Dave Huprich Preliminary Notes for ABA Phone Conference Session regarding Radius Restrictions. 04-15-11.

WHAT IS A RADIUS RESTRICTION? There are at least three types:

Those that run to the benefit of Landlord: A restriction against a particular operation by Tenant (or Affiliate, et al.) within a certain distance of Tenant’s store or within a particular geographic area.

Those that run to the benefit the Tenant and are focused within the Center: Prohibition against Landlord having a particular type of tenant in the center or in the center within a certain distance of Tenant.

Those that run to the benefit of Tenant and are focused outside of the Center: Prohibition against Landlord having a particular type of tenant in any center it owns or controls within a certain distance of the center in which Tenant in located.

FOCUS OF THIS DISCUSSION. Primarily on the first type: Radius Restrictions against Tenants that run to the benefit of Landlord. But much of what we say about this type is also applicable to the other types.

WHAT SHOULD A RADIUS RESTRICTION CONTAIN?

What is restricted?

Just the one Tenant trade name or more or all of Tenant’s trade names (e.g., Saks and Saks Off Fifth; Nordstrom and Nordstrom Rack; Macy’s and Bloomingdale’s)?

Current and any future trade names?

Any similar store? For example, any Italian restaurant; any grocery store or supermarket; any women’s ready-to-wear store.

Any store selling a particular product or type of product. For example, coffee. [Boy, would that kill a lot!]

Any store selling a particular brand of merchandise?

A store in a particular type of shopping center (Outlet, e.g.)?

Definitions are very important.

Are there any Exceptions?

Based on square footage (e.g., stores like Walmart and Target are rolling out “small store” programs);

Percentage of Floor Area devoted to a particular type or brand of merchandise;

Percentage of sales. For example, no restaurant having more than X% of bar sales.

What is the restricted area?

The restricted area may be an area in the center or a particular piece of geography (e.g., Hamilton County) rather than a “circle” based on a radius point.

If it is a radius or a distance (e.g., a sidewalk length distance), from what point is it measured? This needs to be precise.

Are there multiple areas where different restrictions apply to different areas?

Who is restricted?

Just the Tenant entity?

Some or all of the Tenant entity’s “Affiliates”? (Definition?)

Remedies.

Injunction

Damages at law

Liquidated Damages (per day?)

Inclusion of sales or multiple of sales (1.5 times, e.g.) of the “restricted” store in the sales of the store in Landlord’s center. This is one of the more favored remedies because of antitrust concerns.

Repayment of Tenant Allowance

There needs to be “reasonable” aspect to the Radius Restriction vis. enforceability concerns.

LANDLORD’S JUSTIFICATION. What is Landlord’s justification for asking for a radius restriction?

Protection of Landlord’s investment against the development of a rival center.

Has Landlord given the Tenant an allowance?

Percentage Rent

If give Tenant an exclusive, Landlord should get a radius restriction.

Rent Relief: If Landlord is giving Tenant rent or other relief in order to help Tenant stay open in the center, one of the things that Landlord should consider getting from the Tenant is a radius restriction.

Landlord does not want to leave it up to the Tenant to decide whether to add stores in a particular area. Could be detrimental to Landlord if:

Tenant is doing well in Landlord’s center (may bleed off sales from the store in Landlord’s center); or

Tenant is not doing well in Landlord’s center. Could Tenant close its store?

Does Tenant have an operating covenant?

Without a radius restriction and an operating covenant, Tenant could test another store to help it decide whether to leave Landlord’s center or reduce its presence there.

TERMINATION OF RADIUS RESTRCTION.

Tenant may want radius restriction running to Landlord’s benefit to terminate if Landlord is in default under the lease.

Landlord will want to narrow the “triggering defaults” as much as possible.

Failure to maintain the Common Area?

Failure to maintain Tenant’s building?

Failure to reconstruct after damage or destruction?

Landlord will want radius restriction running to Tenant’s benefit to terminate if:

Tenant in default under the lease. Tenant will want to narrow the “triggering defaults” as much as possible.

Tenant closes its store in Landlord’s center, even if it has the right to close.

Notice and right to cure before termination right can be exercised.

ANTITRUST CONCERNS?

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