Get 14 Protections When Renting Retail Space in Office Building
Renting an office building space to a retail tenant raises many issues that you may not have to consider with office tenants—such as trash disposal, odor and noise problems, pest control, and long lines and crowds, notes Ft. Lauderdale attorney Irwin J. Fayne. If your standard office lease doesn't address those issues and you use it with a retail tenant, you could set yourself up for big problems—and lots of complaints from your office tenants.
With the help of Fayne, New York City attorney A. Barry Levine, and property manager Richard F. Muhlebach, we've put together a checklist of 14 protections to include in your lease if you rent space to a retail tenant (other than a restaurant, which requires additional protections). We'll also give you Model Lease Language that you can use to add these retail protections to your lease. CLLI0068 If you put the Model Lease Language in a separate “retail requirements rider” that you attach to your lease, you can still use your standard office lease form with the retail tenant, Fayne, Levine, and Muhlebach suggest.
Restrict Retail Tenant's Use of Space
Restrict how the retail tenant may use its space, says Muhlebach. Say in the lease that the retail tenant can use the space for the purpose specified, and for no other purpose, advises Levine. Otherwise, for example, a bookstore with a small café area could transform itself into a full-fledged restaurant, warns Muhlebach. Or a retail tenant could change its use to one that's not compatible with the building's image or tenant mix, he notes.
Model Lease Language
Tenant shall use the Premises only for operation of [insert type of business] (the “Required Business”) and for no other purpose.
Require Continuous Operations During Certain Hours
Have the retail tenant agree to continuously operate for a minimum number of hours, says Fayne. And specify which hours these are, he adds. For example, if the retail tenant is an office supply store, you may want it to be open when your office tenants are at work. And you may want a dry cleaner tenant to stay open late enough for your office tenants to pick up their cleaning on the way home. But for safety and security reasons, you may not want the retail tenant to operate in its space past a certain hour, Fayne notes.
Model Lease Language
Tenant shall open for business in the Premises no later than [insert date] and shall continuously operate the Required Business in the Premises during the following hours:
(i)Monday through Friday: [insert hours of required operation]; and
(ii)Saturday, Sunday, and holidays: [insert hours of required operation].
In no event shall Tenant stay open for business after [insert time].
Require Tenant to Operate Under Best-Known Trade Name and in First-Class Manner
If the retail tenant has a recognizable trade name and a good reputation, require it to operate in your building under that trade name instead of under one that's less well-known, says Fayne. This will add to the prestige of your building and attract more customers, he explains. Also require the retail tenant to operate in a first-class manner, similar to other first-class businesses operating in first-class office buildings in your area, Fayne adds.
Model Lease Language
Tenant shall operate the Required Business under the trade name [insert trade name] and in a manner commensurate with the service, dignity, and ambiance of similar first-class businesses that are operated in first-class office buildings located in [insert applicable geographic region].
Practical Pointer: Consider requiring the retail tenant to install new, first-class fixtures, equipment, and furniture in its space, says Fayne. Otherwise, the tenant might install used and dingy items that could give customers a bad impression of the space and your building, he warns.
Ban Undesirable Uses
Ban certain activities by the retail tenant that could harm your building's reputation or desirability, says Levine. Fayne notes that you may want to ban the sale of secondhand, damaged, defective, or out-of-style merchandise; auctions; liquidation, “going-out-of-business” and “moving” sales; sales of pornographic materials; or a pawn shop.
Model Lease Language
Tenant shall not conduct, maintain, or carry on its business in any manner which, in the sole judgment of Landlord, may harm or tend to harm the business or the reputation of Landlord or the Building's desirability as a high-quality building for offices of financial, insurance, legal, accounting, and similar prestigious institutions, or reflect, or tend to reflect unfavorably on the Building, Landlord, or other Tenants or occupants, or which might confuse or mislead, or tend to confuse or mislead the public; and Tenant shall immediately discontinue any such conduct upon written demand of Landlord. Sales, business and/or activities prohibited by the foregoing include, without limitation [insert banned practices, e.g., a pawn shop].
Ban Obstructions in Common Areas
Don't let the retail tenant obstruct the building's common areas and lobbies when selling or storing merchandise, or in any other way, says Fayne. Obstructions could impede the flow of traffic in the building, create an eyesore, and anger your office tenants, he warns. Also, bar retail tenants from operating an “open store front” through which it sells products—for example, tobacco products, candy, and newspapers, advises Levine. Similarly, bar tenants from conducting “sidewalk sales,” he adds. Both can obstruct sidewalk traffic and are eyesores, he notes.
Model Lease Language
Tenant shall not keep or display any merchandise in or on or otherwise obstruct any Common Areas or other facilities of the Building. In no event whatsoever shall Tenant have an “open store front” or storefront window at the Premises by which it may conduct business directly with customers on the sidewalk. Furthermore, in no event shall Tenant use the sidewalks adjacent to the Premises for the sale or display of goods and merchandise.
Ban Solicitations by Tenant
Ban solicitations by the retail tenant, says Fayne. Otherwise, the retail tenant might disrupt your office tenants by going door-to-door in your building to sell merchandise or solicit business, he warns.
Model Lease Language
Tenant shall not solicit nor cause to be solicited any business for the Premises in any part of the Building outside the Premises.
Keep Control over Design Elements
You'll want the retail tenant's store to fit in aesthetically with the building, says Fayne. To do that, keep control over the retail tenant's “design elements”—that is, the finishes, materials, fixtures, equipment, furnishings, and decorations it uses, says Fayne. Require the retail tenant to submit plans and specifications of its design elements for your approval, along with other submissions required by the work letter. Don't allow any changes to the design elements without your prior written approval, he adds. Also, don't allow the tenant to install any flashing or intermittent lights, laser lights, or neon lights that can be seen from outside the space, says Fayne.
Model Lease Language
Tenant acknowledges that Landlord has a strong interest in the finishes, materials, fixtures, equipment, furnishings, decorations, and other aesthetic considerations of the Required Business (the “Design Elements”) and how such Design Elements relate to the balance of the Building. All Design Elements shall be set forth in plans and specifications that Tenant shall submit to Landlord for approval in accordance with Exhibit [insert # of work letter exhibit] of this Lease. There shall be no change in any of the Design Elements at any time during the term of this Lease without Landlord's prior written approval which may be withheld based on Landlord's determination of aesthetic considerations appropriate for the Building. In no event will Tenant install any flashing or intermittent lights, laser lights, neon lights, or similar lighting technology that is discernible from outside the Premises.
Keep Control of Signage and Storefront
If your retail tenant's signage isn't compatible with your building's exterior, it can ruin the building's appearance, notes Levine. For example, you don't want a retail tenant to put tacky neon signs on your building's elegant, black granite exterior. So make sure the retail tenant must get your approval to install any signage that's visible from outside its space, he says. You don't need to require your approval of interior signs that are professional and in good taste, as long as you can force the retail tenant to remove any interior sign that you find objectionable, Levine adds. Also, ban the installation of exterior lighting, decorations, transmitters, and storefront changes, unless the retail tenant gets your consent, says Fayne.
Model Lease Language
a.Tenant shall not place or install any sign on the exterior of the Premises or Building, nor shall Tenant place in any display case, windows, entrance doors, or any other area visible to public view from the outside of the Premises, any signs, flashing signs, animated signs, or otherwise, without first obtaining in each instance, Landlord's prior written consent and approval which may be withheld in Landlord's sole and absolute discretion.
b.Tenant may utilize dignified interior signs which are neat, professionally printed, and in good taste without obtaining Landlord's approval to the extent that they do not detract from the dignity and character of the Building; provided, however, that Tenant agrees to remove such interior sign if Landlord shall object thereto.
c.Tenant shall not:
(i)Install any exterior lighting, decorations, transmitter or receivers, fence, aerial, or mast anywhere on the outside of the Building or Premises; or
(ii)Make any change to the storefront;
without the prior written consent of Landlord, which may be withheld in Landlord's sole and absolute discretion.
Require Tenant to Control Crowds
Problems can arise if the retail tenant draws so many customers that crowds gather in the building's lobby and other common areas near the store. Someone could get hurt if a crowd becomes disorderly—and that person might sue you. So require the retail tenant to police and control crowds in the common areas to your satisfaction, advises Fayne. Otherwise, the responsibility will fall on your shoulders, since typically you're responsible for what goes on in the common areas, he explains.
Also, get the right to require the retail tenant to hire and pay for extra security guards and/or install moveable theater ropes and stanchions alongside the store's entranceway if the retail tenant isn't keeping adequate control of the crowds, says Fayne. Obligate the tenant to follow any other directions that you give for controlling crowds, adds Levine. And get the right, if the retail tenant refuses to comply with the required crowd controls or any other directions you gave, to carry them out on the retail tenant's behalf and at its expense, says Fayne.
Model Lease Language
a.Tenant shall police any queues of customers and crowds that form outside of the Premises to Landlord's satisfaction to make sure that such waiting customers and crowds do not impede pedestrian traffic flow in and out of the Building or become disorderly. Tenant shall prevent its customers from queuing, and crowds of its customers from forming, inside the Building's lobby. Tenant agrees to follow Landlord's other directions regarding orderly queuing and crowd control.
b.If Landlord determines, in its sole judgment, that Tenant has not complied with Paragraph a hereof, Tenant will, upon Landlord's direction and at Tenant's sole cost and expense:
(i)Hire a security guard or guards; and/or
(ii)Install temporary and removable crowd control devices in areas designated by Landlord.
c.If Tenant fails to comply with Landlord's directions pursuant to Paragraphs a and b hereof, Landlord shall have the right to do so on Tenant's behalf, and Tenant shall reimburse Landlord for the cost and expense of doing so.
Control Loading and Storage
Retail tenants are likely to get frequent and large deliveries. To prevent disruption to your building and tenants, restrict those deliveries to a designated entrance, says Fayne. And restrict them to times set by the building's management, adds Muhlebach. You don't want deliveries when the tenants' employees are arriving for work, taking a lunch break, or leaving work, Muhlebach notes. If the retail tenant is on the ground floor, the best entranceway may be the back door to the retail tenant's space, if there is one. If the retail tenant isn't on the ground floor, require it to use only the freight elevator servicing its portion of the building—rather than the passenger elevators—for deliveries.
Also, obligate the retail tenant to prevent vehicles that are unloading its merchandise from interfering with the use of the lobby and the building, says Muhlebach. And require the retail tenant to coordinate any deliveries through the lobby with your building's management, he adds.
Model Lease Language
Tenant shall prevent the loading, unloading, or delivery of merchandise, supplies, or other property outside the area and entrance designated therefor from time to time by Landlord. If the Premises is not located on the ground floor of the Building, Tenant shall use only the freight elevator servicing the retail portion of the Building for transporting any merchandise, supplies, and other property to and from the Premises. If Tenant is located on the ground floor of the Building, all loading, unloading, and deliveries to and from the Premises shall be made only through [insert location], or through such other manner as Landlord shall direct and at times designated by Landlord or the Property Manager. Tenant shall prevent any parked or standing trucks, trailers, or other vehicles, or equipment engaged in such loading, unloading, or deliveries in a manner that, in Landlord's opinion, interferes with the use of any portion of the Building including, without limitation, the Common Areas. Deliveries through the Common Areas shall be coordinated with the Property Manager and shall occur only at such times as the Property Manager deems appropriate.
Prevent Sounds, Odors, and Vibrations Inside Building
Retail tenants can bring noise and odor problems with them that can be nuisance to your office tenants. For example, a CD store might play loud music and a manicure salon or dry cleaner might generate chemical odors, notes Muhlebach. So bar any noxious or objectionable odors, fumes, or noises from the space, says Levine. Require the retail tenant to vent and exhaust odors from the space by installing the vent/exhaust systems that you require and that comply with the law, he says. And add that the retail tenant mustn't allow any music or other similar sounds to be heard outside the space without your consent, Levine recommends.
Model Lease Language
Tenant shall not allow any noxious or objectionable odors, fumes, or noises to emanate or escape from the Premises. Tenant shall properly vent and exhaust odors from the Premises, installing such system(s) that Landlord, in its sole judgment, requires and that complies with all relevant laws and governmental regulations. Tenant shall not permit any music or other similar sounds to be heard outside the Premises without Landlord's prior written consent.
Practical Pointer: If you're worried about potential noise problems with a retail tenant, require it to install soundproofing at its space, says Muhlebach.
Control Trash Disposal
Trash disposal can be a big issue with retail tenants. Unlike most office tenants, retail stores can generate unusually large amounts of trash when unpacking shipments, says Muhlebach. And businesses that sell food—even those that aren't restaurants—require frequent trash pickups, adds Levine. Don't let the retail tenant accumulate trash outside of the space, except in compactors or approved receptacles, says Fayne.
If the retail tenant will require more trash disposal services than your building provides to its office tenants, let the retail tenant contract separately with the building's disposal company and get billed directly by that company, says Muhlebach. If the retail tenant gets a separate Dumpster, make sure that it's kept clean, frequently emptied, and placed in a location that you choose, adds Fayne.
Model Lease Language
a.Tenant shall not store nor permit accumulations of any trash, garbage, rubbish, nor other refuse inside or outside of the Premises except in compactors or other receptacles approved by Landlord.
b.If required by Landlord, Tenant shall at its sole cost and expense contract separately for trash removal services with the Building's trash disposal contractor. If Tenant shall obtain a separate Dumpster or other appropriate equipment for trash removal, then Tenant shall:
(i)Place its Dumpster in a location selected by Landlord from time to time;
(ii)Maintain its Dumpster in a neat and sanitary condition; and
(iii)Empty the Dumpster as often as necessary (but at least [insert frequency, e.g., daily]) to avoid overloading, leakage, spillage, pest and rodent problems, and unsanitary conditions.
Practical Pointer: Instead of letting a retail tenant that needs additional services contract separately with the building's disposal company for them, you may want the retail tenant to agree to have you provide the additional services at its expense, says Muhlebach.
Make Tenant Responsible for Plate Glass
Protect the plate glass in the doors and windows at the retail tenant's space. Require the retail tenant to keep them clean, inside and out, says Fayne. And make the retail tenant responsible for all breaks and other damage to the plate glass. To that end, require the retail tenant to carry special form property insurance (without a deductible) on the plate glass, he adds.
Model Lease Language
Tenant shall at all times keep the inside and outside of all plate glass in the doors and windows of the Premises clean. Tenant shall be responsible for all damages to and breakage of plate glass of the Premises including the storefront, and Tenant shall carry special form property insurance without a deductible on all such plate glass throughout the Lease Term. Such insurance shall otherwise comply with requirements of this Lease pertaining to insurance.
Require Pest Extermination
Pest control will be particularly important if your retail tenant sells food. So it's a good idea to require the retail tenant to arrange for separate pest control services at its expense, says Muhlebach. To make sure that the pest control is done properly, require the retail tenant to use a licensed pest extermination contractor, says Fayne.
Model Lease Language
On a monthly basis, or sooner if reasonably deemed necessary by Landlord, Tenant shall, at its sole cost and expense, promptly cause the Premises to be treated for pests by a licensed pest extermination contractor.
Other Points to Consider
Depending on the nature of the retail tenant business and its negotiating power, you may need to consider these other points when negotiating your lease:
Percentage rent. Instead of paying a flat rent, many retail tenants pay a monthly minimum rent, plus rent based on a percentage of their gross sales (known as “percentage rent”), notes Levine. Calculating percentage rent requires a lot of effort on your part. You must collect gross sales reports from your retail tenants and have your accountant calculate what's due to you, says Muhlebach.
Operating expenses. A retail tenant may refuse to pay a share of any operating expenses that benefit the office tenants but don't directly benefit the retail tenant, says Fayne. For instance, the retail tenant may insist on excluding the following from operating expenses: electricity for office space when the retail tenant's space is separately metered; janitorial services provided to office space but not to the retail space; maintenance/repairs for building HVAC equipment when the retail tenant has its own HVAC equipment; and elevator service if the retail tenant is on the first floor. You'll probably have to agree to these exclusions, says Fayne.
Safety and security. In addition to long lines and crowds, retail tenants can cause unique security problems that you should consider before leasing. For example, a CD and video store may draw teenagers who are loud and disruptive. Consider making the retail tenant agree in the lease to eliminate any security problems it causes, suggests Muhlebach. For example, if visitors to the retail tenant vandalize your building, the retail tenant will have to increase the building's security at its own expense to prevent future incidents.
Insurance. Retail tenants may have different insurance requirements from your office tenants. Before signing a lease with a retail tenant, talk to your insurance broker and find out what additional or different insurance requirements you may need to impose to give you full protection, says Muhlebach.
Licenses. If the retail tenant will need governmental licenses and permits to occupy the space, make the retail tenant responsible for getting, paying for, and complying with those licenses and permits, says Fayne.
Parking. Your retail tenants' patrons may overtax your parking lots and take up spaces your office tenants use. As a result, you may need to designate reserved parking for your office tenants, says Muhlebach. Another possibility is to section off part of your parking lot for retail patrons to use, he adds.
CLLI Sources
Irwin J. Fayne, Esq.: Member, Holland & Knight LLP, One E. Broward Blvd., Ste. 1300, Ft. Lauderdale, FL 33301; (954) 525-1000; irwin.fayne@hklaw.com.
A. Barry Levine, Esq.: 320 E. 23rd St., New York, NY 10010; (212) 477-5118; blevine2@nyc.rr.com.
Richard F. Muhlebach, CPM, SCSM: Senior Managing Director, Kennedy Wilson Properties, 275 118th Ave., Ste. 105, Bellevue, WA 98005; (425) 453-2500, rmuhlebach@KennedyWilson.com.