As with most things in life and business, the devil is truly in the details.
More frequently, retailers of every size are demanding that shopping center owners grant them an exclusive right to sell certain products within the shopping center known as an Exclusive Use Provision. This is a highly contested topic among retailers and shopping center owners, which has become even more complicated with the growing use of mobile technology, internet sales, and specialty delivery services. However, there are valid arguments to be made on both sides of the table. In simple terms, the retailer wants to limit competition and the shopping center owner wants to maintain maximum flexibility to lease space to a diverse retailer mix without potential liability.
Exclusive Use Provision
The basic concept of an Exclusive Use Provision is pretty simple. The retailer tells the shopping center owner “don’t lease space to any other retailer that sells the same or similar product, such as groceries.” The shopping center owner agrees, so they then memorialize it in the lease agreement. Simple, right? Wrong!
As with most things in life and business, the devil is truly in the details. Questions arise, for example – is a specific product being protected, for instance, “groceries”? or a specific use, such as “a drug store”? OK, so now what is the definition of “groceries” or “a drug store”? Who determines what that definition actually means? I bet if you asked five different people what they thought the definition was, you would get five different answers. So, if the parties don’t agree on the definition of an Exclusive Use Provision then how can it be enforced?
The answer in most cases is litigation, where the courts will decide for you!
In a recent case, Winn-Dixie Stores, Inc. v. Big Lots Stores, Inc., the court reviewed over 100 Winn-Dixie leases in multiple states and their determination was that an exclusive on “groceries” as ambiguous. Winn-Dixie sued Big Lots Stores, Inc. and Big Lots Stores, Inc. argued that “groceries” should include only food items but not any beverages, snacks, or candy. Winn-Dixie argued that “groceries” should include all food items and all beverage products, as well as nonfood items such as paper products and household cleaners. The state court rejected both arguments and came to its own conclusion that the definition of “groceries” was to include only food items and beverages but not alcoholic beverages. Great, so now the issue is resolved. Not so fast! The Federal court came to a different conclusion and that the offerings of groceries has evolved over time, therefore, groceries may include nonfood items. ii Clear now?
One of many examples
This is one of many examples of this complex issue on how terms and definitions can be interpreted differently, which creates ambiguities. So, what is a drug store? A store that only sells drugs or a store that sells drugs and other items like groceries, health and beauty items, etc.? What about the terms “primary” and “incidental”? As they may show up in exclusive use provisions from time to time.
In the case of Winn-Dixie, the court concluded the terms “incidental” and “primary” may be too ambiguous to enforce. iiiThen let’s define the term “incidental” as a specific amount of the sales floor area used to sell a specific product. Ok, so how is the floor being measured? In the case of Winn-Dixie, Big Lots argued that only the footprint of the display unit should be counted but Winn-Dixie argued that it should also include half of the aisle space. iv The court decided it the aisle space did not count and would be excluded from the measurement.
Now this is when attorneys get really excited because that simple one or two sentences you thought you could add to the lease that was going to cover this “exclusive use” has now become an entire page long, in 8pt. font, and we haven’t even gotten to the best part yet which is “what are the remedies if either party violates the exclusive use provision?”
Retailers exclusive use provision
Now it’s been determined that the shopping center owner clearly violated the retailers exclusive use provision and so the parties look to the lease to determine the remedies. Under the section defined as “liquidated damages” the retailer was successful in getting a remedy that allowed for 100% of the rent to be abated until such time as the shopping center owner cures the violation. Simple right? Well, not so fast. In some states there is a “reasonableness” test and the amount set as liquidated damages must represent a reasonable effort by the parties to estimate a fair average compensation for any loss that may be sustained. The retailer thought they were a great negotiator getting a 100% rental abatement, but in some jurisdictions a full rental abatement has been ruled an unenforceable penalty. There are many difficulties in determining the actual damages and then further difficulties in enforcing those damage claims by one party against another party, so specific performance might be the best remedy.
Is an exclusive use provision really in anyone’s best interest or is a better solution is to have a superior product and/or service to beat the competition the good old-fashioned way? If you’re going to still have an exclusive use provision in your lease, make sure to define in detail the scope of the exclusive and clearly identify the remedies while keeping in mind that different jurisdictions may have different rules.
i Winn-Dixie Stores, Inc. v. Big Lots Stores, Inc., 2012 WL 3292001, at *6-7 (S.D. Fla.). ii Winn-Dixie, 2012 WL 3292001 *6. iii. Id. At *9 and *16 iv. Id. At *7. The Florida state court in the prior case adopted Winn-Dixie’s position.