By: Craig T. Watrous:
Retail leasing presents a unique variety of business issues for tenants to consider. Due to the nature of a store’s operations, a tenant’s use of retail space can require unique tenant build-outs, special use considerations, ADA compliance, and the reliance on other neighboring tenants to generate business. Because of the up-front costs, retail leases often last between 3 to 7 years, and even up to 10 years. The result is a game of risk and cost shifting between the landlord and the tenant. For tenants, the terms of their lease can affect the profit margins, growth potential, and overall success of their storefront and possibly even their brand. For these reasons, retail leases should be carefully and thoughtfully negotiated with the landlord. This article attempts to summarize some of the key business issues tenants should review when entering into and negotiating their retail leases.
The condition of the premises (i.e. the space) prior to commencement of the lease will largely determine the amount of tenant build-out (construction) required to get the space ready for the store. In addition to the tenant build-out, the tenant and landlord will need to determine what representations and warranties are going to be made regarding the space’s condition.
Use of the Space
Has your use of the space been accurately defined in the lease? Are there any specific limitations on your use? Do you want to negotiate an exclusivity provision into the lease? For example, do you want to make sure your business is the only one of its kind in the center/shopping area/strip mall? Double check the hours of operation that the landlord is requiring and make sure these align with your intended use. What are the hours of operation of the neighboring businesses?
What are the common areas associated with your space? Meaning, what other areas in the center/strip mall/shopping mall do you have the right to use and share with the other tenants? This often includes restrooms, parking, hallways, entrances, security, etc.
Term, Commencement Date, Rent Rate and Renewal Options
When the term of the lease actually starts and when the obligation to start paying rent begins should be tied in with the construction and completion of the tenant’s improvements. Often it depends on whether or not the landlord or the tenant is responsible for finishing the tenant’s improvements, as that party has more direct control over when the premises are actually available for use. The parties may determine a fixed date, or it may start on the day the tenant commences its retail operations in the space. There might be penalties for delays. If the landlord is constructing the tenant improvements and significant delays occur, does the tenant have the right to terminate the lease or to seek damages?
Retail leases often have terms between 3 to 7 years, and in some cases up to 10 years. For landlords, because significant cost may be put into the space prior to the lease which is often unique to the tenant, a longer term helps to recapture some of the upfront costs. For tenants, the main concerns are often its location and a space that suits the store in the present and near future. If that location works, the tenant will want a longer term and lease extensions to lock it in. When things are going well, both parties will want the lease to continue, but considerations should be put in place regarding not only the initial term but also renewals and extensions.
What is the minimum rent? Is this a percentage rent? Meaning, is the landlord charging a base rent and then taking a portion of store’s actual sales/revenue? If so, be careful to read through how revenues, sales, profits, and other similar terms are calculated.
The parking is often overlooked in retail leases but it can be vital to the tenant’s business success. If customers can’t find parking, they are likely to go somewhere else. However, it’s not just the parking for the store’s customers that needs to be considered but also parking for the tenant’s employees.
Does the landlord have the ability to relocate the store to another location in the center/strip mall? Try to avoid this if at all possible. If it’s unavoidable, then who has to pay for the move? Will the landlord cover related marketing costs (like changes to websites, stationary, directories, business cards, etc.)? Will the landlord provide the same upgrades to the new space? How much notice does the landlord have to give prior to the relocation?
Find out now what insurance policies and amounts the landlord is requiring. Speak with your insurance agent to figure out what these costs are likely to look like.
These are just a few of the business items a tenant should consider when entering into a retail lease. Keep in mind there are other equally important legal terms that should be negotiated, like casualty provisions, eminent domain, termination rights and remedies, default provisions, and the always overlooked “boilerplate”, to name a few. Ambiguities in leases lead to disputes, and disputes can lead to lawsuits. A standard, off-the-shelf form likely won’t address the particular needs and concerns of the retail owner. It’s worthwhile for the retail owner to spend extra time upfront negotiating lease terms and putting the details in writing. We hope this article has been helpful.
(Mallon Lonnquist Morris & Watrous, PLLC, is a business, employment, real estate, and litigation law firm. Craig T. Watrous is a Colorado real estate
attorney and partner at MLMW, based in Denver, Colorado. Craig regularly represents clients on both sides of retail leases both in contracting and disputes. Craig can be reached at firstname.lastname@example.org and (303) 722-2165.)