The August 2013 issue of the Commercial Lease Law Insider featured an article about negotiating lease radius clauses which was voted the best issue of 2013 by the publication’s insider subscribers. Why would radius clauses garner such interest? Radius clauses are an important tool at the disposal of a retail landlord to protect its economic interest in its retail property.
A radius clause in a retail lease prevents a retail tenant from opening a competing establishment in the same general market, most commonly expressed as a radius in miles. The radius clause protects the landlord’s investment by preventing a tenant from siphoning foot traffic and business from its existing store to a competing location. The radius clause also protects the landlord’s percentage rent. Rent in many retail leases is based on the tenant’s gross sales. If the tenant is able to open a competing store in the same general market, diminished business from the competing store would adversely affect the landlord’s percentage rent. Commercial Lease Law Insider identified four factors a landlord should consider and incorporate into its lease’s radius clause.
• Define the restriction with specificity. Don’t just prevent a tenant from opening another store in the defined market with the same name. A crafty tenant will find loopholes.
• The restriction should not be overly broad, but should prohibit another location within the radius the business of which sells product substantially similar to what the tenant offers it the existing location.
• Don’t give the tenant the opportunity to circumvent the radius clause through its ownership structure. A radius that simply imposes the radius restriction on the tenant exposes the landlord to a competing store owned or operated by a subsidiary, affiliate, partner, officer or other person with an interest in the tenant.
• Establish a reasonable radius distance that will withstand scrutiny. An arbitrary radius distance will likely be found to be unreasonable and unenforceable. Do our market research, know where your customers come from, and define the radius from the borders of your property to the outermost boundaries of your market.
Rightfully, the article’s discussion of potential remedies for a tenant violation of its radius clause makes a point to include adding a portion of the sales from the new location to the sales of the existing location for purposes of calculating percentage rent.
A retail landlord would be remiss if it failed to protect its investment by preventing certain tenants from operating competing businesses at locations in the same market. A well-crafted, fair and reasonable radius restriction will protect the landlord’s investment and percentage rent.