Retail Property: An Exclusivity Clause in a Retail Premises Lease
Understanding the Retail Shop Leases Act 1994 (QLD) is paramount to ensuring ongoing financial success from your retail property asset.
As one of a select number of specialist retail valuers in Queensland, I am examining the Act in this new three part series to help you understand important terms and their relation to your retail business.
Part One examined the difference between a shop and shopping centre. In this Part Two, I answer some common questions around exclusivity clauses, including what is the reason for them, when do they generally apply and are they commercial?
When would I see an exclusivity clause?
Only in retail shop lease does one encounter an exclusivity clause.
An exclusivity clause is protection for a lessee occupying premises in a shopping centre against competition from a similar trader in the centre. Tenancy mix is important to any shopping centre. The greater variety on offer, the more appealing is the centre and its capacity to attract customers.
Shopping centres designated sub-regional and above can have a number of tenants offering similar merchandise – footwear, ladies fashion, optometrists, for example – but, these centres will always be singular on the various types of food operators in their food courts, as food courts require variety for appeal to customers.
However, equally important, this provides the lessee the opportunity to compete and, thereby, sustain their business.
Landlords of neighbourhood centres and below are more likely to accept an exclusivity clause. Why? Because they acknowledge that two or more tenants competing to offer similar products are likely to fail and, further, in the context of the smaller centres, experienced traders and franchises may not enter a lease without an exclusivity clause.
The exclusivity clause may be written as follows:
For example, the lessee has exclusivity for the permitted use being a 24 hour 7 day a week convenience store and is able to sell groceries, and appropriate hot and cold food items, such as BBQ chickens, chicken rolls, pies, sausage rolls, pastries and other convenience items. Is this commercial?
An exclusivity clause with such prohibition against other tenants offering a specific part of the exclusive use could be detrimental to the centre. Consider the above exclusivity clause applying in a convenience shopping centre. If by legal interpretation the above example prohibited a shop that only sells BBQ chickens or a bakery that would normally sell pies, sausage rolls and pastries, then the exclusivity clause arguably has significant impact on the tenancy mix on a centre of this nature.
Another consideration of their commerciality is do exclusive uses provide a higher rental return? This is unlikely to be the case. Traders requiring the protection of an exclusivity clause often do so because they say that without it the viability of their business can be impaired.
So, why would landlords accept exclusivity clauses?
Usually one of two reasons.
One is the desire to have a particular type of trader within their centre. The other being income generation. The third, of course, is the trader adds benefit to the tenancy mix.
The bottom line for the landlord in negotiations over exclusivity clauses is to weigh up the advantages and disadvantages with a view to the wellbeing and vitality of their centre to attract customers.
Next month, I will continue with Part Three, a discussion on occupancy costs and their relevance to market rent determinations.
For expert advice on commercial property management or retail property management, please call our Brisbane office on 1300 076 046 or Bruce Barrington directly on 0411 726 512. Should you require a market rent review report or rental determination under the Retail Shop Leases Act, please click here.
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