Why Major Retailers Should Ditch Prohibited Use Language

by | 30 October 2018

In today’s ever-changing economy, it’s vital for traditional retailers to recognize that the landscape of retail is constantly changing, particularly in the realm of e-commerce. This inevitably creates a shift in the types of retail tenants and how shopping centers are used as a whole. However, this also often requires cooperation between the landlord and its anchor or major tenant. As a result, it has become increasingly important for traditional retailers to change their stance on “prohibited use” language.

A softening of prohibited uses or restrictions is often necessary to improve the health of a retail center, and contrary to traditional belief, may ultimately be of benefit for the retailer providing the relief. As we all know, both the internet and e-commerce have altered how we shop and why we go to retail centers. Today, almost everything in your closest, pantry, refrigerator and most of your home electronics can be purchased online. The shift in how we buy our goods and what we leave our homes to buy has played a role in the closure of thousands of under-performing stores, bankruptcies to electronics, apparel, shoe and other retailers (just look at Sears and Kmart). The result has been large voids, increasing vacancy and loss of anchor tenants in many shopping centers.

Many of these vacancies are being absorbed by what are generally regarded as non-conforming service users — i.e. medical, entertainment, health and wellness, restaurants and schools, to name a few. The problem for the landlord has often been that although these users represent the fastest growing categories in retail, many of these non-conforming users are prohibited by anchor and junior anchor tenants. Ultimately, some users can’t even get into centers due to restrictions, and in other cases, it requires the consent of one or more existing tenants.

Unfortunately, many retailers — some of them being major tenants — are looking at “prohibitive use” language as a means of capitalizing on antiquated provisions that most have little to no adverse effect on their business and are profiting by providing their consent. Many retailers are layering non-essential or inconsequential “prohibitive use” language in their leases, not in an effort to keep out competitors or undesirable uses, but in an effort to control the character of the shopping center. As landlords chase the “best” tenants, they often have to, or continue to, acquiesce to the demands of anchor tenants, and this subsequently forces the landlord to negotiate a waiver or consent at a later date.

The waiver process can be as simple as a conversation followed by an email acknowledgment from the major tenant, or more often than not, a negotiation for compensation to grant the waiver regardless of whether the new user will enhance the center as a whole and ultimately benefit the party providing the waiver. The list of demands might be as simple as a nominal one-time payment or granting additional term, but most often include a more significant payment or tenant allowance, or rent reduction for the balance of the term, both in base rent and NNNs. In other instances, the tenant may seek to shift responsibilities or obligations under the lease from the tenant to the landlord. Either way, the cost of obtaining a waiver or consent is often very high.

Sometimes the demands are so egregious that the landlord can’t move forward and loses out which is not only detrimental to the landlord, but it also hurts the vitality of the retailer(s) that are making the demands. Vacancies are bad for everyone’s business. Fewer tenants equate to less traffic which generally equates to diminishing revenue in a retail center. A simple solution for higher occupancy and strong store profits is for tenants to relax some of their “prohibitive use” language and allow for a new age of retailers to fill vacancies and drive traffic back to what has become an outdated and dormant retail center. In order to achieve this, landlords need to concentrate on obtaining a diverse tenant mix as well as how to efficiently drive traffic to their center. Tenants must get back to focusing on their core business and what ultimately drives profits and shareholder value, and less on profiting on legal loopholes.

As a Senior Vice President for Colliers in Houston, Robert’s area of expertise is retail tenant and landlord representation. He has ownership interests in retail projects totaling more than 400,000 square feet and developing and executing the market expansion plans for several national and regional retail and restaurant chains.