Commercial Real Estate 101 – Chapter 7: Use Restrictions

A lease abstract is a document that summarizes specific, key information from a lease agreement. Leases can be lengthy documents with confusing legalese. Lease abstracts allow users to easily reference and review fundamental lease terms to ensure that both the tenant and landlord are in compliance with applicable obligations, timeframes, etc.

This series will go through a typical lease abstract and explain the various terms and what is important for a tenant to understand.

Permitted Use

  • Lease provision identifying the allowed business activities that may be conducted in the leased premises by the tenant. Uses can be general or specific; limiting the types of services and or products that can be offered by the tenant. Must be in conformance with zoning rules and regulations.
  • What’s important – Ensuring that the permitted use complies with zoning rules and regulations and that all tenant’s offered services and/or products are covered under general uses, i.e. general office use or are specifically listed.

Prohibited Use

  • Lease provision identifying uses that are expressly prohibited in the space, building, and/or project. Prohibited uses can range from general to specific and apply to all tenants or specific tenants. Prohibited uses are generally included in leases to prevent nuisances to other tenants, reduction in property value, and/or increases in required levels of insurance.
  • What’s important – Understanding the implications to tenant’s business. If prohibited uses apply to a particular tenant the more specific the language the better.

Exclusive Use

  • Lease provision restricting a particular use to a specific tenant. Most common in retail leases, exclusivity provisions are a concession granted to tenants to protect them from direct competition from other tenants in the building, center, or project by restricting the sale/offering of particular services or products. The limitations can be broad or specific. Retail landlords have an interest in maintaining a diverse tenant mix to attract the maximum number of customers and promote/protect the profitability and viability of their tenants.
  • What’s important – The scope and scale of the exclusivity terms. For the tenant benefiting from the exclusivity provision the broader the restriction the better. Leases may include a list exclusive services or products and/or limit the amount of sales allowed and/or square footage occupied by the particular service or product. Tenants should verify that their use does not conflict with any preexisting exclusivity clauses in other tenants’ leases.

Radius Restrictions

  • Lease provision prohibiting a tenant from operating a similar business operation with in a particular radius of the leased premises. Primarily found in retail leases, their purpose is to protect the landlord from potential, adverse effects of competition on profitability, percentage rent, likelihood of default, etc.
  • What’s important – Limiting the area and timeframe of the restriction. Tenants should include specific language detailing what constitutes a competing/similar business.

Nive-IFRS-leasing

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