Tenant’s Guide to Understanding Landlord Imposed Radius Restrictions

Have you ever driven down the street and noticed two gas stations or two 7-Eleven stores directly across the street from one another and wondered what gives?  Well, this happens either because some unlearned soul mistakenly believes that two are better than one or because market research has shown that convenience and demand outweigh any downsides to having two stores within close proximity.

To protect the unlearned retailer from itself and the landlord’s bottom line, retail center landlords often impose radius restrictions.  The radius restriction prohibits a tenant from opening another store within a certain distance or geographical area.  In imposing this prohibition, the landlord aims to avoid low sales due to market saturation, and more importantly, the landlord aims to create exclusivity and drive as much traffic as possible to its own retail centers.

The landlord’s reasons for imposing radius restrictions are compelling, but shortening the distance of the radius or eliminating the restriction altogether is not impossible when armed with the right information.

Retail Center Location:  Urban vs. Rural

A walkable or high traffic urban area or business district can withstand more saturation than rural or suburban motor vehicle reliant areas.  Also, in downtown business districts, if an employee only has an hour long break, time for lunch time errands and food runs can take no more than a few minutes each way, precluding retailers and restaurants located more than a few blocks away.  In this situation, having more than one store within a 1-2 mile radius may be feasible.

Base Rent vs. Percentage Rent

If rent is based on sales volume, a landlord will almost always impose a radius restriction, because sales at other locations may directly impact dollars the landlord might otherwise receive absent another store location in close proximity.  Attempts to eliminate the restriction altogether will probably prove futile; however, limiting the radius distance and/or negotiating compensation to the landlord in the form of additional rent for a decline in sales are alternative solutions. Provisions that automatically impose payments based on sales at the new store should be avoided.  Absent a demonstrated decline in sales at the existing store resulting from opening the new store, the landlord is not harmed and should not be entitled to profits from the new store.

Shopping Habits of a Tenant’s likely Customer

Radius restrictions also serve as a way to attract customers to other stores in a retail center.  If the customer can only find their favorite retailer at one location, then the rationale is that the customer will choose the shopping center over all others and patronize other stores at the shopping center during the process.  If your likely customer is not likely to visit other stores at the shopping center, then this can be used as a compelling argument to do away with the radius restriction.  One example is a dry cleaner business where customers tend to zip in and out on the way to the office.  This customer does not usually spend time browsing other stores.

If I Don’t, Someone Else Will

If a tenant’s store is part of a franchise, one of the most compelling arguments may be that the franchise will simply issue rights to another operator to open within a short distance. In this situation, negotiations may be similar to negotiations for percentage rent deals discussed above.  The goal is to give the landlord an incentive ease the restriction.

The factors listed above are not exhaustive of arguments that can be made to support eliminating or reducing a radius restriction and none is guaranteed to work. A radius restriction may be imposed simply because the landlord agreed to give the tenant exclusive operating rights in the shopping center or a tenant construction allowance.  For best results, the particulars of the situation should be considered and the landlord should be shown the value of not restricting another store or that another store will be inconsequential.

 

About LaVonne Torrence

LaVonne O. Torrence is a real estate attorney with Torrence Law Office, LLC. She has over 14 years of experience as a legal professional in the commercial real estate industry. Her practice focuses primarily on leasing transactions and extends to delivering solution oriented counsel and representation in connection with regulatory and operational issues as well as landlord/tenant disputes. She can be reached at: 301-825-5655.

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