Commercial Leasing: Understanding the Impacts of Broad Versus Narrow “Use” Provisions

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By: Sheena Johnson

At first glance, a commercial lease agreement can be overwhelming, even for landlords or tenants who are familiar with commercial leasing. There is one familiar clause, however, that every landlord or tenant may recognize in a commercial lease agreement, and that is the “Use” clause. Although unassuming, how the “Use” provision is written can have an enormous impact on a landlord’s or tenant’s rights. Luckily, landlords and tenants can rely on guidelines to determine how broad or how narrow a “Use” provision should be.

Understanding the “use” provision 

In a commercial lease, the “Use” provision is intended to limit the ways a tenant can use a leased space. The permitted use of a leased space usually depends on factors like how the commercial property is zoned and how the leased space is designed. For example, a medical office space would be difficult to use for a grocery store. Landlords also take into consideration the type of business that is a good fit for the neighborhood, based on the businesses and population demographics in the area. Most importantly, landlords will consider risk when determining whether a particular space can or should be leased for certain purposes. Tenants interested in a commercial space for lease should consider the same factors.

The scenarios below demonstrate how the factors above influence whether a “Use” provision should be broadly written or narrowly written. For consistency, the scenarios feature Landlord, the owner of a commercial property, and Tenant, a restaurateur searching for the perfect commercial space to open a new restaurant.

the broad approach

Scenario: Landlord is the owner of a multi-tenant commercial property, such as a shopping center, located in a developing neighborhood. The commercial property already has tenants who run retail shops and medical and dental offices. The only space Landlord has available for rent was previously improved and rented by a restaurant-owner who ran a popular family-style restaurant. Ultimately, the restaurant-owner relocated the restaurant, leaving the space unoccupied. Tenant approaches Landlord to discuss leasing the space for a fast casual, casual dining, or family-style restaurant.

In this scenario, Landlord and Tenant should discuss how broadly the restaurant may be described in the lease agreement. By permitting use of the space for a “fast casual,” “casual dining,” or “family-style” restaurant, Tenant would have more flexibility to create the sort of restaurant space that suits the rest of the commercial property and the developing neighborhood. The fast casual, casual dining, or family-style restaurant options also mimic the type of restaurant the previous tenant successfully ran, which may provide Landlord with some peace of mind that Tenant will operate a similarly successful restaurant and minimize risks to Landlord. Therefore, Landlord and Tenant may choose to write the “Use” provision in the lease agreement more broadly to give the Tenant some flexibility.

the narrow approach

Scenario: Landlord is the owner of a commercial hotel property located in a neighborhood that has skyrocketed in value over the last few years. The area is known for its high-end hotels, nightlife, and upscale, swanky restaurants. Tenant approaches Landlord to discuss leasing a portion of the hotel lobby for a restaurant. As is, the portion of the lobby in which Tenant is interested is not suitable for a restaurant, but Tenant desires to improve the space to make it ideal for a restaurant operation.

In this scenario, Landlord and Tenant should discuss how narrowly the restaurant may be described in the lease agreement to minimize Landlord’s risk. Given the neighborhood is known for its pricey hotels and restaurants, and it is frequented by patrons interested in local nightlife, restaurants other than fine dining or contemporary casual restaurants are unlikely to suit the area and succeed.

Considering the risk of restaurant failure in the first five years of operation, Landlord also would not want to risk Tenant converting a failed fine dining restaurant into a fast-food restaurant unbefitting the neighborhood. Finally, the space is not designed for a restaurant, so Tenant’s improvements would eliminate use of the space for anything other than a restaurant for years to come, which requires enormous commitment from Landlord. Landlord, then, should negotiate for a narrow “Use” provision that explicitly states the space will be used for a “fine dining or contemporary casual restaurant.” This way, Landlord can minimize losses if the restaurant fails.

conclusion

The “Use” provision in a commercial lease agreement may seem unassuming, but it has the potential to make or break the landlord-tenant relationship and should always be given ample consideration.

While not all-inclusive, the factors above should provide landlords and tenants with some key considerations when negotiating permitted uses for commercial properties. To protect your interests during commercial lease negotiations, reach out to an experienced Chugh, LLP attorney

 

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