What This Clause Means
You're agreeing not to compete with your landlord's other businesses. Or you're agreeing not to compete with your own business at another location. Non-compete provisions in commercial leases restrict what you can do — sometimes in ways that go far beyond what either party understood at signing.
Non-Compete Provisions in Leases Restrict Your Business Activities
Non-compete clauses in commercial leases are different from employment non-competes but have similar practical effects: they limit what business activities you can conduct during the lease term, often within a defined geographic area. The most common version is a radius restriction on opening competing locations (addressed separately). But non-compete provisions can also: prohibit the tenant from operating a competing business anywhere in the landlord's portfolio; restrict the tenant from entering business lines that compete with the landlord's other tenants; or prevent the tenant from operating a similar business for a period after lease expiration.
Post-Lease Non-Competes Are Particularly Restrictive
Some commercial leases include post-lease non-compete provisions — restrictions that continue after the lease ends. A retail concept that signs a 5-year lease with a 2-year post-lease non-compete within a 10-mile radius cannot open a competing location in the same area for 7 total years. Post-lease non-competes in commercial leases are enforced differently by state courts: some courts apply employment-like reasonableness standards (geographic scope, duration, legitimate business interest); others enforce them under standard contract principles with fewer limitations. California strongly limits non-compete enforceability; most other states enforce reasonable post-lease non-competes.
Landlord Portfolio Non-Competes Restrict Expansion Systemically
Some institutional landlords — large shopping center REITs, major office building owners — include portfolio-wide non-compete provisions. The clause may prevent you from opening any new location in any property owned by the landlord, or even from leasing from the landlord's competitors for a period of time. For a retailer, this can be a significant expansion restriction if the landlord owns properties in key markets where you'd want to grow. Portfolio non-competes go beyond reasonable business purpose and are commonly eliminated or heavily limited during lease negotiations.
Reasonableness Standards Apply to Commercial Non-Competes in Most States
Even in commercial leases, courts apply some form of reasonableness standard to non-compete provisions. An overbroad non-compete — covering all of California for 10 years — is unlikely to be enforced even if it was contractually agreed to. But a more targeted non-compete — no competing restaurant concept within a 2-mile radius for 1 year post-lease — is likely enforceable in most states. The evaluation of a lease non-compete typically turns on: whether the geographic scope is proportionate to the market area served; whether the duration is limited to the lease term (or a short period post-expiration); and whether the business category restriction matches legitimate competitive concerns.
Non-Competes as Part of Lease Assignment Transactions
Non-compete provisions can complicate lease assignments and business sales. If a lease contains a non-compete preventing the tenant from operating a similar business for 2 years within 5 miles after lease termination, what happens when the tenant sells the business and the lease is assigned to the acquirer? Does the non-compete follow the original tenant (and prevent them from competing after the sale)? Or does it follow the lease (preventing the acquirer from opening a second location nearby)? Better-drafted leases address assignment of non-compete obligations specifically — releasing the original tenant from post-lease non-compete obligations upon a successful assignment of the lease to a creditworthy assignee.
How Non-Compete Provisions Are Commonly Negotiated
Three approaches appear in negotiated leases: First, eliminating the non-compete entirely — a simple radius restriction on competing locations (which addresses the landlord's core concern) replaces broader non-compete language. Second, rigorous scope limits: specific business category (the tenant's NAICS code, not a broad 'retail' category); specific geography (radius from the location, not the landlord's entire portfolio); specific duration (lease term only, no post-lease extension). Third, a negotiated carve-out for existing business operations — exempting any business the tenant is already operating before the lease signing date, since winding down existing operations can't reasonably be the price of a new lease.
Common Red Flags
- Post-lease non-compete provisions are commonly removed entirely in negotiation
- Where a non-compete remains, negotiated versions limit it to 6 months maximum duration
- Tenant-favorable versions minimize geographic scope to 1 mile or the same shopping center only
- Better-drafted clauses provide that the non-compete doesn't apply if the landlord terminates the lease
- State law matters here — many states limit or void lease-based non-competes
How This Clause Is Commonly Negotiated
Negotiated versions commonly eliminate post-lease non-compete provisions entirely; limit non-compete scope to the lease term and the specific location's trade area (not the landlord's portfolio); carve out all existing business operations; and specify that the non-compete is released upon assignment of the lease to a qualified assignee.
- Post-lease non-compete provisions are commonly removed entirely in negotiation
- Where a non-compete remains, negotiated versions limit it to 6 months maximum duration
- Tenant-favorable versions minimize geographic scope to 1 mile or the same shopping center only
- Better-drafted clauses provide that the non-compete doesn't apply if the landlord terminates the lease
- State law matters here — many states limit or void lease-based non-competes
Example Language: Bad vs. Better
Landlord-Friendly (Risky)
"For a period of two (2) years following the expiration or termination of this Lease, Tenant shall not operate a business of the same or similar type within five (5) miles of the Premises."
Tenant-Friendly (Better)
"No post-lease non-compete restrictions apply. Tenant retains full rights to operate any business at any location following expiration or termination of this Lease."
Frequently Asked Questions
- Can a commercial lease include a non-compete?
- Yes — landlords sometimes include post-lease non-compete provisions restricting where you can operate a similar business after vacating. These are separate from the radius restrictions that apply during the lease term.
- Are lease non-competes enforceable?
- It varies by state. Courts look at reasonableness: duration, geographic scope, and business justification. Unreasonably broad provisions may be voided or narrowed. However, even partial enforcement can be harmful to your business.
- How is a lease non-compete different from an employment non-compete?
- Employment non-competes restrict workers from joining competitors. Lease non-competes restrict businesses from operating in certain areas post-lease. Some states that restrict employment non-competes still enforce property-based restrictions.
- What counts as a 'similar' business under a lease non-compete?
- The definition of similar business is crucial. Narrow, specific definitions are the common negotiated position. A 'similar business' clause tied to your exact current concept is much less restrictive than one covering any business in your industry.
- Can a non-compete prevent me from opening a new location nearby?
- If it's broadly drafted and enforceable in your state, yes. This is why post-lease non-competes are so dangerous — they restrict your ability to serve your existing customer base and prevent you from opening in the most logical expansion locations.