RADIUS CLAUSES IN RETAIL LEASES!!!

By
Commercial Real Estate Agent with KW Realty Centre-Columbia, MD

A radius clause is a clause typically found in a retail lease that prevents the tenant from opening another location within a certain distance of the leased location.  It is usually from 2-5 miles, but is heavily dependent upon the location.  The density of a major city is going to require a pretty short radius restriction, whereas a suburban or rural location would require a lot more of a restricted area.

Why are these clauses in the lease in the first place?  When a landlord leases a space to a tenant that is a draw, it will bring more people to the shopping center.  Let's pretend that there were only three Starbuck's locations in the City of San Francisco, and that they were all in shopping centers.  The center would draw a ton of traffic because people would likely come from miles around to buy their frappamochalattechinos.  It's advantageous for the landlord to get the best tenants in town, and to make sure that not that many other places have them.

The other reason for these clauses is that the landlords don't want businesses to cannibalize their other locations.  There's that old joke that says "I'll meet you down at the Starbuck's across from the Starbuck's,  I don't want to pick on Starbuck's.  They are a great operation, and I'm sitting in one as I type this blog.  However, they had the most aggressive retail expansion that I've ever seen in my career.  Now, demand is down due to the economy.  Demand can decrease for other reasons, like competition.  The first guy on the block (McDonald's, for instance) always has the edge for a while, but eventually a Burger King comes along and takes a bite out of their market share.  Thankfully, McDonald's and Starbuck's are both good, strong companies.  However, the phenomenon has proven true for as long as anyone has built retail centers.

If you are a landlord, you want to prevent cannibalization, and thus your tenant roster at the center.  If you are a retailer, you want to open whereever you see fit.  That's where the negotiation begins.  I urge both tenants and landlords to pay attention to this clause, as it can deeply affect your business/expansion plans.

 

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Rainmaker
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Tim Bradley
Contour Investment Properties - Jackson Hole, WY
Commercial Real Estate Expert in Jackson Hole, WY

Hi Evan, on a related note, I see a lot of HOA agreements in commercial condominium buildings that prevent competing businesses from operating in the building. While it can make sense in retail, it really can make it difficult to sell an office unit in a building where you can't sell the unit to a lawyer, real estate company, or accountant because those users already exist in the building. Are you really likely to change lawyers because you notice there is a different one in the building?

Jan 06, 2009 06:23 PM #1
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Rainer
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Evan Keith Langert

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