Are You a Retailer Negotiating a Lease Soon? Several Strategies for You to Consider.
Although the national retail leasing market generally has continued to improve in the last couple of years, maintaining a strong defensive strategy with your retail lease remains critical for your company’s bottom line. Below are a handful of basic descriptions for some tenant-favorable lease provisions that might be useful for retailers to consider in any upcoming lease negotiation:
Alternate Term Length: A tenant concerned about a long-term commitment for a new business or in a new market may desire a shorter initial term with more renewal terms. The tenant that once agreed to a ten-year initial term and 2 five-year renewals now may want an initial three-year term and 5 three-year renewals. With a structure like this, the tenant can get out of the lease if the business does not support the space, but also has reserved rights if the business does well.
Termination, Contraction, and Expansion Rights: If business is slow, reducing the space or exercising an early termination right (both often with a landlord fee) might be a cost-effective way to reduce or eliminate the lease obligation. Alternately, if business is better than expected, a right to expand into adjacent vacant space may be useful for a tenant who initially leased a smaller space due to economic uncertainty.
Unfettered Assignment, and Subleasing Rights: Having sublease or assignment provisions with minimal landlord conditions or approval rights is ideal in case a retailer wants to quickly unload an underperforming site or sell its assets or stock.
Broad Permitted Use Clause: The permitted use clause should be as broad as possible because it will maximize the audience of prospective subtenants and assignees that may be able to take the space.
Delayed Delivery of Space: It normally is critical for a tenant to have new premises delivered by a landlord on time so that the tenant can open for business as scheduled and begin to generate revenue as budgeted. To this end, consider providing in the lease that, in the event the premises are delivered late, then tenant receives one day of rent abatement for each day of delay, two days of rent abatement for each day over thirty days of delay (this credit is in addition to pushing back the rent commencement date), and a right to terminate if the delay is beyond 90 days.
Retail Co-Tenancy: For retail tenants, a co-tenancy provision allows a tenant to pay reduced rent when certain conditions are not met. Usually, the condition is that certain other stores, such as anchors, or a certain percentage of stores in the center, have to be open for business. The reasoning is that a tenant is spending a lot of money for a particular site and center, and if that center is not operating as it should due to the economy or other reasons, then tenant should receive a remedy.
Preempting Landlord Problems – Self-Help and Rent Abatement: Tenant protections from landlord financial difficulties are useful in a weak economy. Self-help provides a tenant the right to fulfill landlord’s lease obligations if the landlord does not do them and then deduct the cost from rent. A rent abatement provision provides for rent abatement if landlord fails to fulfill its lease obligations after a certain waiting period.
Lease provisions like these may provide flexibility and peace of mind to a retailer and will help keep the tenant’s focus on its most important goal: the success of its business.
