Skip to main content



Not All Retail Leases Are Alike: Pay Attention to the Project!

INTRODUCTION

A lease by any other name is still a lease. Still, does this make all leases alike? Certainly, at one level, all leases have, at their core, a simple premise —for money, a landlord will allow its tenant to have exclusive possession of real estate for a period of time. Nonetheless, all of us who live and breathe know that a lease does far more than that. It covers all of the other economic aspects of the landlord-tenant relationship as well. And, all aspects of the landlord-tenant relationship are economic in nature.

A lot has been said and written about lease negotiation. Without doubt, much of that process depends on the relative bargaining strengths of the parties. Nonetheless, no party—landlord or tenant—ever starts completely from scratch each time. Every landlord has one or more starting (or form) leases. On the other side, all tenants of any size have the same. Whichever form is Used as the starting point (and this usually depends on bargaining power), many concepts in the final lease are already well framed before the negotiations begin.

The purpose of this examination is to explore some of those retail leasing concepts, in particular some that arise merely out of the nature of the overall retail project, rather than from the parties’ relative positions in the transaction. However, retail projects are not neatly machined from blocks of steel. No set of definitions can precisely separate one from another. The following general descriptions, however, should prove helpful in building an understanding of the similarities and differences across the retail development spectrum.

PROJECT DEFINITIONS

Regional Shopping Centers are characterized by at least one full line department store measuring at least 250,000 square feet, but generally contain two or more such tenants. The balance of such shopping centers is populated by stores aggregating an equivalent floor area, only several of which, called destination tenants, draw a significant number of customers to the Regional Shopping Center solely based on that particular merchant’s trade name or merchandise mix. Regional or national chain tenants typically leases the rest of the smaller stores, offering convenience and recognized branded goods. From a marketing perspective, this type of retail project is aimed at upscale customers within about a thirty minute driving range.

Super Regional Shopping Centers typically contain at least three full line department stores with more than 1,000,000 square feet of leased area. The retail mix is similar to that found in smaller regional Shopping Centers, but one can expect that, in addition, to the department stores, there will be several or more “destination” tenants that would draw a measurable number of customers even if they were not found within the shopping center. Typical tenants of this nature are book or music megastores, sporting goods retailers, and specialty department stores. Really they design Regional Shopping Centers to appeal to a market base that will drive up to an hour to reach the shopping center. Recently, the marketplace has seen the addition of ultra-large really Regional Shopping Centers exceeding 3,000,000 square feet in size. Such centers have become regional attractions on the order of theme parks.
Open Architecture describes shopping centers of any size where clusters of stores share common parking and other common facilities, but not under a common roof.

Enclosed Malls, by contrast to Open Architecture construction, describes a project with a single building or the functional equivalent of a single building, often with limited entrances to common corridors. As such, the entire shopping center shares common climate control.

Community Shopping Centers are generally 100,000 to 250,000 square feet in size and typically have a supermarket, variety store, junior department store, or low-priced discount store as an anchor tenant. In addition, there will be ten to fifteen smaller tenants, a few of which will be national or regional operations, but the rest will be local, independent merchants. Such shopping centers are designed to appeal to the middle market customer within about a twenty minute driving range.

A Mini-mall is a variety of Community Shopping Center, enclosed, weather conditioned, and 80,000 to 150,000 square feet in size. A supermarket or a junior department store anchors a typical Mini-mall.

Specialty Malls are characterized by a narrow tenant mix where one can expect to see tenants gathered by category or by the special nature of their customers, i.e., bridal goods, jewelry, antiques or art. The common areas of such malls are designed to service or highlight the mall’s particular focus and might include special display spaces or auditoriums. The individual retail spaces may not necessarily be physically divided, lending a marketplace atmosphere to the project.

Neighborhood Shopping Centers are designed for the sale of convenience goods and to meet daily, neighborhood needs. They are generally 30,000 to 100,000 square feet in size. Other than the anchor store, spaces generally measure from 1,500 square feet to 5,000 square feet in size, and one can expect to see many local merchants offering convenience food, such as pizza, or offering local services, such as dry cleaning.

Supermarket Anchored Neighborhood Shopping Centers form a very large subclass of Neighborhood Shopping Centers. Obviously, the supermarket is the focus, but these retail projects are often tenanted with a drug store as well. Generally, there will be also be five to ten smaller stores serving the immediate neighborhood’s needs.

Unanchored Strip Malls are retail projects populated by merchants who provide for immediate neighborhood needs, such as a laundry, pizza shop, and hairdresser. Such a project might include a convenience store.

Power Centers describe a grouping of two to five stores, each 80,000 to 200,000 square feet in size. Generally each tenant/occupant has its own parking and common facilities, but their buildings share roadways, traffic signals, and some signage with the other retail buildings. Mutual easement and maintenance agreements are typically used to allow for traffic flow across neighboring properties and to provide for allocation of limited shared expenses, such as for maintaining major roadways, sewerage systems, drainage basins, and joint signage. The agreements may regulate the manner in which the individual buildings are used or the permitted uses within the neighboring buildings. Frequently, the stores are tenant-owned (or owned by a related entity), but a single developer also may own an entire project.

Outlet Centers are variants of a Regional Shopping Center or of a Community Shopping Center where most of the tenants are required to offer branded merchandise—first quality, seconds, and closeouts—at a discount of 30–40% from usual selling prices. Most tenants trade under the name of a recognized consumer products manufacturer. While there may be some large space tenants, there is usually no anchor tenant. A Standard Outlet Center is one that is housed in what would otherwise look like a Regional Shopping Center or a Community Shopping Center, i.e., a single or small number of large buildings with one or two small, freestanding buildings. A Theme Outlet Center may be designed like a village, with one or two merchants in each building and usually one building with a cluster of smaller, related tenancies, such as a food court.

City Stores are single stores in a downtown shopping district of a large or small municipality. The store may be the only such unit owned by a landlord in the vicinity or may be part of a series of contiguous or noncontiguous, but closely located properties, owned by a single developer. Here, the key is that the grouping of City Stores often has the characteristics of a shopping center, but no single landlord has sufficient control to create a unified project.

Free Standing Stores consist of individually tenanted buildings found within a suburban retail shopping district. Typically, a Free Standing Store will be found near other Free Standing Stores or adjacent to one or more other types of shopping center projects.

Historic Building Conversions are projects that adapt recognizable properties for retail use. The drawing feature is the building or site, and not any particular anchor or destination store. Although some stores focus on merchandise related to the project itself (specialty books, souvenirs, and the like), most retailers within such projects are brand name merchants and sellers of “arts and crafts.”

A Mixed Use Project is one that combines retail users with other real property activities. Although retail uses may dominate a Mixed Use Project, typically the reverse is true. For example, a Retail/office Mixed Use Project would typically consist of a high rise building or a group of such buildings, where retail tenants occupy the lower floors and office tenants occupy the upper floors. Traditionally, the merchandising focus in a Retail/office Mixed Use Project was to the office tenants and those in neighboring buildings, but more recently, the retail space is aimed at the general public. The aggregate amount of retail space may vary from 3,000 square feet to more than 100,000 (or more) square feet. In contrast, a Retail/residential Mixed Use Project would consist of retail tenants occupying the ground floor of a rental, condominium or cooperative high rise, residential building. In such a project, a typical tenant might be a supermarket, but generally, there is no anchor store. Commonly, the stores in a Residential/retail Mixed Use Project are open for access to the street and, except for being part of a single, mixed-use building, each store has the general characteristics of a City Store. Another variant is the PUD Retail/residential Mixed Use Project where retail stores are integrated within a planned residential development, usually of residential condominiums. In this style of project, the concerns of the residential community act as an envelope within which the retail project must operate.

The term “Odd Duck Project” describes a class of retail developments characterized and framed by an overarching, non-retail environment. In each case, the retail aspect of the project is deeply subordinated to the primary intended project purpose. Examples of such retail projects are:

Airport Projects are the functional equivalents of a retail shopping center marketed toward the air traveler. Previously, populated only by book shops and other stores aimed at the immediate needs of passengers, now Airport Projects house upscale, brand name stores expecting to sell to travelers with idle time.

Theme Parks are populated by retailers unified by the sale of merchandise related to a particular theme or “character.” Unaffiliated merchants are mixed among stores operated by the theme “sponsor.”

Entertainment Projects describe a wide range of situations where the primary customer draw is the project’s central activity, such as a theater, a health club or a participatory sports center. Clearly, customers rarely visit such a project solely to shop. The leasing retailers may cater to either the attracted public, such as golfers, may offer convenience items or food, or may even sell general merchandise, branded or not.

Sports/convention Facilities no longer mean retail opportunities solely for hot dog vendors. Now, the high traffic counts generated by such projects attract an increasing number of general merchandisers.

SO, WHAT’S THE DIFFERENCE?

Every leasing attorney understands the basic concept of allocating common area expenses. Usually, the total cost to operate a retail project is divided, on a pro rata, square footage of floor area basis, among all of the leasable spaces in the project. This makes sense when the burden of use of the common areas bears some (indirect) relationship to the relative size of each store. Although one can argue that we should allocate the cost of cleaning the corridors in an Enclosed Mall based on how many customers each particular retailer sees each month, and that stores that attract families should pay less for parking lot upkeep than stores that attract individual shoppers because the number of “car loads” served is proportionately less, no one makes that depth of analysis. Nonetheless, we implicitly do make such judgments when we think about allocating such costs within an airport environment. For example, why should a retail tenant pay any share of common area expenses? Wouldn’t the burden be just the same if there were no retail users within the airport? Obviously, this is an extreme example, but it serves, nevertheless, to illustrate the point.

ASSIGNMENT AND SUBLETTING

In general, tenants want absolute freedom to assign their leases and to sublet their premises. Also, in general, landlords do not agree. But why? While
many reasons are given in support of each position, most are just details or subparts within one of two primary issues.

Tenants argue that they have bought a slice of time within which they have exclusive possession of a particular piece of property. This, in turn, should give them the right to turn a profit (or avoid a loss) by using their property interest in any lawful way, consistent with the terms by which they, themselves, can use the space in question. At the same time, tenants argue that the basic bargain between themselves and their landlords is that, in return for payments of (often periodic) rent, the landlord should be indifferent to whom actually occupies the property. In short, if the tenant remains liable for paying rent and obeying the other lease terms, it should be able freely to assign and sublet. Therefore, why should tenants be inhibited in finding someone else to take their place in the leased premises when their own business is languishing there?

On the other hand, landlords claim that they are the ones in the real estate business, not their tenants. Consequently, following this argument, it is a landlord that should exercise exclusive control over the identity of the party that actually occupies the property. And, if there is a profit from subletting or assignment, it should go to the landlord.

Grossly simplistic as the two different statements are stated, these are the core principles. However, once the parties agree upon the boundaries within which a retailer will use the leased space—such as a limited purpose, exclusive use rights, and prohibited uses—how often does it matter exactly whose face greets the landlord when entering the store or whose voice answers the phone at the tenant’s office, if rent is paid and the lease terms are observed? After all, having two parties liable for the rent, both the assignee (or the subtenant) and the original tenant, is always better than having only one or the other (but not both) on the hook.

If you do not believe this, then what is the rationale for granting liberal assignment and subletting rights in any circumstance? Answering this question by countering that some tenants have the economic clout or some other bargaining power basis to secure such a concession is less than a satisfying response. After all, if the landlord’s no-assignment, no-subletting principle were sacrosanct, bargaining power would have nothing to do with it. If bargaining power was the beginning and end of every negotiating discussion, then no lease would provide for landlord exculpation or for automatic subordination to future mortgages or deed of trust. In reality, landlords recognize that for any particular project, it is possible to grant liberal assignment and subletting rights without measurable adverse consequence.

Similarly, few tenants are absolutists when it comes to asserting their own position. In the end, even the strongest tenants strike compromises, thereby satisfying their landlord’s specific lease-related or site-specific concerns. Frequently, a middle ground is found on sharing (the often illusive) assignment or subletting “profit.” Sometimes, a landlord is only required to accept a substitute tenant of recognized skill or financial strength. Whatever be the case, each party makes compromises when, in the context of the overall deal, it gets what it was really looking for in the first place.

At the outset, let us understand the scope of the discussion that follows. There are many reasons why a landlord or tenant is concerned about the limits within which an assignment of a lease or subletting of leased premises should be permitted. We have already pointed out the extremes of those limits—a landlord wants no assignment or subletting without its permission, and a tenant wants no restriction at all. Both positions derive from the economics of leasing. First, a Landlord wants, and is entitled, to retain at least the level of “real estate” profit negotiated in the lease. In addition, a landlord wants, and is entitled, to earn a “proper” return on the balance of its property. Consequently, when proposing a subletting or assignment, tenants must address both concerns. Whatever the nature of the retail project, a tenant wanting to transfer its interest in the lease or in the premises, must provide a substitute arrangement that will protect its landlord’s interest in the income stream from the specific lease. Nevertheless, not every assignment or subletting threatens a landlord’s income from the rest of its project.

IT DEPENDS ON THE NATURE OF THE PROJECT

This last understanding helps us fashion the “default” starting points in crafting assignment/subletting provisions in a variety of leases. For example, properties tenanted by a large number of tenants are more likely to be successful if there is a synergy among the various tenants. Such synergy does not come solely from the mix of tenant uses alone; frequently, projects of this nature are founded on assembling a particular level or quality of tenants. This is true regardless of whether the retail concept is based upon diversity of shopping interests, such as in a Regional Shopping Center or a Super Regional Shopping Center, or by adherence to a single theme, such as in a Specialty Mall like a jewelry mart. The same logic, however, does not usually apply to a City Store to a Free Standing Store. In the first instance, a landlord legitimately deserves to shape the tenant mix within its retail project. In the second case, absent special circumstances, a landlord should be willing to suffer any tenant that pays the rent and obeys the terms of the lease.

Projects between these two extremes can also be analyzed in the same way. Neighborhood Shopping Centers and Strip Malls are characterized as having a variety of tenants, but certainly fewer in number and less diverse than that found in larger projects. What is more important, such projects (and to some extent, Community Shopping Centers as well) are generally not founded upon any particular “quality” of tenant. Consequently, a landlord should be willing to begin with the concept that if a substitute tenant will pay the rent, free transfer of a tenant’s leasehold interest should be permitted.

JUMP AND SHOUT

By this time, experienced leasing attorneys should be jumping out of their seats, shouting that a tenant should not have the right to choose who occupies the leased premises just because the rent gets paid. After all, the landlord is the “conductor” of the orchestra that we call a shopping center, or more broadly, a retail project. As such, it (not the tenant) should pick the nature and character of the “instruments” (occupants) in the “orchestra” (retail project). The argument continues that it is the landlord, not the assigning or subletting tenant, that takes the risk of what happens to the rest of the project if one user rather than another occupies the leased premises.

Although these and related questions certainly reflect legitimate concerns, they also misunderstand exactly how limited a lease’s assignment/subletting provision is or should be. In a well-crafted lease, concerns that devolve from the particular permitted or prohibited uses for the leased premises should be contained within provisions concerned with those issues and those alone. For example, if a Supermarket Anchored Community Shopping Center needs a supermarket to be successful, then the use clause should restrict operations at the leased premises to that of a supermarket. Absent unique circumstances in such a retail project, it should not matter who operates the supermarket. Even if the tenant signing the lease is the “best” operator at the outset of the lease, the mere fact that the original tenant no longer wants to operate the location should place a doubt in a landlord’s mind about whether, at that later time, it remains the best operator. In fact, whatever a landlord might say about the desirability of a particular tenant as opposed to another, when its retail space remains unleased, which landlord would leave its space open rather than negotiate with a “less desirable” tenant?

It is common practice to write permitted use clauses making the sole permitted use the same as the intended use of the tenant in question. Nevertheless, does this make sense? Think about the process of leasing an empty space. When a retail spot is available, a landlord is willing to accept nearly any legitimate retail use consistent with the leasing scheme for the overall project. If a prospective tenant’s use is compatible with the nature of the retail project, does not offend any prohibited uses, and does not cannibalize the business of other tenants at the project, most landlords would accept the prospective tenant’s intended use. Why then, should not a retail tenant be permitted to assign its lease or sublet its premises to a replacement tenant that would meet these same criteria if the space were empty and being offered, for rent, by the landlord? Carefully crafting the permitted use clause would protect a landlord’s legitimate interest in creating or preserving its desired tenant mix, while giving the tenant named on the lease the economic flexibility to mitigate its operating losses at the leased premises by allowing it to transfer its leasehold interest.

How would this work in practice? The issues involved are permitted use, intended use, and prohibited uses. The third category is the easiest and most universal to deal with. No matter the identity of the occupant of a particular leased premises, some uses are always objectionable. Commonly applicable prohibitions are those that bar non-retail uses, “immoral” uses, and such objectionable uses such as those that excessively burden parking, but do not provide corresponding consumer traffic. A helpful concept is to agree that the named tenant will open for business as a particular kind of retailer, such as a record store, card shop, or even under a particular brand name. This approach should not be objectionable to a reasonable tenant because the tenant is in the process of negotiating the terms of the lease with a design toward a specific business. No tenant or landlord negotiates a lease for a “generic” use; the parties always negotiate with the prospective tenant’s use in mind. As a consequence, each of landlord and tenant have an economic expectation based upon the. use promised by the tenant. Therefore, a tenant should be willing to agree that it will open with an operation that matches those expectations.

THE TYPE OF PROJECT IS CONTROLLING

Once the concepts of prohibited use and intended use are satisfied, the only remaining factor affecting tenant mix is that of permitted use. Here is where the nature of the retail project controls. For example, in an Outlet Center, whatever other limitations there may be, tenants should not be able freely to assign or sublet to a non-discount retailer. In a Specialty Mall, the permitted use is reasonably limited to sales or services that are compatible with the project’s theme. Likewise, an Entertainment Project could define permitted uses by use of a list of those uses that would have been acceptable at the time of the initial leasing. This approach is just as applicable within a Regional or Super Regional Shopping Center, where the retail project’s concept might be to lease to only merchants with a national brand name identity. In such cases, besides allowing particular retail uses, the permitted use clause could limit occupants to those that operate a minimum number of locations under a common trade name.

Even if one can accept that by creatively drafting the permitted, prohibited, and intended use clauses, a tenant can have the flexibility to assign or sublet without adversely affecting the character and economics of each type of retail project, how does one protect against cannibalization? In a City Store or in a Free Standing Store, this is not usually a problem. Simply speaking, a landlord has no other tenants whose business is reasonably affected by the nature of a particular occupant. Consider also that one of the draws of a Super Regional Shopping Center is that multiple tenants are offering the same categories of goods—more than one book store, three or more shoe stores, and more women’s fashion businesses than can be counted. By this analysis, the problem of cannibalization—too many competitors in a single retail category—is mostly that of the smaller multi-tenant projects. Whether it is a Supermarket Anchored Neighborhood Shopping Center, an Unanchored Shopping Center, a Mini-mall, or a Mixed Use project, there generally are not enough store units to allow competing uses. On the other hand, within reasonable use limitations, it usually doesn’t matter which combination of compatible uses comprises the project’s tenant mix. How then, can the landlord’s need to maintain a diversity of uses at the project be coordinated with a tenant’s desire to have flexibility when it comes to assignment or subletting? One common way to do this is to augment the usual protection against violating pre-existing exclusive use rights at the project with a use restriction against changing the use of the leased premises in question to one that is competitive with the then principal use of any other tenant at the project. In larger projects, the limitation might be framed in terms of not allowing a change to a use that would be the third or fourth of that type at the retail project.

WHAT ELSE?

What else is it about the nature or scope of a particular retail project that is affected by a tenant’s freedom or lack of freedom to transfer use of the leased space to another occupant? To me, it seems that the answer lies in the need of a landlord to control its tenant mix. But, the term mix is not limited to permitted or intended uses alone, because they can negotiate such limitations in the permitted and prohibited- use clauses. Instead, the concern, in this context, is the very identity of the leased space’s occupant—the name on the door, so to speak.

In a Super Regional Shopping Center, customers expect to see a significant number of retailers of known quality and reputation. Brand names have images. Typically, they are national advertisers that draw customers to the shopping center. Customers have confidence in brand name retailers and will travel quite some distance to shop at their stores. Therefore, it is a legitimate landlord concern that the tenant whose name is on the lease replaces itself only with a retailer of comparable status. In a Super Regional Shopping Center, is shouldn’t matter whose name is on the shoe store or the tie shop, so long as it is a retailer recognized by the consuming public. After all, if it has a string of locations and a brand name, it will have the management and marketing skills that the landlord would have been looking for in the first place when it initially sought out the named tenant. Therefore, in this style of retail project, the appropriate limitations should deal with limiting tenant transfers to successor operators that trade under a common name in more than a given number of retail locations.

In contrast, City Stores usually do not raise the same concern. Here, it is the city itself that creates the needed customer traffic. The retailing character of the neighborhood is not under the control of any particular landlord. Even if a lease is negotiated with a particular “quality” tenant, there is no assurance that even adjoining properties will reflect the same character of tenant. In this situation, the single most important control over use should be the “prohibited use” provisions of the lease. Once a landlord has eliminated objectionable uses, on whatever basis landlord and tenant agree, it really should not matter who actually operates the location. Even permitted use provisions can be liberal. After all, in a City Store project, it rarely matters to what legitimate retail use the premises are put. Whatever the identity of the occupant, the lease terms control the tenancy. If the lease is violated, the landlord can avail itself of its remedies.

When it comes to assignment and subletting concerns, Free Standing Stores bear a great deal of similarity to City Stores. Except for those structures that serve merely as detached portions of a larger, integrated shopping center, Fred Standing Stores are generally located on high traffic roads that bring accessibility and visibility to the building. The additional traffic drawn to the particular store by the identity of the named tenant inures to that tenant alone. The stand alone nature of a Free Standing store means that the landlord derives no added benefit if the store draws a lot of traffic or a little traffic. The demographic characteristics of a particular retailer’s customers versus that of a different retailer do not effect the revenue that a landlord derives from its other properties.

FORM OF LEASE

I doubt that few have ever thought about it in an analytic way, but the very first decision that the leasing parties make is the form of the lease to be employed. To quote a rent figure requires that both landlord and tenant understand what the rent to be charged covers. At one end of the spectrum, all occupancy costs may be included in the rent. Such an arrangement, commonly known as a “gross” lease, is inclusive of real property taxes, common area maintenance costs, property insurance costs, and sometimes even the utility costs to operate the leased property. When the landlord quotes rent on a “gross” basis, even the cost to make repairs within the leased premises may be included. Contrasted with office leasing arrangements, the use of gross leases may be relatively uncommon in the retail arena, but such practice is not extinct. In circumstances where the retail users are insignificant in comparison to the overall project environment, such as at an airport or within a convention site, expect to see some form of a gross lease form as the starting point for the final agreement. More about this later.

The underlying premise in a gross leasing arrangement is that the risk of unpredictable costs falls on the landlord. If the parties had perfect knowledge about the future costs to operate a property, the quoted rent would exactly cover those costs and provide a fixed, acceptable profit to the landlord. At the other extreme, when circumstances make sense, the parties may accept, as a starting premise, that the tenant should bear all risks of unpredictable operating costs. Sometimes called an “absolute net” or “triple net” lease, when such a form is chosen, the landlord gets to keep whatever rent money is left over after it pays its own financing costs. When rent is quoted on such a basis, all real property taxes, all maintenance and repair costs (common area and internal to the leased premises), and all costs of a similar nature are borne by the tenant.

Most leasing action lies between the two extremes—a landlord takes some leasing risks and the tenant takes others. Although the degree to which one party or the other is willing to take a risk depends upon many factors personal to each of the landlord and tenant, one context is the scope or nature of the retail project itself. All parties assume in a multi-tenanted retail project populated exclusively or almost exclusively by retail tenants, the landlord will be responsible to maintain everything that falls outside of individual leased premises. In that respect, the forms of lease offered for tenants (other than those that own their own buildings) in Regional Shopping Centers, Super Regional Shopping Centers, Community Shopping Centers, or Neighborhood Shopping Centers will all be very similar in structure. On the other hand, the form of lease used for a multi-tenanted Airport Project would differ substantially.

In a typical Airport Project, the landlord provides an extensive range of services beyond those that would be delivered in a traditional shopping center. For example, frequently, storage space is very limited. Consequently, many airport landlords provide central delivery and storage facilities to be shared in common by all retail tenants at the airport. The cost of providing those services might be passed along on a variable basis, such as on a per delivery basis or on an average square foot of storage space utilized basis. Also, airport authorities might provide interior cleaning services or require that their retail tenants utilize the approved airport cleaning contractor for such purposes. Similarly, many airport authorities generate their own power and provide such power as part of the retailer’s rent.

Even where the contrast is not as clear as between an Airport Project and a traditional shopping center, the choice of lease form is still dependent upon the nature of the retail project itself. Consider, for the moment, the difference between a Mixed Use project and one that is strictly limited to retail uses. For example, in a high-rise project, the upper floors are occupied by residential or office tenants. Such a combination of unrelated uses changes some of the leasing concepts. Cost recovery items such as for real estates taxes, common area expenses, and insurance are not fairly proportioned on a square foot basis alone. For example, to the extent that real estate taxes are assessed on an ad valorem basis, the upper floors of a tall building just don’t have the same “real estate” value as does the ground floor. On the other hand, the space occupied by stairwells, upper floor corridors, and elevators provides no value to first floor retail tenants. Unlike a multi-level project, there is no synergy between first floor retailers and upper floor occupants in a Mixed Use project. Such a situation mitigates against using either a “gross” form of lease or an “absolute net” form of lease. In fact, to the extent that there is no rational method of accounting for changes in overall building expenses in a way that would distinguish between the retail and other uses, an alternate form of lease for such a project would adjust the estimated rent component for such costs by use of a relevant index.

A Sports/convention facility poses a different challenge. Leasing attorneys have found that superimposing traditional shopping center lease forms over this type of retail leasing transaction is a frustrating task. As in an Airport Project, a retail tenant may be deprived of the resources with which it would ordinarily maintain and operate its leased premises. Merchandise handling services are commonly separate and remote from the tenant’s control. Utilities and similar services would be operated by the landlord in common with the other convention facilities. Frequently, like in a typical Airport Project, the facilities are governmentally owned and traditional real property taxing concepts do not apply.

In retail projects such as a Sports/convention Facility, an Historic Building Conversion, or a Theme Park, the primary business interest of the landlord lies outside of retailing activities. In such projects, landlords have the need and desire to carefully control the overall project environment. For example, it may not be in the landlord’s best interest to allow tenants to perform their own repairs and maintenance. This is because it is far more critical for a landlord of such specialized projects to maintain an absolutely uniform work and level quality than would be the case in even a Super Regional Shopping Center. Such landlords should never lose sight of their primary mission, i.e. to provide overriding service or ambiance, such as entertainment value or utility value. Therefore, circumstances such as these dictate that the form of lease employed by the landlord shift most of the responsibilities for performing services or maintaining individual premises to the landlord. Of course, this does not mean that in such projects, the landlord will bear all of the related expenses or even bear the risk of such expenses, but clearly the customary allocation of responsibilities between landlords and tenants may be inapplicable. For that reason, a form of lease prepared for such types of projects will vary greatly from one used for projects that are solely or overwhelmingly retail in nature.

SELECTING A FORM

The lesson to be understood is that when confronted with the task of crafting a lease for a retail project, talented attorneys will spend a small amount of time conceptualizing the framework in which the retail tenant is situated. After all, an attorney’s object is to facilitate the making of a deal that is acceptable to both landlord and tenant. This is true regardless of which party is represented by that particular attorney. It is easy to think about the next leasing project as if it were a variant of the previous leasing project. Doing so, however, could compromise the final result while at the same time create needless friction between the parties and their attorneys by reason of failing to recognize that each style of a retail project has its own peculiarities and special needs.


MEISLIK & MEISLIK
66 Park Street • Montclair, New Jersey 07042
tel: 973-783-3000 • fax: 973-744-5757 • info@meislik.com