Exclusivity clauses hamper leasing opportunities

Broll Property Group says exclusivity clauses hamper leasing opportunities that could potentially benefit property assets.

Historically, the majority of lease agreements with anchor tenants would have contained some form of exclusivity. Grocery anchor tenants naturally needed to protect their initial investment into the establishment of the new store, as well as their future trading and growth, within the centre explains Preston Gaddy, Divisional Director: Strategic Retail Leasing at Broll.

Gaddy explains that there are a number of retail developments that would not have been possible, without the inclusion of some form of exclusivity in the lease. Also, he says without the commitment of the anchor tenant, financial institutions would not have agreed to finance these developments.

“Lately, we have seen variations to this, particularly in large shopping centre developments where there are two or three (in some cases four), grocery retailers.

“The exclusivities are then limited to these co-anchors, and in certain cases become a co-tenancy provision in the lease -certain grocery retailers are comfortable with trading alongside a specific co-anchor.”

For example, Gaddy says most ‘exclusivities’ contain a restriction on certain service lines i.e. bakery, butchery, deli etc. and will limit these competing tenants to a specific size. This does preclude the landlord from having independent operators of this nature, above a certain size, thus pose a challenge from a leasing perspective.

Broll also finds that generally, when they take on buildings from previous owners and there is an exclusivity clause, it hampers leasing opportunities that could potentially benefit the asset.

“We have however been able to identify a number of unique operators that are trading relatively well, within these size parameters, but the smaller trading area can limit any form of realistic competition within a specific category,” says Gaddy.

According to Gaddy, landlords have tried implementing “radius” clauses into certain agreements, whereby they limit the grocery chain from opening the same offering within a certain radius of the centre. This was meant to be a “quid pro quo” for exclusivities to be agreed, but unfortunately not too many landlords/developers have had much success with implementing these restrictions.

SA REIT Association believes these exclusivity clauses are anti-competitive and are being used by retailers in their fight to restrict each other in market share to the detriment of the consumer.

Dov Green, chairman of the legal and competition committee of the SA REIT Association says while they have not lodged a formal complaint to the Competition Commission, they are currently considering the matter as a whole and researching the exact processes and procedures that need to be followed in order to get the matter before the tribunal. Once this has been done, SA REIT Association will approach its members.

“We find that since the Competition Commission released its statement about exclusivity clauses, retailers have become a lot more aggressive and confident with regard to the enforcement of these clauses and that is why we would want the Commission to take a definitive stance and put an end to the uncertainty,” adds Green.