How to Limit Tenant's Ability to Exercise ‘Performance Kickout’ Right

April 30, 2003

Strong national and regional tenants that are expanding into new markets often demand a “performance kickout” right. It gives the tenant the right to terminate the lease if gross sales fall below or don't reach a certain dollar amount during a “performance period”—that is, a set time period, typically the first few years of the lease. From the tenant's perspective, the performance kickout right gives it the security of knowing that it can close the store quickly—and cheaply—if the new market or location turns out to be a flop.

Ideally, it's better to reject any demand for a performance kickout right. But to lure a desirable tenant to your center, you may have to give the tenant this right. If so, be sure to limit the tenant's ability to exercise the performance kickout right so it can't walk away from its lease too easily, says New York attorney Howard M. Rittberg. To do that, Rittberg says, your lease should say that the tenant can't exercise its performance kickout right if any one of seven events occurs. There's a Model Lease Clause on p. 7 that discusses these events. You can adapt the clause and use it in your lease.

Seven Events that Cancel Performance Kickout Right

Make sure that your lease clause, like our Model Lease Clause, cancels a tenant's performance kickout right if any one of these seven events occurs:

* Tenant Fails to Send Notice

Require the tenant to notify you by a certain deadline, say 30 days after the end of the performance period, that it's planning to exercise its performance kickout right. If the tenant doesn't, the performance kickout right is canceled, says Rittberg [Clause, par. a(i)]. This way, the tenant has to warn you that it's planning to terminate the lease, giving you time to try to line up another tenant to take the space, he explains.

* Tenant Doesn't Operate Continuously

Don't let the tenant exercise its performance kickout right unless it has operated “continuously, actively, and diligently” by using 100 percent of its space, says Rittberg. Also, require the tenant to stay open during “Shopping Center Hours” [Clause, par. a(ii)]. (These hours are typically listed elsewhere in the lease or in the center's rules and regulations.) This way, you prevent a wily tenant that opens for only one or two hours a day from claiming that it's continuously operating and should be able to exercise its performance kickout right, he says. You also prevent a tenant from letting most of its space go dark while using only a tiny remainder as selling space, he adds.

Practical Pointer: Expect a savvy tenant to argue that the requirement to occupy 100 percent of its space applies only to the selling area, not to the office and storage area, says Rittberg. You may have to give in on this point, he says.

* Tenant Doesn't Keep Fully Stocked Shelves

Don't let a tenant that hasn't kept its shelves fully stocked with current merchandise—or isn't selling it at competitive prices—exercise a performance kickout right, says Rittberg [Clause, par. a(iii)]. The tenant may be deliberately filling the shelves with old, damaged, or discounted goods to lower its gross sales.

* Tenant Doesn't Staff Store with Trained Employees

Bar the tenant from exercising the performance kickout right if it doesn't keep a full staff of trained personnel working in its space, says Rittberg [Clause, par. a(iv)]. A tenant that hires a skeleton staff or incompetent employees with no experience is trying to undermine its gross sales, he says. So it shouldn't benefit from the performance kickout right.

* Tenant Causes ‘Event of Default’

Your lease clause should also say that if the tenant causes an “event of default” under its lease, or violates the lease in some way, it won't be able to exercise its performance kickout right, says Rittberg [Clause, par. b]. The performance kickout right is a special concession for a “good” tenant, he says. It isn't meant for a deadbeat tenant, he explains.

Practical Pointer: Your lease should also make it clear that even if the tenant exercises its performance kickout right, it's still liable for its lease obligations up to the termination date, says Rittberg.

* Tenant Assigns or Sublets

If the tenant assigns its lease or sublets its space, don't allow it—or the assignee or subtenant—to exercise the performance kickout right, says Rittberg [Clause, par. c]. The performance kickout right is a special concession intended only for the original tenant, he says. You shouldn't allow it to transfer to anyone else, he warns.

Practical Pointer: A savvy tenant may balk at this, says Rittberg. The tenant may demand that you limit the ban to assignees and subtenants that will use the space differently from the original tenant, he explains. For example, if an assignee or subtenant uses the space as a restaurant but the original tenant used the space as a furniture store, neither the tenant nor the assignee or subtenant should be allowed to exercise the performance kickout right. Depending on the negotiating power of the tenant, you may have to give in on this point, he says.

* Tenant Opens Competing Store

If the tenant opens another store within a certain radius—say, one mile—of your center, make sure it can't exercise its performance kickout right, says Rittberg [Clause, par. d]. Otherwise, it's too easy for the tenant to open a competing store at a more successful location—and, in effect, sabotage its business at your center—so it can wiggle out of your lease.

Practical Pointer: If the tenant balks at this, try this compromise: Agree to add the gross sales of the tenant's competing store to the gross sales of the tenant's store at your center. Then use the total to determine whether the performance kickout right is triggered, he advises.

CLLI Source

Howard M. Rittberg, Esq.: Partner, Levene Gouldin & Thompson, LLP, 450 Plaza Dr., Vestal, NY 13850; (607) 763-9200.

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