Negotiating Tips

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Because visibility of its show windows and storefront signage is always a concern for retail tenants, a discussion about visibility will inevitably come up in negotiations for a lease for space at your center. Savvy tenants will demand that you agree in the lease not to block this visibility. But if the visibility restriction isn’t drafted properly, it could cause many problems for you. For example, it might prevent you from doing simple maintenance work, renovations, or landscaping, or from staging promotional events that could benefit your center.

An hours cotenancy clause—which says that a tenant will be required to open during the center’s normal hours of operation only if a certain percentage of other tenants are also open—is a typical provision in retail leases. But like many other lease issues that seem ordinary at first, it should still be carefully negotiated. That’s because in some clauses, nothing prevents the tenant from turning it into a right-to-go-dark clause. Here’s how you can make sure that doesn’t happen.

Audits can help you uncover any discrepancies in what you’re collecting in percentage or other types of additional rent, so it might seem as if they’re always positive. But conducting an audit in a way that harms a tenant can leave you open to claims. It’s not unusual for a tenant, especially large retailers or tenants with competitors, to ask you to promise to keep any sales or business information you uncover when auditing their gross sales private. Confidentiality can help avoid having this information fall into the hands of a competitor.

If you own an unusual building—one with “character,” a unique layout, or historic elements—you’ll need to find tenants that appreciate quirks. These types of properties can be wildly successful, but you’ll need to take into account marketing and leasing issues that may not be a factor when leasing traditional commercial properties.

In order to entice a tenant you might offer very competitive initial rent. At the same time, you need to make sure that you maintain a certain level of income over time. Rent adjustments are typically a part of negotiations with a prospective tenant for space at the property you own. But if you’re particularly worried about the low initial price you’ve given the tenant, there are several ways to make rent adjustments that you should be attuned to. An experienced tenant will be particular about this issue as well.

Not all tenants are created equal when it comes to the way they are organized. That is, whether a tenant is a professional corporation, professional limited liability partnership, or professional limited liability company matters during lease negotiations, and it should guide the guaranty provisions of your lease. With this kind of entity, the liability of the tenant’s shareholders, partners, or members is limited by law.

Vacancy rates are still a struggle for shopping center and office building owners in some areas. Maybe your local economy isn’t robust and businesses aren’t interested in new office space, your projections for how much foot traffic your center will see were higher in theory than in reality, or other owners are offering better leasing packages than you are for the same types of space. If you find yourself in the position of having to actively draw in tenants, you can sweeten the deal for those that might be on the fence.

Commercial property owners, and especially those that own large or multiple properties, are likely to have several employees. If you have a staff of professionals who help you operate your properties, be very careful about how much official power you give to them and how much interaction they have with tenants during the negotiation process.

Unfortunately, at some point you may have to evict a tenant or pick up the pieces if a tenant abandons its space. It’s hard enough to have to regroup and find a new tenant quickly. But being forced to take on an undesirable tenant—one with a bad credit rating or that doesn’t help the synergy you have established at your shopping center or some other part of your business plan—is worse. And if you’re in one of the many states that force owners to try to lessen—that is, “mitigate”—their damages when a tenant defaults, that could happen.

While the economy has steadily improved in many areas, it’s still important to protect yourself from the perils of a bankrupt tenant. When negotiating with a prospective tenant—especially one that’s small or not financially strong—keep in mind that if it experiences financial problems the security deposit could wind up being your only access to funds that can compensate you if the tenant stops paying rent or otherwise breaches the lease. A cash security deposit can leave you vulnerable in the event of a tenant’s bankruptcy.