In the course of preparing last week’s blog posting about small (bargaining power) tenants being entitled to assurance that their leased spaces are as physically accessible and visible as when the lease was signed, we got to thinking about “why this comes up in the first place.” No, we weren’t thinking as a philosopher might think; we were much more at the nuts and bolts level. Basically, we framed the question thusly: “What do tenants look for in landlord-form leases that just don’t seem to be there?” Today, we aren’t listing things that are commonly in such lease forms, but written in a way that should make a tenant unhappy. We’re talking about items tenants need to ask for. [This isn’t bait and switch our part.. We’ll tie this in with today’s blog posting’s title later.]
So, we started a list and got this far before running out of energy:
Renewal (extension) options
Exclusive use rights
Contraction (skinny-down) rights
Ability to do leasehold financing
Assignment and sublease rights upon sale of the business
Recognition rights for subtenants
Limitation on monetary damages
There are many more candidates. Readers, that’s your job. Ruminate with us. Send your suggestions by way of the “Leave a Reply” box at the end of this posting.
Yes, we, like our readers, also think starting our list with the “missing lease extension provision” is a little peculiar, even for Ruminations. We start with this item, however, because we frequently see “newbie” tenants “forget” to ask for such a right and then, when the lease form goes out for review, its “newly hired” attorney raises the issue for the first time. What has our experience taught us happens next? Answer: the landlord says, “OK.” So, we think landlords should ask every prospective tenant if it wants a lease extension option and the provision should be in the lease form to begin with. [Is there any experienced tenant that doesn’t seek a lease extension option? Should a landlord take advantage of someone’s inexperience? Should anyone?]
That having been written, when the lease as presented is missing the lease extension provision, any tenant making a request for one needs to decide: How many? How long each? At what rent? How much notice needs to be given?
Retail tenants (and some others in unique situations) should ask for exclusive use rights in all but huge projects. Large tenants know to ask (and what to ask for). The smaller tenant may be even more vulnerable to losing the value of paying the “shopping center” premium if it later finds itself sharing, with a competitor, the traffic such a project brings. It is the “traffic” for which tenants pay the premium.
All tenants should consider the following “good problem to have.” Work successfully and draw a loyal customer following, so successfully that the leased space becomes constricting. That’s a problem with garnering excessive “good will” at the leased location. Wouldn’t it be nice to have the right to expand into adjacent space and not be at the mercy of a landlord that thinks it better to have a “brand name” in that space and not the squeezed tenant? That’s where the “missing” expansion right provision comes into play.
Hope springs eternal … [Alexander Pope, An Essay on Man, Epistle I, 1733]. Few tenants plan for less than full success. Take note that we didn’t say don’t plan for failure; some do. But, what about having a business that works, but the paradigm shifts and the business would work in smaller space? How about a space reduction option in the lease? Large space tenants (with bargaining power) have learned to ask. Why not others?
What if the store is a new venture or is an expansion to a less than tested area? Some tenants with bargaining power look for the right to end a lease early if the location doesn’t work out. They and the landlord each expect success, but without a “kick-out” right, only the tenant takes the risk of being wrong. Why not agree on a sales threshold which, if not met, allows a tenant to end its lease with some advance notice and a reasonable termination fee?
Last week (click HERE to see), we wrote a lengthy posting about even small tenants deserving protection of their right to access, visibility, and adequate parking for customers. We won’t repeat all (or any) of that. We bring it up because it just represents another “missing” lease provision.
We interrupt this show at this point to reiterate a very, very important point That’s because we’re afraid that not every reader will make it to the end of today’s posting. So, here it is. Our list (and the items that you’ll be adding to it) are commonly insisted-upon by large space tenants and those tenants often get what they ask for. That’s because they have a big leg up on “bargaining power.” However, it isn’t size alone that gives them such bargaining power. It isn’t even size. It is the desirability of that particular prospective lease to that particular landlord at that particular property at that particular time. Every prestigious prospective tenant has more bargaining power when it is the only prestigious prospective tenant seeking that particular space. The smallest of tenants has “bargaining power” when the prospective landlord is “sucking wind” at the location under discussion. How does this Ruminating about bargaining power fit in with today’s posting? That goes to another common idiom, “It doesn’t hurt to ask.” If you don’t ask, you already have your answer and it is, “No.” So, by asking, all that can change is that you get a “Yes.”
Ask for a pylon sign position. Ask for identification on entrance monument signs or directional signs. Ask for the side or back of the building. Unless a tenant is selling a better mousetrap, it needs to pave the path to its door. It needs to be found. Think of this idiom: “Out of sight; out of mind.” Large tenants know this and aren’t shy to push for all the signage they can get.
There are “destination” tenants, ones that customers know they want to visit and then find them. They can be located anywhere. Examples are sporting goods stores and stores that sell only light bulbs. Most tenants locate their stores at shopping centers and similar projects because, in addition to customers who seek them out, they need customers who have come to the property for one thing and shop around while there. Well, the Captain may be obligated to stay with a sinking ship, but the weakest passengers are allowed in life-boats. If a tenant is paying a premium for “shopping center” traffic, it should try to get a premium access right to the lifeboats if the shopping center is taking on water.
Our next listed item really demonstrates that even tenants with bargaining power may not notice that the landlord’s lease form (or even their own) is missing a provision that allows for leasehold financing. Smaller tenants (and that isn’t synonymous with tenants who take small spaces) aren’t going to get such financing, so this topic is not for them. Tenants need to think about future possibilities, such as the ability to get leasehold financing. This isn’t the place to discuss such financing. We’ve done that before and you can read those postings by clicking HERE and HERE.
Savvy tenants discuss assignment and subletting rights upfront, often with the same vigor as rent itself. Smaller tenants don’t. But, this can be really important to a smaller tenant. A smaller tenant might protect against the cost of failure by taking a shorter term lease or by getting an early termination right or by negotiating for a limitation of the personal guaranty given by the tenant’s owner. But, what if the business is successful and it is time to cash out? What if the that owner’s personal circumstances change and health or relocation needs demand that the owner sell its business? Every small tenant should look for a lease that gives it the right to sell its business and have the buyer take over the lease and its renewal options. There is a lot more to be said about this, but that’s the principle.
Here’s another one for the better bargaining power tenant that is often left off the table. What good is using that bargaining power to get liberal subletting rights when decent subtenants are afraid to take the risk that their sublandlord will default under the master lease? A meaningful subletting right requires a lease with a companion sublease recognition obligation placed on the landlord. Again, this isn’t the place for an exposition. That can be found by clicking: HERE and HERE.
Lastly, for today: Why have the open-ended risk of paying rent for the balance of the lease term if the business fails? And, this is especially true in the “no obligation to mitigate” states such as New York. There are a number of approaches, such as the “good guy guaranty” [click HERE for a posting on that], but there is also a straight-forward approach usable everywhere. Limit the “future rent” damages to a dollar figure or a time-based amount. Think it can’t be done, will never happen? Think again. If that’s what a landlord needs to do to make the deal, it happens. After all, in a lot of circumstances, it can have an empty space now (because it won’t go along with the concept) or it can have the space filled today with just a possibility of getting it back earlier than it had hoped.
Today’s bottom line may not be apparent. It isn’t really about the list we’ve offered; it is about realizing that bargaining power is not arbitrarily issued; every tenant has bargaining power and, as written earlier: “If you don’t ask, you know the answer is: No.”