How Dare You!?

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Sometimes development can get heated. Blood pressures rise, adrenaline kicks in, ego comes out. Recently I was privy to one of these exchanges. The topic: a radius restriction.

“How dare you tell me that I can’t open another restaurant!?” Jason said. His face was visibly red. Jason tapped his class ring firmly on the table and waited for the Landlord to respond. He stared at the speakerphone waiting for the Landlords reply. “Jason, your lease with us clearly states there’s a radius restriction.” Alex said in a matter-of-fact tone. “You can’t build another {restaurant} that close to the one in our center.” Alex is the Landlord of a very successful lifestyle center in which Jason has an over-performing, and very popular restaurant. So popular, in fact, Jason has started looking for a site to open a second location. Jason’s pick for location number two is approximately 3.5 miles west of his opened restaurant. “Alex, this new site is over three miles away, there’s no way you can tell me that I can’t open another restaurant three miles away!” Jason said clearly frustrated by what Alex said. “Actually Jason, I can. It’s in your lease with us. Read the lease. There’s a radius restriction in your lease!”  Alex said sternly. The room and the speakerphone fell silent. Jason flipped through his lease to the section Alex had referenced in a previous email. “So you mean to tell me, that I can’t build anything within five miles?” Jason said testing the waters. “Yes”, Alex said. “Five miles, as the crow flies.” Uncomfortable silence ensued. Alex was the first to speak again. “This is tied to your percentage rent clause”.

So why do Landlords impose radius restrictions? Generally radius restrictions and percentage rent clauses show up to the party together. If the Landlord is banking on the collection of percentage rent, and will be sharing in your upside, a radius restriction will protect that collection from your own cannibalization. In dense trade areas, radius restrictions can inhibit your growth strategy. Before you agree to a radius restriction, make sure you map out the extents of the proposed radius so you understand the boundaries. If you’re part of a franchised organization, compare the radius the Landlord is proposing as a radius restriction, to your development boundaries outlined in your franchise agreement.

As with most items in your lease if you knowingly act in conflict, you could be placed in default. If you defy your radius restriction you might be liable for ‘damages’ or for any perceivable loss in the collection of percentage rent.

Related: http://www.franchisefrankness.com/blog/percentage-rent

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