Leasing 101: Permitted Uses
The permitted use provision in a lease will state the specific things for which tenant can use the premises.
An office landlord likely will limit the permitted use to office uses. A retail landlord will try to limit the permitted use section to only those uses that reflect the retail tenant’s business.
Analyzing the Permitted Use Section
A prospective tenant needs to keep a few things in mind with respect to permitted uses.
First, the permitted use needs to include the tenant’s anticipated plans for the leased premises. If the tenant is a retailer and intends to sell women’s shoes, this use must be included in the permitted use section.
Second, the permitted use section must not be too restrictive. If the prospective tenant wants to sell shoes for men, women, and children, it cannot accept a permitted use section that only provides for “women’s shoe sales”. This would be too specific and would severely impact tenant’s operations.
Third, the permitted use section must anticipate any future uses that the prospective tenant might want to include at the store. Even if the current permitted use is “women’s shoe sales” and is acceptable now, the prospective tenant should consider if it might want to expand to other shoe sales, such as men’s or children’s.
Since a lease is a multi-year commitment, the tenant needs to think through how its business might expand and evolve.
Finally, an ideal permitted use section would state a specific use and then include “for any other lawful general retail use.” This would most flexible because it provides for any legal retail operation. This is not always acceptable to a landlord, but a savvy prospective tenant will insert this into its leases as a matter of good practice.
A Broad Permitted Use Benefits Subleasing and Assignment
A tenant should keep in mind that a broadly worded permitted use will help in the event it wants to sublease or assign the lease in the future.
This may be particularly true if a business fails or underperforms and the tenant wants to quickly wind down the business and unload the lease obligation to a subtenant or assignee.
In conjunction with this, it is very important to make sure the permitted use definition is as all-encompassing as possible.
For example, it is better to have a permitted use “for all retail uses” than a use only for “the sale of wicker furniture.”
A broadly-worded permitted use clause will expand the audience of prospective subtenants and assignees that can operate within it, while a very narrow permitted use clause conversely may limit the size of the prospective subtenants that could use the space and might be interested in subletting.
If tenant needs to rapidly end its operation at the site, a broad permitted use section is very helpful to secure during the lease negotiation as part of advanced preparation.
Prohibited Exclusives
At the same time the prospective tenant is reviewing the permitted use section, tenant also should review any prohibited exclusives list in the lease.
The review should include checking to make sure the permitted use is not prohibited. The review also should include consideration toward any potential future uses that tenant, or any potential future subtenants or assignees, may want to have in the store.
