There is no one size fits all when it comes to commercial lease forms. Just like a perfectly fitted suit, every commercial lease should be tailored to fit the particular parties, properties, uses and issues involved. Retail leases are no exception to this rule. In addition to the typical lease issues that must be addressed and often customized, there are more particular issues and concerns that routinely (and in some cases only) arise in connection with a retail leasing arrangement. If not properly addressed, these issues and concerns can lead to disagreements and conflicts down the road.
Although certainly not intended as an exclusive list, below are five topics that may need to be considered and addressed in a retail lease arrangement.
Zoning and Permitting
Unlike office and manufacturing uses, retail uses under zoning codes are often very specific. The code likely only permits specific retail uses without a permit, requires a special use permit with respect to other retail uses or prohibits certain retail uses completely. Likewise, parking requirements generally vary depending on the use of the space and are often linked to facts other than the size of the space alone.
Since the landlord owns and should be familiar with the zoning of the property and will be accepting rent in connection with the right to use the property for the permitted use, the landlord has some responsibility for ensuring that the premises can be used for the intended use. Landlords generally want to avoid making representations or warranties with respect to use and may try to shift the burden to the tenant to ensure its use complies with laws. Ultimately, neither party will be able to fulfill its obligations under the lease if the permitted use is prohibited by law. As such, both parties to the lease should invest time in this issue and perform diligence as necessary to confirm the permitted use under the lease is also a permitted legal use.
Percentage Rent
Percentage rent provisions generally require tenants to pay rent, usually in addition to base rent, if gross sales at the leased premises exceed a certain amount, also known as the “breakpoint.” As such, percentage rent provisions almost exclusively appear in retail leases. A landlord who goes to the effort to provide amenities or out-of-the-ordinary benefits or services to attract foot traffic to a retail location may want the ability to share in the tenant’s profits, particularly if the tenant’s retail business is successful.
A percentage rent provision can also be a vehicle for a tenant to negotiate a lower base rent on the front end to allow some cushion to build its business or account for variable expenses. Ultimately a percentage rent provision also incentivizes the landlord to maintain the property and to ensure the property is attractive and inviting to the public. Assuming a percentage rent provision is on the table, the parties will need to agree on the method for determining the breakpoint, the landlord’s percentage share of gross sales, and the timing for payments and true-ups, if applicable, before a percentage rent provision can be finalized.
Exclusive Use Rights
Exclusive use rights usually need to be addressed in connection with leases involving a multi-tenant retail property. A tenant considering space in a multi-tenant retail space, such as a shopping center, will want to ensure that it will not compete with or lose business to other tenants within the same center.
While understandable, landlords generally want any exclusive use right to be narrow so that the landlord has the largest pool of potential tenants possible to keep the property fully occupied. In addition to negotiating the exclusive use right itself, it is important for the parties to review any covenants and restrictions of record and for the landlord to keep track of and disclose any existing exclusive uses benefiting other tenants since there could be ramifications to both parties for violating an existing exclusive use right.
Continuous Operation Obligations
Landlords of multi-tenant retail spaces generally want the right to hold a tenant in default if it fails to continuously open and operate at its space during the lease term, even if the tenant is paying rent and performing its other obligations under the lease. Unlike leases for office or warehouse space, retail tenants often rely, at least in part, on a fully occupied, attractive and operating center to attract foot traffic and retain customers. At the same time, tenants may have legitimate concerns about a provision that forces the tenant to continuously spend money to operate a failing retail business. Early termination rights, go-dark and go-dim rights, and co-tenancy clauses are all methods the parties may want to consider in connection with mitigating a continuous operations clause. A number of factors need to be considered by the parties and documented in the lease to fully address these types of provisions, but ultimately, there are creative ways to address concerns and risk that can be created by a continuous operations clause.
Visibility and Accessibility
Landlords often retain broad rights to alter, modify and develop areas outside of the leased premises, including any common areas. At the same time, retail tenants often choose the leased space based on its visibility and accessibility to the public generally. The tenant will likely want to mitigate this risk by providing that any alternation, modification or development of such areas by the landlord will not interfere with visibility or accessibility to the tenant’s storefront and signage. Depending on the landlord’s future plans or possibilities for the site, the landlord may want to clarify the tenant’s expectations by designating and agreeing to specific “no build” or “no change” areas in the lease. At the very least, the parties may need to address rights and restrictions surrounding temporary obstructions or interference that may be necessary for repairs, replacements and alterations to comply with laws but which will have an impact on the tenant’s business, even if only temporarily.
The issues discussed above are just a sample of the various issues that will arise in connection with a retail lease arrangement. However, addressing some of the more common concerns and nuances of the retail lease arrangement will help facilitate a clear and harmonious arrangement between the parties as they move forward.