Welcome to the twelfth and final installment in our series “The ABCs of Commercial Real Estate Leases”. This post is on Retail Lease Provisions, a type of Lease Clause that is specific to retail space and leases. Because of the unique nature of retail, leases for retail space often include clauses or provisions that are not typically found in leases for other types of properties, such as office, industrial or multi-family. In this post, we’ll review some of the more common Retail Lease Provisions, provide examples and point out some of the important information to look for in them.
Business Hours
In retail leases, the hours during which a tenant is required to remain open for the conduct of business. In some retail leases, the tenant’s business hours are contingent upon a specified percentage of tenants maintaining the same business hours.
An Example of A Business Hours Lease Provision
(1): Tenant’s business hours are 9am to 9pm, Monday through Friday, and 10am to 6pm, Saturdays and Sundays, excluding holidays. (2): Tenant shall be open for business during all regular center hours, provided 80% of all other tenants of the Center are open for business during regular Center hours.
Continuous Operations Clause
A type of Business Hours clause in a retail lease that obligates the tenant to remain open for business throughout the term of its lease. This is not to be confused with a Business Hours clause, which specifies the hours during which a tenant is required to remain open for business.
A continuous operations clause helps to avoid a situation where a tenant closes its store but continues to pay rent, potentially resulting in no percentage rent and lower traffic and sales for other tenants. Also see “Go Dark” below.
An Example of A Continuous Operations Clause
ABC Retail Tenant signs a lease at Realogic Mall that requires it to continuously operate its business throughout its 10‐year lease term. After three years, ABC is not happy with customer traffic at the mall and decides to discontinue operating. ABC would be in default of their lease pursuant to the Continuous Operations Clause.
Important Information to Look For In a Business Hours Clause
- Whether the Tenant is required to operate continuously
- Exceptions to the continuous operations requirement, if any
- Consequences if the Tenant violates the clause (i.e., monetary fee due to Landlord, the Landlord can terminate)
Co-Tenancy
A clause in a retail lease that provides remedies to a tenant in the event that another tenant, typically an anchor or major tenant, ceases operations at the property.
There are two types of co‐tenancy clauses: (1) opening co‐tenancy and (2) ongoing co‐tenancy. An opening co‐tenancy clause typically provides that a tenant is not required to initially open until specified anchor tenants and/or a certain percentage of other tenants are open. An ongoing co‐tenancy clause typically states that a tenant is not required to remain open if specified tenants and/or specified percentage of tenants are not open.
Co-Tenancy, Illustrated
ABC Retail Tenant is concerned that traffic at Realogic Mall will be adversely affected if BIG Anchor Tenant ceases its operations at the mall. To alleviate this concern, ABC negotiates in its lease a Co‐Tenancy clause, whereby if BIG Anchor Tenant ceases operations, ABC Retail Tenant may terminate its lease at Realogic Mall.
Important Information To Look For In Co-Tenancy Clauses
- Anchor(s) and/or certain percentage of tenants not open that triggers the Tenant’s right for remedy
- Description of the remedy (typically termination or reduced rental payments, i.e., Percentage Rent in lieu of Minimum Rent)
- Notice requirements, if any
- Termination fee, if any
Go-Dark
A clause in a retail lease that allows a tenant to cease operations at a property. Although “Go Dark” provisions are rarely granted, other than to major national tenants, it is a very important provision to be aware of. This clause may be hidden in various lease provisions, such as continuous operations, hours of operation, etc. This provision varies from Continuous Operations in that it specifically grants a tenant a right to close the Premises during periods that would normally be required, without repercussion.
Example of A Go-Dark Clause
From and after the date that Tenant opens for business, the Tenant shall not be obligated to continuously operate its business. If for any period in excess of 90 consecutive days the Tenant ceases to operate, the Landlord may at any time thereafter terminate the Lease and recapture the Premises by written notice.
Important Information To Look For In Go-Dark Clauses
- Trigger(s) for Tenant to cease operations
- Notice requirements, if any
Landlord Audit Rights
This is a clause in a retail lease that grants the Landlord the right to audit the books and records of a Tenant related to gross sales.
Example of A Landlord Audit Right
Landlord shall have the right at any time upon prior written notice and during Tenant’s business hours at Tenant’s general office to examine books and records related to business conducted in, upon, or from the Premises, or have them audited at Landlord’s expense.
Retention Of Books And Records Related To Tenant’s Sales
This is a clause in a retail lease that states how long the Tenant must retain books and records showing the Tenant’s gross sales.
Example of Retention Of Books and Records Related To Tenant’s Sales Clause
Tenant shall keep at its general office complete and accurate books of account and records with respect to all business conducted in, upon, or from the Premises, for a period of three years.
Media Fund/Promotion
A fund established by the landlord of a retail property whereby tenants are required to make specified contributions to the fund for the purpose of promoting the property in the local media. The fund is managed by the landlord and, in many instances, the landlord is required to make a defined number of promotions per year.
Example of A Media Fund/Promotion Clause
ABC Retail Tenant has a lease clause that requires that a Media Fund contribution be made in an amount equal to the lesser of $0.50/sq. ft. /annum or $1,000/annum. Upon collection of the Media Fund contributions from ABC and all other tenants of Realogic Mall required to make such a contribution, the Landlord places advertisements for Realogic Mall in the local newspaper and on local radio stations.
Important Information To Look For In Media Fund/Promotion Clauses
- Tenant’s contribution amount and scheduled increases, if any
- Landlord’s contribution amount and scheduled increases, if any
- Required participation of other tenants
Merchant Association
An association organized by a landlord of a shopping center but operated jointly by the landlord and tenants of the center, that collects funds for use in the advertising and promotion of the center to the benefit of all tenants. In many instances, the landlord is required to match a specified percentage of the Merchant Association Dues received from tenants.
Example of A Merchant Association Clause
ABC Retail Tenant has a lease clause that requires ABC to participate in the Merchant’s Association at Realogic Mall, so long as 75% of the other mall tenants are also required to participate, and pay dues equal to $2,000/year, subject to annual increases equal to the increase in the Consumer Price Index. The lease also requires the Landlord to make a matching contribution on a quarterly basis equal to 25% of the dues received from all contributing tenants. ABC Retail Tenant is allowed to have one member serve in the association. All members meet once a month and determine how the funds collected from the tenants and Landlord should be spent to promote the mall and increase customer traffic therein.
Important Information To Look For In A Merchant Association Clause
- Tenant’s contribution amount and scheduled increases, if any
- Landlord’s contribution amount and scheduled increases, if any
- Required participation of other tenants
- Board member information, if any
Radius Restriction
In retail leases, a clause that prohibits a tenant from opening a similar or competing store within a defined area from the location of the leased premises. The intent of a Radius Restriction clause is to protect a tenant’s sales from the leased premises, and in many cases, the landlord has the right to include the sales from the similar or competing store with the sales from the leased premises in the calculation of Percentage Rent.
Example of A Radius Restriction
ABC Coffee is a tenant on the ground floor level of Realogic Tower that sells gourmet coffee from its premises to the general public. In addition to Base Rent, ABC is required to pay Percentage Rent based upon the amount of Gross Sales from the premises. ABC’s lease contains a Radius Restriction clause that prohibits ABC from opening a competing coffee store within a two block radius of Realogic Tower. Due to heavy demand within the area, ABC opens another store 1.5 blocks from their store at Realogic Tower. Due to the Radius Restriction clause within the Realogic Tower lease, the Landlord can pursue default remedies against ABC and can also require that ABC include sales from the competing store in the computation of Gross Sales from Realogic Tower for purposes of calculating Percentage Rent.
Important Information To Look For In a Radius Restriction Clause
- Description of the geographical radius
- Notice requirements, if any
- Time limitations, if any
- Exceptions to restrictions, if any
That’s A Wrap!
That wraps up our series on commercial real estate lease fundamentals, “The ABCs of Commercial Real Estate Leases”. Hopefully you’ve found the 12 posts in the series to be helpful, educational and informative. If you missed any, here are links to all 11 of the previous posts in the series:
Part 2: Rent and Recoverable Expenses – Gross Leases vs Net Leases
Part 3: Rent and Recoverable Expenses – Inclusions, Exclusions and Caps
Part 4: Lease Options – Contraction and Expansion
Part 5: Options – Renewal and Extension
Part 6: Options – Purchase and Relocation
Part 7: Options – ROFO/ROFR and Termination
In addition, we’ve compiled all of the information in the series into a comprehensive primer on commercial real estate leases called, like our blog series, “The ABCs of Commercial Real Estate Leases”.
While our series on commercial real estate leases may be over, we’ll be covering lots of other topics pertinent to commercial real estate in future posts, so be sure to check the Realogic Blog regularly.
By Terry Banike, Marketing Manager, Realogic