Tuesday, November 29, 2011

Restrictive Covenants

Next segment in our Leasing Series…Restrictive Covenants.

Restrictive Covenants (RC) are always an interesting point of negotiation between Landlord and Tenant in working out a commercial lease deal. Rather than pick sides, let me try to give you the differing perspectives for both parties.

If you are a Tenant, you would like to ensure that the Landlord does not put you head-to-head with a similar operation within a commercial complex. For instance, if you are setting up a new hair salon, you would prefer to have ‘exclusivity’ on your use within this location. In your RC, you would cover off the key elements of your operation – ie. hairstyling and aestetics. Practically, these areas should represent the ‘bread and butter’ of your business and they cover a high percentage of your total sales. At the end of the day, you become the one and only ‘Hair Salon’ in this particular development.

If you are the Landlord, you want to ensure you are not allowing RC’s that create problems in bringing in other quality tenants. Going back to the hair salon example, you might want to allow a restrictive on the ‘hairstyling side’, but only for women or not on the aestetics side. This would allow you then to bring in a separate ‘nail salon’ or a ‘traditional barber shop’. The most challenging RC’s for landlords, are generally those that are too broad and cover too many areas, thereby precluding a host of other uses. Although not always easy to do, landlords typically try to respect the tenant’s main business focus, but are not as willing to allow restrictions on their secondary business lines.

As a final note, this will again vary property to property, and generally RC’s get harder to incorporate into a lease, the larger the commercial property gets. In a larger commercial setting, competition is seen as good and this includes in-line competition.

Again seek out experienced commercial realtors with strong leasing backgrounds, to assist you in negotiating ‘restrictive convenants’ that suit your purposes.

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