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Out of Bounds: Radius Restrictions in Shopping Center Leases

By Joseph P. L. Snyder and Catherine Morgen

A common restrictive covenant in shopping center leases is the so-called “radius restriction,” a lease provision that prohibits a tenant from opening a competing establishment within a proscribed distance from the present location. Typically, a radius restriction goes hand in hand with a percentage rent provision, which allows the landlord to participate in the tenant's gross sales after a certain threshold or “break point” is achieved.

Landlords argue that the radius restriction is necessary to prevent a shopping center tenant from operating from a nearby location to the detriment of the landlord and its center. The presumption by landlords is that a competing establishment within a certain distance from their shopping center would divert customers away from the center and result in a dilution of percentage rent. On the other hand, tenants argue that a radius restriction does not protect either the landlord's competitive position or percentage rents, but is anticompetitive and prevents them from acting aggressively in a quickly-expanding market (which, in turn, hinders their ability to compete vigorously in the marketplace).

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