There’s plenty that can go wrong when opening and running a retail business, and one of those pitfalls is a bad commercial lease. Whether unintentionally or on purpose, landlords and property managers do sometimes negotiate lease agreements with retail tenants that set the business up to struggle. Creating additional barriers to success is the last thing the owner of any retail business wants to do, but property managers should also want to make sure the business stays afloat — and occupying the commercial space.
Both landlords and their retail tenants are ultimately trying to create a profitable situation, and what’s best for one party often isn’t ideal for the other. Knowing these points of contention – and having a qualified broker such as Douglas Commercial represent you in your negotiations – is key to coming out on top in a retail lease agreement. Here are some tips and tricks to help you navigate the sometimes-frustrating negotiation process.
Don’t overlook the exclusivity clause
Landlords hate them, tenants love them. An exclusivity clause keeps direct competitors from taking up residence on the same leased property, including outparcels. Retail businesses obviously love these clauses because the risk of, say, two Mexican restaurants going up in plain sight of one another can be bad for both businesses. Landlords, meanwhile, dislike such clauses because they can be very limiting when you start adding businesses onto the leased property. In most cases, this will become a tug-of-war between landlords and renters.
Escalation clauses tend to look good on the surface, but when you do the math some may be much more brutal than others. This clause allows for various rent increases to be enacted over time. In some cases, the percentage increase can be very costly and crippling to a retail business and may be worse than paying a higher base rent with little or no escalation. Plus, if the rent is so high that it forces the business to move or close, the landlord loses, too. Parties should seek a fair middle ground.
Be clear on common area maintenance
In multi-use areas and parts of the property shared by more than one business, the language regarding appropriate conduct is essential. Landlords benefit most from broad common area maintenance (CAM) definitions, which gives them greater latitude in charging businesses for incurred costs. Lessees, though, should get very clear answers on what costs they are responsible for, and which costs are being reimbursed by warranties or insurance — and those instances should all be detailed in the restaurant lease.
Define appropriate use
If you are the property owner or manager, use clauses are important to include. Without a use clause, lessees are legally entitled to do anything they want in their space, provided it is legal. Landlords tend to have very in-depth restrictions to control what happens on their property. Lessees should make sure that none of the stipulations will interfere with their business practices in any way.
Address go-dark and co-tenancy issues
Most retail businesses are dependent at least in part, on the business brought by the traffic from surrounding businesses. If these businesses close, it can inhibit a retail store’s ability to survive and thrive. Landlords and tenants will want to address various issues if neighboring tenants change or commercial spaces go empty. Landlords don’t like these clauses, but for retail businesses, they’re an important protection.
While far from comprehensive, these key points will help both landlords and tenants understand the implications of their contract and empower them as they negotiate their lease. It’s never fun to deal with the fine print, but failing to thoroughly address these concerns could set you up for failure before the leasing period begins.
At the end of the day, the best solution is always to have a qualified commercial real estate broker, such as Douglas Commercial, on your side and representing you in any lease negotiations. To learn more about our work representing retail tenants, contact us![Image Credit]