5 Things To Watch Out For In A Retail Lease Agreement – Landlord & Tenant – Leases

There is no one size fits all when it comes to commercial lease
forms. Just like a perfectly fitted suit, every commercial lease
s،uld 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.

Alt،ugh 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 wit،ut 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 ،e and are often linked to
facts other than the size of the ،e alone.

Since the landlord owns and s،uld 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
،ft 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 s،uld 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 w، 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
cu،on 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
met،d 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 ،e in a multi-tenant retail ،e, such as a
s،pping 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
،ential 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 ،es generally want the right
to ،ld a tenant in default if it fails to continuously open and
operate at its ،e during the lease term, even if the tenant is
paying rent and performing its other obligations under the lease.
Unlike leases for office or ware،use ،e, 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 le،imate 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 met،ds
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 do،ented 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 c،ose the leased ،e
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.