6 ways to optimize terms
to allow for tomorrow’s retail needs
By Marni Lefkowitz Ahram
Retailers must try to predict the future when negotiating leases. As tenant, you need a lease that supports your long-term business goals. Once you have found a location with the right mix of existing foot traffic and optimal space flexibility, how you negotiate key lease provisions will impact your success.
1Permitted Uses. Gone is the era of the permitted-use clause that permits one discrete use category. While most landlords will not agree to broad use add-ons such as “all activities related or incidental thereto,” the permitted-use clause must be flexible enough to support your current and potential customer outreach during the entire term of the lease. For example, if you primarily sell alcoholic beverages, but may want to offer educational events such as whiskey tastings, your permitted- use clause must permit “educational and promotional activities and events.”
2Exclusive Uses. Beware the shopping center lease with restrictive existing exclusives. You do not want to sign a lease and then later learn that you cannot expand your product or service offerings because a legacy tenant has a category locked up. Determine what exclusives the landlord requires for a site early in the negotiation, and walk away from the deal if an existing exclusive may limit your business’ potential. For instance, if you are opening an indoor play-space and want to sell lattes to waiting parents, make sure any existing café does not have an exclusive on selling coffee. Likewise, for any near-term expansion of product and service offerings, negotiate a lock on those items within the shopping center. If you currently offer personal grooming products but anticipate adding complementary services, you might push for an exclusive on salons and grooming services.
3Economics. Landlords understand that your revenue may originate from mobile apps and online sales that were informed by the customer experience or fulfillment in-store. If you are negotiating a percentage rent provision, clearly identify which sales are included, whether any costs should be netted out (for instance, reductions for returns made within an agreed-upon time period and equipment maintenance and repair costs that you will absorb), and ensure that the lease contains a reconciliation mechanism protected by confi dentiality. This will almost always be an issue for a popup that builds on an existing online presence or where sales will be fulfilled elsewhere. Clearly designate which merchandise and service sales will be counted for determining your percentage rent liability and try to limit it to sales through an on-site POS and on-site fulfillment. In particular, beware of a landlord’s “catch-all” lease language for revenue that is “in any way related to” or “touches” the store.
4Relocation and Termination Rights. If you are pushing an untested product or service concept, if your sales are seasonal, or if you have any qualms about a site’s actual traffic, ask the landlord for:
- a two-way relocation right,
- a permissive “go dark” provision,
- and a lease termination right if your annual gross sales levels do not meet a threshold amount.
While landlords often retain the right to force a tenant to relocate within the center, retail tenants have not historically benefitted from a reciprocal right until recently. Tenants often find landlords open to granting a strong-credit tenant a one-time, if not an ongoing, option to relocate or expand into a larger space that comes available in the same center via a right of first offer (ROFO). You will need to move quickly to exercise a ROFO, and to make sure you can simultaneously expand your permitted uses under the lease. A landlord would be wise to consider granting such lease options if expecting percentage rent or concerned about the local economy, the possibility of a “ghost center,” or the tenant mix. But you must be prepared for the landlord to barter a ROFO, go-dark, and/or termination right in exchange for less incentives up front (for instance, recovery of fi tout allowances), payment of a fee, and likely recoupment of the landlord’s costs.
5Popups and Subletting. Popups have become common over the past few years, as they can generate excitement that draws larger and more diverse customers to a center. As a result, some landlords are loosening their lease standards to permit tenants to sublet their premises for related popups. While landlords potentially benefit from the exposure of an exciting and successful short-term popup tenant, expect some horse- trading for this right in your lease negotiation. Landlords generally require hefty security deposits, gross rent plus or high percentage rent, and payment for exclusive common area usage and additional services such as security and valet parking. Identify in advance the risks and costs your landlord will want covered as a result of this short-term arrangement, and have a proposed solution ready. In your lease negotiation, provide for any popup buildout and tear-down requirements, including time for governmental permits needed. Build in contingencies.
6Flex Common Space. As product pickup and delivery options evolve with mobile app purchasing, lockers and drones, your business may need exclusive rights to certain center common areas. Consider asking for sidewalk use rights in the lease. If there are common parking spaces and drive aisles behind your building, check that there are no restrictions on your customers using those areas for drive-up loading or even as a public entrance to your store. You may require additional tent, identifying and directional signage rights for reserved areas of the parking lot, or at the back of the shopping center. This will trigger a risk allocation discussion with your landlord, so consult with your insurance broker in advance to assess what coverage is available and at what cost to your business.
The enhancement of customer experience and convenience is driving innovative product and service delivery models and creative merchandising. As a tenant, you must have a lease in place that permits your business to evolve with innovation, while also incentivizing the landlord to accept some associated risk. The points raised above are not exhaustive of what should be considered when negotiating your lease. To maximize your potential and minimize your risk, have an attorney negotiate the lease on your behalf, and make sure that attorney understands your market, your strategy, consumer trends, and new retail technology.
Marni Lefkowitz Ahram is an attorney with Shapiro, Lifschitz & Schram’s Real Estate and Business groups. She represents clients in commercial real estate transactions, including retail and office leasing, and business and commercial transactions.