Franchisee Real Estate Lease: EXCLUSIVE USE CLAUSE

An exclusive use clause in a commercial lease is a provision that gives a tenant the sole right to operate a specific type of business within a defined area, usually the same shopping center or commercial building.

Contact Neufeld Legal PC for franchising legal matters at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com

The complexity of the lease agreement for the commercial real estate that is used in the franchise operation can very easily equal, or even surpass, that of the franchise disclosure document and the franchise agreement, such that retaining the legal services of an experienced lawyer to decipher, explain and negotiate the commercial lease agreement and its schedules. And for over 25 years, we have been working with business owners, including franchisees, to understand and deal with commercial lease agreements that have been presented by landlords and are foundational to their business operations. To gain the most from our legal analysis and advice as to the commercial leasing arrangement, a franchisee would be well served to understand some of the most significant commercial leasing terminology, which we have undertaken to provide you with in-depth analysis.

An exclusive use clause in a commercial lease is a provision that gives a tenant the sole right to operate a specific type of business within a defined area, usually the same shopping center or commercial building. In return, the landlord is prohibited from leasing space to any other tenant that would compete with the franchisee's business.

This clause is a critical tool for franchisees (the tenant), especially for retail stores, restaurants, and service-based businesses, as it protects their investment and customer base by eliminating or limiting direct competition from nearby businesses.

Key Aspects of an Exclusive Use Clause

• Defining the "Exclusive Use": This is the most crucial part of the clause. The language must be very specific and clear to avoid future disputes.

  • Specificity is key: A clause that simply says "no other coffee shop" may be ambiguous. Does a cafe that sells coffee as a minor part of its business count? A well-drafted clause would define the exclusive use more precisely, for example, "the primary business purpose of selling prepared coffee and coffee-based beverages for on-site or off-site consumption."

  • Scope of the clause: The clause should clearly define the geographic area where the exclusivity applies. Is it just the building, the entire shopping center, or a specific radius around the premises?

• Landlord's Obligations: The clause places a significant burden on the landlord, such that the landlord must:

  • Represent and Warrant: Confirm that no current tenants violate the exclusive use.

  • Covenant: Agree not to enter into any new leases that would violate the exclusive use.

  • Notify New Tenants: Often, the landlord is required to include a notice in new leases about the existing exclusive use clauses.

• Remedies for Violation: A good exclusive use clause must include remedies for the tenant if the landlord breaches the agreement. These remedies can include:

  • Rent Reduction or Abatement: The franchisee's (tenant) rent may be reduced or abated for as long as the violation persists.

  • Right to Terminate the Lease: In some cases, if the violation is severe and not cured by the landlord within a specified timeframe, the franchisee (tenant) may have the right to terminate the lease.

  • Legal Action: The franchisee (tenant) can sue for damages or seek an injunction to stop the competing business from operating.

Benefits and Risks for the Franchisee (Tenant)

• Protection from Competition: The main benefit is safeguarding the franchisee's business from direct competitors in the same location.

• Increased Sales and Profitability: With less competition, the franchisee can attract more customers and potentially justify higher prices.

• Higher Value: The exclusivity makes the business more valuable, which is important for brand integrity and potential sale.

Naturally, how the concept operates in the specific context of the particular lease agreement requires experienced legal analysis, such that you make the most out of your understanding of the commercial lease agreement for your franchise. For such legal analysis and advice for your franchise and its commercial leasing arrangements, we welcome you to contact franchisee lawyer Christopher Neufeld at 403-400-4092 [Alberta], 905-616-8864 [Ontario] or Chris@NeufeldLegal.com to schedule a confidential consultation.

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Contact us via email at chris@neufeldlegal.com or call 403-400-4092 / 905-616-8864.