Leasing 101: Radius Restrictions
A radius restriction is a restriction put in place by a landlord when it charges percentage rent. The radius restriction prevents a tenant from opening another store within a certain radius of the leased premises.
The purpose is to prevent tenant from opening other nearby stores that would take away sales from the leased store, causing a decrease in percentage rent.
Landlord’s potential remedies in the event tenant does open a store within the radius include adding the sales figures from the other store or stores to the sales figure for the leased premises.
Radius Distance Can Depend on Geography
The radius distance under the restriction can vary depending on the leverage of the tenant and the geographic region in which the store operates.
A strong national tenant may be able to negotiate a short radius or, in some cases, the deletion of the restriction entirely.
Depending on where the store is located, the radius could be a quarter mile or five miles. In a high density urban setting, a shorter radius restriction is more appropriate.
In a less dense suburban or small city setting, a second store even a few miles away may draw potential customers and associated sales.
To determine if a radius restriction is acceptable, a prospective tenant needs to think through a few things:
1. What is the growth plan for the business?
If the intent is to expand the store presence in the particular geographic area, a radius restriction may be problematic. The growth plan for five years from now may be hard to gauge with any accuracy.
However, the tenant should give this some thought, and if there is a chance of potential store growth, the radius should be shortened as much as possible.
2. What's in the geographic area?
As part of tenant’s due diligence when negotiating the lease, the tenant should look at the map for the area around the store. This may be a statement of the obvious, but it is worth the time to look at the map to get a sense of the intersections and retail areas within the radius zone.
Is there potential for new retail development? Is the area poised for rapid growth or change? These types of factors should be considered.
3. Is the radius distance as the crow flies, or is it by street distance?
This will help provide an understanding of the potential area within the radius restriction.
4. Will this affect related businesses?
Some radius restriction provisions will try to apply the restriction not only to the tenant but also very broadly to any entity that controls, is controlled by, or is under common control with tenant, as well as any partner, officer, director or stockholder of tenant that may have a financial interest in tenant.
The prospective tenant needs to consider this, particularly if tenant is owned by a parent company that owns other companies. A private equity company that invests in a variety of companies, including tenant, may have a potential problem with such a broad provision.
Thinking through these issues will help prevent any unforeseen problems during the lease term.