Limit Tenant's Storage Area to Avoid Loss of 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, says New York City attorney Craig Ingber. Otherwise, you could lose percentage rent if the tenant devotes too much space to the storage area and not enough space to retail uses, because a storage area doesn't generate sales, he explains.

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

Look what happened to a Connecticut owner that didn't set a precise limit on a storage area: Its lease required the retail tenant to use its space for retail purposes only, but permitted the storage of goods “as an incident to” conducting the retail business. The tenant sublet the space to a subtenant that used 17,302 square feet of 60,000 square feet of the space for “extra storage.” The owner sued the tenant, claiming that it had violated the lease because the subtenant's storage area was so big that it wasn't incident to the retail business and it deprived the owner of percentage rent.

A Connecticut court ruled that the tenant didn't violate the lease. After explaining that the storage area was incident to the retail tenant's business operations, the court said the parties could have, but didn't, specify either the minimum square footage to be used for retail space or the maximum permitted for storage space. So the owner couldn't insist that the court rewrite the lease to include this omitted condition, said the court. And the owner couldn't prove that the subtenant intentionally expanded the storage area to minimize percentage rent

CLLI Sources

Craig Ingber, Esq.: Member, Belkin Burden Wenig & Goldman, LLP, 270 Madison Ave., New York, NY 10016; (212) 867-4466; cingber@bbwg.com.