Limited Impact on Reverse Radius Restriction

A retail tenant may demand that the landlord give it a “reverse radius restriction”. This restriction bars the landlord from renting space in any nearby shopping center it owns to the tenant’s competitors. The restriction applies if the other center is located within a certain radius of the tenant’s center. A tenant will often demand this restriction if landlord is attempting to impose a radius restriction on it to bar it from doing business nearby.

Ideally, the landlord would want to decline the tenant’s demand. But if the landlord is negotiating with a highly desirable tenant that insists on the reverse radius restriction, the landlord may have to concede to the demand.

Landlord Perspective

Agreeing to a reverse radius restriction could affect the landlord in several ways:

Diminish sale of center. Landlord may not expect a reverse radius restriction to affect it because it has no intention of building or buying a center within a competing distance of the tenant center. But what if the landlord wants to sell the center where the tenant is located? The sale of the center may fall through if the prospective buyer also owns a center within the radius. There are so many REITs purchasing real estate across the country, it’s getting more likely that a REIT may buy two centers that are within a small radius of each other.

Damage financing ability. Concerns about the restriction could cause a lender to back out of a loan to the landlord. Suppose the lender has made a loan to another center within the radius. The lender may be worried that if it must foreclose on and then end up owning both centers, it will violate the tenant’s reverse radius restriction.

Hamper ability to expand business. Suppose the landlord decides to merge its business with another business that owns a nearby center. The last thing the landlord wants is for a reverse radius restriction to kill the merger.

Tenant’s Perspective

Any retail tenant will want a reverse radius restriction. Most retailers think anything that cuts down on competition is generally in their best interest – including a restriction that insures that a nearby center won’t have any competing tenants. If the tenant is being pressed by the landlord to agree to a radius restriction in the lease, it may refuse, unless landlord agrees to a reverse radius restriction too.

Compromise: restriction affects only landlord. As a compromise, landlord can agree to give the reverse radius restriction, but have it apply only to landlord, the current owner of the center. That means as long as the current landlord owns the center, the landlord must abide by the restriction. But the restriction is lifted if the center is transferred, say, to a buyer or a lender (after a foreclosure or deed-in-lieu of foreclosure).

To put this compromise in the lease, add the following language to the reverse radius restriction:

This provision shall be binding solely on the [insert name of Landlord in lease] only while it is the owner of the shopping center, and it shall not be binding on: a) any mortgagee that becomes the owner of all or any part of shopping center by virtue of a foreclosure of a mortgage, the acceptance of a deed in lieu of foreclosure, or an acquisition through a foreclosure proceeding or bankruptcy proceeding; b) any other person or entity that acquires all or any part of the shopping center through any transfer, merger, or sale; or c) [insert name of Landlord in lease] after it has sold or transferred the shopping center to any mortgagee, purchaser or transferee.

Provided as an educational service by John Raymond Dunham, III, Esq..

This publication is intended to serve you. If you would like certain topics covered, or have any questions or comments, you are invited to contact Mr. Dunham at: 941.951.1800, Ext. 250, Facsimile: 941.366.1603, E-Mail: jrd@jrdlaw.com, Web site: www.jrdlaw.com or write him at LUTZ, BOBO, TELFAIR, DUNHAM & GABEL, Two North Tamiami Trail, Sarasota, FL 34236.

This publication is designed to provide accurate and authoritative information in regard to the subject matter covered and report on issues and developments in the law. It is not intended as legal advice, and should not be relied upon without consulting an attorney.