What This Clause Means
Your landlord wants to make sure you don't open a competing location nearby. That sounds reasonable in theory. But a radius restriction clause can prevent you from expanding your business for the entire lease term — limiting your growth in ways you won't anticipate when you're focused on your first location.
Radius Restrictions Prevent You From Opening Competing Locations Nearby
A radius restriction clause prohibits you from operating a business in the same category within a specified geographic radius of your leased location. Common in percentage rent leases, where a competing location would reduce the sales (and therefore percentage rent) attributed to your leased premises. Typical radius restrictions run 1–5 miles for neighborhood retail, 3–10 miles for destination retail, and up to 10–25 miles for anchor tenants or locations with large trade areas. If you violate the radius restriction, the landlord can often attribute the competing location's sales to your leased premises for percentage rent calculation — adding your other location's revenue to your base, whether or not it's reasonable.
Radius Restrictions Can Prevent Business Growth
A restaurant group that signs a lease with a 5-mile radius restriction for a new concept might later want to open a second location in the same city. If the city's core is within 5 miles of their first location — which it often is in dense urban markets — the radius restriction blocks them. The landlord's argument: sales diverted to the new location reduce percentage rent from the original location, harming the landlord economically. The tenant's argument: the new location serves a different neighborhood, would have different customers, and shouldn't count against the original location. These disputes are common and expensive to resolve.
Radius Restrictions and Percentage Rent Are Inseparable
Radius restrictions only make economic sense in percentage rent leases. The purpose of the restriction is to prevent diversion of sales from the leased premises to a nearby competing location, thereby reducing the percentage rent the landlord would otherwise collect. If your lease doesn't have a percentage rent clause — which is true of most net leases without a revenue component — a landlord's insistence on a radius restriction is much harder to justify. If your lease is structured as base rent only with no percentage component, you should be able to negotiate out of any radius restriction entirely, as there's no economic basis for it.
How to Negotiate Radius Restrictions
Four strategies: First, reduce the radius from whatever the landlord proposes — 3 miles instead of 5, 1 mile instead of 3. Second, add a 'sales diversion' test rather than an absolute restriction — the restriction only applies if you can demonstrate that the new location is actually diverting sales from the existing lease premises, not just because it's within the radius. Third, carve out existing locations owned or operated by your business before the lease signing date — your existing restaurants or stores shouldn't be suddenly prohibited by a new lease. Fourth, negotiate a sunset on the restriction — after year 3 of the lease, the radius restriction terminates, having served its purpose during the establishment period.
The Sales Attribution Remedy Is Worse Than Termination
The most landlord-friendly remedy for radius restriction violation: the landlord gets to add the competing location's gross sales to your leased premises' sales for percentage rent calculation. If your new location generates $1.2 million in sales and your original location generates $800,000, the landlord might calculate percentage rent on $2 million — $1 million above your natural breakpoint — generating $50,000 in percentage rent rather than nothing. This remedy is worse than termination in some cases because it's ongoing — every month your competing location is open, your percentage rent at the original location grows. Push for liquidated damages rather than sales attribution as the exclusive remedy for violation.
Franchisors and Radius Restrictions Create Unique Problems
For franchisees, radius restrictions in a lease can conflict with the franchisor's expansion strategy. A franchise system that wants to add a location within your radius — even if operated by a different franchisee — may technically violate your lease's radius restriction and expose you to landlord claims. If you're a franchisee, review your lease's radius restriction against your franchise agreement's territory provisions. Ideally, your lease radius restriction would include an exception for other franchisees of the same system operating independently — you shouldn't be penalized for your franchisor's expansion decisions that you don't control.
What to Watch Out For
- Reduce the radius to the smallest possible area (1–2 miles vs 5–10)
- Exempt existing locations from the restriction
- Limit the restriction to the initial lease term, not renewals
- Exclude franchise or licensed locations from the restriction
- Negotiate an exception for locations in different retail formats (e.g., kiosk vs full store)
How to Negotiate This Clause
Reduce the radius to the minimum commercially reasonable distance; add a 'diversion test' so only actually diverted sales trigger the restriction; carve out all existing business locations owned by you before lease signing; negotiate a termination of the restriction after year 3; and specify liquidated damages as the exclusive remedy rather than sales attribution.
- Reduce the radius to the smallest possible area (1–2 miles vs 5–10)
- Exempt existing locations from the restriction
- Limit the restriction to the initial lease term, not renewals
- Exclude franchise or licensed locations from the restriction
- Negotiate an exception for locations in different retail formats (e.g., kiosk vs full store)
Example Language: Bad vs. Better
Landlord-Friendly (Risky)
"Tenant shall not, directly or indirectly, operate a business substantially similar to the Permitted Use within a five (5) mile radius of the Premises without Landlord's prior written consent."
Tenant-Friendly (Better)
"Radius restrictions, if any, shall be limited to a two (2) mile radius and shall apply only to locations opened during the initial Lease Term. No restriction shall apply to franchise locations, existing Tenant locations, or locations opened after Lease expiration."
Frequently Asked Questions
- What is a radius restriction in a commercial lease?
- A radius restriction prohibits the tenant from operating a similar business within a specified distance of the leased location. It protects the landlord's investment (and percentage rent) by preventing tenants from self-competing nearby.
- Are radius restrictions enforceable?
- Yes, if they're reasonable in scope and tied to legitimate business interests. Very broad restrictions (10+ miles in a dense city) may be challenged as unenforceable restraints on trade. Courts generally uphold reasonable radius restrictions.
- How does radius restriction interact with percentage rent?
- They're related. If you have a percentage rent clause, opening a nearby location diverts sales that would have generated percentage rent. Landlords use radius restrictions to protect that revenue stream.
- Can I negotiate an exception for existing locations?
- Always — and you should. Any locations you operate before signing the lease should be explicitly carved out from the radius restriction. Failing to do this can put existing locations in violation.
- What happens if I violate a radius restriction?
- Violation can be treated as a lease default, potentially leading to eviction. The landlord may also seek an injunction to force closure of the nearby location. Radius restriction violations are serious — always get legal advice before opening a potentially conflicting location.