What is an exclusivity clause in a Scottish commercial lease?

Exclusivity clauses are an established feature of Scottish commercial leasing. For tenants, they are an important commercial consideration, offering reassurance around competition within a specified area. For landlords, exclusivity can form part of a successful letting, although its implications extend beyond the specific lease.

Exclusivity clauses are most common for retail and leisure use, but can apply to offices. They generally restrict a landlord's ability to grant leases within a defined area to occupiers carrying on a competing use. The exclusivity terms vary: they may be narrowly drafted to prevent only a very specific competing use or named competitor; or they can be broader, restricting competition by reference to categories of trade or products.

From the landlord’s point of view the detail matters, particularly the scope of the prohibited use; the area affected; and period of the restriction.

What are the landlord’s considerations with tenant exclusivity?

Exclusivity should neither be granted lightly, nor be viewed as a default position. Even where it is commercially justified, landlords should understand how it will operate in practice and how it may affect the property over time.

Leasing Flexibility 

Exclusivity can influence future leasing decisions. Clauses that are widely drafted or apply across a large area may limit a landlord’s ability to respond to market demand, adjust tenant mix or re‑gear space as a scheme evolves. This is particularly relevant where:

• the protected use is broadly defined; or
• the restriction applies across an entire estate rather than specific units; or
• the exclusivity continues for the full lease term, including any renewals; or
• the exclusivity is not personal to a tenant, but runs with the lease and remains after an assignation.

Exclusivity is best (a) considered alongside the landlord’s wider asset strategy; and (b) applied narrowly to minimise the prohibited uses or parties; the time it applies for; and the affected area.

From a practical perspective, the landlord should consider any material impact on valuation at rent review or the overall impact on the value of the landlord’s property (e.g. the whole retail park).

Personal to the landlord?

In Scotland, not all lease obligations automatically bind successor landlords. The key is whether an obligation is normally found in that class of lease and intrinsic to the landlord and tenant relationship.

The courts have consistently said that this is about substance rather than drafting. Even where a clause appears in the lease and is expressed to bind successors, it may still be treated as a personal or extrinsic obligation binding only the original parties. A purchaser and new landlord of the property would not have to observe the exclusivity. See our earlier blog for further detail.

Personal to the tenant?

The landlord should consider how long the exclusivity should apply. If they are happy with the exclusivity running for the entire period of the lease, it will likely be included in the lease. If it is to be personal to the tenant then it is usually recorded in a personal and confidential side letter.

Keeping an exclusivity arrangement confidential to the parties does not remove any competition law risk if the agreement is anti-competitive.

Competition law considerations

Landlords are increasingly aware of legislation prohibiting anti-competitive agreements of which they may fall foul when granting exclusivities. Whether or not the use exclusivity breaches competition law depends on the facts of each circumstance and the market affected.

Competition legislation is somewhat complex. To assess if an exclusivity would breach those provisions, one needs to look at the other available options for customers in the same market. What constitutes the same market for that purpose depends on the circumstances including the categories of trade or product affected.

Competition law considers market scope from two perspectives: product market and geographic market. It is often necessary to consider customer behaviour.

• Similar products may fall within different product markets (a high performance sports car is not a substitute for an affordable family car) and different products may fall within the same product market (a box of matches may be a substitute for a lighter).
• When defining the geographic market it is necessary to consider how far buyers will travel for products in the relevant market that is being constrained by the exclusivity clause. A person in a city centre may only be willing to travel a city block or two for a coffee but would be willing to travel to another city for a designer handbag. A person in a more rural setting may be more likely to drive for a coffee and so willing to travel several miles to a different town for one. For some products the relevant market may be as narrow as a single shopping parade.

To ensure no breach of such legislation, we increasingly see the clause itself be caveated to say it is only enforceable where it does not breach legislation (though any clause that is in breach is unenforceable in any event). It is however still important for the parties to an exclusivity restriction in a lease to ensure that the scope is proportionate to the product and geographic market or markets affected, and is kept as narrow as it can be. Parties may still find themselves in breach of competition law if they act according to an exclusivity clause that breaches competition law even though neither would be able to enforce it.

Monitoring and enforcement

Exclusivity clauses are rarely ‘set and forget’. They create ongoing management obligations for the landlord including:

• reviewing proposed uses for new tenants and change of use consents;
• reviewing proposed new tenants and assignation and/or subletting requests;
• responding to alleged breaches; and
• managing disputes as occupiers’ uses evolve over time.

Challenges are more likely to arise where exclusivity is drafted in complex or ambiguous terms. For example, turnover‑based exclusivity can be complicated and is relatively uncommon. It is typically seen only in retail‑led schemes where some overlap of use is unavoidable, and is often unattractive to landlords due to monitoring, confidentiality and enforcement difficulties.

What does a landlord need to consider before agreeing to exclusivity?

Before agreeing to exclusivity, landlords should consider:

• their long‑term objectives
• any negative impact on future lettings
• any negative impact on valuation
• if it can be easily monitored and managed going forward
• if it could breach competition law.

What are the key takeaways on exclusivity?

Exclusivity clauses are not uncommon in Scottish commercial leasing and can play an important role in securing tenants. The challenge for landlords is striking the right balance between accommodating tenant requirements; ensuring compliance with competition legislation; protecting the property’s value; and retaining the flexibility to manage the asset over time.