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Roll Film: Movie Theater Issues

More than ever before, shopping center owners find themselves leasing space to tenants operating movie theaters. In some ways, these tenants' leases present many of the same issues as retail tenants'; in others, they require responses to a different set of concerns. This article will discuss some of the novel issues a landlord must face in negotiating a movie theater lease for its shopping center.

Percentage rent provisions present a primary set of unique issues. On one hand, landlords will want to include such items as the gross revenues from all theater rentals and admission tickets, whether sold by personnel, on-site machines, telephone services or the internet. (Since tickets purchased by phone or the internet are solely for use at a particular theater, allocating these sales to various locations is less controversial than for other retail tenants such as clothing stores.) Landlords will also want to include all other products and services offered at the theater, whether food, drinks, merchandise, pay phones or video games, and whether sold by the tenant or its concessionaires, licensees or subtenants.

On the other hand, tenants will want to exclude various items which are not typical for other tenants' leases at a center. For example, tenants may request that landlords exclude (1) theater rentals or merchandise sold for the benefit of nonprofit groups, (2) receipts from sales of senior citizen, student and other discount cards, (3) service charges for advance ticket sales, (4) tips and gratuities, and (5) ticket proceeds (but not license fees) for films shown in "four wall" deals, which are short-term licenses for particular auditoriums granted by theater operators to third parties. A common compromise is to permit some of these items but limit them to a certain dollar amount or percentage of the tenant's overall revenue.

Permitted-use provisions also require special attention in movie theater leases. The crux of the use issue involves the types of movies the tenant may feature. The landlord will likely want the tenant to show only first-run feature films. The tenant may want flexibility to show independent and art house films; amateur, educational and documentary films; classic and retrospective films; and even closed circuit television broadcasts. These decisions can greatly impact the tenant's revenues and the demographics of (and thus purchases by) its patrons, which in turn affect the percentage rent collected by the landlord.

A secondary use issue involves related services the tenant may offer. The landlord's and tenant's interests converge here in one respect: they both want the tenant to offer a wide variety of ancillary products and services, in the hope that these activities will increase the tenant's revenues (although the tenant may want revenue from some activities wholly or partially excluded from percentage rent). The parties' interests diverge when they consider the impact on other tenants of the center. Namely, the landlord will want to limit the activities so they do not violate any exclusive uses granted to other tenants, while the tenant will have no such concern.

Finally, theater leases may present an issue concerning after-hours common area usage. In this respect, these leases share concerns involved with other late-night tenants such as nightclubs, bars and some restaurants. The issue here is that the tenant may want the landlord to keep the common areas open and maintain lighting and security services beyond the normal business hours of other tenants. The resulting issue is two-fold: (1) Will the landlord agree to the extended common area hours and services? and (2) who will pay for it?

The parties normally resolve the first question more easily than the second, although the solutions to both may come most readily when linked. That is, the landlord will generally agree to the extra hours and services, on the condition the tenant pay some additional amount to reflect its greater benefit from the situation. The amount and formula for the extra contribution are usually a matter for negotiation on a case-by-case basis.

The foregoing discussion should help demonstrate the unique nature of movie theater leases for shopping centers. While this forum does not allow for a comprehensive discussion of all the novel issues, it should help parties prepare to negotiate such leases with more confidence.

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