An exclusive restricts every future letting in the centre, not just this one. Priced as blocked lettings, it is rarely free and the definition decides the bill.
An exclusive use clause costs the landlord the lettings it can no longer make: the number of re-lettings a year, times the chance that the best bidder for a unit trades in the protected use, times the rent and void lost by turning to the next bidder. On an illustrative 48-unit centre that is 8,551 a year, so a tenant paying 70,000 should pay about 12.2 per cent more for a narrowly drawn exclusive, and well over a third more for a broad one.
Worked in full in Retail Real Estate by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
An exclusive use clause is a landlord covenant: for as long as the protected tenant trades, the landlord will not let another unit in the centre for the protected use. Coffee shops, pharmacies, opticians and supermarkets ask for it most often. A radius clause restricts the tenant; an exclusive restricts the landlord, and it does so on every future letting in the scheme, not just this one. The cost is therefore spread across the rest of the rent roll and rarely shows up in the deal that grants it.
| Input | Value |
|---|---|
| Specialty units / average rent | 48 / 55,000 |
| Centre specialty rent roll | 2,640,000 |
| Share of units re-let each year | 9.0% |
| Share of lettings where the best bidder trades in the protected use | 6.0% |
| Next-best bidder: rent below the best bid, until the first review | 7.5% for 5 years |
| Next-best bidder: extra void / irrecoverable service charge per void month | 3 months / 850 |
| Term of the exclusive / discount rate | 10 years / 7.5% |
| Rent of the tenant asking for the exclusive | 70,000 |
The 6.0 per cent probability is the input that carries the answer. It describes a tight definition, "the sale of specialty coffee as a principal use", in a centre where coffee operators are one bidder category among many. It should come from the letting agent's record of who actually bid on recent vacancies, not from a guess.
Lettings a year = 48 × 9.0% = 4.32
Lettings where the best bidder is excluded = 4.32 × 6.0% = 0.259 a year, or 2.6 over the 10-year exclusive
On most of the centre's lettings the clause costs nothing, because the best bidder is a fashion, service or food operator outside the protected use. That is why it is usually conceded without a price. But two or three lettings in ten years is not zero, and each one is a letting made to the second choice.
| Item | Working | Amount |
|---|---|---|
| Extra void | 3 months of 55,000 | 13,750 |
| Irrecoverable service charge while empty | 3 × 850 | 2,550 |
| Lower rent to the first review | 4,125 a year for 5 years at 7.5% (factor 4.0459) | 16,689 |
| Loss per blocked letting | 32,989 |
The rent shortfall is 7.5 per cent of 55,000, or 4,125 a year. It is carried only to the first review on the assumption that the market rent then reasserts itself; if the next-best tenant is simply a weaker covenant on a full term, the loss runs longer.
Expected cost a year = 0.259 × 32,989 = 8,551
Present value over the exclusive = 8,551 × 6.8641 = 58,694
Rent premium needed = 8,551 ÷ 70,000 = 12.2%, so a rent of 78,551 rather than 70,000
Excel: =48*9%*6%*(3/12*55000+3*850+PV(7.5%,5,-7.5%*55000))
Measured against the whole centre, 8,551 is only 0.32 per cent of the specialty rent roll, which is how the clause gets waved through. Measured against the one tenant that benefits, it is 12.2 per cent of its rent. The second comparison is the one that matters, because that tenant is the only party who can pay for it.
| Definition (illustrative) | Best bidder excluded | Blocked lettings in 10 years | Cost a year | PV over 10 years | Premium on 70,000 |
|---|---|---|---|---|---|
| Named concept only | 2.0% | 0.9 | 2,850 | 19,565 | 4.1% |
| Specialty coffee as principal use | 6.0% | 2.6 | 8,551 | 58,694 | 12.2% |
| Coffee, tea and bakery | 12.0% | 5.2 | 17,102 | 117,387 | 24.4% |
| Any food and beverage | 18.0% | 7.8 | 25,652 | 176,081 | 36.6% |
The cost scales one for one with the probability, so the drafting is worth more than the rent negotiation. Moving from "specialty coffee as a principal use" to "any food and beverage" triples the cost. The other inputs matter less. If the next-best bidder pays 15.0 per cent less rather than 7.5, the loss per blocked letting rises to 49,679 and the premium to 18.4 per cent; if the extra void is six months rather than three, the premium is 18.3 per cent. At a 5.0 per cent rent gap it falls to 10.2 per cent.
Pricing the exclusive at nothing because no competing tenant is in negotiation today. The clause runs for ten years across 48 units, and the cost arrives on lettings nobody has thought about yet. The second mistake is granting an exclusive the landlord cannot police. Tenants on open user clauses can change what they sell without consent, and if one of them starts selling the protected product, a typical remedy for the protected tenant is a rent reduction. A 50 per cent abatement on 70,000 is 35,000 a year, and two years of it is worth 62,845 today, more than the whole expected cost of the clause. Carve out existing leases, tie the exclusive to the tenant actually trading in the protected use, and let it fall away if the tenant assigns, goes dark or falls into arrears.
Illustrative. The expected cost assumes blocked lettings occur evenly over the term and values each loss at the date of letting. The protected tenant's own rent and covenant are taken as given; an exclusive that genuinely lifts its sales may also lift turnover rent, which offsets part of the cost.
An exclusive use clause is a ten-year restriction on the landlord's future lettings. Price it as blocked lettings a year times the loss on each, here 8,551 a year or 12.2 per cent of the beneficiary's rent, and spend most of the negotiation on the definition, which moves the cost from 4.1 to 36.6 per cent. The free workbooks for the book carry the tenant mix and rent at risk unit by unit, which is where the bidder categories behind the probability come from.
A landlord covenant not to let other units in the centre for the tenant's protected use while that tenant trades. It is common for coffee, pharmacy and grocery tenants. On an illustrative 48-unit centre a narrowly drawn exclusive costs the landlord 8,551 a year in blocked lettings, about 12.2 per cent of a 70,000 rent.
As narrowly as the tenant will accept, because the cost moves one for one with the share of bidders excluded. In the worked example a named concept costs 4.1 per cent of the tenant's rent, specialty coffee as a principal use 12.2 per cent and any food and beverage 36.6 per cent, on the same 32,989 loss per blocked letting.
It depends on the lease, but a common remedy is a rent reduction for the protected tenant until the breach stops, sometimes with a right to terminate. A 50 per cent abatement on a 70,000 rent is 35,000 a year; two years of it is worth 62,845, more than the whole expected cost of the clause, which is why existing open-user leases should be carved out.
This article is one calculation from Retail Real Estate. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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