Limit Tenant's Right to End Lease or Reduce Rent if Gross Sales Lag

Strong national and regional tenants that are expanding into new markets often demand some type of protection if their gross sales fall below or don't reach a minimum dollar threshold during a set time period. A tenant like this will want either the right to terminate its lease (called a “performance kickout” right) or the right to reduce its rent until it meets its gross sales goal.

But giving a tenant a performance kickout right or reduced rent right can cause problems for you: It could leave you with a dark space or too little rent—and an unhappy lender. And a deceitful tenant could deliberately abuse either of these rights. For instance, a tenant may want to close down its store at your center and rent space at a brand new center down the road. Or it may decide that it's paying you too much rent. So to keep its gross sales at or below the minimum dollar threshold, it might keep its store at your center half-stocked, half-staffed, and rarely open. Then it could exercise its performance kickout right or reduced rent right.

To avoid these problems, you don't want to make it too easy for the tenant to walk away from its lease or reduce its rent, say Dallas attorney T. Andrew Dow and New York attorney Howard M. Rittberg. So say in the lease that the performance kickout right or reduced rent right won't be available to the tenant unless it meets nine conditions. There's a Model Lease Clause on p. 3 that you can adapt and use in your lease that includes these conditions.

Set Nine Conditions for Tenant

Make sure that your lease, like our Model Lease Clause, includes the following nine conditions:

* Tenant Has Operated According to Use Clause and Center Hours

Don't let the tenant exercise its right unless it has operated in accordance with its use clause, say Dow and Rittberg. Also, require the tenant to have stayed open during “Shopping Center Hours” [Clause, par. a]. (These hours are typically listed elsewhere in the lease or in the center's rules and regulations.) With this condition, a tenant that opens for only one or two hours a day couldn't legitimately claim that it's operating as required and should be able to exercise its performance kickout right or reduced rent right, he says.

* Tenant Has Kept Store Fully Stocked

Require the tenant to have kept its shelves fully stocked with current merchandise—and to have sold it at competitive prices, says Rittberg [Clause, par. b(i)]. Otherwise, the tenant may have deliberately filled its shelves with old, damaged, or discounted goods to lower its gross sales.

* Tenant Has Staffed Store with Trained Personnel

Say that the tenant must have kept a full staff of trained personnel working in its space, Rittberg explains [Clause, par. b(ii)]. A tenant that hires a skeleton staff or personnel with no experience is trying to undermine its gross sales, he says. So it shouldn't benefit from the performance kickout right or reduced rent right.

* Tenant Has Occupied Entire Space

Require the tenant to have occupied the entire space for a use permitted by the lease, says Dow [Clause, par. c]. A tenant then won't be able to undermine its gross sales by letting most of its space go dark and using a tiny remainder as selling space, he explains.

Practical Pointer: Expect a savvy tenant to argue that the requirement to occupy the entire space should apply 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 Has Used Best Efforts to Meet Sales Mark

Allow a tenant to exercise its performance kickout right or reduced rent right only if it has used its “best efforts” to meet the minimum sales threshold, says Dow [Clause, par. d]. This language essentially tells the tenant that it must first do everything it can to meet the minimum sales threshold, he explains. This is a tough hurdle for tenants.

Practical Pointer: The tenant may argue that it should be required to make only “commercially reasonable” efforts to meet the minimum sales threshold, notes Dow. That is, it must do what any other tenant would do in this position. You may have to agree to this lower standard, he says.

* Tenant Has Sent Notice

Require the tenant to notify you in advance that it will exercise its performance kickout right or reduced rent right. And set a deadline for this notice, such as 30 days after the end of the performance period (that, is after the period for meeting the minimum sales threshhold), says Dow [Clause, par. e]. This way, you'll at least get a warning that the tenant is terminating the lease or reducing the rent. If the tenant is terminating, this gives you time to try to line up another tenant for the space, he explains.

* Tenant Hasn't Caused ‘Event of Default'

Your lease should also say that if the tenant ever caused an “event of default” under its lease—that is, violated the lease in some way—it won't be able to exercise its performance kickout right or reduced rent right, says Rittberg [Clause, par. f(i)]. The performance kickout right and reduced rent right are special concessions for a “good” tenant, he says. They're not meant for a deadbeat tenant, he explains.

Expect a savvy tenant to balk at this condition. The tenant won't want to let the condition apply to a past event of default that the tenant had already cured, he notes. Instead, the tenant will probably demand that this condition say that the tenant can't exercise its performance kickout right or reduced rent right if there's an uncured event of default, says Dow.

Practical Pointer: The lease should say elsewhere that if the tenant causes an event of default while it's paying reduced rent, it will lose the reduced rent—both prospectively and retroactively. The tenant will then have to pay the amount it would have been paying without the reduction, advises Dow. This may help deter the tenant from causing an event of default, he notes.

* Tenant Hasn't Assigned or Sublet

If the tenant assigns its lease or sublets its space, don't allow the tenant—or the assignee or subtenant—to exercise the performance kickout right or reduced rent right, says Rittberg [Clause, par. f(ii)]. Both of these rights are special concessions intended only for the original tenant, he says. You shouldn't allow them to transfer to anyone else, he warns. Plus, an assignee or a subtenant may use the space differently than the original tenant, which might result in gross sales lower than the tenant's gross sales, Rittberg adds. So an assignee or a subtenant might be more likely than the tenant to exercise the performance kickout right or reduced rent right if that right was made available to it, he warns.

* Tenant Hasn't Opened Competing Store

Your lease with a tenant may have a separate radius restriction clause in it. If it doesn't, then include the following condition in your lease: If the tenant wants to exercise its performance kickout right or reduced rent right, require that the tenant not have opened another store within a certain radius—say, one mile—of your center, says Rittberg [Clause, par. f(iii)]. Otherwise, the tenant could open a competing store at a more successful location—and easily sabotage its business at your center—so it can wiggle out of your lease.

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

Practical Pointer: Elsewhere in your lease, make it clear that if the tenant exercises its performance kickout right, it remains liable for its lease obligations up to the termination date, says Rittberg.

Consider One More Condition

There's one more condition you may want to consider adding to your lease, says Rittberg: If the tenant wants to exercise its performance kickout right or reduced rent right, say that the tenant mustn't have reached the minimum sales threshold at any time during the lease [Clause, par. f(iv)]. These rights are meant to protect a struggling tenant. If the tenant has reached the minimum sales threshold, it's not struggling and shouldn't have access to those rights any longer, Rittberg notes.

But you may have difficulty getting a tenant to agree to include this condition in your lease. Most tenants who get these rights sign long-term leases with multiple renewals, Dow points out. The tenant may argue that even if it reaches the minimum sales threshold in year two or three, its business (or the neighborhood) may go downhill after that. So it may not be feasible for it to stay in the space by, say, year eight, he notes. The tenant may also point out that its gross sales in year two have nothing to do with its gross sales in year eight, says Dow. But Rittberg says that he has gotten tenants to agree to this condition.

CLLI Sources

T. Andrew Dow, Esq.: Member, Winstead Sechrest & Minick P.C., 5400 Renaissance Tower, 1201 Elm St., Dallas, TX 75270-2199; 214-745-5400, ADow@winstead.com.

Howard M. Rittberg, Esq.: Member, Levene Gouldin & Thompson, LLP, 450 Plaza Dr., Binghamton, NY 13902-0106; 607-763-9200; hrittberg@binghamtonlaw.com.