Don’t Let Storage Area Diminish Percentage Rent

If you're negotiating a lease with a retail tenant that wants to devote part of its space to storage, make sure the lease limits the size of that storage area. Otherwise, you could lose percentage rent if the tenant devotes too much space to the storage area and not enough space to retail uses. That’s because a storage area doesn't generate sales.

To be as precise as possible in the lease when limiting the size of the storage area, avoid size limits that rely on a confusing, vague term—such as “incident to” or “incidental.” Instead, spell out the minimum square footage that the tenant must use as retail space and the maximum square footage it can use for storage.

If you don’t set a precise limit on a storage area, here’s what could happen: Your lease that requires the retail tenant to use its space for retail purposes only, but permits the storage of goods “as an incident to” conducting the retail business has a loophole—the tenant can use a significant amount of square feet of the space for “extra storage.” You could sue the tenant, claiming that it had violated the lease because its storage area was so big that it wasn't incident to the retail business and it deprived you of percentage rent. But a court could rule that the tenant didn't violate the lease because you didn’t specify either the minimum square footage to be used for retail space or the maximum permitted for storage space. It might say that you can’t insist that it rewrite the lease to include this omitted condition. And it would most likely be hard for you to prove that the tenant intentionally expanded the storage area to minimize percentage rent.

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