Negotiating Your Shopping Center Lease Before you sign on the dotted line, find out just what you need to watch out for--and have included--in your retail location lease.
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So you've got a wonderful idea for a retail business andhave found the perfect space in your local shopping mall or"Miracle Mile." The size is right, there's tons offoot traffic and plenty of parking, and heck, the rent's evenaffordable. All you have to do now is negotiate your lease with thelandlord.
One of the biggest mistakes you can make is to sign thelandlord's lease form without first having it reviewed by anattorney who specializes in real estate matters. But before you do,read through this list of points that shopping center tenants--andeven their lawyers--frequently overlook:
Don't accept an "as is" lease without aninspection. Shopping center leases almost always require you toaccept the space "as is," because the landlorddoesn't want to spend a lot of money on repairs. But a lot ofproblems, such as mold, faulty electrical wiring, worn-out airconditioning units and bathrooms that don't comply with federaland state Americans with Disabilities Act (ADA) requirementswon't be apparent until you have the premises thoroughlyinspected.
Make sure you can terminate the lease if the inspectionisn't satisfactory. If the landlord won't agree to that,make him represent that the premises are "in compliance withall applicable laws, rules and regulations" at the time yousign your lease. That way, if you discover any building code orother violations, the landlord will have to spend money correctingthem. Your landlord should also warrant that the heating,ventilating and air-conditioning equipment is "in goodcondition and repair" and will function satisfactorily for atleast the first year of the lease term.
Make sure the "use" clause is flexible.Shopping center leases always spell out the "permitteduse" for the premises--a description of the businessyou're engaged in. Make sure this description isn't toonarrow, and always add "and related goods and services"to whatever description the landlord comes up with. You don'twant to have to get the landlord's approval every time you adda new product or service to your inventory.
If you're buying a franchise, make sure your franchisoris happy. If you're buying a franchised business, be sureto send your franchisor a copy of the lease and get their approvalin writing. Also, understand that franchisors usuallyrequire landlords to sign a separate document, called a"Collateral Assignment of Lease," giving the franchisorcertain rights to "bail you out" in case you fail to payrent or otherwise default under the lease. Get a copy of yourfranchise's collateral assignment document and make sure yourlandlord signs it. Otherwise, you may be in breach of yourfranchise agreement.
Get a "rent free use period." Most landlordswill give you 30 to 60 days rent free to install your tradefixtures and spruce up the space before you have your grand openingand 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 mostparts of the country, shopping center leases are "triplenet," meaning that you're required to pay your percentageshare of the landlord's property taxes and utility bills inaddition to the monthly "base rent." Ask to see the priortenant's tax and utility bills so you can budget accordingly,and be sure to visit city hall and ask if any major tax increaseswill be coming down the road in the next few months.
Limit your liability for early termination. Mostlandlords won't let you out of the lease if your business turnsout to be not so wonderful. They want you "on the hook,"making rent payments until they can find another tenant so theirrental income isn't interrupted. Since you don't want to beon the hook forever for a business that's failed, ask if thelandlord will cap your liability at one-year's rent if you haveto 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 rentpayment is five to 10 days late. Things sometimes get lost in themail, though, and you don't want to lose your space because ofa postal service mishap. Ask the landlord to provide you with"written or telephonic" notice if they don't get arent payment on time, and the chance to pay up within five to 10days after you get the notice.
Get a noncompete clause. Ask the landlord to agree not toput a competing business in the mall or shopping center, or in anyother building the landlord owns within a two- to three-mileradius, as long as you're paying your rent on time andotherwise complying with the lease. And don't be surprised ifthe landlord asks the same of you and requests that you not competewith any of the center's other tenants.
You're not done yet. Here are several more points thattenants--and their lawyers--frequently overlook when negotiatingleases of retail space in shopping centers or strip malls.
Utilities. All the utilities (water, electricity, gas andso on) should be separately metered to your space, so you pay onlyfor what you actually use. Many leases require you to pay a fixedpercentage of the shopping center's utility bill, based on yoursquare footage. But that's not fair. Let's say you're alarge 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 squarefootage, you'll end up paying for some of thedelicatessen's water.
Heating and air conditioning. Likewise, you should have aseparate heating and air conditioning compressor for your space. Inolder shopping centers, you may have an "octopus" HVACsystem, where the compressor is on top of the building and ductworksnakes through the walls piping hot or cold air to each tenantspace. If the HVAC system is an "octopus," make sure thelandlord agrees to maintain the compressor and any ductwork outsideyour space. Also, insist that the landlord guarantee HVAC systemperformance for at least the first year of your lease.
Signs and hours of operation. Be sure to show yourlandlord photos or drawings of what your outside signage will looklike, and get the landlord's approval--before you sign thelease--as landlords are sometimes very fussy about how theirshopping centers look to the outside world. Likewise, make sureyour hours of operation are spelled out correctly in the lease. Youdon't want to be forced to stay open Sundays just because othertenants do and the landlord wants all its tenants to be "insync."
Parking. Are there parking spaces dedicated for yourcustomers' or employees' use? Are they convenientlylocated? While landlords will never guarantee that your parkingspaces won't be used occasionally by other tenants and theircustomers, you should at least have a few spaces for yourself andyour employees, located not too far away from the leasedpremises.
Eminent domain/condemnation. The U.S. Supreme Courthanded down a decision recently giving municipal governments broadpowers to seize private property whenever they deem it to be in thepublic interest, as long as they pay fair value to the propertyowners. The "condemnation" clause in many leasesprohibits you from suing anyone for damages if your leased premisesare seized for a public purpose--all you can do is terminate thelease and move elsewhere. But that's not fair. The landlordunderstandably doesn't want you suing them or glomming ontotheir condemnation award, for something that, after all, wasoutside the landlord's control. But you should insist on theright to seek reimbursement from the government directly forrelocation expenses, loss of business and any other damages if yourspace is seized by the local government.
Tenant relocation. Surprisingly, many leases contain aclause allowing the landlord to relocate your business to anotherpart of their shopping center at any time with just 30 to 90days' notice. That's okay if it's being done for a goodreason--such as construction being done to expand the shoppingcenter. It's not okay, though, if the landlord has found abetter-paying tenant for your space and wants to relocate you toretail Siberia. Insist that relocation occur only temporarily (fornot 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 asmaller space. Also, make the landlord pay for signs at all mallentrances directing customers to your temporary location.
Security deposit. Believe it or not, many retail leasesdon't require the landlord to return your security deposit whenthe lease expires. Make sure that information in included in thelease. Also, insist on including a provision forcing anyone whobuys the shopping center from your landlord to honor all thelandlord's obligations to preserve and return your securitydeposit.
Personal guaranty. Last but not least, if you'reusing a corporation or limited liability company (LLC) for yourbusiness, ask that any personal guaranty of the lease be limited toone year's base rent, plus any arrearages. For example, if youare paying $3,000 a month in base rent and owe the landlord $9,000back 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 12months). If you're in a strong bargaining position, ask for a"good guy" guaranty, in which your personal liability forlease defaults is limited to rent that accrues up to the day youquit the premises.
Cliff Ennico is a syndicated columnist, author and host ofthe PBS television series MoneyHunt. His latest book isSmall 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 inyour state. Copyright 2005 Clifford R. Ennico. Distributed byCreatorsSyndicate Inc.