Make Tenant Indemnify You for Enforcing Illegal Exclusive

A strong tenant may demand an exclusive, and you may have to give in to that demand. But what happens if another tenant in your center later claims that the exclusive violates anti-trust laws? You'll have to pay to defend yourself. Plus, if the court rules against you, you may owe damages. And you can't necessarily count on the tenant that demanded the exclusive to protect you and pay your costs. If your lease is like many we've looked at, it has no provision that requires the tenant to protect you.

But you can plug this loophole by requiring the tenant to agree to reimburse and defend you for your damages—in legal terms, “indemnify” you—if anyone sues you, claiming that the exclusive you gave is illegal, says Sacramento attorney Thomas F. Stewart. There's a Model Lease Clause on p. 8 to help you do this.

Some Exclusives Are Illegal

Both federal and state anti-trust laws bar restrictions on trade and commerce that eliminate or stifle competition, Stewart says. These laws sometimes apply to exclusive use clauses, he adds. For instance, it's illegal for an exclusive in a major retailer's lease to have the effect of “price fixing”—that is, keeping the cost of merchandise at the center at a high level, and eliminating discount competitors.

An Ohio owner and its major retail tenant found this out when they tried to enforce an exclusive that allowed the tenant to stop classes of retailers and discount stores from opening in the center. One discount store sued the owner and tenant, claiming that they were restraining its trade by trying to stop it from operating at the center. The Ohio court ruled that the exclusive was illegal because it was a restriction on trade, designed to keep prices high and to stop competition [State v. Zayre of Ohio, Inc.].

While most exclusives don't violate the law, some might be subject to a challenge, warns Stewart. Retired commercial property management expert Alan A. Alexander agrees. Each year, Alexander encounters several tenants or prospective tenants that complain—and often threaten to sue—over another tenant's exclusive. While none of those complaints have gone to trial, owners have had to waste time and money dealing with them, he says.

Make Tenant Indemnify You

Because you can't always tell if an exclusive use is illegal, you can protect yourself by adding a tenant's indemnification clause to your leases, suggests Stewart.

Have the clause cover two points. It should make the tenant responsible for reimbursing your losses and expenses, including reasonable attorney's fees, if someone sues you, claiming that you're enforcing an illegal exclusive, says leasing manager Lisa Carter of Kitchell Development Company [Clause, par. a]. It should also say that if the exclusive violates the law, the exclusive will terminate immediately and you won't have to enforce it any longer, adds Stewart [Clause, par. b].

CLLI Sources

Alan A. Alexander: Former Senior Vice President, Woodmont Real Estate Services, Inc., 10870 E. Cochise St., Scottsdale, AZ 85259.

Lisa Carter: Leasing Manager, Kitchell Development Co., 703 Palomar Airport Rd., Ste. 320, Carlsbad, CA 92009.

Thomas F. Stewart, Esq.: Shareholder, Trainor Robertson, 701 University Ave., Ste. 200, Sacramento, CA 95825.