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Summary

Experience counts when negotiating any commercial lease.  Hire a seasoned pro if you are not one.

 

Mall Leasing Snags, Pitfalls & Horror Stories
GENERAL INFORMATION ABOUT MALL STORE OPERATIONS

Malls love to play games with their tenants.   After you ask other tenants how much they pay per square foot, ask these questions:

  • Can I buy power directly from the power company?
  • Can I buy water directly from the water company?
  • Can I buy telephone lines directly from the telephone company?

Most malls "resell" utilities (power, gas, water, telephone, internet) to their tenants at HUGE markups.

The next thing malls like to do is charge you for "extras".  Usually, these extras are represented in the form of a lease/contract:

  • If the rent is accidentally late by a day, is that justification to change one of the terms in the lease?
  • If your power usage is above ___ then does a distribution fee apply?
  • If your gas usage is above ___ then ____________
  • If you serve more than ____ people then you must share in the maintenance of parking area X to defray shared/common area costs.
  • If an exterior facing window/door/whatever breaks, you are responsible for its repair.
  • "Tenant agrees to share costs of common insurance coverage(s)..."

Always get a PROXIMITY CLAUSE.   This means the mall is not allowed to place another restaurant right next door to you.

Finally, malls want you to be open when they are... even if you lose money on those days.    Before you sign the lease, state the hours you intend to be open.  Include clauses that allow you to close for bad weather or health problems.

A well written TERMINATION CLAUSE will specify a fixed dollar amount due if the tenant (you) wishes to close the store for any reason.   Consider getting a special circumstances clause that reads, "If tenant becomes seriously ill and can no longer operate the leased space, the (fixed dollar amount from above) will be reduced by a factor of 50 percent."    The lease should also have a way for you to sublease or transfer the store to another operator.

Oh yeah, one last point:   BUILD OUT MONEY is for people who don't read the fine print.   If a mall offers you build out money, it is for one of these reasons:

  1. You are overpaying the rent (and they've amortized the value of the build out money into your lease)
  2. You are required to use CERTAIN MATERIALS or CERTAIN CONTRACTORS exclusively.   The mall may own or have an interest in the contractors & suppliers.
  3. You are a highly desirable tenant and they do not want you to leave.   This could mean you are their ONLY desirable tenant and that the mall is not generating enough traffic.  In this case, you should be very aggressive with your terms.   The mall may even lose other tenants if they can't land a tenant like you!

 

Commercial Lease Gotcha's

Identification of the Parties

A tenant must confirm that the party with whom he is entering into a lease is the party who has the right to lease the real estate. First, title information should be reviewed to confirm the ownership of the property and the exact name of the title holder of record. Second, depending on the type of entity holding title, a tenant may want to review the organizational documents of the landlord and even require a resolution approving the lease and giving authority to the signatory to sign the lease on behalf of the landlord.

Commencement Date, Possession Date, Rent Commencement Date, and Termination Date

A tenant should be concerned with delaying rent payments until he is obtaining revenue from the leased premises, and may wish to take possession for renovation and stocking earlier than the rental commencement date.

Description of Leased Premises

Review the description of the leased premises to make certain that the description is specific and there will not be a question later as to the area leased. Consider whether a survey or a drawing of the leased premises is necessary to clarify what is leased.

Permitted Use of Lease Premises

Generally, common law provides that a leased premises can be used for any lawful purpose unless limited by the lease. Some cases have required that the use not be substantially different from the usual use of the premises. Therefore, it may benefit a tenant to have no mention of the permitted use.

Governmental Approvals

A tenant should consider governmental approvals which are necessary before he can begin operations. The commencement of the lease should be made contingent upon obtaining the necessary governmental approvals. Include a provision that requires the landlord to cooperate in obtaining approvals.

Compliance with Law

A tenant should obtain a representation from the landlord that the property which includes the leased premises currently complies with existing laws and regulations.

Rent

It is preferable to include rent in a specific dollar amount.   If it must increase over time, those increases should be a fixed percentage.   Watch out for common area costs and other fees that are payable once a year or at lease termination.

 

Tenant Improvements/Ownership of Additions or Fixtures

A tenant may request an allowance to perform renovations necessary for the tenant's business. A landlord may require that a portion of that allowance be repaid if tenant moves out before a particular time. Usually, the plans for tenant improvements must be approved by the landlord. If they exist at the time of signing the lease, approval of the plans can be included in the terms of the lease.

Rather than argue at the termination of the lease whether additions made by a tenant are fixtures, the lease should clearly spell out the right of tenant to remove the items it has added to the premises. Be as specific as possible with this language. Most leases use the phrase "trade fixtures", but use of such phrase could present an ambiguity at the time of termination. The more costly the additions, the more important the tenant's right to remove them at the termination of the lease.

Repairs, Maintenance and Common Area Expenses

Even in a lease which is considered "triple net", often a landlord will agree to make repairs to the structure, such as roof repairs. (FYI:  Triple Net means that the tenant pays more money)  Review repair provisions to determine what should fairly be allocated to the tenant and what should be paid by the landlord. Should a tenant have to pay to paint the exterior of a building? Should a tenant have to repair loading dock doors?

Repairs should be carefully distinguished from replacement. For instance, a tenant may be responsible for repairs to the heating and cooling system, but it should be clear that the tenant is not responsible for replacing the unit if it is not repairable.

Signs

A lease silent as to sign requirements may allow a tenant to raise any signs he desires, but numerous other provisions in a landlord's standard lease which may limit rights to improvements including signs, could limit a tenant's rights.  Also, in most shopping centers there is a central sign or signs on which a tenant may wish to be included. Consider having dimensions and art work, if required, approved by the landlord at the time the lease is negotiated.

Parking Requirements and Critical Area

Having ample parking can be critical to the success of a retail business. It is also important to other types of uses. A tenant may want to include a requirement in the lease that a certain number of parking spaces will be maintained for its use. A tenant may want to designate which parking spaces will be maintained.

Seasonal Sales / Events

The tenant may wish to have an outdoors/seasonal area.   This space will often be "comped" by the landlord provided that its use does not interfere with other tenants.  Get it in writing.

 

Assignment and Subletting

In some states, if a lease is silent about transfers of the tenant's interest, either assignment or subletting, both are permitted without the landlord's consent or even notice to the landlord. Some leases address assignment but not subletting. There may be a distinction between the two concepts, and a restriction as to one is not necessarily a restriction as to the other.

Review the provision to determine whether the tenant is still liable upon assignment. If the lease is silent as to liability upon assignment, the common law rule is that a tenant remains secondarily liable. A release from liability can be negotiated. A tenant may be able to include certain net worth thresholds for a transferee which would allow the tenant's release.

Subordination, Non-Disturbance and Attornment

Attornment provides that the tenant recognize the lender as the landlord under the lease. A tenant should insist on a non-disturbance agreement in exchange for subordinating the lease and attorning to the mortgagee. If a senior mortgage already exists on the property, the tenant may wish to request a non-disturbance agreement from the mortgagee. The non-disturbance provision should state that the lease will remain in effect and the mortgagee will recognize the tenant as a lessee so long as the tenant is not in default under the lease.

Insurance

It is customary for a tenant to carry insurance on the tenant's personal property.  Never open a restaurant without General Liability coverage.

 

Destruction of Premises

A destruction clause should include a requirement that the landlord rebuild the premises. If there is a mortgage on the property, a tenant will want to make certain that the landlord's insurance proceeds can be used for rebuilding rather than being automatically applied to the payment of the mortgage. If insurance proceeds for destruction over a certain percentage of the premises is applied to the mortgage, then the lease should terminate at the same level of destruction. Make certain that rent is abated even in the case of partial destruction. Full rent should be abated for the period of repairs in which a tenant cannot operate. Then, rent should be abated on a pro rata basis so that the square footage rental remains the same.

 

Condemnation

Condemnation provisions are often overlooked as doomsday scenarios which are not important. Remember, that when imminent domain laws are applied, the first step is for the parcels to be condemned.   Be sure to protect yourself and your build out investment by speaking with an attorney about this.

 

Exclusive Agreement and Proximity to Leased Premises of Tenant's Other Locations

An exclusive agreement provides that a landlord will not allow another tenant to sell a particular product or offer a particular service within an agreed upon area, such as a shopping center. A tenant should assess both the exclusive rights she is requesting and the exclusive rights that the landlord has already granted.

 

Environmental Provisions

Liability for environmental problems with leased property can apply to both landlords and tenants. It is important to have clear provisions in a lease dividing such liability. A tenant should insist on a representation as to the environmental status of the property at the time of leasing.

 

Default Provisions and Remedies

A tenant should negotiate for notice of and a right to cure any defaults.

 

Termination Rights

Evaluate instances where a landlord might agree to allow a tenant to terminate the lease. If a tenant determines that the site no longer meets her needs, a tenant may be willing to pay a few months rent for the right to terminate. A shopping center tenant may want to terminate a lease if another tenant or tenants vacate their property. A landlord, if willing to allow such a right, may require a payment to allow such an early termination.

Landlord's Lien

A landlord has a lien on all personal property of a tenant to secure the payment of rent. Waiver of this statutory lien can be imperative if the tenant wants to obtain financing which is secured by inventory. It is far easier to negotiate waiver of the landlord's lien at the time of entering into the lease than after the fact.

Recordation of a Memorandum of Lease

Recording a memorandum of lease should protect a tenant from any possible sale or lease of the property and a subsequent claim that the purchaser or lessee has rights prior to the tenant. Shopping center and mall leases often are not recorded, but it should be considered at the time of negotiating the lease.

 

Trade Name/Right to Change Name

To maintain maximum flexibility regarding the leased space, avoid any requirement of landlord that the tenant maintain the same business name as she was using at the time of entering into the lease.

Commercial Lease Terms
Base Rent: Rent paid based on a set amount. It is often calculated by the square footage of the leased premises.

Common Area Maintenance (CAM): The maintenance and repair of the areas of the shopping center or building used in common by more than one tenant. Tenants are generally required to pay their share of common area maintenance, which consists of things like security, parking lot repairs, snow removal, and lighting.

Continuous Operation Clause: A clause requiring that the tenant not cease operations for an extended period of time, usually more than 60 to 90 days. This clause will prohibit the tenant from ceasing operations but continuing to pay base rent.

Cotenancy Agreement: A tenant requirement that his lease terminates if another tenant vacates his premises or terminates his lease.

Critical Area (Redlined Area): An area specified by a tenant as critical to its operations. It usually includes all of the heated leased area, a certain portion of parking and sometimes a view corridor to a major street. The critical area is typically identified by outlining it on a site plan of the leased premises. It is sometimes called the redlined area.

Exclusive Agreement: A requirement by a tenant that no other tenants within a particular area, usually a shopping center or mall, sell certain goods or services being sold by the tenant requesting the exclusive. A corollary to the tenant exclusive agreement is a requirement by a landlord that a tenant not have another place of business within a specified radius of the leased premises.

Going Dark: Ceasing operations, while still paying base rent.

Gross Lease: A lease whereby a tenant pays only rent, and the landlord pays all expenses of operating the leased premises out of the rental amount. Sometimes landlords include rights to charge for expenses over a particular dollar limit. That dollar limit is referred to as a stop.

Gross Leaseable Area or Rentable Square Footage: The total area leased, including utility rooms, bathrooms, columns. Not the usable area. Most often the Gross Leaseable Area us used to calculate rent and expense charges. Square footage can be calculated in different ways, and the parties should agree on either the square footage or the method for calculating square footage before the lease is signed.

Net Lease: A lease where one or more items of operating expenses are passed through to the tenant by the landlord.

Percentage Rent: Rent based on a gross sales breakpoint or other performance measure.

Promotional Fund: A fund which shopping center or mall tenants often must contribute to for the purpose of advertising the shopping center. The contribution is usually based on square footage of leased space.

Recapture Clause: A clause allowing a landlord to terminate a tenant's lease in the event of a request for approval of an assignment or a sublease. The idea is for the landlord to maintain the exclusive right to all profits derived off of the leased premises. The recapture clause allows a landlord to determine whether rent under an assignment or sublease is more favorable than the rent being paid by the current tenant and then terminate the lease to capitalize on an increase in rent.

Subordination, Non-Disturbance and Attornment Agreement (SNDA): An agreement whereby a tenant under a superior lease subordinates its interest in the leased premises to a mortgagee (the subordination agreement) and agrees to recognize the mortgagee or another purchaser at a foreclosure sale as the landlord under the lease in the event of foreclosure (the attornment agreement) and whereby the mortgagee agrees to maintain all of the rights of the tenant under the lease so long as the tenant is not in default (the non-disturbance agreement). These separate components of the typical agreement can be mixed and matched together. The critical piece for a tenant is the non-disturbance provision.

Tenant Improvements: Renovations and remodeling done by a tenant to prepare for occupancy of the leased space.

Tenant Improvement Allowance: Money paid by the landlord to off-set the tenant's cost of renovating the leased space for its purposes.

Triple Net Lease: A lease where the landlord passes through to the tenant and the tenant pays the taxes, operating expenses and insurance on the leased premises