Use Short Initial Lease Term Incentive to Attract Hesitant Retail Tenants

June 30, 2003

Nowadays, as more and more retail businesses fail, many owners are desperate to fill vacancies at their centers. But with the continuing decline in consumer spending, and uncertainty in the retail sector, prospective retail tenants, particularly small retailers, may be hesitant about going into centers—especially if they have to commit to a long-term lease. These tenants are worried that their businesses may fail. They may have to downsize, change their retail strategy, or terminate their operations altogether.

Nowadays, as more and more retail businesses fail, many owners are desperate to fill vacancies at their centers. But with the continuing decline in consumer spending, and uncertainty in the retail sector, prospective retail tenants, particularly small retailers, may be hesitant about going into centers—especially if they have to commit to a long-term lease. These tenants are worried that their businesses may fail. They may have to downsize, change their retail strategy, or terminate their operations altogether.

If you want to attract these small retail tenants to your center, try offering an incentive that will make the tenant feel more secure about signing a lease, suggests Virginia attorney Paulette B. Peltz. That is, offer the tenant a short-term initial lease with a longer renewal, she says. In Peltz's experience working with Charter Oak Partners, the owner of factory outlet shopping centers throughout the United States, she has found that small, hesitant retail tenants are often more willing to sign a lease when this incentive is offered. Here's how to set up this type of incentive in your lease. There's also a Model Lease Clause, at right, which you can adapt for your own use.

How to Set up Incentive in Lease

To set up this incentive in your lease, make sure your lease clause, like our Model Lease Clause, does these four things:

  • 1) Sets length of initial lease term. Instead of offering the tenant a long initial lease term for, say, five years, offer a short initial term of one year, for example, says Peltz [Clause, par. a]. This gives the tenant the security of knowing that if its business doesn't get off the ground, it won't be tied to a long-term lease, she explains.

Practical Pointer: Since the initial term is short, don't give the tenant a big improvement allowance, warns Peltz. If you pay for improvements and the tenant doesn't stay past the initial term, you've wasted the money, she warns.

  • 2) Requires automatic renewal. To make this incentive a little more owner-friendly, make sure your lease says that if the tenant's average annual gross sales reach a certain level during the initial term, the lease will “automatically” renew, Peltz advises [Clause, par. b]. This way, you don't have to worry about losing a profitable tenant. The tenant will be renewing its lease automatically, she explains.

Practical Pointer: Certain states have special requirements for automatic renewals, says Peltz. For example, New York State law requires an owner to send the tenant a notice reminding it that the lease will automatically renew unless the tenant notifies the owner otherwise, she points out. And California law requires that an automatic renewal provision be typed in print that's large enough so tenants won't overlook it, she adds. So check with your attorney about anything you may need to do to make sure your automatic renewal provision conforms with your state's laws, Peltz adds.

  • 3) Sets length of renewal term. Be sure to set the length of the renewal lease term, says Peltz. The incentive involves a short initial term with a longer renewal term, she says. So, for example, if you're offering a one-year initial term, you may want to offer a four-year renewal term [Clause, par. b].

  • 4) Prevents renewal if tenant performs poorly. If the tenant's business is performing poorly—that is, if its annual gross sales are below a set amount—the tenant may not want to renew the lease. You may not want the tenant to renew, either. Your lease then should say that the tenant must notify you or that you will notify the tenant by a certain deadline—say, at least 30 days before the initial term ends—that the lease won't be renewed, says Peltz [Clause, par. c].

It's important to block the lease from renewing if the tenant's gross sales are low by notifying the tenant that the lease won't be renewed, Peltz says. This way, you can search for a more successful tenant for the space.

Lastly, if the tenant's gross sales are low but neither you nor the tenant gives notice that the lease won't be renewed, your lease clause should say that the lease will renew automatically, says Peltz [Clause, par. c]. This way, even if you've made the mistake of not notifying the tenant that you don't plan to renew its lease, you'll at least still have a tenant in the space.

CLLI Source

Paulette B. Peltz, Esq.: Senior Vice President & General Counsel, Charter Oak Partners, 8000 Towers Crescent Dr., Ste. 950, Vienna, VA 22182; (703) 905-4400.

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