So you've got a wonderful idea for a retail business and have found the perfect space in your local shopping mall or "Miracle Mile." The size is right, there's tons of foot traffic and plenty of parking, and heck, the rent's even affordable. All you have to do now is negotiate your lease with the landlord.
One of the biggest mistakes you can make is to sign the landlord's lease form without first having it reviewed by an attorney who specializes in real estate matters. But before you do, read through this list of points that shopping center tenants--and even their lawyers--frequently overlook:
Don't accept an "as is" lease without an inspection. Shopping center leases almost always require you to accept the space "as is," because the landlord doesn't want to spend a lot of money on repairs. But a lot of problems, such as mold, faulty electrical wiring, worn-out air conditioning units and bathrooms that don't comply with federal and state Americans with Disabilities Act (ADA) requirements won't be apparent until you have the premises thoroughly inspected.
Make sure you can terminate the lease if the inspection isn't satisfactory. If the landlord won't agree to that, make him represent that the premises are "in compliance with all applicable laws, rules and regulations" at the time you sign your lease. That way, if you discover any building code or other violations, the landlord will have to spend money correcting them. Your landlord should also warrant that the heating, ventilating and air-conditioning equipment is "in good condition and repair" and will function satisfactorily for at least the first year of the lease term.
Make sure the "use" clause is flexible. Shopping center leases always spell out the "permitted use" for the premises--a description of the business you're engaged in. Make sure this description isn't too narrow, and always add "and related goods and services" to whatever description the landlord comes up with. You don't want to have to get the landlord's approval every time you add a new product or service to your inventory.
If you're buying a franchise, make sure your franchisor is happy. If you're buying a franchised business, be sure to send your franchisor a copy of the lease and get their approval in writing. Also, understand that franchisors usually require landlords to sign a separate document, called a "Collateral Assignment of Lease," giving the franchisor certain rights to "bail you out" in case you fail to pay rent or otherwise default under the lease. Get a copy of your franchise's collateral assignment document and make sure your landlord signs it. Otherwise, you may be in breach of your franchise agreement.
Get a "rent free use period." Most landlords will give you 30 to 60 days rent free to install your trade fixtures and spruce up the space before you have your grand opening and start paying rent. They won't give it to you, though, unless you ask for it.
Take a look at previous tax and utility bills. In most parts of the country, shopping center leases are "triple net," meaning that you're required to pay your percentage share of the landlord's property taxes and utility bills in addition to the monthly "base rent." Ask to see the prior tenant's tax and utility bills so you can budget accordingly, and be sure to visit city hall and ask if any major tax increases will be coming down the road in the next few months.
Limit your liability for early termination. Most landlords won't let you out of the lease if your business turns out to be not so wonderful. They want you "on the hook," making rent payments until they can find another tenant so their rental income isn't interrupted. Since you don't want to be on the hook forever for a business that's failed, ask if the landlord will cap your liability at one-year's rent if you have to close your business before the lease expires.
Have the landlord include notice of payment defaults. Most shopping center leases say you're in default if any rent payment is five to 10 days late. Things sometimes get lost in the mail, though, and you don't want to lose your space because of a postal service mishap. Ask the landlord to provide you with "written or telephonic" notice if they don't get a rent payment on time, and the chance to pay up within five to 10 days after you get the notice.
Get a noncompete clause. Ask the landlord to agree not to put a competing business in the mall or shopping center, or in any other building the landlord owns within a two- to three-mile radius, as long as you're paying your rent on time and otherwise complying with the lease. And don't be surprised if the landlord asks the same of you and requests that you not compete with any of the center's other tenants.
You're not done yet. Here are several more points that tenants--and their lawyers--frequently overlook when negotiating leases of retail space in shopping centers or strip malls.
Utilities. All the utilities (water, electricity, gas and so on) should be separately metered to your space, so you pay only for what you actually use. Many leases require you to pay a fixed percentage of the shopping center's utility bill, based on your square footage. But that's not fair. Let's say you're a large antiques store located next to a small delicatessen. Who's going to have the bigger water bill? The deli, of course. Yet if your share of the utility bill is based on your square footage, you'll end up paying for some of the delicatessen's water.
Heating and air conditioning. Likewise, you should have a separate heating and air conditioning compressor for your space. In older shopping centers, you may have an "octopus" HVAC system, where the compressor is on top of the building and ductwork snakes through the walls piping hot or cold air to each tenant space. If the HVAC system is an "octopus," make sure the landlord agrees to maintain the compressor and any ductwork outside your space. Also, insist that the landlord guarantee HVAC system performance for at least the first year of your lease.
Signs and hours of operation. Be sure to show your landlord photos or drawings of what your outside signage will look like, and get the landlord's approval--before you sign the lease--as landlords are sometimes very fussy about how their shopping centers look to the outside world. Likewise, make sure your hours of operation are spelled out correctly in the lease. You don't want to be forced to stay open Sundays just because other tenants do and the landlord wants all its tenants to be "in sync."
Parking. Are there parking spaces dedicated for your customers' or employees' use? Are they conveniently located? While landlords will never guarantee that your parking spaces won't be used occasionally by other tenants and their customers, you should at least have a few spaces for yourself and your employees, located not too far away from the leased premises.
Eminent domain/condemnation. The U.S. Supreme Court handed down a decision recently giving municipal governments broad powers to seize private property whenever they deem it to be in the public interest, as long as they pay fair value to the property owners. The "condemnation" clause in many leases prohibits you from suing anyone for damages if your leased premises are seized for a public purpose--all you can do is terminate the lease and move elsewhere. But that's not fair. The landlord understandably doesn't want you suing them or glomming onto their condemnation award, for something that, after all, was outside the landlord's control. But you should insist on the right to seek reimbursement from the government directly for relocation expenses, loss of business and any other damages if your space is seized by the local government.
Tenant relocation. Surprisingly, many leases contain a clause allowing the landlord to relocate your business to another part of their shopping center at any time with just 30 to 90 days' notice. That's okay if it's being done for a good reason--such as construction being done to expand the shopping center. It's not okay, though, if the landlord has found a better-paying tenant for your space and wants to relocate you to retail Siberia. Insist that relocation occur only temporarily (for not more than 180 days) and for good reason (such as construction), and that any substitute space be "reasonably comparable" to your original space, with a rent adjustment if it's a smaller space. Also, make the landlord pay for signs at all mall entrances directing customers to your temporary location.
Security deposit. Believe it or not, many retail leases don't require the landlord to return your security deposit when the lease expires. Make sure that information in included in the lease. Also, insist on including a provision forcing anyone who buys the shopping center from your landlord to honor all the landlord's obligations to preserve and return your security deposit.
Personal guaranty. Last but not least, if you're using a corporation or limited liability company (LLC) for your business, ask that any personal guaranty of the lease be limited to one year's base rent, plus any arrearages. For example, if you are paying $3,000 a month in base rent and owe the landlord $9,000 back rent when you default, your personal risk would be limited to $45,000 (the $9,000 back rent plus $36,000, or $3,000 times 12 months). If you're in a strong bargaining position, ask for a "good guy" guaranty, in which your personal liability for lease defaults is limited to rent that accrues up to the day you quit the premises.
Cliff Ennico is a syndicated columnist, author and host of the PBS television series MoneyHunt. His latest book is Small Business Survival Guide (Adams Media). This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. Copyright 2005 Clifford R. Ennico. Distributed by Creators Syndicate Inc.
Cliff Ennico is a syndicated columnist and author of several books on small business, including Small Business Survival Guide and The eBay Business Answer Book. This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state.