Exclusivity and prohibited use provisions, which give a tenant the right to exclude a type of use or even a specific name brand within a shopping center, have been a standard part of retail leases for decades. “Landlords have always tried to whittle those exclusions down to just uses that make sense and narrow that category as much as possible,” said Terry Ohnmeis, Cushman & Wakefield director of retail services in Cincinnati. Now, many landlords have more bargaining power and they’re trying to pull those rights back in their favor as much as they can, he said.

Limited new construction has contributed to tight vacancies across many metros. “Landlords have more leverage, and some of them are flexing and really enjoying using that leverage,” said Ohnmeis. As landlords look to narrow exclusions, their wish lists include flexibility so they can add things like entertainment uses and drive-thrus and can develop outparcels. COVID also was a catalyst for change. When tenants were going to landlords asking for rent reductions, among the tradeoffs property owners were getting was a loosening of covenants on exclusive uses and no-build restrictions.

The shift has been an eye-opener for some tenants. “There are a lot of retailers who still think that because of COVID, landlords are desperate for deals or that they can negotiate whatever terms are attractive to them, and we’re constantly trying to educate our clients that all of the leverage is on the landlord’s side,” said Corey Bialow, CEO of tenant rep firm Bialow Real Estate. The exception is B and C malls, he noted.

Tenants Use Rights as Bargaining Chips

Different types of exclusive use and approval rights are coming into play. In some cases, tenants are looking to exclude uses or competitors that genuinely affect their businesses. For example, Chick-Fil-A wouldn’t want a Raising Cane’s or a Popeyes across the street and vice versa. “The majority of landlords, whether a tenant has an exclusion or not, are not going to put a competitor right next to another because it does no one any good,” said Ohnmeis. However, landlords also don’t want dozens of names on that exclusion list, he said.

An exclusives also can restrict a use that might be perceived as negatively impacting a business. Categories that tend to top the list for restricted use are entertainment, fitness, churches, schools and tobacco shops. “Parking is usually the biggest challenge and the source of consternation for most of these retailers. They want to make sure their customer can park — and park closely to the storefront,” said Ohnmeis.

Some tenants that have a lot of leverage will get whatever exclusion or approval rights they can, such as not having restaurants within 300 feet of their front doors. “They rationalize it as: They don’t want someone interfering with their parking,” said Ohnmeis, “but they really just want approval rights on who’s coming into a property or a handout later on.” In some cases, tenants can use such exclusions as bargaining chips to get something they want, such as improved landscaping or a resurfaced parking lot, he said.

Broad-Based Exclusions Disappear

Developers traditionally gave anchor and junior anchor tenants whatever they wanted in terms of exclusions because the developers needed these tenants in order to kick off new centers. Tenants like Ross Dress for Less or T.J.Maxx would negotiate for exclusion rights on tenant categories like fitness and education, noted Bialow; for years, a lot of anchors and junior anchors didn’t want gyms because they took up a lot of parking. Now, such uses are common as popular brands like Orangetheory Fitness, SoulCycle and F45 fill space and draw traffic.

Bialow represents Goldfish Swim School nationally. “We’re constantly running into old leases that prohibit schools in a shopping center,” said Bialow. Though the company provides swimming lessons and isn’t practically speaking a school, it has to get waivers from some existing tenants to allow the use. From a practical standpoint, these concepts are not hurting these junior anchors, but landlords have old leases and are stuck with the exclusions, he said.

Landlords are working to reclaim some of those exclusion and approval rights held by their tenants, and broad-based exclusives are more difficult to get on new leases now, said Bialow. “However, it will be a long transition because most leases are 10 years plus options, and we’re constantly running into old leases,” he said.

A lot of the leases with junior boxes were done in the early 2000s when there was massive growth among these retailers. Those leases are now terminating. “The trend we’re seeing now is that these landlords are pushing back on use clauses, particularly with these junior anchors,” agreed SRS Real Estate Partners principal Scott Landgraf.

Major anchors are more difficult to control; as the major drivers for centers, they tend to have more bargaining power. “If you want Target to anchor your center, you pretty much have to give them what they want,” noted Landgraf. Going forward, only major anchor tenants will have approval and exclusive rights on the rest of a center, he said.

Obstacles to Redevelopment

Exclusive rights covenants are especially frustrating for landlords when these rights create impediments to redeveloping or remerchandising centers. For example, an inline tenant might have a no-build exclusion that prevents a landlord from developing a parcel or pad sites that would impact the tenant’s visibility from the main road. According to Ohnmeis, landlords are trying to tighten that language as much as they can, especially in such cases as a 3,000-square-foot tenant in a 300,000-square-foot center.

Landlords are looking to rid themselves of exclusive rights that make it more difficult to redevelop or repurpose centers. They’re also trying to adapt covenants to the changing nature of the marketplaces industry, which includes a variety on nonretail uses. For example, a landlord might redevelop an empty anchor store as apartments, office or an entertainment venue. Some of the uses that traditionally have been restricted — such as entertainment, fitness and medical — are becoming more mainstream at malls and shopping centers.

As department stores go dark, malls in particular are being forced to reinvent themselves and need to get creative to find alternative uses. “Tenants and landlords are aligned that there is an issue, and we are aligned that it could be mutually beneficial to find a solution,” said John Ciotola, a vice president at Avison Young in Columbus. “Where the disconnect seems to be is that the landlord wants a lot of flexibility on what they can do.” In some cases, landlords are replacing an anchor with a church or a school or a go-kart track that doesn’t produce the same footfall, so those scenarios are creating some pushback from tenants, he added.

Restrictive covenants also can slow the path of redevelopment at malls and shopping centers. Department store anchors have negotiated exclusions and approval rights that are pervasive and have lasted for decades. Those rights show up as restrictions on what new uses can be added as owners de-mall anchor spaces, and they affect the development of outparcels. There is a lot of “gravy” sitting out in mall parking fields, said Ohnmeis. People often scratch their heads and ask why nothing is happening there, and it’s almost always because of these restrictive covenants, he added.

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