Legal Briefs

Exclusive Use

Office landlords beware: It’s not just for shopping centers anymore.

By Steven P. Heller |

As the nature of office space changes and as the mixed-use concept proliferates, it’s not surprising that battles over exclusive use rights are spreading beyond their traditional arena at retail centers. It is common in retail settings for tenants to typically demand that landlords grant exclusive use rights, so that the tenant will be the only one at the property selling a certain product or service.

However, conventional office building environments seldom required tenants to take legal measures to protect their market share from their building co-tenants, and, if they did, written provisions granting these rights were usually fairly simple in nature.

Uncharted Territory

The growth of exclusive use rights in office circumstances is for the same traditional reasons as in the retail environment, even if applied in some unfamiliar ways. Protection from competition allows new businesses to grow and small businesses to survive. Armed with these use restrictions, aggressive businesses use their rights to strategically disadvantage competitors. For example, some retailers want to keep their exclusive rights intact even after they close their store just to handicap competitors’ stores.

In the typical retail situation, a shoe store will require the landlord to agree not to lease to any other business that sells shoes. The same concept may take the shape of restricting other activities that could hurt a business, for example: prohibiting businesses that use a lot of parking, such as a fitness center; degrade the quality of the retail project such as a pawn shop or auto repair service; or simply don’t mix well, such as second-floor residents who prohibit noisy morning deliveries to the ground floor supermarket.

These same desires and concerns raise exclusive use matters in “creative office” campuses. For example, a video game company’s “digital/gaming” exclusive use rights worried a prospective digital ad agency tenant; the prospective new campus café tenant was concerned about the juice sales by the campus gym; and an executive suites business required aggressive protective lease provisions to enhance its operation. Historically, office building property managers didn’t have these problems. But the rise of creative office space and an increase in mixed-use projects are driving these trends.

Creative Campuses. Creative office campuses introduce gyms and other non-office amenities into the office environment, forcing diverse businesses to stake out competitive protections for themselves, and raising issues similar to those in retail and mixed-use projects. For example, one Southern California campus has open fields for office employees to use, but the campus fitness center tenant has exclusive use rights for athletic activity, so the landlord must limit the rights of office tenants’ employees to use personal trainers in the open space grass areas.

Name Brand/Image. Consumer tech and product companies jealously guard their products from competitors, enhance their images by publically connecting their brand identity to trendy real estate campuses, protect against employee poaching by their tech campus co-tenants, and even worry about competitors finding out which consultants or partners are visiting their offices.

Executive Suites. The current trend toward flexible work patterns leads to the rising use of office sharing, virtual offices, and executive suite services that require restrictions against competitors, and even, in practice, demand limits on routine office building subleasing and office-sharing arrangements.

Changing Face of Office Space

New office use patterns create inconsistent and imbalanced uses. Office spaces are shrinking and feature open collaborative spaces, causing changes in circulation, parking and commute patterns, employee density and uses. These changes, in turn, impact parking areas and the overuse of building services such as elevators and utilities during off-hours, and even raise unique daily challenges such as handling a tenant who places a basketball hoop right outside another tenant’s conference room window,

Because change creates uncertainty, these trends place additional burdens on landlords and property managers. When a landlord grants exclusive uses, it assembles a web of wires on which to trip itself. The burden is on the landlord to be a careful and organized operator to avoid conflicts between tenants and any resulting liability.

Landlords already have to track traditional office building items such as parking spaces and overlapping renewal and expansion options. Now, exclusive use rights add another layer. Office building owners, brokers, and tenants are less familiar with these concepts and often miss — and even noticeably avoid — some of the complexities that arise. For example, one concerned prospect asked if another tenants’ exclusive rights would prevent them from conducting even routine “general office” use! This unfamiliarity and avoidance means mistakes down the road, whether these are mistakes of potential liability or unwittingly restricting business opportunities.

With changes in the office and mixed-use markets, owners, brokers, and tenants need to take a page from the retail sphere and give renewed focus to the details of drafting, managing, and enforcing exclusive use rights.

Steven Heller is an attorney with Gilchrist & Rutter PC, a real estate and business law firm based in Santa Monica, Calif. Contact him at sheller@gilchristrutter.com.