Successfully Negotiating a Commercial Lease Agreement: Restrictive Covenants

February 4, 2013

Strip Mall It is perhaps one of a business’s worst nightmares. The business selects a space to rent, negotiates with the landlord, signs the leases and moves into the property, only to witness its landlord rent a nearby space to one of its chief competitors shortly thereafter. It is this nightmare scenario that motivates many commercial tenants to negotiate for the inclusion of restrictive covenants in their lease agreements, even though such provisions are often difficult to reach agreement on, and equally difficult to enforce.

Tenants often seek restrictive covenants to limit a competitor’s ability to move into one of the landlord’s other spaces. Landlords may also seek restrictive covenants, in order to limit the tenant’s permissible uses for the premises.

In order to be legally enforceable, a restrictive covenant’s terms must serve a legitimate business objective and be reasonable in accordance with New Jersey law. If a court is called upon to interpret the terms of a restrictive covenant, it will favor the interpretation that is the least restrictive.

Both landlords and tenants should approach restrictive covenants cautiously. A landlord or a tenant must take care to ensure its lease has restrictive covenants worded with substantial specificity. The landlord will seek to avoid granting too sweeping of exclusive use rights to a tenant so as not to handcuff its ability to fill its other rental spaces, while the tenant will seek a more restrictive term to protect its business interests. For instance, suppose a landlord grants a restrictive covenant to a Mexican restaurant tenant who rents out a space in one of its strip malls, but the landlord later rents another space in the same mall to a Guatemalan restaurant. Without a carefully worded covenant, the dispute could descend into costly litigation for both sides and, if the covenant is sufficiently ambiguous, could ultimately result in defeat for the Mexican restaurant tenant.

Another key to a landlord’s successful dealing with restrictive covenants is to maintain copies of the restrictive covenants it has agreed to with each of its tenants. This will help minimize the landlord’s risk of agreeing to covenants that are inconsistent or conflict with other tenancies, and will allow the landlord’s attorney to determine whether a potential new tenant’s proposed use conflicts with any of the covenants the landlord already signed. This can be vital in helping the landlord avoid a breach. Otherwise, a landlord may unknowingly commit a breach of a tenant’s exclusive rights. If the landlord breaches, a tenant’s legal remedies may include an award of damages, a rent adjustment or even allowing the tenant to terminate the lease earlier than initially agreed upon.

Restrictive covenants require careful consideration and even more careful drafting. With so much at stake, a landlord or a tenant should consult experienced legal counsel about the terms of a proposed covenant. To obtain the best quality advice about your rights, and how a restrictive covenant might affect your business objectives, consult the real estate attorneys at Samuel C. Berger, P.C. Our New Jersey real estate attorneys can help you ensure that any covenant you sign as part of your lease will help, not harm, your business. Reach us online or call (201) 587-1500 or (212) 380-8117.

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