Exclusivity Provisions in Commercial Leases
By: Steven D. Weber, founding shareholder, Weber Law
Exclusivity provisions can give tenants the right to operate a particular type of business as well as prevent other tenants from using their space in certain ways, with lasting implications for both landlords and tenants.
BEFORE SIGNING A commercial lease, pay careful attention to the exclusivity provision. An exclusivity provision can provide a tenant with the exclusive right to operate a business, and prevent another tenant from using its space in certain ways. An exclusivity provision can also incentivize a tenant by restricting its competitors from leasing space.
The leasing process should begin with the landlord inspecting any existing leases for an exclusivity provision that would restrict new tenants or uses. If existing leases do not have such a provision, and a new tenant desires one, the provision should not go beyond the intended scope, grant more favorable restrictions than intended, or conflict with existing tenants’ leases.
From a tenant perspective, an exclusivity provision must be specific enough that the landlord cannot bypass its intent. The tenant should know the scope of any existing exclusivity provisions that it agrees not to violate. While these concerns may seem obvious, even seemingly straightforward language can make it difficult to define an exclusivity provision’s scope.
The Winn-Dixie Example
One example of an exclusivity provision dispute played out in several Florida lawsuits involving Winn-Dixie Stores Inc. In a 2002 case, Winn-Dixie’s lease contained an exclusivity provision restricting its landlord from permitting other tenants from selling certain products sold by Winn-Dixie. The lease provided that the landlord could not permit other tenants to sell “any staple or fancy groceries, meats, fish, vegetables, fruits, bakery goods, dairy products or frozen foods without written permission of [Winn-Dixie].” The landlord subsequently entered into a lease with 99 Cent Stuff-Trail Plaza LLC, which stated it “shall not operate its premises in a manner which violates any exclusive rights of any other tenant in the Shopping Center . . .” Winn-Dixie filed suit, alleging that 99 Cent Stuff sold products that violated its lease provisions.
Based on expert testimony on the definition of “groceries,” the trial court found that the term should include “all food, but no non-food items.” The trial court rejected Winn-Dixie’s argument that “groceries” applied to a “multitude of non-food items, such as detergents and paper towels.” The trial court found “no clear, unambiguous meaning extending the words staple and fancy groceries’ to all household products.”
Florida’s Third District Court of Appeal, however, reversed the trial court’s finding. It stated that “to find the plain and ordinary meaning of words, one looks to the dictionary,” and that the “commonly recognized definition of the term groceries includes more than just food.”
Twelve years later, another court considered the definition of “groceries.” In 2014, the Eleventh Circuit Court of Appeals stated that Winn-Dixie filed lawsuits that initially identified 136 stores being in violation of restrictive covenants created by exclusivity provisions. It noted that a number of Winn-Dixie’s locations used what it called a “standard grocery exclusive in Winn-Dixie’s lease” that prevented a landlord from permitting a tenant to sell “any staple or fancy groceries” without written permission of Winn-Dixie. The Eleventh Circuit explained that the lower court entered an order finding that the term “staple or fancy groceries” was ambiguous, and that it narrowly construed “staple or fancy groceries” to mean “only food items, including non-alcoholic beverages.”
In response to arguments from Winn-Dixie that “staple or fancy groceries” includes both food and nonfood items, as well as arguments from the defendants that it only includes food, the Eleventh Circuit stated that “the term ‘groceries’ appears to admit at least two reasonable interpretations.” Nonetheless, the Eleventh Circuit found that, at least in this case, the trial court “should have followed the holding in [the Winn-Dixie case mentioned above] by looking to the dictionary definitions, which instruct that ‘groceries’ includes food and ‘many household supplies (as soap, matches, paper napkins).’”
Clarity Is Vital
Understanding an exclusionary provision should not be given short shrift. Landlords should be wary of conflicts with their existing leases and granting unintended rights to tenants. Tenants should remain alert to ensure that they receive the protection they intended. Given the ambiguities described above, this is not a simple task.