LEGAL GUIDE
Written by attorney Michelle A. Perfili | Oct 23, 2010

A Small Business guide to negotiating a Commercial or Retail Lease...or how not to get "malled" by a

To

[My full caption included ...or how not to get "malled" by a Shopping Center Lease or Retail Landlord] So you have decided to take the next step with your retail or other business and are looking for a space in a shopping mall or a "strip center". Sure the draw of the mall will give you visibility and "foot traffic" but are you ready to go head to head with a commercial landlord? First things first. Do your homework and ask how businesses of your kind have done in that particular center. You can ask the landlord or their leasing agents, but it also helps to interview other tenants. Take notice of the vacancy rate and the tenants that will be your new neighbors. Ask yourself if putting your "all natural juice bar" near the health club will help by building in "destination" visitors. Also be realistic about the amount of rent you will be able to pay and how long a commitment you will make with respect to the number of years on the lease. A commercial lease may be a daunting document. Often times there are numerous chapters involving the base rent, any additional rent (such as "percentage rent" which is based on an additional payment determined by sales volume) or reimbursable charges often called "CAM" (common area maintenance). CAM charges are additional sums required by the landlord to be estimated and pro-rated amongst the mall or center tenants generally on a proportional basis of the tenants square footage divided by the square footage of all tenant space. This clause can be particularly difficult if for example the lease provides that the proportion of the tenants CAM charges are determined by the tenants square footage divided by the "gross leasable area" (all leasable space in the center versus a less favorable (to the tenant) clause which determines CAM based on the tenants square footage divided by "open and occupied" leasable space. By way of example considering the following example under each variation: You have a 1,000 square foot space in a center which has 10,000 square feet of total leasable area. You are one of the 5 occupied spaces (each of 1,000 square feet) and there are 5 vacant spaces (each of 1,000 square feet. How much CAM would you pay? Under the "gross leasable area" clause, you would pay 1,000 divided by 10,000 or 10% of common area maintenance charges. Under the "open and occupied" clause, you would pay 1,000 divided by 5,000 or 20% of common area maintenance charges. Quite a difference based on a simple difference in wording. Since common area maintenance can include costs of security, lighting, landscaping, parking lot maintenance, property taxes on the common area this can be a major component of your rent (and that elusive budget you were trying to maintain). Additionally, commercial leases can include "COLA" increases (cost of living adjustments) that can again come as quite a surprise if you haven't read and understood that lease you signed when you were excited at the prospect of your new venture. Bottom line, commercial leases are generally long term and significant commitments of time and money. A lease like any contract is interpreted based on the common meaning of the words used. If you cannot understand a clause, then it is probably a "red flag" that you should negotiate an amendment or revision to the language. Simply put if it doesn't "say" what you understand to be the deal, you should not sign it. In this economic climate, Landlords are more likely to "deal" with tenants. Ask for a "construction allowance" which is generally an amount given (yes no pay back) for improvements to the premises. Ask for a "cap" (a maximum) for cost of living adjustments or percentage of CAM charges. If you are unsure, contact a real estate professional or attorney to review and perhaps negotiate the lease with the Landlord on your behalf. It is a small price for insuring that you are not getting in over your head or ending up "mauled" by a commitment that you really didn't understand in the first place. Good luck and Good Law. Michelle

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