Why Exclusivity Clauses Are Critical for Commercial Tenants in New York

What Is an Exclusivity Clause in a Commercial Lease?

An exclusivity clause is a lease provision in which the landlord agrees not to permit certain competing uses within the same building, shopping center or commercial development.

For example, a coffee shop tenant may negotiate a restriction preventing the landlord from leasing another unit in the property to a business whose primary use is selling coffee or espresso-based drinks. A physical therapy practice may seek protection from another physical therapy provider opening in the same medical building. A specialty grocery store may want to prevent another tenant from deriving a substantial portion of its sales from the same protected product category.

The purpose is not necessarily to eliminate every form of competition. Instead, the clause should protect the tenant’s core business from direct competition within the property controlled by the landlord.

Why This Protection Matters to Commercial Tenants

Protecting the Tenant’s Investment

Commercial tenants often invest heavily in a location before opening. Depending on the business, those investments may include:

• Architectural and engineering work
• Construction and tenant improvements
• Equipment and fixtures
• Professional licensing and permits
• Branding and signage
• Advertising and customer acquisition
• Employee recruitment and training

A tenant may make those investments based partly on the expected customer demand and tenant mix at the property. If the landlord later brings in a direct competitor next door or elsewhere in the same development, the economics of the location may change significantly.

An exclusivity clause helps protect the assumptions that influenced the tenant’s decision to sign the lease and invest in the space.

Preserving Customer Traffic and Market Position

Location is often central to the success of a commercial tenant. Customers may choose a business because it is the most convenient provider of a particular product or service within a shopping center, office complex or neighborhood development.

A direct competitor in the same property can divide customer traffic, create confusion and place pressure on pricing. The original tenant may also have helped establish demand for that type of business at the property.

Without an exclusivity provision, a tenant should not assume that the landlord will voluntarily preserve that competitive advantage throughout a five-, ten- or fifteen-year lease term.

Creating Greater Predictability

A commercial tenant cannot control every outside competitor that may enter the surrounding neighborhood. The tenant can, however, negotiate restrictions covering property that the landlord owns or controls.

That limited protection can provide greater predictability when the tenant evaluates projected revenue, rent obligations, renewal options and the long-term viability of the location.

Why the Exact Language Is Especially Important in New York

New York courts generally enforce clearly written commercial agreements according to their terms, particularly when the parties are sophisticated, represented by counsel and negotiating at arm’s length. Courts ordinarily will not add a protection that the parties did not include or rewrite an unambiguous lease after a dispute arises.

That makes the drafting of an exclusivity clause extremely important. It is not enough for the tenant and landlord to have a general conversation about avoiding direct competition. The restriction should be stated clearly in the executed lease.

The language should answer questions such as:

• What products, services or business activities are protected?
• What qualifies as a competing business?
• What property is covered by the restriction?
• Are existing tenants excluded?
• Does the clause cover leases, licenses, concessions, kiosks and subleases?
• What happens if the landlord violates the restriction?
• Does the protection continue during renewal or extension periods?

A vague provision may result in disagreement over what the parties intended. An overly narrow provision may technically remain in effect while failing to protect the tenant from the competition it was designed to prevent.

Existing Tenants and Uses Must Be Investigated

Before negotiating an exclusivity provision, a tenant should understand which businesses are already operating at the property and what rights those businesses have under their leases.

This was an important issue in the New York case L’Art de Jewel Ltd. v. Hudson Sheraton Corp., LLC. A jewelry tenant’s lease stated that the hotel would not rent other space for the sale or display of certain jewelry products. However, another operator had already been licensed to sell merchandise at the hotel before the tenant signed its lease. The court determined that the restriction was prospective and did not apply to the preexisting use, particularly because the tenant knew about that operator before entering the lease.

The case illustrates why a tenant should not assume that a broadly worded exclusivity clause automatically eliminates or restricts an existing business.

Before signing, the tenant and its attorney should consider:

• Reviewing the current tenant roster
• Identifying existing businesses with potentially overlapping uses
• Asking about pending leases or letters of intent
• Reviewing exceptions or preexisting rights disclosed by the landlord
• Determining whether existing tenants may expand or change their permitted uses
• Confirming whether the restriction applies when an existing lease is renewed, amended, assigned or replaced

Any agreed exceptions should be clearly identified in the lease rather than left to informal explanations.

Defining the Protected Use

The central challenge is defining the business activity that the landlord cannot permit elsewhere in the property.

A restriction stating that the landlord cannot rent to a “competitor” may be too uncertain. Businesses can compete in different ways, and the parties may later disagree about whether a particular concept falls within that term.

A more useful clause may identify:

• The protected products or services
• Whether the restriction applies to a tenant’s primary use or any use
• A percentage of revenue or floor space that triggers the restriction
• Specific types of competing businesses
• Activities that are considered incidental and therefore permitted
• Related services the tenant may add as its business evolves

For example, a restaurant may not be able to prevent every other tenant from selling any food item. A landlord may argue that a movie theater selling coffee or a grocery store operating an in-store café should not violate a coffee shop’s exclusivity.

The parties may address this by distinguishing between a business whose primary operation involves the protected product and another tenant that sells it only incidentally.

Make Sure the Covered Property Is Clearly Identified

An exclusivity provision should also define where the restriction applies.

Depending on the transaction, the covered area may include:

• The building containing the tenant’s premises
• An entire shopping center
• Adjacent buildings under common ownership
• Parking-lot kiosks or temporary structures
• Future phases of a larger development
• Parcels controlled by the landlord or related entities

A restriction covering only the tenant’s particular building may be inadequate when the landlord owns an adjoining retail building or plans to expand the development.

The tenant should also consider what happens if the landlord sells part of the property. The lease may need to require successors, affiliates or future owners to recognize the exclusivity rights to the extent legally and practically available.

Address Leases, Licenses, Assignments and Other Occupancy Arrangements

The landlord may not always place a business in the property through a traditional lease.

Competing operations may occupy space through:

• A license agreement
• A concession arrangement
• A kiosk
• A temporary or pop-up agreement
• A sublease
• An assignment of an existing lease
• A management or operating agreement

A carefully drafted clause should consider more than the landlord’s execution of a new lease. Otherwise, the restriction may leave gaps that undermine its purpose.

The tenant may also seek language addressing whether the landlord can approve an assignment, sublease or change in use that would create a prohibited competitor.

Review Any Conditions Attached to the Protection

Landlords commonly condition exclusivity rights on the tenant satisfying certain obligations.

The protection may apply only while the tenant:

• Is not in default under the lease
• Remains open and continuously operating
• Uses the premises for the protected business
• Meets minimum operating hours
• Occupies a particular amount of space
• Has not assigned the lease or sublet the premises
• Meets an agreed sales threshold

Some conditions may be reasonable, but they should be reviewed carefully. For example, an exclusivity provision that disappears immediately after a minor or disputed default may provide less protection than the tenant expects.

The lease should address whether notice and an opportunity to cure are required before the tenant loses its exclusivity rights.

What Happens If the Landlord Violates the Clause?

An exclusivity provision is only as effective as the remedies available when it is breached.

Possible remedies may include:

• Requiring the landlord to stop or correct the prohibited use
• A reduction or abatement of rent
• The right to terminate the lease
• Monetary damages
• Reimbursement of legal fees where permitted by the lease
• Injunctive relief
• A combination of remedies that changes depending on how long the violation continues

The appropriate remedy depends on the transaction. A tenant may find it difficult to prove the exact amount of lost revenue caused by a new competitor. For that reason, the parties may negotiate a predetermined rent adjustment or termination right rather than relying exclusively on a future damages claim.

A tenant may also seek an injunction to prevent or stop a competing use. Injunctive relief is not automatic under New York law. A party seeking a preliminary injunction generally must establish a likelihood of success, irreparable harm without the injunction and that the balance of equities favors granting relief.

The lease should therefore identify the available remedies as clearly as possible. New York courts give significant weight to the plain language of negotiated commercial agreements. In a New York commercial lease dispute involving a co-tenancy requirement, the court enforced the specifically negotiated provision and the tenant’s associated termination rights according to the lease language.

Exclusivity and Permitted-Use Clauses Should Work Together

An exclusivity clause protects the tenant from certain competing uses, while the permitted-use clause defines how the tenant may operate its own premises.

These provisions should be negotiated together.

A tenant may secure broad protection against competitors but still agree to a permitted-use clause that is too narrow for its own future plans. The tenant could then be prevented from expanding its products, adding services, changing its business model or responding to changes in the market.

The goal should be to protect the tenant’s core business while preserving reasonable flexibility for the tenant’s operations over the full lease term.

Exclusivity Clauses Are Not Limited to Large National Tenants

Landlords may be more accustomed to granting exclusivity rights to anchor tenants, franchises and national retailers, but smaller businesses may also have a strong reason to request them.

The protection may be particularly valuable for:

• Restaurants and specialty food businesses
• Medical, dental and therapy practices
• Fitness studios and gyms
• Salons, spas and beauty businesses
• Childcare and educational providers
• Specialty retailers
• Financial and professional services
• Businesses that depend heavily on neighborhood convenience

Whether a landlord will agree depends on the property, bargaining strength, existing tenant obligations and the competitiveness of the leasing market. Even when a landlord will not provide complete exclusivity, the parties may be able to negotiate narrower protection for the tenant’s primary products or services.

Review Exclusivity Rights Before Signing a New York Commercial Lease

The best time to negotiate an exclusivity clause is before the lease is signed and before the tenant commits substantial funds to the location.

Once the lease has been executed, a landlord may have little reason to add a protection that was not included in the original agreement. A commercial tenant should therefore review the clause, the property’s tenant mix, existing exceptions and available remedies as part of the overall lease negotiation process.

A carefully drafted exclusivity clause can help protect a tenant’s investment, reduce the risk of direct on-site competition and preserve the economic value of the location. A poorly drafted provision—or no provision at all—may leave the tenant with limited options after a competing business has already opened.

Sabrina Rabban, Esq. PLLC assists commercial tenants with commercial lease review, contract negotiation and real estate matters throughout New York, including Nassau County, Suffolk County, Long Island, Manhattan, Brooklyn, Queens, the Bronx and Westchester. Contact the firm to discuss the terms of a proposed commercial lease and the protections that may be appropriate for your business.This article is provided for general informational purposes only and does not constitute legal advice. Commercial lease rights and obligations depend on the language of the agreement and the circumstances of the transaction. Reading this article or contacting the firm does not create an attorney-client relationship.