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Negotiating a lease is a lengthy process. To say that a lease, drafted by the landlord’s counsel, heavily favors the landlord is a huge understatement. However, there are important provisions that tenants can negotiate into a lease to protect their interests.
An exclusivity clause limits a competing business from leasing in tenant’s shopping center. The clause protects the tenant’s business by ensuring that the tenant is the only tenant in a shopping center that can offer particular products or services. For example, a nail salon might seek exclusivity to offer manicure and pedicure services in its shopping center. Some exclusivity clauses are drafted to prohibit the landlord from renting to another competitor. That’s great. Better still is a clause that prohibits the landlord from permitting another tenant to operate a competing business. Under the later scenario, the landlord has a duty to police the activity of competing tenants. Since the tenant’s remedies are minimal in a lease, seeking a remedy beyond injunctive relief is wise. The option to reduce rent while the competing business is in operation is a good one.
Walk Away Clause
A walk away clause (also called a kick-out clause or exit clause) permits the tenant to terminate the lease after a stated time period--usually three or four years--if gross revenues do not meet expectations. For example, if Bob’s Restaurant does not reach sales levels of $500,000 per year by the end of the third lease year, Bob’s Restaurant may terminate its lease upon certain conditions. Walk away clauses should be drafted with care to give the tenant flexibility regarding the termination. The termination period, ideally, should be open ended; permitting the tenant to determine the best time to close the business. A walk away clause provides a new business the ability to enter into longer leases while reducing the risk that comes with a new location.
A co-tenancy clause permits a tenant to exercise specific remedies if certain conditions regarding the operation of other tenants in the shopping center are not met. There are two types of co-tenancy clauses. The first type of clause is tied to the opening of a new shopping center. It permits the tenant to delay its opening, pay rent, pay reduced rent or terminate the lease if a certain threshold of stores is not open by a given date. The second type of clause is tied to the operation of an existing shopping center. This clause ties the tenant’s rent structure to the continued operation of one or more important anchors or mini-majors in a shopping center, or alternatively, ties the rent structure to a certain percentage of store in remaining in operation. For example, if an anchor closes in an existing shopping center, a co-tenancy clause permits the tenant reduced rent until such time as another anchor opens. Co-tenancy is usually geared to the anchor stores and mini-major stores because these businesses are viewed as important to the overall success of a shopping center.
The lease will inevitably state that the landlord must approve all assignments and require the tenant to produce a litany of documents for the assignment. However, when dealing with franchise chains, a useful provision is one that permits a franchisee to assign the lease to the franchisor upon notice, but without approval. Note, however, that the franchisee tenant will likely be required to remain as a guaranty of the lease. Similarly, a provision that permits the franchisee to assign the lease to another franchisee upon notice is attainable. In this situation, a landlord may require the assignee to have greater or equal net worth. A franchise assignment clause makes the sale of a franchise much easier for all parties.
Lastly, many of these provisions are key provisions that need to be addressed in the letter of intent (“LOI”). Some landlords take the position that, if a given “special consideration” is not included in the LOI, then the tenant may not include these provisions during later lease negotiations. Ensuring that the above provisions are addressed in the LOI ensures that the tenant will not be blocked from including them during later negotiations.
Debra Hill is a partner at the firm FisherBroyles, LLP, practicing in the area of franchise and intellectual property. Ms. Hill can be reached at email@example.com 904-612-3780.