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Leasing Retail Space – Defaulting on the Lease

Relocation Clause

Many retail space leases provide the landlord the option of relocating the tenant at the landlord’s expense. For example, consider a local retailer leasing 2000 square feet of retail space in a regional mall. The landlord is attempting to lease 10,000 square feet of space to a national retailer. However, to consummate the lease they need the 2000 square feet of space occupied by the smaller, local tenant.

You Lose

Even if the landlord pays 100% of the cost to move your store, you will incur a loss. In addition to the time spent planning and executing the move, it will disrupt your business. Some previous customers will believe you have gone out of business and instead of realizing you’ve moved to a different location within the mall. Relocation clauses are another issue where the interests of the landlord and the tenant diverge.

Event of Default

An “event of default” is when either party does not perform as agreed upon in the lease. In some leases, the landlord has the right to terminate the lease if the tenant defaults. This can include both objective and subjective issues. An objective issue is timely payment of rent. A subjective of issue could be a product or service offered by the tenant which was not initially contemplated.

Non-Financial Event of Default – Example

For example, the tenant initially sold skateboards but is now also selling clothing for skateboarding. (Leases often define precisely what business the tenant may perform in the retail space. From a technical perspective, even a slightly different type of business is a violation of the lease, which is an event of default.)

Financial Event of Default – Example

Most landlords and most tenants act reasonably. However, some people are unreasonable. Consider the following example. Retail space is leased at a fixed rental rate agreed upon 10 years ago. The contract rent is $ 15 per square foot but the market rent is $ 30 per square foot. The lease continues for another 10 years at the same rental rate. Due to a clerical error, the tenant forgets to send a rent payment one month. The tenant has an exemplary history of timely payment for the previous 10 years.

However, this is an event of default on the lease. Instead of calling the tenant to inquire regarding the current month’s rent, the landlord sends the tenant a notice of default. The notice of default informs the tenant the lease has been terminated and demands the tenant vacate the premises within 30 days.

What is Reasonable?

A reasonable solution is for the landlords to provide written notice in the event of a default. The tenant should have a reasonable period of time to cure the default. This issue becomes more complex when it is not possible for either the tenant or the landlord to cure the default.

What if Landlord Can’t Perform?

For example, a lease includes an affirmation by the landlord to comply with local laws and regulations. However, city council retroactively increases the parking requirements. (The number of parking spaces required per 1000 square feet of space.) This issue is being intensely litigated by local retail center operators. However, final resolution of the litigation is not expected for three or four years. Should the tenant have the right to terminate the lease in this situation?

Dispute Resolution

Most retail space leases address the venue for resolving disputes between the tenant and landlord. In most cases, the venue is state district court in either the location of the retail property or where the landlord is headquartered. The former is prevalent. There’s a growing trend to require binding arbitration for disputes. The advantage it is a less expensive process to resolve differences of opinion. The disadvantage is forgoing some of your rights for a process which can be even more arbitrary than state district court.

Right to Terminate

Finally, tenants should consider providing themselves an escape clause. When starting a business, a high level of optimism and the excitement is typical and understandable. However, the actual business results sometimes fall far, far short of what was expected.

Right to Terminate – Example

For example, assume you had expected sales of $ 20,000 per week for your retail store and thought the very lowest level that could possibly occur would be $ 5,000 per week. Even though the $ 5,000 per week seemed like a very pessimistic scenario, you were comforted that the business would be profitable at this level. At least you’d be all the pay your expenses and pay yourself a barely adequate salary.

Example Continued

Unfortunately, the pessimistic scenario turned out to be wildly optimistic. For whatever reason, the stores only generating sales of $ 1500 per week. This is inadequate to pay your cost of operations.

What Rights Should You Require?

Should you have a right to terminate your five-year lease in this scenario? If you do terminate the lease, what is a reasonable amount to pay for expenses incurred by the landlord?

Beware of the Consequences

Although termination clauses and personal guarantees may seem like an arcane nuance when negotiating the lease for your new business, they are critical factors. If you personally guarantee the lease and do not have an option to terminate the lease if your business performs poorly, in a worst-case scenario you are faced with personal bankruptcy or funding an operating deficit for a long period of time.

Conclusion

This concludes the article on leasing retail space. By researching best practices for your competitors, carefully analyzing the demographics and psychographics of successful stores, identifying an appropriate submarket for your store, performing thorough due diligence regarding the retail space you are leasing and carefully negotiating the lease, you have substantially improved your chances of success. In addition, you will have mitigated your exposure in the event your retail establishment is not successful.

Finding a perfect retail space for your business – What are things you should know before taking a retail space for lease?

Nowadays more businesses are looking to take a retail space for lease. There is an increase in demand for the office space. When you take a large retail space for lease, it will be less than buying or building up an office space for your business. There are some important things you should consider before selecting an office space for your business.

First thing you should consider is hiring a commercial real estate agent. It will be important thing to do when you don’t have any idea about the location where you are going to buy the property. They have knowledge about each and every property in the specific location and help you in finding the right property which matches your expectations. The main advantage of hiring these agents is that they will get you the retail space which comes under your budget.

You can also look in to the internet to find information about the retail spaces available for lease. The benefit in searching property through online is that you don’t have to travel to the location. You can view the snapshots of the place from your home. The websites of retail advisor gives all the information and features of the property. You can search for the property with your expected budget and features. Some websites also give the option to compare the prices and facilities of the retail space. You can get a good deal on the property with online brokers.

If you are finding a retail space with higher lease amount, you can still use the property by sharing it with another company. In this way you can reduce the money spent for leasing a office space. It is applicable for business owners who are looking for a smaller place and have the intention of sharing the place with another company. The major disadvantage with sharing the office is that you have to find the people with similar ideas and adjustability. If the person sharing office with you doesn’t adjust things at your convenience, it will be difficult for you to run business in the shared space.

There are also choices for taking a lease for a short period of time. If you want to take up a space for a short period of time, you can search for a short term space. These spaces are most often expensive but with continued research on similar properties, you can find the retail space with your expectation. You should look for an office space which is available at your nearest location with useful facilities.