Non-compete covenants in commercial leases limit direct competition inside a project or nearby trade area. These provisions either restrict a landlord from leasing to a competitor of an existing tenant or restrict a tenant from opening another competing location within a defined radius. They protect tenant investment in build-outs and customer acquisition while preserving a landlord’s merchandising strategy and project value. Unlike employment non-competes, the Federal Trade Commission’s 2024 worker rule targets employment agreements and does not cover commercial lease restrictions. Competition law still applies, but the analysis for retail and mixed-use projects is different.
In practice, five forms appear most often, each with clear tradeoffs. Understanding them helps parties target protections without stalling future leasing flexibility or triggering competition concerns.
Exclusive use clauses prevent a landlord from leasing to a specified category such as full-line grocery above a certain square footage, cannabis sales, or fitness centers. Well-drafted exclusives apply to a particular building or a defined site plan and often include carve-outs for existing tenants and incidental sales below a set percentage of gross sales. Because they are category-specific, these clauses can be tailored to the tenant’s core merchandise mix and investment thesis.
Radius restrictions work in the other direction. A tenant agrees not to open another location that competes with the leased premises within a defined distance for a set period. Landlords favor these provisions in outlet centers and food and beverage concepts to avoid cannibalization. In franchise-heavy properties, mutual restrictions sometimes appear so franchisors can manage brand density and market coverage.
Prohibited-use lists set property-wide rules that restrict certain uses beyond a single tenant’s exclusive. They are broader than single-tenant exclusives and often sit in recorded reciprocal easement agreements or declarations that bind future owners and lenders. These lists support long-term merchandising plans and are crucial for mixed-use campuses with multiple ownership parcels.
Recorded restrictive covenants can run with the land when properly drafted. They safeguard anchor tenant exclusives and project-wide merchandising elements across ownership changes. By contrast, in-lease covenants create personal obligations between the current landlord and tenant. Successors are not bound unless a recorded memorandum or separate instrument gives notice of the restriction.
Incentives predictably diverge. Anchor tenants seek strong, long-duration exclusives given significant capital exposure and brand risk. Inline tenants want protection sized to their merchandise mix so they are not boxed out of future pivots. Landlords want maximum leasing flexibility and worry about portfolio gridlock from overlapping rights. Lenders and buyers demand clarity on enforceability, duration, scope, and remedies that could erode net operating income.
State real property and contract law govern enforceability, subject to an antitrust overlay. Courts generally enforce exclusive use and radius restrictions that are clear, reasonable in scope and duration, ancillary to a legitimate transaction, and consistent with public policy. Drafting that ties restrictions to property interests and shows intent to run with the land makes enforceability more likely.
The distinction between contract obligations and servitudes is central. Covenants that run with the land usually require intent, touch and concern with the land, and privity. These elements vary by state. Many courts will bind successors using equitable servitudes when they have notice, even if running-with-the-land elements are disputed. The Restatement Third of Property recognizes competition-limiting servitudes as valid if they avoid unreasonable restraints on trade.
Recording creates notice to successors, lenders, and purchasers and preserves priority. Parties typically record a memorandum of lease or a separate instrument that summarizes the exclusive. Failure to record relegates a tenant to purely contractual recourse against the original landlord. That is a weak position once a property sells or is foreclosed upon.
Courts are more likely to enforce exclusives that track lease terms and a defined site plan. Perpetual restrictions gain defensibility when placed in reciprocal easement agreements supported by cross-parcel consideration. Overbroad definitions like “any business selling food” invite judicial narrowing or invalidation. Narrow, measurable definitions and reasonable carve-outs reduce litigation risk and speed leasing approvals.
Antitrust analysis treats exclusive use and radius provisions as vertical restraints under a rule of reason framework. Enforcers examine market definition, foreclosure share, duration, and procompetitive justifications such as investment recoupment and brand positioning. The 2023 DOJ and FTC Merger Guidelines discuss foreclosure risks when firms diminish rivals’ access to customers or inputs. That logic informs vertical restraint analysis beyond mergers, especially in local retail markets.
The UK Competition and Markets Authority warns that restrictive covenants in land agreements may violate competition rules when they prevent, restrict, or distort competition without strict necessity for legitimate objectives. Provisions blocking grocery competitors from opening nearby have drawn heightened enforcement attention, so UK and EU assets demand narrower scope and shorter durations.
Effective documents describe scope and remedies with precision and align all related exhibits and agreements. Ambiguities erode enforceability and add operational friction during leasing and financings.
Well-drafted clauses define protected uses at item, category, or functional levels such as “full-service grocery,” “prescription pharmaceuticals,” or “high-intensity interval training classes.” Geographic scope typically covers the project footprint defined by a site plan, and sometimes extends to off-site radii for landlord-owned outparcels. Temporal scope usually matches the lease term and may survive for wind-down or for the duration of a reciprocal easement agreement.
Letters of intent should identify exclusive categories, geographic scope, and baseline remedies while setting expectations for recording and lender consent. Leases must house detailed provisions, definitions, carve-outs, and a remedy ladder that matches the business deal. Use clauses, site plans, and prohibited-use lists should align. A recorded memorandum should give notice of key rights and either incorporate the exclusive by reference or selectively summarize it to maintain confidentiality.
Reciprocal easement agreements embed project-wide exclusives for multi-parcel and multi-phase projects. They define enforcement rights among parcel owners and anchors and create notice and cure mechanisms. SNDAs should align lender priorities by expressly recognizing exclusives and confirming that foreclosure will not extinguish them. This is where recorded documents and lender acknowledgments do as much work as the lease text itself.
Exclusives influence rent levels, occupancy, and cap rates. On one hand, a strong anchor exclusive can justify higher rents for the protected tenant and lift occupancy by avoiding direct cannibalization. On the other hand, broad or overlapping exclusives reduce leasing flexibility, delay backfilling, and can depress valuation if buyers price the extra friction.
Remedies drive the direct NOI exposure. Rent abatement reduces base rent during breach periods. Percentage rent adjustments cut the rate if sales fall. Liquidated damages apply a negotiated factor to the sales delta. Termination rights add downtime and re-leasing cost. To translate these outcomes into value, many investors use the income capitalization approach to quantify how NOI changes affect price at the underwriting cap rate.
Consider a 20,000 square foot specialty grocer paying 30 dollars per square foot base rent plus 1 percent of gross sales above a breakpoint. Sales run 25 million dollars annually before a competitor opens in violation, causing a 10 percent decline to 22.5 million dollars. A clause providing 50 percent base rent abatement during breach plus liquidated damages equal to 10 percent of the sales delta creates substantial exposure.
Base rent loss reaches 300,000 dollars annually from a 50 percent abatement on 600,000 dollars of total rent. Percentage rent may vanish if sales fall below the breakpoint. Liquidated damages add 250,000 dollars per year while uncured. Total NOI impact approaches 550,000 dollars per year before litigation costs, and a termination right could trigger downtime and tenant improvement re-spend. Real estate investors, including many real estate private equity sponsors, now model exclusive-risk scenarios as part of base and downside cases rather than treating them as remote.
A practical portfolio tip is to maintain an exclusivity heat map the way you track parking ratios and access drives. Overlay category-protected zones, carve-outs, and radii on a live site plan. Then model lease-up options that respect those contours. This simple visual helps you avoid overlapping rights that gridlock a center and can also support procompetitive justifications by showing why a narrow restriction is necessary to recoup specific build-out or allowance spend.
Tenant bankruptcy under Section 365 allows debtor-tenants to assume and assign leases despite anti-assignment clauses if they cure defaults and provide adequate assurance of future performance. Whether exclusives bind the assignee depends on whether the rights run with the land or are personal covenants. Buyers of leaseholds want clarity that exclusives survive assignment. Landlords want assurance that exclusives bind assignees and other tenants after assumption to preserve merchandising balance.
Landlord bankruptcy or foreclosure can wipe out unrecorded, in-lease exclusives. Recorded memoranda that capture the exclusive or REA provisions with lender subordination mitigate that risk. SNDAs should explicitly bind current and future mortgagees to recognize exclusives following a transfer.
Distressed workouts often include negotiated waivers or temporary suspensions of exclusives as part of multi-tenant relief after an anchor closure. Lender consent is typically required. Track these waivers meticulously for buyer diligence because temporary solutions tend to persist absent active follow-up and explicit sunset dates.
Exclusive dealing and territorial restrictions present competition risk when they foreclose rivals from a substantial share of a local market for a significant period. U.S. enforcement applies rule-of-reason analysis. For retail land-use restrictions, relevant geographic markets are usually local. Foreclosure is assessed relative to developable sites and available retail square footage, not just the number of occupied storefronts.
In the UK, land agreements have no blanket exemption from competition law. The CMA’s guidance highlights potential “by effect” violations when restrictions prevent competitors from opening in a catchment area without objective justification. Valid justifications may include investment recoupment or development viability, but the scope and duration must be no broader than necessary.
Practical mitigants include limiting duration and geography to the investment thesis, using narrow product definitions with incidental sales thresholds, avoiding off-site restrictions unless tied to tangible investment needs, and documenting procompetitive rationales such as build-out allowance recoupment and overall merchandising strategy.
Exclusives often fail in practice because of weak monitoring and slow enforcement. Property management needs to understand each exclusive and the prohibited-use list. Leasing teams should run conflict checks before any proposal goes out.
Several recurring mistakes undermine otherwise sound exclusives. A simple checklist can prevent costlier fixes later.
Consistent diligence and documentation hygiene separate paper protections from rights that survive refinancing and ownership changes.
When remedies hinge on sales impact, define baselines and data rights up front. Require point-of-sale reporting and audit rights, and specify seasonal normalization and store age adjustments. Clear measurement rules reduce litigation and produce faster cure outcomes.
Properly drafted and recorded exclusives are enforceable in most U.S. jurisdictions and can be decisive in tenant underwriting and anchor negotiations. They protect tenant investment and enhance merchandising value, but they also constrain leasing flexibility and can reduce proceeds at sale or refinancing if buyers price in remedy risk and friction costs.
Enforceability depends on clarity, reasonableness, and sound property-law mechanics. Recording and lender subordination matter as much as lease text. Remedies drive valuation risk, so underwrite quantitative exposure to abatement, damages, and termination and demand data rights that match the remedy structure. Finally, governance and monitoring determine results. Robust exclusive registries, conflict checks before LOIs, and strong estoppel discipline turn paper rights into durable protections that survive ownership changes.
P.S. – Check out our Premium Resources for more valuable content and tools to help you break into the industry.
