CAVEAT EMPTOR - LESSEE BEWARE
Contrary to popular belief, most retail Landlords are willing to modify their boilerplate lease to
provide tenants with some level of comfort and recourse should problems arise. While you will never
get everything you ask for, you won't get anything without asking. Amazingly, many retail tenants or
their representatives will fight tooth and nail to save $.50/s.f on their basic rent, leaving themselves
vulnerable to excessive charges and other potentially damaging circumstances that could ultimately
put them out of business.
While there are over 150 specific areas of concern for reasonableness in the typical retail lease,
here are some critical clauses that tenants should insist be part of their lease document:
Shell Condition - Vacant retail spaces can be leased as a "plain vanilla
shell", or a "cold-dark shell", or a "warm-lighted-powered shell", or "as-is." There are
plenty of variations in between as well. Be sure your lease clearly defines in writing
exactly what condition the Landlord is going to deliver the space to you in. Insist on
a detailed drawing if possible that denotes the Landlord's responsibilities. Most
Landlord's leases will state that when you take occupancy of the space, you are
accepting its' condition at that time. Don't! Modify the terms defining "Ready for
Occupancy" to be after you have completed an inspection of the premises and the
Landlord has completed any punch list items to your satisfaction. Your $10,000
renovation budget could quickly double or triple if you are not careful here.
Method of Measurement - Put three architects in the same space and they
will inevitably arrive at three different calculations of square footage. CAD
drawings (computer-aided design), which calculate square footage automatically,
have improved this situation dramatically, but are still based on field measurements
which could be subject to error. Before you sign a retail lease, make sure you check
the measurement yourself or with an architect of your own. Ask the Landlord to
specifically define how the space has been measured. There are many variations,
including some that count the sidewalk outside your space! Most measurement
errors are inadvertent, honest mistakes. Others are viewed by a few landlords as
take-what-you can-get profit centers. Either way, slight mismeasurements can cost
you thousands of dollars over the life of a lease. Surprisingly, less than 5% of all
tenants field-measure their spaces.
Landlord's Warranty - Whenever you take over an existing space, you
have no idea what condition its mechanical, electrical and plumbing system will be
in. You may not have the time or money to hire an engineer or contractor to inspect
those systems. And you certainly don't know how well they will be working after you
move in, especially if they have not been in use for an extended period. Standard
retail leases make you responsible for repairs the moment you accept the premises.
Insist that the Landlord give you a 90-day warranty on the proper operation of those
systems. If you are taking over your space in the summer, specifically request a 180day warranty on the heating system. You don't know what you have inherited, and
it could cost you a fortune in repairs unexpectedly.
Gross Sales Exclusions - Most retail leases require the tenant to report
gross sales every month and pay to the Landlord a percentage of those sales over a
certain negotiated amount. Landlord's leases usually insist that any and all monies
you collect are to be included in their definition of gross sales. This shouldn't
necessarily be the case. Insist on exclusions for such things as: discounted sales to
employees; wholesale transactions to other vendors; penalty charges you receive for
foiling a returned check; interest, service or carrying charges in excess of the sales
price of any merchandise; and accounts receivable charged off as bad debt. Credit
card sales and layaways should be counted as gross sales when you are actually
paid, not when the sale is completed. Be sure you define this carefully in your lease,
or you may be paying the Landlord percentage rent on sales you yourself haven't
been paid on yet!
Exclusives - Nothing can be more damaging to a retailers business than
when the Landlord allows another tenant in the shopping center to sell similar
merchandise. Most Landlords are very careful with their tenant mix, and insist
they would never lease to a competing business. Get it in writing. Your Landlord
may not be your Landlord tomorrow! You would be surprised how many retailers
have trusted their Landlord's word, only to be forced out of business when a better
deal can be completed with a "bigger name" retailer in later years. Others have
found out the hard way that some Landlords will intentionally do this to retaliate
against them over some unrelated dispute. Small retailers without deep pockets are
particularly vulnerable to this. Many Landlords will take a very hard line about
exclusives because it can be very problematic for them. If you can't get them to
budge, interview other tenants in the Mall or strip center to ferret out any horror
stories that would indicate a pattern of disrespect that could affect your livelihood.
Expense Exclusions - The direct pass-through of operating expenses and
common area charges is the smoking gun of all retailers. You never know exactly
what you'll be hit with, and surprises abound. You can protect yourself and
minimize your exposure several ways. First, request a cap on year-to-year increases
so that they do not exceed the relative inflation rate. Some Landlords will agree to
restrict your exposure to no more than a 5% maximum increase. Second, define the
things the Landlord cannot pass through to you. A list of legitimate and reasonable
exclusions can run over 25 items. Important ones to exclude are: capital repairs and
replacement costs; severance payments to terminated employees; the Landlord's
pursuit of or defense of any legal action; brokerage commissions; and any costs
related to marketing vacant spaces.
These are just a few of the many potholes to watch for on the road to retail riches. Carefully
and thoroughly negotiating around them will cost you a pittance compared to the financial and
emotional ruin that might unknowingly await you.
Darrell Nevin of LeaseWright Commercial Real Estate, LLC, is a tenant advocacy broker and
advisor for office, retail, and industrial businesses. He is located in Columbia, Maryland and can be
reached at 410-953-6370.