Use Clauses and Exclusive Uses – Tips for Landlords in Retail Shopping Centres
Landlords are often faced with requests from prospective tenants for a broad use clause or “exclusive” use protection in their leases. With an increasing number of tenants that offer similar merchandise or services, landlords must be alert to the dangers of promising tenants too general of a use clause that could conflict with the exclusive use of current tenants or impede on their ability to attract future tenants.
A recent case from the Ontario Superior Court of Justice, 2249778 Ontario Inc. v. Smith, dealt with a tenant operating as a fast food restaurant who also had an ATM installed in the premises. The landlord objected to the ATM on the grounds that the tenant was offering “banking services” which were not included as a permitted use under the lease. The tenant argued that the ATM was a tool which facilitated his business by lowering his costs and providing convenience for customers. The court ultimately sided with the tenant, concluding that the ATM was appropriate for “business reasons” and that the installation of the ATM did not in any way change the purpose of the premises, which was a fast food restaurant.
The case above illustrates the importance of a use clause that considers, and if necessary explicitly prohibits, activities which may be ancillary to the general purpose or use of the premises, but which are nevertheless in the landlord’s interest to control. When agreeing to a tenant’s proposed use, the description should be kept as specific as possible and should include details, particularly of the type of merchandise or services offered. Landlords should also consider specific carve-outs for activities which could interfere or conflict with the uses of existing tenants or the uses of prospective tenants that landlords may want to attract in the future (for example, large, big-box tenants). Avoiding overly broad use clauses without explicit prohibitions ensures landlords have the flexibility to lease to a wide variety of retailers and is critical in developing and maintaining a diverse and productive shopping centre.
business reasons carve-outs diverse exclusive flexibility Landlords Ontario Superior Court of Justice Retail Shopping Centres tenants