2C — April 26 - May 9, 2013 — Spring Preview — Mid Atlantic Real Estate Journal
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A ttorney
By Scott C. Butler, Esquire, Kaplin Stewart Negotiating retail leases in the current market
T
he state of the econ- omy and the growth of internet shopping
to the integration of technol- ogy into retail stores, realizing that the stores can promote on-line purchases without the need for a large store space. As a result, there continues to be a strong competition between landlords for tenants to fill vacant space. Depending on the location and tenant-mix of a retail center, a landlord may not have a solid negotiating po- sition in completing a retail lease. Even in such a situa- tion, however, the landlord
must be careful in negotiating certain important provisions, the most important of which are co-tenancy provisions. In order to lure new tenants to a retail center, landlords often make promises that certain other occupants will remain open for business at the center. As a result, the new tenant will want a provision added to their lease which states that in the event those occupants close for business, the new tenant will have the right to either pay less rent or termi-
nate their lease. The reason- ing for a co-tenancy provision is that if these occupants close for business, then less customers will visit the re- tail center and, therefore, the new tenant’s sales will decrease. Understanding this reasoning, the landlord should require certain pro- tections in any co-tenancy provision, such as requiring the new tenant to remain open, requiring the new tenant to lose sales in order to obtain the benefit of this provision, and allowing the
landlord the ability to cure the breach of the co-tenancy provision by replacing any required closed occupants. In addition, a landlord in this market may be forced to lease space to tenants that do not have strong financial credit. In negotiating a lease with such a tenant, the land- lord must be careful to mini- mize the risk associated with the increased potential for a tenant default, by not paying for an expensive build-out of the premises, negotiating for guarantees from the owners of the tenant, and negotiat- ing for a security deposit to offset the amount of the construction costs and allow- ance in the event of a tenant default. In the current market, ten- ants are also very cognizant of costs and, therefore, are ne- gotiating caps on all costs and expenses that are customarily passed through to the ten- ants, such as common area maintenance costs, insurance costs and real estate taxes. In the past, the common resolu- tion has been for landlords to provide a cap only on certain expenses, excluding non- controllable expenses such as taxes, utility costs, snow removal costs, insurance costs and taxes. Some tenants, however, have been trying to cap such uncontrollable expenses as well, thus pass- ing the risk of the increased costs on to the landlord and decreasing the amount of rent that may actually be profited from the retail center. Retail leasing in this econ- omy is still very competitive due to the limited number of retail tenants vying for loca- tions and the decreased size of retail stores. As a result, landlords may be tempted to agree to unfavorable lease provisions and non-credit tenants in order to fill vacant retail space; however, in doing so, landlords have to be very careful in order to protect their assets. Scott Butler is a princi- pal of Kaplin Stewart in Blue Bell, Pennsylvania in the Real Estate Trans- actions and Corporate & Business Law groups. n
are still hav- ing a major impac t on retail shop- ping centers and malls. A l t h o u g h c e r t a i n p r o d u c t types have
Scott C. Butler
not been affected by the in- ternet, the size and number of retail locations for some retailers have decreased due
Contact: Scott C. Butler, Esq. 910 Harvest Drive, Blue Bell, PA 19422-0765 • 610-260-6000 • www.kaplaw.com Other Offices: • Cherry Hill, NJ 856-675-1550 • Philadelphia, PA 215-567-3120 Kaplin Stewart At t o rne y s a t Law Getting you through the maze of real estate law. Strategy. Skill. Success.
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