Although small tenants often do not think of themselves as having much leverage in a lease negotiation with a landlord, there can often be situations, particularly in the context of a strip center, where a landlord may be highly motivated to lease its space to a small tenant. In addition, even when a landlord may have leverage over a small tenant, such tenant may be surprised to find a number of favorable lease terms to which the landlord would be willing to agree. Of course, such requests are better made by the individual negotiating the original deal, rather than having the tenant's attorney negotiate after the deal has been struck. The following is a short "wish list" for small tenants.
Limitation of costs. Small tenants, perhaps even more than large tenants, need to have a handle on the total cost of their leases. In addition to base rent, a landlord will likely look for percentage rent, a contribution toward common area maintenance (CAM), promotional and media funds, merchant's association and other miscellaneous charges (don't forget to watch out for hidden costs, see Lease Language, December 1996). With respect to base and percentage rent, a small tenant with a new, "untested" concept might suggest that the landlord share in the risk and reward of such venture by providing for a lower base rent in return for a higher percentage rent.
As to CAM, although a request for a cap on percentage increases may not be greeted with enthusiasm, a landlord will often agree (i) not to duplicate charges, (ii) to exclude specific items such as leasing commissions, costs attributable to other tenants at the center, costs incurred in the initial development of the shopping center, and costs that have been reimbursed (e.g., from insurance proceeds or other tenants), and (iii) to amortize capital expenditures over a longer period of time than may be set forth in its form lease. As to other miscellaneous charges (e.g., promotional and media fund contributions), landlords are often more receptive to a cap on increases.
Also, small tenants should examine the landlord's definition of "tenant's proportionate share," which may have the tenant disproportionately covering costs to make up for vacancies at the shopping center. If nothing else, a landlord may be willing to place a limit, or "floor," on the amount of unleased square footage it excludes when calculating a tenant's share of costs.
Know what you're getting into. A small tenant should have its contractor and/or architect inspect the premises. Such inspection should, at a minimum, include an examination of the systems and equipment serving the space. For example, does the HVAC need to be replaced now or soon after the tenant opens for business? Often by doing its homework, a small tenant may be able to negotiate the replacement of or a contribution toward future replacement of HVAC where it would otherwise get hit for the total cost. The tenant should also determine whether the space is free of asbestos and in compliance with the ADA, and if not, who will pay to address the situation.
Insurance. A tenant should have its insurer review the insurance provisions of the lease to see if limits will need to be increased, and if so, how much the increase will cost. If the tenant had reasonable limits to begin with, a landlord may be willing to live with them. Also, be wary of lease language allowing landlord to increase such limits. Depending on the duration of the term, a landlord may be willing to delete such language.
Assignment rights. Landlord form leases often provide that a tenant may not assign its lease without the landlord's consent, such consent to be at the landlord's sole discretion. While landlords have good reason to want discretion over the assignment, they may be willing, particularly with a small, "start-up" tenant, to agree to be reasonable in considering a proposed assignment. This might be especially true where assignment is the only "out" for a failing "start-up" tenant.
Gross sales kickout. A small tenant might want to request a right to terminate the lease if its gross sales don't reach a specified figure. A unilateral kickout right in favor of the landlord is often included in landlord form leases, but a landlord may agree to a mutual right for an "untested" tenant concept.
Security deposit. Although security deposits are often required for small, "untested" tenants, such tenants might be able to negotiate the return of the deposit after one or two years provided they have complied with the lease.
Marc A. Benjamin is an associate in the Chicago office of Los Angeles-based Pircher, Nichols & Meeks.