Tenant exclusives in a shopping center

11 Replies

We have a 52,000 sq ft shopping center with retail and medical on the first floor, and second floor has professional and medical tenants. We have a chiropractor tenant upstairs who has been in the center over 20 years. They have an exclusive on chiropractor services and spinal adjustments. We have a prospect looking to sign a 5 year lease for space on the first floor for physical therapy. We would word the lease such that the physical therapist must observe all the exclusives of the chiropractor, and the new physical therapy user would not preclude the chiropractor from performing services involving physical therapy.

In your experience, are the two uses too similar to introduce the physical therapist? If there were to be any violation of the chiropractor exclusive on the part of the physical therapist, would the liability be on the new tenant or on us as landlord?

Would you feel it necessary to have a discussion with the chiropractor prior to signing the physical therapist? Keep in mind, these tenants are small in size in the grand scheme of things, with each having a 2% pro rata share of square footage.

Is there anything I am overlooking here?

@Michelle R. A lot depends on how your lease is worded. Typically, your lease with the chiropractor is an agreement between you (the landlord) and the tenant (the chiropractor). If the exclusive is violated, this would probably be a breach of your lease contract with the chiropractor.

The physical therapist is NOT a party to this agreement, so they did not agree to the exclusive. HOWEVER, many leases (if properly drafted), will contain appropriate restrictions on violating the exclusives of other tenants and I've even seen leases where the exclusives of other tenants were incorporated into the lease (as an exhibit) and the new tenant agreed to not violate those exclusives.

If you want to be 100% safe, you need to talk with the chiropractor tenant and make them feel comfortable with the situation and convince them allowing the physical therapist is in their best interests. You could then try to get them to waive their exclusive for that one tenant (in writing). You might need to offer them some type of inducement (such a free month's rent).

Good luck.

You need to pay a commercial attorney to help with this.

Sometimes it depends on the wording. Some exclusives in a lease are more broad and undefined. The typical landlord favored lease if an exclusive is given has it more narrowly defined so that other types of tenants are not included in this broad language.

The other part is for instance a clause stating what percentage makes up the business. Example there could be a pizza place where 90% of their business is pizza and they have a hamburger on the menu but only a tiny percent of sales. Same thing a burger bar type place might have a pizza on their menu but only a tiny part of their sales.

No legal advice given.

@Michelle R.

I don’t think the uses are too similar to have both. Especially since your center is more medically focused.

If the physical therapist “use language” violates the chiropractors “restriction language” then the liability would be on you the Landlord. The new tenant isn’t a party to the previous agreement between you and the chiropractor. But the chiropractor might try to pull the new tenant into the legal situation. And to let the new tenant into the center you’d need to get the chiropractor to lift the restriction language via a written waiver.

Restriction language is put in place to protect the tenant. If you think the physical therapists “use” violates the chiropractors “restriction” then you need to discuss that and potentially negotiate that with both parties early on in the process.

Negotiating restriction and use language within a shopping center is a very common situation. And in the rare situation can make or break a center. It needs to be handled by an experience retail lawyer.

Originally posted by @Joel Owens :

You need to pay a commercial attorney to help with this.

Sometimes it depends on the wording. Some exclusives in a lease are more broad and undefined. The typical landlord favored lease if an exclusive is given has it more narrowly defined so that other types of tenants are not included in this broad language.

The other part is for instance a clause stating what percentage makes up the business. Example there could be a pizza place where 90% of their business is pizza and they have a hamburger on the menu but only a tiny percent of sales. Same thing a burger bar type place might have a pizza on their menu but only a tiny part of their sales.

No legal advice given.

 I love the leases with a percentage of gross from hamburgers as definitions. Also, Vietnamese food as distinguished from south Asian (Indian) or Chinese take out vs. Japanese buffet. Read the lease, calculate the risk, but ultimately you have to make a decision.

I spoke to a commercial real estate attorney, and he had the same suggestion as @Stanley Bronstein - he said to approach the chiro and show them how the exclusive would be worded to protect their interests. The call went as predicted, they were very unhappy with the situation as they do rehabilitation and so does a physical therapist.  

The chiropractor's lease only provides them an exclusive on chiropractor services and spinal adjustments. It says nothing about rights to do physical therapy.

So, I will circle back with the commercial attorney to review the lease. We used our standard lease and had a different real estate attorney who is primarily focused on residential fill in the blanks pertinent to this deal. I think we will shift to using a specialist commercial attorney in future who would have seen this issue from a mile away.

I would suggest an attorney read the leases, as well, but it can't hurt to ask the chiropractor to waive exclusives with regard to this particular tenant, to the extent that they exist. If it is a cooperative tenant, it shouldn't be an issue. They may even get referrals from the PT tenant. If they are uncooperative and say no, they'd make a big deal about it once the PT tenant was in anyway, so better to know up front. 

@Jessica Zolotorofe @Stanley Bronstein Yep, that is exactly what the attorney said - better to ask first and who knows, maybe they will cooperate. He made the comment that '99% of tenants get upset because they feel they weren't even asked and should have been'. Well I asked, and the chiro was very unhappy with the idea of a physical therapist. The chiro said she does rehabilitation work. She felt it will have an effect on her livelihood and that it was a '"conflict with her contract".

The chiro has no exclusive right on rehabilitation in its lease, and with some tweaks to the language we could likely protect ourselves and bring in the new tenant. They have an exclusive right "to provide chiropractic services, including spinal adjustment and manipulation."

Now we are kicking back and forth internally whether to upset a long term tenant . We are new owners to the plaza but this tenant has been there nearly 30 years. 

I just represented a massage therapist going into a new building that already had a massage therapist. The old massage therapist doesn't even have an exclusive and the new one only works from referrals.

Despite all that, the landlord went ahead and spoke with the old tenant, just to make sure they wouldn't be mad.

They weren't and we are proceeding with the deal.

Does the retail center have an elevator or just stairs to get to the second level?

Typically if it just has stairs it is a big negative for a medical type plaza because older people most can't use the stairs and need the elevator. Even if it has the elevator what I have seen is the first floor especially if it's at street level gets the most rent per sq ft and the second floor tends to rent for less rent per sq ft and is typically harder to fill. Not always but I generally see that reviewing lots of properties.

If you have a long term tenant upstairs that pays on time versus an unknown going in on the first floor it might not be worth it. Especially is if it is only 2% space of the center like you mentioned. I would also weigh what lease the physical therapist is wanting ( how many primary term years of lease, annual rental increase percentage amount, is it a single or multi unit operator with experience, unlimited personal and corporate guarantee with updated personal and business financials, their current net worth backing the potential lease for the guaranty, etc.)

The other thing is being there so long the chiropractor might be very well liked in the center with other businesses. If there is a falling out and they decide to leave it could create a domino effect and discord among other tenants how the business was treated.

What rent per sq ft would the physical therapy look to pay versus the chiropractor? Maybe chiropractor is paying way below market since they have been there so long. Since only 2% of the space that is very tiny.

I do not use residential attorney for commercial properties or (dabblers) which they say they do commercial but also do estate planning, (jack of all trades and master of none) types. I have found both of those types make constant errors. Additionally I do not use commercial attorneys who are litigation attorneys. Some practice general commercial and litigation. Experienced firms that tried litigation and regular commercial services eventually tend to decide against it. The reason is litigation attorneys trying to work on regular commercial transactions and services tend to be always tied up in court proceedings litigating cases. Instead of one day to get back they take 4 days or more. The other parties counsel on the transaction gets frustrated and everything slows down. Sometimes timing of all the parts can kill a deal from closing. I talked with a firm owner commercial attorney the other day that has 30 plus attorneys. He told them you either litigation or do regular transactions but you can't do both at his firm. He mentioned some of the reasons I mentioned above and more.  I also find commercial litigation attorneys can't get out of COURT MODE meaning they want to negotiate every little minutia detail and take issue with the other counsel. They can run up 3,000 in fees negotiating a 500 item!

The regular commercial attorney is looking for ways to make a transaction happen rather that ways to blow it apart for minor things that are manageable in the overall picture of the transaction. 

Please people do not use residential attorneys for commercial services. You are stepping over dollars to try and save pennies. Also qualify commercial attorneys with experience level. Some have only worked on 1 million dollar deals and have not interacted with REIT's, Insurance companies, CMBS loan structures,etc. They have no clue and make lots of mistakes. A regular commercial retail attorney with lot's of experience in my area can cost over 300 an hour. Now the un-seasoned investor might think that is expensive and they want to use a cheaper attorney and focus on time charged per hour for savings.

The cheaper and inexperienced attorney ACTUALLY can cost a lot more with the mistakes they make and having to be inefficient redoing things over and over again ( think contractor on house repair quotes 7,000 for 10,000 job). Bad contractor messes up and and then you get good contractor at 10k anyways. They would have done it right the first time and usually much quicker as they are better at what they do. I find the great commercial attorneys are very efficient with time charged and high quality. They use regular attorneys and paralegal at their firm for the more mundane tasks that need to get done at less cost per hour charged. This frees them up to work on the very important high level stuff that requires their seasoned experience to negotiate.

No legal advice given. 

   

@Joel Owens Thank you for the well thought-out reply as always. The chiro is on a second floor with elevator. This would be a second location for the physical therapist, who has a long-term location in a nearby city. 

I don't think the chiro would leave over this as they would have to start from scratch elsewhere and have a client base in this neighborhood center.

My concern is I just may not be understanding the nuance between a chiro who certainly also treats the entire body, and a physical therapy practice. On a human level, I worry this would very significantly affect the chiro's livelihood. I just don't know if this is going to take away a small portion of customers, or a very large chunk.