Tenant Negotiations For A Shopping Center Lease
Often tenants are at a disadvantage in commercial lease negotiations. Landlords are in the business of commercial leasing and they have experience negotiating leases. A landlord typically provides a prospective tenant with a form of lease written to tilt many provisions to the landlord’s advantage. Although brokers are helpful on basic matters, a wise tenant will engage an attorney to review the lease thoroughly and negotiate to improve the lease for the tenant’s benefit.
Which party has the greater negotiating leverage in a lease transaction varies depending on the circumstances. A large national retailer is often a desirable tenant and has more negotiating power than a small, local or regional business which may have little negotiating power against a large commercial real estate company landlord. When the parties are more closely matched, negotiations may sway to favor the party who has the most options – if there is plentiful desirable similar space (retail, office, industrial or whatever the tenant needs), and a potential tenant is an established business with good credit, that tenant is in a better negotiating position than when multiple businesses are competing for limited space.
Plenty of time should be allowed to negotiate a commercial lease, as frequently the negotiations go back and forth multiple times. Tenants who feel time pressure to sign a lease may rush to concede and accept terms they would not have accepted otherwise. When selecting an attorney, tenants should choose someone who is knowledgeable about the commercial leasing climate in the area and who knows which lease terms are likely to be negotiable. That attorney’s knowledge can save a tenant time and money during the negotiation process and over the lease team.
KEY LEASE PROVISIONS
Most leases of retail space require the tenant to maintain certain days and hours of operations. A retail store will be expected to be open for business when the other retailers in the shopping center are open. If the tenant’s business is not a traditional retail business, the required days and hours of operation (if any) can become an issue in lease negotiations.
If the lease requires certain days and hours of operation, the tenant may desire an option to “go dark” in the lease. This will allow the tenant to close operations temporarily for certain conditions, such as for a remodel or for an extended holiday. Without the option to “go dark” the tenant may be in default when the business is not open during the times required by the lease. Common exclusions allow for closing of the business due to a casualty (such as flood or fire), remodeling or repairs, holidays or force majeure, for example when weather is so extreme employees would endanger themselves in trying to arrive to open for business.
A co-tenancy condition protects the tenant from a decrease in revenue due to a decline in consumer traffic if there is a cessation of business either by anchor tenants or by a specified percentage of the businesses in the shopping center. Remedies for a breach of the co-tenancy clause may include allowing the tenant to terminate the lease, to go dark or to receive rent concessions.
Every commercial lease is likely to designate the permitted use of the premises. The broader the permitted use, the more options the tenant will have. On the other hand, a permitted use that is narrow in scope may effectively stifle growth of the tenant’s business. For example, if the permitted use is limited to retail sale of women’s shoes, the tenant would be in default for adding children or men’s shoes to its inventory. The permitted use provision also comes into play when the lease includes exclusivity provisions (discussed below).
If the tenant wants to prohibit the landlord from leasing space in the shopping center to a competitor, the prohibition must be an express provision of the lease. The prohibited activities must be precisely defined to be enforceable. Also, there is priority among the lease prohibitions, so any lease that was in place earlier in time will have priority over later leases in the same shopping center. A potential new tenant should determine if existing tenants have exclusivity provisions that may affect its allowed activities in the leased space.
The lease should expressly state the remedies for breach of any exclusivity provisions. Common remedies are monetary damages, termination of the lease or even injunction against the landlord to prevent leasing to a prospective tenant that would engage in the prohibited activities.
Common Area Maintenance Costs (CAM), Insurance & Taxes
Typically a commercial lease will require the tenant to pay its proportionate share of common area maintenance (CAM) costs. Several factors go into the calculation of CAM costs. The tenant’s proportionate share of CAM is generally calculated as the tenant’s leased square footage divided by the total leasable area in the property. Each tenant pays its allocable share for the use of common areas. The lease should identify specifically the costs included, such as, utilities, grounds care, et cetera. Sometimes a lease defines base year costs and provides for annual increases over and above the base year costs. There may be a cap on the increase of CAM limited either by a percentage cap or by a specific dollar cap. An alternative to annual CAM increases is to apply a fixed rate for CAM costs.
Typically, along with the CAM costs, the tenant will pay a proportionate share of the insurance and taxes allocable to the common areas. Again, these specifics should be set out in the lease. An agreement to pay allocable taxes may require the tenant to pay a portion of the landlord’s state franchise or even federal or state income taxes, as well as property taxes. If the tenant agrees only to reimburse the landlord for property taxes, that agreement must be specified.
Assignment and Subleasing
There are two common ways leases address potential assignment and subleasing. Generally, a lease will prohibit any assignment or sublease, or those actions require prior consent from the landlord. When negotiating, the tenant may request that the landlord permit transfers to affiliates, franchisors or successors in the event of mergers or buyouts. A tenant should also be watchful for restrictions on change of control of the tenant entity. These transfers should be specifically allowed in the lease to protect the tenant’s right to such transfers.
Many people do not realize that even though the lease permits a transfer or the landlord consents, the prior tenant or any guarantor may not be released from liability under the lease. The lease must provide for the release in the event of transfer or the tenant must obtain a release from the landlord, otherwise if the subtenant or assignee fails to pay rent, the landlord still can hold the original tenant and guarantor liable.
Term of Lease
The length of the lease term is almost always negotiable. Often, the landlord will want the original term of the lease to be for several years or even decades, unlike a residential lease that is typically for 12 months. Some tenants will want to negotiate for a shorter lease term based on their projected business needs. In other cases, the tenant may desire the security of a long-term lease, but the landlord may not want to commit the space for many years.
In addition, many leases will have automatic renewal terms, possibly for a length of many years. If the tenant is seeking stability of location, longer and multiple renewal terms are desirable in the lease.
Additional Space Options
If the tenant expects it may need expanded space in the future, it may request a right of first refusal provision that will give tenant the right to match the terms of a proposed third party lease transaction and require the landlord to lease additional space to the tenant rather than the third party. A similar provision is a right of first offer. Here the landlord is required to offer adjacent space to the tenant before marketing it to third parties. Both options allow the tenant the opportunity to expand its leased space.
The lease will likely include provisions providing for the indemnification of the landlord in the event there is a claim for personal injury or property damage in the tenant’s leased space. The tenant is responsible for the safety of its customers and guests and the indemnity will protect the landlord from claims by the injured party against the landlord.
If the lease does not provide for the indemnity of the tenant by the landlord, the tenant should negotiate for such indemnity. The tenant does not want to be liable for claims due to injuries occurring in the common areas or in the tenant’s space due to the negligence of the landlord.
Three ways a landlord may default on the lease are: by breaching an express covenant in the lease; by breaching an implied covenant in the lease; or by breaching a legal duty to the tenant.
A tenant may default several ways on a lease. A default may be monetary, such as when rent or CAM charges are not timely paid. When the tenant breaches other provisions of the lease, the breach will be non-monetary. A non-permitted transfer by the tenant will also be a default under the lease. The tenant should make sure the lease provides for notice and a time to cure in the event of the tenant’s default.
If the tenant breaches the lease agreement, typically the landlord can accelerate the rent and require the tenant to pay immediately the rent that would be due under the remaining term of the lease. However, the landlord will have a duty to mitigate this penalty by attempting to re-let the space. The rent the landlord receives under any new lease will help to offset the amount owed by the defaulting tenant.
A landlord of a commercial space in Texas has a statutory right to lock out the tenant for non-payment of rent. A lock out is usually accomplished by changing locks on the doors of the premises. The tenant may be required to pay all back rent and related charges in full prior to receiving new keys.
A landlord’s remedies may also include monetary damages, specific performance by the tenant, an injunction prohibiting certain actions of the tenant, or repossession of the leased premises.
A landlord is entitled to money damages if the tenant breaches the lease and fails to pay rent. The tenant should examine the lease to determine the additional costs to which the landlord is entitled. The type or amount of additional costs payable to the landlord may be negotiable, depending on the leverage of the tenant.
If a breach by the tenant is a nonmonetary breach, for example carrying on a prohibited business in the space, the landlord can seek to enjoin the tenant from that activity; alternatively, if the tenant is not performing a requirement under the lease the landlord may ask a court to enforce specific performance by the tenant.
The landlord also may choose to retake possession of the leased premises under certain breaches by the tenant. A landlord’s rights to repossession may exist in the lease, state law or both.
The lease should specify the tenant’s remedies in the event of the landlord’s default of the lease. Common remedies are monetary damages, specific performance by the landlord, an injunction prohibiting the landlord from taking certain action, or termination of the lease.
The lease or state law may provide the landlord with a lien on the tenant’s personal property; however, the tenant may have financing in place that prohibits giving a lien to the landlord. Even without an express lien in the lease, the landlord may still have a statutory lien based on state law, but a lender’s lien would generally have priority over the landlord’s statutory lien.
Subordination to Landlord’s Lender
A subordination, non-disturbance and attornment agreement (SNDA) is usually between the tenant, landlord and landlord’s lender. In an SNDA, the tenant agrees to subordinate its lease to the lender’s mortgage and upon a mortgage foreclosure to recognize the lender as the new landlord if the lender complies with the lease terms. The lender agrees that if it forecloses on the landlord the lender will not disturb the tenant’s rights under the lease. And, the landlord agrees not to make a claim for rent against the tenant if the landlord has defaulted and the lender has the right to collect the tenant’s rent.
The lease should express what happens in the event of a casualty (like fire or flood) or a condemnation of the premises. The lease should state which party has the option to terminate the lease. Under certain conditions, the tenant should be able to terminate the lease without penalty. The property owner should have a timeframe to repair or rebuild the premises after a casualty and the tenant should have the option to terminate the lease if the premises will not be ready for occupancy within a given timeframe.
Negotiating a commercial lease involves numerous considerations; however, if a tenant provides enough time to work out the details and finds a knowledgeable attorney for assistance, the task does not have to be daunting.