

§1.07 Who Are the Co-Tenants? Traditionally, the co-tenants fell into two minimum categories: (i) the“majors” or “anchors”, and (ii) the “satellite” or “specialty” retail tenants.

In modern leasing transactions, the “anchors” have been further refined into subcategories of:

a. required anchors by name;b. required anchors by type, e.g. a department store or other “high drawing” large user; orc. a combination of (a) and (b).

The category of the satellite tenants has been further refined into subcategories of:

x. specifically named “mandatory” key tenants;y. specifically named “required” key tenants (i.e. not as mandatory as in (x) above) from a

larger pool of choices;z. a percentage of GLA occupied by generic unnamed retail tenants.

The specific naming of department stores and satellite stores has played a larger role in suchthreshold issues as the (i) initial deal contingency [§1.02], (ii) delivery of possession requirements [§1.03],(iii) initial opening requirements [§1.04] and (iv) full rent requirements [§1.05]. Maintaining such specificrequirements on an ongoing basis thereafter as a continuous operation requirement has been a much morecontroversial issue as the risk to the developer becomes exponentially greater. While the Landlord canwith some degree of comfort guarantee the initial appearance of specifically named department stores andsatellite stores, their continued presence over time as businesses come and go (whether by assignment orclosures) is a high risk proposition for the developer. For the tenant, however, the loss of the originalquality of anchors and retailers that supported its decision to go into the center at an agreed-upon rentstructure undermines the justification for continuing to pay rent at that level.

Relationship to Additional Anchor Rent (or GLA) Increase Clauses. Many landlord lease formscontain a provision that the tenant's rent will increase if additional anchors open within the center or thecenter is expanded by a certain amount of GLA, reflecting an increase in the center’s (and premises’) rentalvalue. For the tenant, the rationale should be the same and work in reverse – the loss of bargained-foranchors and a minimum quantum of specialty retailers should be reflected in a decrease in rental value andultimately a lease termination option.

§1.08 The Anchors. The identity of the anchor is a fundamental component of the co-tenancy clause.This topic has been the one in which developers have tried to be most creative in response to changingbusiness trends and consequently has become the area of the greatest controversy.

Department Stores. Historically, the department stores have rightfully been equated with theconcept of “anchor” or “major”. These were the true anchors of the center, whose drawing power attractedcustomers to the center with the satellite retailers deriving the benefits of sales from the traffic generated bythe department stores. This concept was so fundamental to the very notion of a shopping center that nodefinition of a department store was deemed necessary – everyone knew who they were and understoodthat these were the anchors relied upon by the smaller retailers to support their businesses. The partiesfocused their attention on the number and identity of the department stores for various purposes of thelease.

Issues began (and continue) to arise with respect to what types of department stores can replacethe original department store anchor. If Nordstrom was the original anchor, then unless the lease providedotherwise, its replacement by another department store, albeit lower down in the fashion and price pointcategory, would keep the landlord in compliance with the co-tenancy clause. Thus, where a tenant signeda lease comfortably relying upon the presence of a Nordstrom, there might come a time where Nordstromcould be replaced by JC Penney or Target. While such retailers are not objectionable per se, they would beunacceptable for co-tenancy purposes to a tenant who tied its rent structure to the presence of a high endfashion department store, especially if that tenant were in close proximity to that department store site.

4

The only way a tenant can protect itself in this situation is to require that the department storereplacement be equal to or better than the department store it replaces, in terms of quality of merchandise

offered and price points.5

“Department Store” Is A Subjective Concept. Before there was a need to specifically define theterm, the presence or number of “departments” was not the deciding factor in describing a “department

store”.6

Although a certain merchandise assortment was necessary, the extent varied widely from onedepartment store to the next. Nordstrom, Neiman’s or Saks do not carry hardgoods such as refrigerators ortools while Sears does – but all are considered “department stores”. Indeed, in the definition which followslater in these materials (where certain objective criteria are set forth), many stores which are traditionallyregarded as true “department stores” would not even qualify, while many other stores who were neverregarded as department stores would qualify.

This fact illustrates the subjective nature of the concept. The idea of a department store is heavilybased upon historical impressions and perceptions. It is extremely difficult to define objectively in such away as to accurately include all of the “right” people and exclude all of the “wrong” people. Consider thefollowing types of retailers:

General Merchandiser. There are general merchandise retailers - Wal-Mart or K-Mart forexample, who would literally meet every objective criteria under a generic definition for a departmentstore: large, multi-departmented and carrying apparel, electronics, housewares, furniture, appliances, tools,etc. But in the retail industry they are not thought of as “department stores” for the purposes we arediscussing here.

Membership Warehouse Stores, e.g. Costco. Large, multi-departmented stores, carrying apparel,electronics, housewares, furniture, appliances, tools, food and health and beauty aids. Why are they notperceived as “department stores”? Perhaps the biggest influence in people's perception is the fashion leveland service level of the store coupled with its size. The large size makes possible an extensive assortmentof merchandise (i.e. departments) but this varies widely among these retailers. In the membershipwarehouse stores, they are very “industrial” in their layout and look, with no special store design feature.Customers pick their own merchandise; there is no real sales force, just cashiers.

Drug Stores. Super drugstores such as Walgreen’s and CVS have replaced the small drug storewhich predominantly dispensed prescription drugs and sold over-the-counter medicines, first aid items anda small assortment of other merchandise. Today’s drug chains are large, multi-departmented stores whichsell merchandise across a broad spectrum of categories including, apparel, household goods, health andbeauty aids and over-the-counter medicines with a relatively minor portion of their premises actuallydevoted to the dispensing of prescription drugs. Despite a literal compliance with Webster’s definition,most retailers would not consider such stores as qualifying as “department stores” or suitable replacementsfor department stores.

Catalog Stores. To the extent such stores continue to exist, these stores are also large and multi-departmented, carrying electronics, housewares, furniture, appliances, tools (perhaps apparel). Again, theyare not perceived as “department stores” or anchor replacements for co-tenancy purposes.

5Some landlords are skittish about using “price points” as a yardstick because of a feared anti-trust implication.

However, the requirement does not prevent the advent of the value priced department store into the center; it merelyfunctions as a measure to determine whether tenant can avail itself of the remedies for a co-tenancy failure. It is not acredible argument that a developer would somehow be deterred from leasing to the value priced department storesimply because one or more of its satellite stores might convert to alternate rent or cancel their leases. The signing ofthe new department store lease is too vital for the developer to ignore.

6Webster's definition of a department store is “a large retail store carrying several lines of merchandise and

organized into various departments for sales and administrative purposes."

5

The Large Specialty Store. In recent years some of specialty stores which started out in business assmall in-line shops have expanded their merchandise mix and have occupied a much larger amount of GLA- exceeding 50,000 sq. ft. in some malls. Nevertheless, as attractive and successful as these retailers are,they are not perceived as “department stores” or even anchor stores, by reason of their satellite storeorigins. A supersized Limited store or a Limited, Inc. operation containing its numerous divisions underone umbrella lease would be examples.

Generic “Anchor” Stores. A dramatic change occurred in the industry in the 1980’s. Developershad become concerned that they could not replace a dark department store site with another “true”

department store in the face of bankruptcies or consolidations of various department store chains.7

Further, developers began to advance the idea that an anchor need not necessarily be a traditionaldepartment store but could also be represented (or replaced) by large, single user occupants whose presencewould in theory exude the same drawing power as the department store. Hence the definition of an“anchor” was revised to include any large user, whether multi-departmented or not, that occupied asignificant amount of space, originally on the magnitude of 75,000 – 80,000 square feet. In recent yearsthat figure has decreased to as low as 30,000 square feet and occasionally to 25,000 or 15,000 square feet.Some lease forms unabashedly refer to the latter as “junior majors”. The unfortunate impact upon thesmaller tenant who signed a lease in reliance upon the presence of a Nordstrom as setting the tone andfashion level (and rent structure) of the shopping center would be to discover that its replacement anchorwas a deep discount department store or a 30,000 square foot furniture or shoe store.

As landlords became more emboldened, the definition of “anchor” and what would replace thembecame more surreal. Following is an admixture of concepts taken from the lease forms of severaldevelopers and represents, in the author’s view, the most startling and polar views on this concept:

Figure 1-1

Definition of Anchor

An Anchor means any tenant or other occupant of the Shopping Center which either (i) occupies afloor area in excess of 30,000 square feet in the Shopping Center, or (ii) occupies a floor area in excessof 15,000 square feet and is designated an Anchor in a notice to that effect given by Landlord toTenant. [Emphasis added]

For purposes hereof, a Suitable Replacement shall be any one or a combination of the following:]

(i) another Anchor (which for purposes hereof shall mean a national retailer or specialty retailerwhich occupies at least 30,000 square feet (or smaller if replacing a smaller designated anchor) withinone set of demising walls, under one roof and under one trade name);

(ii) new, replacement or additional leasable square footage attached or adjacent to the ShoppingCenter with at least 30,000 square feet of space;

(iii) 2 restaurants of at least 6,000 square feet;

(iv) 2 big box users of at least 15,000 square feet, whether or not contiguous, or in the aggregate,30,000 square feet or more;

(v) an entertainment facility;

7There is a widespread (and exaggerated) fear on the part of developers in the United States that department stores

are becoming extinct, much like the situation in Canada where only a few department store chains remain. While therehas been a reduction in the population of department stores in the United States by reason of closure, bankruptcy,acquisition and consolidation, this phenomenon has not approached the level of contraction seen in the Canadianexperience.

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(v) office space of 20,000 square feet;

(vi) a hotel; or

(viii) residential living spaces of at least 30 units. [Emphasis added]

It is astonishing to dignify any of the foregoing with the characterization of “anchor” and in any

way ascribe to them any similarity in drawing power to that of the anchor they are intended to replace.8

§1.09 Definition of Department Store. Following is an outline of a proposed generic definition of adepartment store anchor:

Step 1: A Generic Definition of Department Store. To avoid becoming ensnared by the sweepingdefinitions discussed above, the tenant should focus on creating a sensible definition of a department store.One would begin with a generic definition of a department store and then deal with specific inclusions,exclusions and exceptions to that general definition:

a. Size – e.g. 75,000 square feet;

b. Single tradename, operating within a single set of demising walls;

c. Multi-departmented carrying merchandise in the following lines:

x. apparel; apparel accessories; cosmetics and perfume; jewelry; (“RequiredMerchandise”), plus one of the following:

y. housewares, domestics and linens, electronics, home furnishings, appliances,furniture, floor coverings.

Step 2: Specifically Name All Approved Department Stores In Advance. It is helpful to bothparties to have a list of specifically approved department stores without regard to any merchandise test orsize. This would eliminate definitional differences between full line stores (i.e. Sears) and more limited linestores (Nordstrom) and between large department stores and smaller ones (e.g. Saks). The longer theapproved list the better, as the occasions for dispute are thereby reduced.

Step 3: Specifically Name All Un-Approved Stores. It is essential to have a list of specifically-named retailers who will not qualify as department stores for purposes of the co-tenancy clause despite thefact that such stores would otherwise literally meet the size, single-operation, tradename and merchandisetests of the generic definition offered above. Unless a prohibited list is created, certain retailers that thetenant does not regard as an acceptable anchor will be included in the definition of a replacement anchor.A tenant may find, much to its chagrin, that the Nordstrom department store two doors away has beenreplaced by a Costco while the landlord continues to expect the tenant to operate and pay the negotiatedrent based upon a Nordstrom anchored center despite the dramatic change in the center’s character. The“unapproved” list is where the discount “department stores”, large multi-departmented apparel stores andother multi-use large users would be enumerated. This is not to say that such stores have no proper place inthe shopping center mix but these stores simply would not qualify as “anchors” upon which the tenant's rentstructure (or covenant to operate) would be predicated.

8The author does acknowledge however that it is becoming more common for retailers to accept restaurants, theaters

and book sellers as legitimate “anchors”. However, one can also argue that the well known specialty retailersthemselves, i.e. the in-line satellite stores, exude no less drawing power (and probably more) than (i) a lunch and dinnerMexican restaurant, and (ii) a theater whose patrons come to the center to watch a movie and not to shop, or (iii) abookstore where patrons linger at their leisure.

7

Step 4: Exclude Certain Types Of Stores. Certain types of stores should also be excluded from thedefinition of department store, such as large drug stores, supermarkets, home improvement centers and

price-club stores.9

Aside from a few examples that could be included, this would avoid the chore ofcreating a long list of stores by name when a description by type would be sufficient.

Step 5: Replacing Anchor Stores. A mechanism for replacing department stores which haveclosed with “acceptable” substitutes should be negotiated, as hereinafter discussed.

§1.10 Replacing Department Store Anchors With a Replacement Not On The Approved List. Thereal issue underlying this whole subject of defining anchors or department stores is not so much one of whothe landlord has in its stable at the inception of the deal but who replaces the anchor as the economics of theshopping center change over time. The departure of some of the original anchors is a reality and thepossibility that such departure will trigger a co-tenancy failure is a very real danger for a developer. Thus,defining “acceptable replacements” of the anchor is the real battleground.

Tenants will take a much stricter view about permitting any replacement of the department store ororiginal anchors prior to the beginning of the term - i.e. as a deal contingency, a delivery of possessionrequirement, an opening requirement or “full rent” requirement - since the department stores that wereinitially promised as an inducement to come into the center may never materialize, having been switchedfor another, less attractive replacement. This serves to illustrate that the landlord didn’t really have truecommitments from the originally named department stores in the first place. In many cases noreplacements will be permitted unless they are clearly an improvement over what was originally promised,e.g. a Nordstrom being replaced by a Neiman’s but not by a Macys.

Subsequent to the commencement date however, retailers recognize that landlords have littlecontrol over what the department stores will do and will agree to a department store replacement in an on-going co-tenancy clause.

Department Store Replacement. If the anchor is a department store, then a replacement for adepartment store could mean a national retailer that meets the definition outlined in §1.09 and whichoperates in all or substantially all of the space vacated by the prior department store. It is not necessary forthe replacement to occupy all of the space occupied by the former anchor, just a significant portion of it.Ninety percent (90%) of the space of the original anchor is common so long as successive “downsizings”are not permitted (e.g. 90% of the immediately preceding anchor as distinguished from the original

anchor).10

If the original anchor was very large, e.g. 130,000 square feet, then the break-up of that spaceinto smaller units would be acceptable so long as there was one that met the minimum size and otherrequirements of the definition in §1.09 above.

Fashion Department Store Replacement– “Qualified Fashion Replacement”. In the case of adepartment store anchor, the tenant may tie the co-tenancy requirements to a certain quality of departmentstore or specifically-identified retailer, especially if it were close to either. Using such a standard, asuitable replacement of a fashion department store would be a comparable national fashion departmentstore meeting the definitional requirements of §1.09 and (if not on the pre-approved list of departmentstores) recognized in the industry as selling merchandise and at price points equal to or better than the

9The author acknowledges, however, that high end supermarkets such as Whole Foods and others have been

increasingly accepted by retailers as initial anchors and replacement anchors.

10Figure 1-4 deals with this point with the following language: “A ‘Comparable Replacement’ shall mean a

department store [meeting the requirements of §1.09 above] …and occupying at least ninety percent (90%) ofthe space occupied by the original department store for which it is a replacement (the “minimum size”). Thereduction in size of the department store space to the minimum size in accordance with the preceding sentencecan only occur once during the Term with respect to the department store space in question and there can be nofurther diminution in the minimum size of that department store space following the first replacement of theoriginal department store which resulted in a diminution in size.”

8

named department store it is replacing. Replacements of lower tier stores with equal or higher tierdepartment stores would be permitted, but not the reverse.

A variation of the foregoing would be the case where the replacement need not meet the “fashionlevel” of the very store it is actually replacing so long as it met a “minimum fashion level” acceptable to thetenant. For example, if a center had a Sears, JC Penney, Macys and a Nordstrom, it might be acceptable toa tenant that a replacement of Nordstrom with a department store equal to or better than Macys might besufficient for its purposes, but not Sears or JC Penney.

Other Replacements. It has become increasingly common for tenants to accept as replacementsfor department store anchors (or to establish such occupants as acceptable initial anchors in the firstinstance), occupants such as a large bookseller, theater, electronics giant, restaurant or high endsupermarket. Whether such occupants offer the tenant the drawing power or justify the rental being askedfor the tenant's space is a matter of intense negotiation.

§1.11 The Satellite Stores. The other part of the co-tenancy equation is the satellite store component -the GLA of the non-anchor space. Traditionally, a percentage of such space – 70% to 85% being thecommon range – was the custom. The satellite store element of this co-tenancy equation were usuallyretailers known to the tenant when it first signed its deal and no doubt were part of the inducement to jointhe center but were almost always described in generic terms with no specific mention of individual names.It was historically recognized by the tenant seeking co-tenancy protection that the composition of thesatellite stores could change over time and often for the worse, a situation over which the landlord had littlecontrol no matter how strict the use, operating and assignment clauses were in those other leases. Wherethe center started out with a population of high-end retailers, that population through gradual attrition coulddevolve into a warren of value priced stores and heavy discount operations and food courts. This processcould be accelerated by the loss of the high end department store and its replacement with a lower qualitylarge space user.

More recently however, tenants have been demanding that at least initially certain portions of thesatellite store co-tenancy population be composed of retailers of a certain quality and identity to justify therent being asked of the tenant. Often, these clauses are structured as a requirement that the landlord obtaina certain percentage of specifically named retailers from a larger pool of specifically named choices.Increasingly we are seeing clauses in which subclasses of required specialty retailers are also being created,each with tighter (or looser) requirements. Following is an example:

Figure 1-2

Initial Co-Tenancy Requirements

[Choose as Appropriate]

[Contingency: This Lease is expressly conditioned upon the Landlord entering into leaseswith all of the retailers required in the categories specified below:]

[Delivery of Possession: Tenant shall not be required to accept delivery of possession of thePremises, nor shall the ____ day Construction Period commence to run until Landlord hasdelivered possession of spaces to all of the retailers required in the categories specifiedbelow:]

[Opening: Tenant shall not be required to initially open for business in the Premises, norshall the Commencement Date be deemed to occur until all of the retailers required in thecategories specified below have opened or are ready to open simultaneously with Tenant:]

[Full Rent: If upon the date that Tenant opens for business in the Premises all of the retailersrequired in each of the categories specified below have not opened their premises forbusiness, then Tenant shall be entitled to pay, in lieu of the Minimum Rent [and Additional

9

Rent hereunder],11

an amount equal to fifty percent (50%) of the Minimum Rent (the“Alternate Rent”) for each month thereafter until the Full Rent Co-Tenancy Requirementsare met.]

(i) Macy’s, Robinson-May and Nordstrom (collectively, the “Required Anchors”) [ortheir Comparable Replacements (as defined herein)]; and

(ii) each of the following tenants (the “Mandatory Co-Tenants”): Apple,Anthropologie, Z. Gallerie, Coach, Brookstone, Sharper Image, Banana Republic, WilliamsSonoma, Pottery Barn, Sephora, Coach, Tommy Bahama, Armani A/X, P.F. Changs; and

(iii) at least twelve (12) of the following list of “Key Co-Tenants”: Cole Haan, Izod, ,Bebe, Victoria’s Secret, The Gap, J. Crew, Urban Outfitters, Smith & Hawken, Ann Taylor,Talbot’s, Lucy, Coldwater Creek, Urban Outfitters, Joseph A. Banks, Eddie Bauer, Aveda,Lucky Brand Dungarees, Abercrombie & Fitch. Victoria’s Secret, J. Jill, Chico’s, CaliforniaPizza Kitchen , White House Black Market, Corner Bakery and Cheesecake Factory; and

(iv) eighty five percent (85%) of the retail tenant gross leasable area (excluding theRequired Anchors but including the Mandatory Key Tenants and the Key Co-Tenantsdescribed above).

A ___________“Co-Tenancy Failure” shall mean that one or more of the foregoingrequirements in (i), (ii) or (iii) above are not met. [Emphasis added]

As noted in clause (i) above, a replacement of the initial department stores, may or may not beallowed. If allowed, a “Comparable Replacement” might be described as a “department store” (as definedin §1.09) selling merchandise of a fashion quality and at price points equal to or better than the departmentstore it is replacing.

In the case of the Mandatory Co-Tenants under clause (ii), no substitutions are allowed initially.This guarantees that the landlord has indeed secured, as promised, the high level of retailers represented bythat group.

In the case of the Key Co-Tenants under clause (iii), the landlord has some wiggle room as it has abroader universe from which to secure acceptable tenants.

In clause (iv), all of the satellite space, inclusive of the Mandatory Co-Tenants and Key Co-Tenants, must comprise at least 85% of the non-department store GLA. This still leaves landlord thefreedom to have a vacancy factor of fifteen percent (15%) of GLA.

§1.12 Ongoing Co-Tenancy Requirements. Subsequent to the commencement date, the co-tenancyrequirements usually convert to a simpler formula, in recognition of the fact that it may be unreasonable torequire the landlord to maintain the initial quality level of the multiple classes of the satellite GLArequirement.

Figure 1-3

Continuous Co-Tenancy Requirements

The term “Continuous Co-Tenancy Requirements” shall mean that during the Term of thisLease subsequent to the Commencement Date all of the following retailers and specifiedgross leasable area shall be open for business:

11Whether the additional charges such as CAM, Taxes, insurance or other costs are abated during this period is a

negotiated issue.

10

(i) Macy’s, Robinson-May and Nordstrom (collectively, the “Required Anchors”) [or theirComparable Replacements (as defined herein)]; and

(ii) eighty five percent (85%) of the retail tenant gross leasable area (excluding the RequiredAnchors).

A “Co-Tenancy Failure” shall mean that one or more of the foregoing requirements in (i) or(ii) above are not met.

Nevertheless, in some cases tenants will bargain for and obtain more elaborate assurance ofretailer quality among the satellite stores in those cases where it is most important to them. See thefollowing clause.

Figure 1-4

Continuous Co-Tenancy Requirements

The term “Continuous Co-Tenancy Requirements” shall mean that during the Term of thisLease subsequent to the Commencement Date all of the following retailers and specifiedgross leasable area shall be open for business:

(i) Macy’s, Robinson-May and Nordstrom (collectively, the “Required Anchors”) [ortheir Comparable Replacements (as defined herein)]; and

(ii) each of the following tenants (the “Mandatory Co-Tenants”) or their ComparableReplacements (as defined herein): Apple, Anthropologie, Z. Gallerie, Coach, Brookstone,Sharper Image, Banana Republic, Williams Sonoma, Pottery Barn, Sephora, Coach, TommyBahama, Armani A/X, P.F. Changs.

A “Comparable Replacement” in the case of the Required Anchors shall mean a departmentstore [meeting the requirements of §1.09 above] with products of a fashion level and pricepoints similar to, or better than, those of the department store it is replacing and occupyingat least ninety percent (90%) of the space occupied by the original department store forwhich it is a replacement (the “minimum size”). The reduction in size of the departmentstore space to the minimum size in accordance with the preceding sentence can only occuronce during the Term with respect to the department store space in question and there canbe no further diminution in the minimum size of that department store space following thefirst replacement of the original department store which resulted in a diminution in size.

A “Comparable Replacement” in the case of the Mandatory Co-Tenants shall mean anynational or regional retailer of a quality in terms of quality of merchandise and price pointsand target customer equal to or better than, and occupying all of the space formerlyoccupied by, the Mandatory Co-Tenant it is replacing. [Emphasis added]

Note the addition of the qualifier “target customer” to the formula. While admittedly subjective (asis the rest of the formula) it is the tenant's attempt to preserve the rationale behind its insistence upon thepresence of the Mandatory Co-Tenants in the first place – they symbolize the kind of customer the tenanthopes will patronize its store.

§1.13 Remedies for a Co-Tenancy Failure.

Lease Signing Contingency. Upon a failure of the lease signing contingency, the remedy wouldbe the right of the tenant to cancel. Whether this is a continuing right or one with a limited period of timefor exercise is a matter for negotiation. In addition, whether the landlord would be required to reimbursethe tenant for its expenses in designing the store and negotiating the lease would be part of thosenegotiations.

11

Delivery of Possession Requirement. If the landlord failed to deliver the spaces of the requiredtenants by the time that physical possession of the space were to be delivered to the tenant, then “deliveryof possession” is not deemed to have occurred nor does the tenant's construction period begin to run. Oftenthe landlord will insist that after a period of time - 120 days to one year – the tenant must either (i) acceptpossession of the space notwithstanding the failure of the landlord to meet the delivery requirement, or (ii)terminate the lease. The period of time as well as any obligation of the landlord to reimburse the tenantfor its expenses is a topic of negotiation.

Opening Requirement. Although the tenant could refuse to open until the opening co-tenancyrequirements are met, that may not be a economical remedy for the tenant. The tenant would have alreadyspent considerable sums building the store, merchandising it and hiring personnel; it would not make goodbusiness sense to not open and try to sell some merchandise. Thus, while the tenant is not required to openat all, if it does open it will pay alternate rent with an ultimate termination right if the co-tenancy failure isnot cured within a certain time.

Figure 1-5

Failure Of Opening Co-Tenancy Requirements

If upon the date Tenant intends to open for business in the Premises the Opening Co-Tenancy Requirements have not been met, then Tenant will not be required to open forbusiness, nor shall the Commencement Date be deemed to have occurred until the OpeningCo-Tenancy Requirements have been met. If Tenant elects to open for business despite theOpening Co-Tenancy Failure, then Tenant shall be entitled to pay, in lieu of the Minimum

Rent [and Additional Rent hereunder],12

an amount equal to fifty percent (50%) of theMinimum Rent (the “Alternate Rent”) for each month thereafter until the Opening Co-Tenancy Requirements are met. If such Opening Co-Tenancy Failure continues for morethan twelve (12) months following Tenant's opening for business, then in addition to payingthe Alternate Rent, Tenant shall have the continuing right thereafter to terminate this Leaseupon sixty (60) days notice to the Landlord. [Emphasis added]

Full Rent Requirement. Here, the tenant is required to open notwithstanding that the openingco-tenancy requirements have not been met. However, the remedies for an initial full rent co-tenancyfailure are the same as in the case of an opening co-tenancy failure and are fairly standardized. Alternaterent will be its principal relief. After a period of time, the tenant would also acquire a cancellation right ifthe co-tenancy failure was continuing. Following is such a clause:

Figure 1-6

Failure Of Full Rent Co-Tenancy Requirements

If upon the date Tenant opens for business in the Premises the Full Rent Co-TenancyRequirements have not been met, then Tenant shall be entitled to pay, in lieu of the

Minimum Rent [and Additional Rent hereunder],13

an amount equal to fifty percent (50%)of the Minimum Rent (the “Alternate Rent”) for each month thereafter until the Full RentCo-Tenancy Requirements are met. If such Full Rent Co-Tenancy Failure continues formore than twelve (12) months following Tenant's opening for business, then in addition topaying the Alternate Rent, Tenant shall have the continuing right thereafter to terminatethis Lease upon sixty (60) days notice to the Landlord. [Emphasis added]

12Whether the additional charges such as CAM, Taxes, insurance or other costs are abated during this period is a

negotiated issue.

13See footnote 12 above.

12

Fish or Cut Bait. It is common for the landlord to insist upon a “fish-or-cut bait” requirementwhereby the tenant, after paying alternate rent for a while (typically 12 months), must decide whether toterminate the lease or remain in possession and revert to full rent.

A right of the tenant to cancel after the initial 12 months of the term would not make economicsense after the expenditure of considerable sums to construct the store, purchase inventory and hireemployees. Thus, this “remedy” is a rather hollow one. Of necessity, the tenant would then have to beginpaying the full rental despite the continuance of the co-tenancy failure (which could be substantial). In suchcase, a periodic right to “revisit” the termination option should be available to the tenant for so long as theco-tenancy failure continues (see discussion below).

Ongoing Co-Tenancy Requirement. Upon a failure of the ongoing co-tenancy requirements it iscommon to see the following features negotiated into the clause.

i. A “Waiting Period”, typically one year in the case of the department stores and a shorterperiod in the case of the satellite stores. During the waiting period, either :

a. no co-tenancy failure is deemed to exist, with no remedy for the tenant duringthe such period, or

b. A right to pay alternate rent would immediately accrue upon a co-tenancy failurebut a cancellation right on the part of the tenant would not accrue until the endof this period.

ii. The “Fish-Or Cut- Bait” Decision. Here the tenant, after paying alternate rent for aspecified time must decide whether to terminate the lease or revert to full rent. This would generate ademand from the tenant that should it elect to revert to full rent and not terminate at that time, it would havethe right to reassess its termination option at periodic intervals thereafter so long as the co-tenancy failurewas continuing.

Figure 1-7

Ongoing Co-Tenancy Failure - “Fish Or Cut Bait”

If at any time during the Term of this Lease subsequent to the Commencement Date thefollowing have occurred (a “Co-Tenancy Failure”) :

(i) either one of more of Macy’s, Robinson-May or Nordstrom (collectively, the “RequiredAnchors”) have closed and a Comparable Replacement (as defined herein) has not openedwithin one year from such closure; or

(ii) eighty five percent (85%) of the retail tenant gross leasable area (excluding the RequiredAnchors) are not open and operating for a continuous period of three months,

then Tenant shall have the right to pay Alternate Rent until the Co-Tenancy Failure hasbeen cured. If the Co-Tenancy Failure continues for a period of twelve (12) months, Tenantmust elect within thirty (30) days thereafter whether to terminate the Lease upon thirty (30)days notice to Landlord or revert back to full rent obligations, effective as of the end of thetwelve (12) month period. [Emphasis added].

Right to Revisit. Although the duration of the waiting periods, if any, are subject to muchnegotiation, the “fish-or-cut bait” feature has become almost universal. However, this presents a dilemma

13

for the tenant. At the time the tenant is required to make that final, irrevocable decision, it may not beprepared to cancel as its store may still be profitable despite a downward trend resulting from the co-tenancy failure.

A fair and increasingly common solution is one where the tenant may elect to (i) waive the rightto cancel for the time being, (ii) revert to full rent but (iii) reserve the “right to revisit” the issue ofcancellation at regular intervals in the future (e.g. 6 month or 1 year intervals) for so long as the co-tenancyfailure endures. In this manner, while the landlord will be receiving full rent, the tenant can reassess at theend of the next interval whether termination is the proper course at that time. To achieve this, thefollowing provision would be added to Figure 1-7 above:

Figure 1-8

Right to Revisit

Notwithstanding the foregoing, however, Tenant’s shall have the right to terminate at theexpiration of each six (6) month period thereafter, for a period of thirty (30) days) in eachcase, provided that the Co-Tenancy Failure has continued throughout such periods.

No Permanent Waiver of Co-Tenancy Protection. The way some co-tenancy clauses are written,once the tenant elects to waive all then available cancellation rights, the tenant waives all future co-tenancyprotection for the rest of the term. This is unfair and inappropriate. The clause must also provide that ifthe co-tenancy failure is cured and thereafter subsequently fails again, the tenant still has all of its rights fora co-tenancy failure in accordance with the procedures that applied during the first co-tenancy failure.Figure 1-9 would also be added to the foregoing:

Figure 1-9

Co-Tenancy Remedies Continue

If a Co-Tenancy Failure is cured (and Tenant has not terminated this Lease) and thereafteranother Co-Tenancy Failure occurs, Tenant shall have all of its rights and remediesprovided in this Article, including, without limitation, the right to pay Alternate Rent andthe right to terminate in accordance with the above provisions.

§1.14 Forms of Rent Relief. Alternate Rent can take several forms:

a. The tenant pays a percentage of the regular minimum rent (e.g., 50%); or

b. The tenant pays the lower of (i) the monthly minimum rent, and (ii) a percentage of itsmonthly sales; or

c. The tenant pays a percentage of its sales in lieu of the regular rent and charges. This lastmechanism should only be used if the lease contains a percentage rent clause. If thetenant’s sales remain above the breakpoint despite the co-tenancy failure, the landlordwill still receive its bargained-for rent. If the tenant’s sales fall below the breakpoint, thetenant only pays on the basis of what is actually sold at the store, rather than payingminimum rent.

If the lease contains no percentage rent clause, option (a) or (b) above is the better solution. Otherwise, ifthe tenant were to pay a straight percentage rent, the landlord may receive more rent than it bargained for, if

the tenant’s sales are high despite the co-tenancy failure.14

14In this scenario, the landlord will argue that the tenant is not hurt, despite the co-tenancy failure. The tenant

will argue that a failure of the negotiated co-tenancy requirements should reflect a diminution of rent as the shopping

14

§1.15 Right to Go Dark. The tenant may reduce its losses due to poor sales performance by closing thestore and limiting its operating expenses to paying just the minimum rent and other occupancy costs. Ifthere had been no operating covenant in the lease in the first instance, and the tenant had already closed(pursuant to its right to do so) before the co-tenancy failure had occurred and was paying full minimum

rent, the tenant would commence paying alternate rent as described in the preceding Section.15

Somelandlords argue for the proposition that in order to “earn” the right to pay alternate rent, the tenant musthave been open and operating. There is merit to this position and it is a negotiated item.

Landlord’s Response – Right to Cancel. “Going dark” for a specified period of time often triggersa landlord termination right (which may be a welcome result for the tenant). The landlord may haveanother prospect for the space and want to recapture it quickly. In addition, if the tenant is doing poorly thelandlord may want to recover possession of the premises before the tenant files for bankruptcy. In eitherevent, the tenant will want the landlord to reimburse it for the unamortized costs of its leaseholdimprovements (excluding any construction allowance), while the landlord may insist that the tenantreimburse the landlord for the unamortized portion of the construction allowance or the cost of landlord’swork if the landlord had delivered a turnkey store.

The “go dark” period usually falls within the range of 60-120 days of continuous closure.Closures for legitimate purposes do not count against the tenant. Such “excused closures” are discussed in§2.05 of these materials. Indeed, closures for these purposes usually indicate an intention to continue inbusiness, as distinguished from an abandonment.

Reinstatement By Tenant. In many cases, the tenant may want the right to nullify the landlord’scancellation and reinstate the lease by reopening within a certain period. The landlord may object to thereinstatement, however, if the landlord has already made a deal with someone else while the tenant wasclosed; the landlord will insist on the right to proceed with its other deal. In such case, the tenant mightagree to relent if the landlord actually shows proof that it has another deal in the wings and would beprejudiced by the tenant's reinstatement. Following is a clause that addresses this point.

Figure 1-10

Landlord May Nullify Reinstatement

If Tenant elects to reinstate this Lease, Landlord shall have the right, for a period of ten (10)days following receipt of the Reinstatement Notice, to notify Tenant that it has signed a leasewith another tenant for the Premises, as evidenced by a fully executed copy thereof betweenLandlord and such other tenant. In such event, Tenant's reinstatement of this Lease shall beineffective and the term hereof shall expire upon the original termination date specified inLandlord's cancellation notice.

center is dramatically different from the one upon which the full rent was predicated. The landlord should not berescued from the necessity to meet such requirements to justify the negotiated rent, simply because the tenant may stillenjoy high sales despite such failure. See also the discussion under Section 1.16, infra.

15The landlord will argue that since the tenant had already closed prior to the co-tenancy failure and was paying

full rent, it should continue to do so after the co-tenancy failure and the landlord should not be further penalized. Fromthe tenant’s viewpoint, it had the right to close at any time and pay full rent. However, if a co-tenancy failure occurssubsequently, there is a corresponding diminution of rental value and, therefore, alternate rent should be payable duringthe co-tenancy failure. If the tenant had been open and a co-tenancy failure occurred subsequently, the tenant wouldhave been entitled to close and pay alternate rent. Once a co-tenancy failure occurs, the result should be the samewhether the tenant closed prior to or subsequent to the co-tenancy failure.

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Tenant's Rights After Reinstatement. Many landlords take the position that once the tenant makesthe decision to reinstate, the tenant waives all cotenancy protection forever after. This is too extreme. Thetenant's decision to reinstate is based on a business decision predicated on the business circumstances atthat moment in time. If the tenant does reopen, it is most likely based upon the fact that the tenant nowfeels it can operate profitably and is willing to give it another try. It is appropriate however, to limit itsrights in some fashion for the immediate future to prevent an endless cycle of closings, terminations andreinstatements.

Moratorium. An acceptable clause would be a prohibition from going dark or paying alternaterent for a period of one year from the reinstatement regardless of any cotenancy failure, with the tenant tohave its full arsenal of remedies thereafter for the then existing or any new cotenancy failure. Further, ifthe tenant closed a second time by reason of the same co-tenancy failure and the landlord again terminatesthe lease, the tenant's right to reinstate would be eliminated.

§1.16 Sales Test As a Prerequisite to Any Co-Tenancy Failure Relief. Many landlords argueforcefully that the tenant should be required to demonstrate a sales decline (e.g., 10% - 20%) before thetenant can avail itself of any of its co-tenancy remedies, arguing that there must be a direct causalrelationship between the co-tenancy failure on the one hand and a loss of business on the other. If thetenant has not suffered a sales decline, then the rule of “no harm, no foul” should apply. The landlord,with some persuasiveness, argues that the tenant is unfairly taking advantage of a breakdown of the co-tenancy requirements when it has suffered no economic harm.

This argument, however, overlooks a fundamental element of the leasing transaction. Whenlandlord first induced the tenant into the shopping center, it was on the premise that the shopping centerheld the promise of a healthy and viable economic macrocosm, with thriving attractive department storesand high-end retailers. It was that environment that drove the rentals the landlord was demanding. If thateconomic climate deteriorates, is the rental value of its space the same to that tenant when Nordstrom isreplaced by Target or Barnes and Noble (or with no one) or the center is largely vacant, even if its saleshave not yet materially declined? If the tenant were first asked to lease space in the center as it nowappears (after the deterioration of the co-tenancy population), would it pay the same rent for that location,even if its projected sales were about the same? Probably not. It comes down to a question of rentalvalue of the space. This is not driven by the tenant's sales but by the quality of the location, as defined bythe population of surrounding retailers. If the co-tenancy failure did not hurt the tenant, then compliancewith the co-tenancy requirements didn’t help him either, the landlord contributing little to the equation.

It should be noted that many landlord lease forms provide for an increase in rent when another“anchor” opens in the center or the center is expanded by a certain amount of GLA – a presumed increasein the rental value of that center. Therefore, the rental value equation must also work in reverse – the lossof anchors and reduction of the level of open satellite store GLA drives down the rental value of that center,regardless of what the tenant's sales are at any given time.

If the Landlord still wants a bright line test to determine when the tenant is sufficiently injured tomerit a resort to its co-tenancy remedies, then a sales threshold test would be more appropriate. So long asthe tenant’s sales are above that negotiated threshold, the tenant would not exercise its co-tenancyremedies. If its sales fall below the threshold, the tenant is entitled to have recourse to its co-tenancyremedies for so long as the co-tenancy failure endures and its sales remain below the sales threshold. Aclause encompassing this concept follows.

Figure 1-11

Rolling Sales Threshold Test for Co-Tenancy Remedies

Alternate Rent. Upon the occurrence of a Co-Tenancy Failure, then commencing on the firstday of the calendar month following such Co-Tenancy Failure and continuing thereafter forso long as such Co-Tenancy Failure endures, if Tenant's Gross Sales for the immediately

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preceding twelve (12) full calendar months on a rolling monthly basis are less than$_____________(the “Threshold Amount”), then for so long as (i) the Co-Tenancy Failure iscontinuing, and (ii) Tenant's Gross Sales at the Premises for the immediately precedingtwelve (12) full calendar months are less than the Threshold Amount, Tenant shall beentitled to pay to Landlord, in lieu of Minimum Rent and Additional Rent, an "AlternateRent" equal to fifty percent (50%) of the Minimum Monthly Rent that would otherwise bedue hereunder.

Termination. Further, (x) if there is a Co-Tenancy Failure for a period of twelve (12)consecutive calendar months, and (y) if at the end of such twelve (12) calendar month periodor thereafter and while such Co-Tenancy Failure is continuing, Tenant’s Gross Sales for thePremises for the immediately preceding twelve (12) full calendar months on a rolling basisare less than the Threshold Amount, then Tenant shall have the continuing right toterminate this Lease upon thirty (30) days prior written notice to Landlord, whichtermination notice, if given, shall be given prior to the time that the Co-Tenancy Failureceases to exist.

§1.17 Effect of Options to Extend. Landlords often insist that if the tenant exercises an option toextend while a co-tenancy failure exists, then either (a) tenant's co-tenancy remedies cease, or (b) thereduced co-tenancy that existed when the tenant exercised the option becomes the new co-tenancyrequirement. This rationale is obvious as the tenant accepted the reduced co-tenancy environment byelecting to commit for a longer term. Fairness requires that the tenant should not be allowed to continue topay alternate rent through the option period. This may be acceptable if the co-tenancy failure occurs atleast a year before expiration of the lease term. If this is not the case, the tenant will have little time withinwhich to make such a major business decision. One solution is to extend the term and the deadline for theexercise of the option in order to give the tenant sufficient time within which to consider the effect of theco-tenancy failure on its business. Another solution is to keep the co-tenancy requirements intact but agreeon an adjusted rent, higher than the alternate rent but lower than the originally negotiated option periodrent.

§1.18 Transition From Opening Co-Tenancy Requirements to Ongoing Co-TenancyRequirements. A point often overlooked by deal makers is that they often negotiate initial opening (orfull rent) requirements which are more relaxed than the on-going co-tenancy requirements. An examplewould be as follows:

Figure 1-12

Opening [or Full Rent] Requirements

Tenant shall not be required to initially open the Premises for business [or pay full Rent forthe Premises] until the following occupants are open for business in the Shopping Center:

a. Sears, Macys & Nordstrom, and

b. occupants of 65% of the gross leasable area of the shopping center (exclusive of thedepartment stores)

On-Going Operations Requirements

Tenant's obligation to remain open for business and to pay the Minimum Rent set forthherein shall be conditioned upon the following occupants continuing to be open andoperating in the Shopping Center:

a. Sears, Macys & Nordstrom (or a Suitable Replacement), and

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b. 75% of the gross leasable area of the shopping center (exclusive of the departmentstores) [Emphasis added]

In the case of the anchor stores, the tenant is holding the landlord to the promise it made when itinduced the tenant to come into the center - no substitutions are permitted with respect to the opening (orfull rent) requirement phase. But if one of those named anchors never opens or a replacement appears in itsstead, the landlord is in a continual state of initial co-tenancy failure. When does it end? What happens ifthe satellite store component never reaches 65%? It is theoretically possible for the opening (or full rent)co-tenancy failure to continue indefinitely. One solution is if the tenant accepts a fish-or-cut-bait provision,with or without a right to revisit a cancellation decision later on. Another (and perhaps more practical)solution would be for the parties to agree that unless the opening (or full rent) co-tenancy requirements arenot met within a certain time, and provided the tenant has not elected to terminate pursuant to the aboveprovisions, then the opening (or full rent) co-tenancy clause would be retired and the ongoing co-tenancyrequirements clause goes into effect. Then the landlord would be in immediate co-tenancy failure under theongoing co-tenancy provisions and the mechanics of that clause begin to operate.

Also, with respect to the satellite store element of the equation, if the landlord achieves the 65%level, then he has met the initial opening or full rent requirement and that clause is retired. Again, thelandlord is in an immediate ongoing co-tenancy failure circumstance by reason of the failure to have 75%of the GLA open. The obvious answer here to is allow landlord a period of time, typically six months, toget the levels from 65% to 75%. Figure 1-13 captures the concept.

Figure 1-13

Transition From Opening Requirements to Ongoing Co-Tenancy Requirements

If the Opening [or full Rent] Requirements are not met for a period of ______months andTenant has not terminated this Lease as provided in this Section, then effective as of the daynext following the expiration of such _________month period, the provisions of this Section_____ [Opening [or full Rent] Co-Tenancy Requirements] shall become inoperative andTenant’s rights with respect to the obligation to operate in the Premises, the payment of rentand the right to terminate this Lease shall be exclusively governed by the provisions ofSection ____ [Ongoing Co-Tenancy Requirements].

§1.19 Unavoidable or Justifiable Closures of the Co-Tenants. The tenant may not invoke itsremedies until the cotenancy requirements have failed. But it is not always clear when this occurs. What ifthe department stores or satellite stores are closed for force majeure reasons or for remodeling or takinginventory? How long should the tenant have to wait before availing itself of its co-tenancy remedies?

The landlord may want to provide for different grace period times for different situations. Forexample, a renovation or restoration of a department store will take longer than that of a satellite store.These differences should be recognized provided the tenant puts an ultimate time limit on them. Althoughthe real time it may take to complete these operations may often exceed those limits, the question the tenantfaces is how long must it endure the closures by reason of such occurrences, regardless of whether theclosures are unavoidable or justified. A provision such as the following would work:

Figure 1-14

Excused Closures Not Constituting Co-Tenancy Failure

Notwithstanding the foregoing, the closure of any Department Store or SatelliteStore by reason of the following causes shall not be deemed a Cotenancy Failure nor

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give rise to any right of Tenant to pursue any of Tenant's remedies unless suchclosure continues beyond the periods hereinafter set forth:

a. Fire or other casualty: Department Stores - 180 days; Satellite Stores - 60 days;

b. Remodeling: Department Stores - 90 days; Satellite Stores - 60 days;

c. Taking inventory: Department Stores - 10 days; Satellite Stores - 5 days;

d. Force Majeure (other than fire or other casualty): Department Stores - 30 days;Satellite Stores - 30 days.

§1.20 Other Drafting Considerations. Assume that the business representatives of the landlord andtenant have agreed that the tenant's operating requirement is to be tied to a department store and a certainpercentage of satellite store GLA. Unhappily, one still sees clauses like the following issuing out of thelandlord's lawyer’s office:

Figure 1-15

Tenant's Requirement to Operate - Cotenancy

Tenant shall be required to operate during designated days or hours provided thatthe ABC department store (or its successor) is required to operate and 75% of thetenants (including Tenant) are required by their leases to be open during such daysand hours. (Emphasis added)

To the tenant, such a clause is a travesty of the agreement between the business people and a mockery of

the tenant.16

From a tenant's perspective, such a provision should be modified in accordance with thefollowing principles:

a. The Anchors. The anchors and the manner of designating their successor has beenexhaustively examined above;

b. “Actually Open” vs. “Required to be Open”. To state the condition in terms ofbeing “required to be open” is discounting the tenant's prime motivation. The presence or absence of anoperating covenant in the department store's lease (or REA) is not the controlling factor for the tenant. Theonly thing that matters to the tenant is whether or not the department store is actually open.

When applied to the satellite stores, the “required to be open” test is especially problematic. It isunlikely that the condition could ever fail because every satellite lease contains an operations covenant,even if it is coupled with a co-tenancy provision. Indeed, if those tenants went dark in violation of theirleases, the landlord would still have met the test simply because there was a clause in their leases requiringthem (in some form or another) to be open, whether or not they were actually open. This provision wouldalso allow the landlord to not even require an operating covenant in a large number of its leases while stillrequiring the tenant to operate.

The only thing that matters to the tenant is how many other retailers are actually open, regardlessof what their leases say. A landlord's willingness to use all reasonable efforts to enforce the operatingclauses of those other leases is not especially helpful because specific performance is difficult to obtain andtermination of the other fellow's lease does not increase the number of other stores that are open.

16“No poet ever interpreted Nature as freely as a lawyer interprets Truth”. Jean Giradoux.

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c. Percentage of the Tenants Being Open. If the shopping center is only 80% leased, thenthe landlord's requirement is diluted to merely 75% of 80% or 60%. The cotenancy requirements must betied to a percentage of the gross leasable area of the center being open, not just a percentage of the tenantsthe landlord happens to have.

d. Is The Premises Included In The Count? If the total satellite store GLA was 100,000square feet and the tenant occupied 5,000 square feet, the landlord would argue that the 75,000 square feet(75% of 100,000) includes the tenant's store itself as being counted towards meeting that total. This meansthat the landlord only has to have 70,000 square feet of other space open - 70% of the 100,000 square foottotal GLA - in order to require the tenant to open.

From a tenant's perspective, it is interested in what the other stores are doing before the tenantitself can be required to be open or pay full rent; its own store should not be included. What the tenantintends is that 75,000 square feet of other stores be open before tenant is required to be open and that75,000 square feet is calculated as 75% of the total GLA of the center, even if that total includes the area ofthe Premises.

Which one is the correct answer? It’s a legitimate area for negotiation. If the tenant's space issmall, the impact to it may be very little and he can concede the point. However if the tenant's space is alarge one, then the pendulum will swing in its direction and the landlord may have to concede the issue.

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2.00 COVENANTS TO OPERATE

§ 2.01 Covenant to Operate/Express vs Implied. Shopping center lease forms, as they firstdeveloped, generally did not contain an express covenant of the tenant to operate. While many of thoseleases did include percentage rent clauses, few contained an express covenant of the tenant to operate inorder to ensure that the tenant would be generating sales. However, there is a substantial body of case lawwherein the covenant of a tenant to operate has been implied by the courts from a variety of factors

including the presence of other operating requirements in the lease17

or the adequacy of the minimum rentbeing paid as compared to the percentage rent provisions.

This last factor - the adequacy of minimum rent - has been the most influential in determiningwhether a continuous operations covenant will be implied. If the court found that the minimum rent wasnominal, it often concluded that the parties intended that the landlord also rely on the percentage rentgenerated from tenant's sales to ensure an adequate rental return from the premises. Conversely, if theminimum rent was found to have been adequate - when viewed at the time of lease execution, not at thetime of the lawsuit - then no covenant would be implied, the court refusing to protect the landlord from itsown imprudence in failing to include an express covenant to operate or providing for rent increases over theterm.

In modern shopping center leasing practice landlords rely principally upon the express covenant tosupport the tenant's obligation to operate the store (and produce percentage rent in those leases that providefor it).

§ 2.02 The Obligation: General Obligation vs Specific Hours Requirement. As shopping centerleases evolved, they began to include a general covenant of the tenant to operate from the premises such asthe following:

Figure 2-1

General Covenant to Operate

Tenant agrees during the Term to continuously and uninterruptedly occupy and usethe entire Premises for the Permitted Use and to conduct Tenant's business thereinin a reputable manner.

A slightly more specific clause, like the one which follows, was also found in early leases(including the ancestral version of the International Council of Shopping Centers' standard form) andreferred to hours of operation in a general way:

Figure 2-2

General Reference to Hours of Operation

Tenant agrees during the Term to continuously and uninterruptedly occupy and usethe entire Premises for the Permitted Use and to conduct Tenant's business thereinin a reputable manner. Tenant specifically agrees to remain open for businessduring the usual days and hours for such business as are customary in the vicinity ofthe Shopping Center. [Emphasis added[

Today, most shopping center leases include rather specific requirements, with the right of thelandlord to change days and hours from time to time, such as the following clause:

17E.g., provisions requiring a tenant to keep the store continually stocked and staffed, a covenant to use its best efforts

to maximize sales and a requirement that the tenant staff the store with a sufficient number of employees.

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Figure 2-3

Specific Reference to Hours of Operation

Tenant will operate Monday through Saturday from 10:00 A.M. until 9:00 P.M., onSundays from 12:00 Noon until 6:00 P.M. or during such other days and hours asare designated by Landlord.

In modern practice and in response to the increasing pressure from tenants to link their operationscovenant to a co-tenancy requirement, landlords have included a cotenancy requirement in their lease inthe following form:

Figure 2-4

Reference to Operation of Other Tenants

Tenant will operate during such days and hours that the ABC Department Storeplus seventy five percent (75%) of the tenants of the Shopping Center are open andoperating. [Emphasis added]

The problem from the tenant's viewpoint is that the tenant’s obligation to operate is tied only tothose existing tenants that happen to be open and only 75% of that group instead of all of them. The tenantwill want to ensure (i) that there is a critical mass of other occupants against which the tenant will measureits obligation, and (ii) that in no event shall the tenant be required to operate during hours that do not makesense for its business.

A tenant does not bargain for an obligation to be open simply because many of the other tenantsare open during some days and hours, if those days and hours don't make any sense for the tenant - e.g.11:00 a.m. to 3:00 p.m. Nor does the tenant bargain for the privilege of being allowed to close early (e.g.3:00 PM) simply because the landlord could only maintain the cotenancy requirement up until that time.From a tenant's perspective, its obligation to open for business at all, as well as its obligation to operateduring specified days and hours, should be treated as one, directly tied to the cotenancy requirement.

§ 2.03 Tying Tenant’s Obligation to Operate to Minimum Co-Tenancy. The tenant will want tolink its obligation to operate to similar compliance by a critical mass of tenants which comprise the ongoingco-tenancy requirements discussed above in §§1.01 et. seq. In addition, the tenant will want the additionalprotection that the “specified hours”, even if observed by the required co-tenants, will not obligate thetenant to operate during unusual hours. Consider the following clause.

Figure 2-5

Tenant Only Obligated to Operate Certain Times

Tenant shall be required to operate its business during those hours that the tenants oroccupants which comprise the Co-Tenancy Requirements of Section ___ are open andoperating, provided however that Tenant shall not be required, by reason of the foregoing tooperate:

a. longer than the hours of 10:00 am - 9:00 pm Monday through Saturday, 11:00 amto 7:00 pm Sundays (the “Maximum Times”), nor

b. less than the hours of 10:00 am - 6:00 pm Monday through Saturday, 12:00 Noonto 6:00 pm Sundays (the “ Minimum Times”).

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If less than the tenants comprising the Co-Tenancy Requirements are operating during theMinimum Times, then Tenant shall have no obligation to operate at all and may close thePremises (but shall continue to perform all other obligation arising under this Lease andapplicable to a vacant premises) for so long as the foregoing requirements are not met.

In this way the tenant has protected itself against having to operate during days or hours that arenot suitable for its business simply because the cotenancy requirements are being maintained during suchunusual times.

Exemption for Restaurants and Other Special Retailers. For purposes of these “hours co-tenancies”, the landlord will want to exclude from this population restaurants, theaters and other userswhose normal business hours do not coincide with the typical hours of retailers in general.

§2.04 Operation During Additional Hours.

Right of Tenant to Stay Open During Additional Hours. Now that the tenant has ensured that it isnot required to be open during additional hours, it will want the right to open during extra hours if othertenants in the mall are open. In negotiating this point the landlord may again wish to exclude tenants suchas theaters or restaurants from consideration and permit the tenant to open during additional hours only ifother retailers who otherwise maintain regular business hours are also open during the later hours.Landlord may also want the tenant to pay its share of the costs of operating the shopping center duringthose additional hours, allocated among the square footage of those tenants that are actually participating.

Obligation of Tenant To Open During Additional Hours. From the landlord's perspective, it maywant its tenants to open during days and hours beyond the established operating days and hours for theshopping center, e.g. during the holiday season or during so-called “Midnight Madness” sales or on NewYear’s day (if it is not an “Excused Closure” as discussed immediately below). In such event the tenant'sobligation to operate during such additional days and hours should be tied to the same level of co-tenancycompliance as is the case with respect to the “standard” days and hours.

§2.05 Excused Closures. There are certain days and hours in which the tenant may not wish to operateor to be excused from the obligation for legitimate business reasons. Restaurants will negotiate for theirown operating hours, which will be different from those of the customary retailers. Their obligation will beconditioned upon a minimum quorum of other restaurant users being open during similar hours, taking intoaccount whether a restaurant tenant (or the required co-tenant) operates all day or only during the lunch ordinner hours. Other reasons for closure (or non-operation) will be for obvious business or practical reasonsas are shown in Figure 2-6 below. Some retailers have a policy of not operating on certain nationalholidays (e.g. New Years Day) despite the compulsion to do so by developers and other retailers in recentyears.

Figure 2-6

Excused Closures

An “Excused Closure” is a temporary closure due to or in connection with: (i) an event offorce majeure as defined in this Lease; (ii) a casualty to or a taking of the Premises; (iii) aperiod not to exceed seventy-five (75) days in the event of an assignment or sublease made inaccordance with this Lease; (iv) the making of repairs or for remodeling or renovationwork; (v) closures for special events and preparation for new product launches, (vi) four (4)days per year for the purpose of taking inventory in the Premises (vii) Easter Sunday orMonday, Thanksgiving Day, Christmas Day or New Year’s Day or other nationally,regionally or locally recognized holiday (a “Holiday”), (viii) when to do so would violate anylegal requirement, criminal or civil, or subject Tenant or its employees to a fine or penalty,whether criminal or civil in nature.

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§2.06 Landlord's Remedies for Violations of Operating Covenant. A breach of the operating covenantconstitutes a material breach of the terms of the lease, entitling a landlord to exercise all of its rights underthe lease and at law to terminate the lease and regain possession. Injunctive relief for failure to operatemay also be available in certain states. Providing for an additional remedy, such as the liquidated damagespayment contained in Figure 2-8 below, may be important to address situations where the termination ofthe lease for default is too drastic a remedy in the case of a tenant who is otherwise a productive part of theshopping center but refuses to operate during shopping center hours. The liquidated damages provisionmay be preferable to injunctive relief because it can be invoked immediately, without significant cost, andwithout the requirement of initiating a court proceeding.

§2.06-1 When Has The Tenant Violated The Covenant? There are two ways a tenant canviolate the operations covenant: (a) by refusing to open at all, or (b) by opening late or closing early, orfailing to open for a single day. The violation in (a) can be cured with an appropriate notice and cureperiod, five (5) days being typical. It would not be reasonable to expect the landlord to wait 30 days for acure for this type of non-monetary default. The second type in (b) cannot be cured - the damage is done, itcannot be undone.

The failure of performance may be so minor, e.g. a one-time occurrence or an incurable infractionthat to unleash all of landlord's remedies would be disproportionate to the offense. In the case of a type (a)violation, a concept of repeated defaults should be used (unless the tenant has failed to reopen during thecure period). Additionally, in the case of a type (b) violation, only multiple repetitions of the offenseshould precipitate a default.. Following is an appropriate clause dealing with each type of violation.

Figure 2-7

When Failure to Operate is a Default

a. Failure to Open. An Event of Default will be deemed to occur upon thefailure of the Tenant to be open for business at all - when otherwise required bySection _____or other provisions of this Lease to do so - on a fourth (4th) occasionduring any one Lease Year provided that on each of the previous three (3) occasionsduring said Lease Year Tenant had received written notice from Landlord of suchfailure and has been accorded on each such occasion five (5) business days (duringwhich actual compliance occurred) in which to correct such failure and reopen forbusiness.

b. Opening Early/Late/Failing To Open For A Time. In the case of a failure ofperformance under Section _____ which is incurable by notice because such failurehas already occurred – e.g. where Tenant has failed to maintain the minimumnumber of hours required by that Section on a particular occasion – an Event ofDefault will be deemed to occur on the fourth (4th) such occasion during a LeaseYear provided that on each of the previous three (3) occasions of a failure of likenature during said Lease Year Tenant had received notice of such failure fromLandlord.

With respect to a failure to open at all, the tenant must have committed this breach on a 4thoccasion during the Lease Year provided that on the 3 previous occasions tenant was given 5 days toreopen and did so.

With respect to opening late or closing early or not opening on a certain day, the tenant must havecommitted this breach on a 4th occasion during the Lease Year provided that it received notice of the priorbreaches on all 3 of the previous occasions.

§2.06-2 Lease Termination. As in any default situation, the lease or the tenant's right toexclusive possession is subject to forfeiture in cases where the tenant violates the operating covenant.

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While this may be what the tenant wants, it must be remembered that in such a case the tenant also will besubject to the whole range of damages which are provided for in the lease and at law following a default.

Landlord's “Basic Remedies” Depending upon the lease form one encounters, the followingremedies (the “Basic Remedies”) break down into numerous various sub-categories:

a. terminate the tenant’s “right of possession” and the Lease but still be able to pursue

recovery for past due rent and future rents;18

b. terminate the tenant’s “right of possession” but not the Lease and continue Tenant’sliability for all obligations thereunder, or

c. do not terminate the tenant's “right to possession” but continue to sue for rent as itbecomes due (if not otherwise paid);

d. “Other Damages”, i.e. in addition to the possession and rent recovery damages listed initems (a)-(c) above, the landlord can recover all sums necessary to compensate the landlord for all damagesproximately caused by the breach, e.g. the landlord's expenses in retaking possession, preparing thepremises for reletting and broker's commissions.

The pursuit of the rental recoveries under items (a) - (c) above involved either (i) the rent

acceleration remedy found in most leases and authorized by some statutes,19

or (ii) the “monthly deficiencyremedy” whereby the landlord waits to collect the rent periodically. During that time he (or the tenant) issupposed to attempt to find a replacement tenant (depending on that jurisdiction’s rule regarding the duty tomitigate damages) and the tenant must pay the landlord the positive difference between the lease rent andthe rent the landlord is able to collect from a replacement tenant. In the case of the rent accelerationremedy, the concept of mitigation is built into the requirement that either the landlord or the tenant(depending on the jurisdiction) has the burden of proof that the duty has been met (landlord) or not met(tenant).

§2.06-3 Remedies Without Termination.

Landlord's “Secondary Remedies” are those not involving termination of the lease, dispossessionof the tenant and the pursuit of rentals for the remainder of the term, e.g.:

a. recovery of damages in a traditional lawsuit;

b. monetary penalties, i.e. those for failure to continuously operate, e.g. liquidated damages;

c. equitable (injunctive) relief for initial opening or continuous operating violations.

§2.06-4 Other Damage Issues (Other Than Rent).

A. Extraordinary Damages (With Or Without Termination) . Aside from the rent damagesdiscussed above, the normal rules on damages apply in a case where a tenant violates its covenant tooperate. Depending on the tenant's relationship to the rest of the center, the damages flowing from itsbreach may be enormous. In Hornwood v. Smith's Food King No. 16, 772 P. 2d 1284 (Nev 1989), asupermarket tenant breached its operating covenant and the landlord sought consequential damages based

18As a companion remedy, upon the reentry by the landlord it may extract a grant from the tenant of the additional

right collect all rents and profits received by the tenant as a result of the possession of the premises by any partyclaiming through the tenant including subtenants, licenses and concessionaries.

19California Civil Code §1951.2, which was first enacted in 1971 and amended in 1990.

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on the diminution in value of the shopping center. The court found that the tenant, as an anchor, (1) drewthe largest amount of customers, (2) attracted other satellite tenants, and (3) was essential for long termfinancing. When the anchor tenant left, the rental value of the shopping center immediately decreased byvirtue of the vacancy, discouraging replacement tenants and customers and thereby decreasing the overallvalue of the center. The court awarded the landlord “diminution in value damages” in excess of onemillion dollars stating:

“Smith's is a sophisticated business entity. Smith's knew that its presence as the anchortenant had a critical impact on the shopping center’s success. Without an anchor tenant,obtaining long term financing and attracting satellite tenants is nearly impossible for ashopping center. Perhaps more importantly, the anchor tenant insures the financialviability of the center by providing the necessary volume of customer traffic to theshopping center. Therefore, we find that the district court clearly erred in concluding, as amatter of law, that the diminution in value of the Hornwoods' shopping center wasunforeseeable.”

While the withdrawal of a satellite tenant is not likely to have the same impact as that of an anchor,the inclusion of a properly drafted liquidated damages provision is important so as to eliminate any danger ofexcessive damages.

B. Liquidated Damages (With Or Without Termination) . Most shopping center leases todaycontain a liquidated damages provision such as the following:

Figure 2-8

Failure to do Business

The parties covenant and agree that because of the difficulty or impossibility ofdetermining Landlord's damages by way of loss of the anticipated percentage rentfrom tenant or other tenants or occupants in or adjoining the shopping center, or byway of loss of value in the shopping center because of diminished salability ormortgagability or adverse publicity or appearance by tenant's actions, should Tenant(a) fail to take possession of the Premises on the Delivery of Possession Date for thepurposes of commencing Tenant's Work or, (b) fail to open for business in thePremises fully fixtured, stocked and staffed on the Commencement Date, (c) vacate,abandon or desert the Premises, or (d) cease operating or conducting its businesstherein, (except during any period the Premises are rendered untenantable by reasonof fire, casualty, permitted repairs or alterations) or (e) fail or refuse to maintainbusiness hours on such days or nights or any part thereof as required by Section ___hereof, then and in any of such events (hereinafter collectively referred to as "failure todo business"), Landlord shall have the right, at its option, and as liquidated and agreeddamages (and not as a penalty) due to the difficulty or impossibility of ascertainingactual damages, (i) to collect not only Fixed Minimum Rent and other rents, chargesand sums herein reserved, but also an amount payable as additional rent equal to_______ percent ( %) of the Fixed Minimum Rent reserved for the period of Tenant'sfailure to do business, computed at a daily rate for each and every day or part thereofduring such period; and Landlord and Tenant agree that such additional rent shall bedeemed to be their best estimate of the damages which will be suffered by Landlord asa result of Tenant's defaults as set forth in (a), (b), (c), (d) and (e) of this sentence andsuch amount shall be payable as liquidated damages in lieu of any percentage rent thatmight have been earned by Landlord during such period, and (ii) to treat such failureto do business as an "Event of Default” within the meaning of Section __ of this Lease.Landlord's claim that Tenant has vacated, abandoned or deserted the Premises shallnot be defeated solely because Tenant may have left all or any part of its trade fixturesor other personal property in the Premises." (Emphasis added)

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Liquidated Damages - Compensation or Penalty? When negotiating a liquidated damagesprovision in the lease for a violation of the operating covenant, the tenant should establish a figure which isa realistic estimate of what the landlord's probable loss will be. In other words the tenant will want to makethe figure compensatory rather than punitive. If the tenant does not have a percentage rent clause, then thelandlord's damages may be the reduced percentage rent received from others, resulting from the negativeeffect of such closure upon the surrounding retailers. Such damages are uncertain and ripe for such aclause. A figure of 15% - 20% of the daily minimum rent and, in the case where the tenant pays apercentage rental, an average of the most recent percentage rent (over an agreed upon period) for anexisting store would be reasonable solutions.

The importance to a tenant of a reasonable liquidated damages provision is underscored by theHornwood case described above.

Liquidated Damages - The Clause is Not Applicable During a Cotenancy Failure. If the tenanthas gone dark because the operating requirements have failed, then the tenant should not be required to paythe “failure to do business” penalty. Therefore, the tenant must insert, where appropriate, into a clause likeFigure 2-8 the following phrase: “except when such closing or cessation of business is otherwisepermitted by this Lease."

Liquidated Damages Provision - Security For Performance or Alternate Performance As a Bar toInjunctive Relief? While one might speculate that a liquidated damages provision precludes the ability ofthe landlord to obtain an injunction because its remedy at law (the liquidated damages) was deemedadequate by the landlord's own admission, this is not the case. A preponderance of courts have held thatthe right to specific performance is not determined by whether the provision is one for a penalty on the onehand or for liquidated damages on the other; rather, the question is whether the provision was intendedmerely as security for performance of the obligation or was intended as an alternative to the obligationgiving the tenant the option either to perform the obligation (operate the store) or to pay or forfeit thepenalty or liquidated sum. If it appears that the parties intended that the covenant be performed and that theprovision for liquidated damages was merely security for such performance, then specific performancegenerally will not be denied on the “adequacy” ground. It is only when the lease stipulates for one of twooptions in the alternative - the performance of the covenant or the payment of a sum in lieu thereof - thatequity typically will not decree specific performance. In a shopping center lease it is more likely that theliquidated damages provision will be construed as security, not alternate performance, and will not in itselfserve as a bar to the landlord's suit for specific performance. But see Lippman v. Sears, Roebuck & Co., 44Cal.2d 136, 280 P.2d 775 (1955), where the court reached an opposite result.

§2.06-5 Specific Performance or Injunctive Relief (No Lease Termination). The landlord'smost effective remedy is specific performance of the covenant requiring the tenant to operate (or reopen) oran injunction preventing the tenant from closing. While a violation of the operating covenant will entitlethe landlord to all of its usual legal rights and remedies-- forfeiture of the lease, eviction and damagesresulting from the breach - the question of whether a court will consider equitable relief to be moreappropriate and force the tenant to remain open is a crucial one. To a tenant, the compulsory continuanceof a business that is suffering losses each day may be more onerous than eviction and damages.

The two most important obstacles that the landlord will encounter in securing specificperformance of a continuous operations covenant are (1) establishing that the landlord's remedy at law fordamages is inadequate, and (2) the judicial doctrine against burdening the equity court with ongoing andcontinuous supervision of its decree. While several courts recognize that the unique nature of a shoppingcenter will support the conclusion that damages are an inadequate remedy and would otherwise havenormally been disposed to grant specific performance, these courts nevertheless have generally declined todo so because of a judicial policy against issuing a decree that will require continued judicial supervisionand special skills to ensure its enforcement. See Reicker, Specific Performance of Shopping Center Leasesin California, 21 Hastings Law Journal 532.

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A increasing number of jurisdictions (but still a minority of them) have granted specificperformance or injunctive relief to the landlord and have not been troubled by the traditional reluctance ofequity courts to involve themselves in the supervision of its decree. The prevailing majority view,however, would deny the landlord relief on this ground.

§2.04-6 Landlord's Express Reservation of the Right to Injunctive Relief. Typically, thefollowing clause appears in a landlord's lease form:

Figure 2-9

Landlord's Right to Injunction

In the event of any breach or threatened breach by Tenant of any of the terms andprovisions of this Lease to be performed and observed by Tenant, Landlord shall have theright to injunctive relief and declaratory relief or any other equitable relief as if no otherremedies were provided for herein. [Emphasis added]

This language would appear to suggest that the tenant has stipulated that the landlord's remedy atlaw was inadequate. Regardless of whether the parties can contractually confer equitable jurisdiction to acourt (given the broad discretionary power of an equity court) and relieve the landlord of the duty to pleadand establish it, the tenant should avoid any implication that the lease does so. The clause should bemodified as follows:

Figure 2-10

Landlord's Right to Injunction - Modified by Tenant

In the event of any breach or threatened breach by Tenant of any of the terms andprovisions of this Lease to be performed and observed by Tenant, Landlord shall have theright to seek injunctive relief and declaratory relief or any other equitable relief as if noother remedies were provided for herein. [Emphasis added]

Another way to achieve this result would be the following clause:

Figure 2-11

Landlord's Right to Injunction - Modified by Tenant [Alternate]

In the event of any breach or threatened breach by Tenant of any of the terms andprovisions of this Lease to be performed and observed by Tenant, Landlord shall have theright to injunctive relief and declaratory relief or any other equitable relief as if no otherremedies were provided for herein provided however that the foregoing shall not be deemedto relieve Landlord of the obligation to establish its entitlement to injunctive relief,including, without limitation, that its remedy at law is inadequate. [Emphasis added]

________________

JOEL R. HALL is a sole practitioner in San Jose, CA with extensive experience incommercial leasing transactions for both developers and tenants with national and internationalpresence. He is a former shareholder in the law firm of Miller Starr Regalia in Walnut Creek,CA and an Assistant General Counsel for Gap Inc. in San Francisco. He is recognized as an

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accomplished negotiator and a frequent speaker and author of numerous materials on commercialleasing topics on behalf of ICSC, the Georgetown University Law Center Advanced CommercialLeasing Institute (where he serves on the Advisory Board) and several other professional leasingprograms. He has been selected as a Superlawyer in the area of real estate for Northern Californiafor 2012 and is a member of the American College of Real Estate Lawyers In 1988-1989, he wasa contributor to the California Law Revision Commission with respect to changes in assignmentlaw in California. His materials have been cited as secondary authority in state and federalopinions. His clients have included Gap Inc.,Apple Inc., Chico’s FAS/Inc., Ross Dress for Lessand Milos Estiatorio Greek Restaurants. He is a graduate of Pennsylvania State University andthe Villanova University School of Law.

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