Four Hidden Issues for Tenants to Consider in a Shopping Center (Multi-Tenant) Lease
I. – Existing Use Restrictions
There are two types of existing use restrictions: specific use restrictions and general limitations. With a specific use restriction, a tenant cannot sell a particular product (e.g., hamburgers) or provide a particular service (e.g., bingo parlor). Notably, a change in usage can be a challenge – e.g. grocery stores now sell ready to eat foods and gasoline; chili parlors now sell hamburgers and deli sandwiches. With a general limitation, a tenant might be prohibited from having noxious odors, loud noises or engaging in a disreputable activity (query — whether cooking aromas are considered a “noxious odor,” or whether the legal sale of marijuana is considered a “disreputable activity”).
When it comes to these restrictions, do you “ask for permission rather than forgiveness?” The new tenant is usually able to place the burden of “clearing” its proposed use on the landlord, since the landlord (rather than the new tenant) is the one at risk for violating the existing use restriction since it is part of the landlord’s lease with a current tenant. Further, the landlord (i) has the relationship with the other tenants (and generally does not want third parties dealing directly with its tenants), (ii) is the party that agreed to putting the existing restrictions in place, and (iii) is presumably in the business of leasing space and therefore derives a benefit from additional tenants. Despite this, we have occasionally seen landlords attempt to shift the risk to the tenant by either (i) retaining the right to terminate the new tenant’s lease or (ii) requiring the new tenant to indemnify the landlord in the event an existing tenant claims the new tenant is violating a restrictive covenant. In this event, it is definitely better to “ask for permission rather than forgiveness.”
II. – Common Area Charges
- Anchor Tenants. As an incentive to get the anchor tenant in the facility, they are often charged a flat fee for CAM, which is less than the proportionate share based on square footage. This has the effect of increasing the amount being paid by the other tenants based on square footage.
- Management Fees. A landlord should not take a cut for management fees if they are paying a manager (including an employee) as the expense is already included. Often, this is stated as a percentage of the other CAM charges, but that percentage should not be applied to taxes and insurance, which are generally large numbers but require little to no work.
- Capital Expenses. While it is acceptable for the landlord to pass certain capital expenses on to the tenants, the cost should be amortized over the useful life of the improvement or repair.
III. – Parking
Zoning is not always enough. Often times, it does not meet the requirements of a franchisor, let alone the actual needs of the tenant. Additionally, employees are often required to park far away from the store, leaving the spaces closer to the building available for customers. This can be an issue for tenants that close later at night. Further, a tenant may have a need for short-term parking spaces (e.g., for restaurant pick-up).
IV. – HVAC and Utility Capacity
HVAC systems for certain uses (such as restaurants) require a higher capacity than others. This can be an issue particularly in an existing space that was previously used for a different purpose. Regarding utilities, certain uses (again, restaurants) may require a higher capacity of water, sewer or gas. Others, such as those with significant computer usage, may require additional electric capacity. Further, the fact that the space in question is connected does not mean that the capacity will be sufficient – there could be limitations due to current tenant mix and use, existing infrastructure at the shopping center or even limitations from the utility providers themselves.
If you wish to discuss any of these issues in further detail before you sign a lease, feel free to give me a call.
Authored by Andrew J. Hogan