It is no secret that the advent of online commerce has eroded the value of retail properties for landlords and tenants alike. Brick and mortar – or stick and brick – retailers have been steadily losing market share to online giants such as the ubiquitous Amazon.com, amongst others, who are able to leverage lower overhead, efficiency of scale, and customer delivery within hours. These online giants occasionally offer consumers the ability to avoid paying state and local sales taxes as an additional cost saving.
Landlords and tenants are harmed by this change in consumer habits by having less foot traffic in their shopping centers and less dollars being spent in their stores. When tenants or prospective tenants lose margin or market share, it reduces the ability for landlords to raise rents, lease empty stores to tenants with healthy balance sheets, or develop new shopping centers.
When Amazon announced that it was acquiring Whole Foods this summer, many landlords and tenants began to imagine how the grocery space would change with this powerful new e-commerce player entering the landscape. Beginning in August, Amazon began installing Prime Now pick-up services in certain Whole Foods locations for pick-up of e-commerce items ordered by Amazon customers online.
Well represented landlords and big box tenants have a valuable tool at their disposal to prevent Amazon from saturating the prime real estate positions within Whole Foods or other store fronts. These tenants and landlords must agree on the mutual benefit of granting tenants exclusive use provisions in their lease that restrict the use of other retail space within the surrounding shopping centers. Anchor stores in power centers such as Target, Bed Bath and Beyond, and Best Buy famously include restrictions on the activities of their neighbors uses within the shopping centers where they operate. Use restrictions are not just designed to protect tenants from current direct competitors (e.g., no other Mexican restaurants can operate in the shopping center as long as my restaurant concept continues to serve Mexican-style food), but also can exclude certain types of businesses which could erode the customer base for traditional tenants in the future. When leases can have terms lasting ten to forty years in the future, broad exclusive use provisions can protect tenants and shopping centers as a whole from cannibalism or undesirable competition for generations to come.
As with all lease negotiations, the leverage between the tenant and landlord is critical. If tenants are willing to agree to take a large portion of the space and commit to a long term lease, landlords may be willing to forgo potential revenue by refusing to lease to a restricted rival. Tenants must also convince landlords that barring another large name retailer – or restricting certain activities by another large retailer – will benefit the shopping center ecosystem as a whole by creating a balanced playing field with a symbiotic tenant mix expanding the business opportunities for all tenants rather than engaging in competitive battles for each consumer dollar spent.
Whether you are a landlord or tenant, it is important to employ competent legal counsel with experience negotiating and reviewing exclusive use provisions before making a significant long-term financial commitment.