When A Tenant Withholds Rent If Landlord Leases to Competing User

In a recent case handled by one of your co-authors, a retail tenant in a commercial shopping center found himself in a difficult position. He was the sole fitness center tenant in the center and his lease contained an exclusive use provision. The landlord was prohibited from leasing space to another fitness center tenant. Somehow, the landlord either ignored or forgot about this limitation, and leased space to our client’s competition. Our client, acting without counsel, invoked the "exclusive use" clause in its lease to justify withholding rent from its landlord. Our client claimed that the landlord breached the lease by renting space to another tenant offering the same products and/or services, both in direct competition with the existing tenant’s business and as a breach of the exclusive use clause. This case highlights the importance of understanding the implications of exclusive use clauses, as well as the limitations and potential pitfalls of withholding rent as a legal strategy.

PITFALLS OF WITHHOLDING

While an exclusive use clause may provide grounds for a tenant to claim that the landlord has breached the lease, a unilateral decision to stop paying rent to the landlord is fraught with risk. Tenants may find themselves in breach of the lease agreement, especially where the obligation of a tenant to pay rent is expressly independent of all other lease obligations of the parties.

This was precisely the position taken by our client’s landlord. This prompted a costly legal dispute that could have led to our client’s eviction. Courts often construe leases to require tenants to continue fulfilling rent obligations while such disputes are ongoing. Accordingly, withholding rent without a court’s approval could backfire. Tenants should seek legal advice BEFORE withholding rent. Pursuing alternative dispute resolution methods, such as mediation or arbitration, may be a safer first step than cutting off rent payments.

Our client might have claimed that the landlord breached the lease by violating the exclusive use provision, but the tenant would still need to prove damages (e.g. lost clients, lower revenue); AND if our client were to claim it was constructively evicted, the tenant (in Illinois) must actually vacate the premises to utilize this defense.

LANDLORD'S ARGUMENTS

The landlord in this scenario had several potential defenses against the tenant's withholding of rent:

• Non-Competing Use: The landlord first argued that the new tenant’s use of the space was sufficiently different from the existing tenant’s business, thus not violating the exclusive use clause.
• Tenant’s Waiver: When the tenant failed to enforce the exclusive use clause immediately, the landlord could argue that the tenant had waived its right to claim a breach.
• Cure Period: If provided in the lease, the landlord could claim that the lease provided a cure period for any alleged violations, during which time the landlord could address the claimed breach without the tenant withholding rent.

The frustrating fact is that if the tenant felt “wronged” by the new lease to the competing tenant, in order to claim a breach by the defense of constructive eviction, the tenant would have been required to risk all and vacate the space. In the alternative, the tenant could have filed a suit (or a counterclaim to the eviction action) seeking declaratory judgment that the landlord breached the lease. Both are expensive and risky alternatives.

DRAFTING TIPS FOR EXCLUSIVE CLAUSES

To avoid such disputes, landlords and tenants should negotiate and carefully draft exclusive use clauses with specific language:

• Define Competing Uses: Clearly define what constitutes a “competing use.” This will prevent ambiguity and future conflicts, as it would have in this case.
• Exclusions and Limitations: The landlord should specify any exceptions to the exclusive use clause, such as permitting certain businesses or services that may not directly compete.
• Cure and Enforcement Provisions: Include clear processes for enforcing the clause, including a cure period for the landlord and any steps a tenant must take before withholding rent or taking legal action. On the tenant side, addressing tenant remedies such as liquidated (monetary) damages and/or rent abatement, could be considered.

CONCLUSION

Exclusive use clauses can be powerful tools for tenants, but they must be exercised carefully. Withholding rent is a high-risk strategy that should only be undertaken with appropriate legal guidance. Both tenants and landlords can avoid conflicts by ensuring that exclusive use clauses are carefully negotiated, clearly defined, and supported by well-drafted enforcement procedures.