Modify Standard Office Building Lease for Retail Tenant
As mixed-use commercial properties have become prolific over the last few years, office building owners have had to get used to the idea of leasing space to retail tenants in buildings that traditionally might’ve been used strictly as office space. This formula can work to an office building owner’s advantage by creating a synergy among its office and retail tenants that benefits everyone at the premises—but only if retail tenants’ leases address troublesome issues that can pop up and annoy office tenants who rented their space expecting the same level of professionalism and service as in other first-class buildings.
Can you make retail leasing in your office building profitable and avoid complaints from office tenants? Yes, if you address the following eight issues in the standard office lease that you’ll modify for a retail tenant.
Issue #1: Use Restrictions
Shopping centers aren’t the only properties that are affected by a tenant’s “use” of its space. Just as a center’s owner should negotiate a use clause with its tenants to make sure that together, their businesses create the right “synergy” to attract customers, office building owners should also consider how a prospective retail tenant’s use will affect its office tenants and visitors.
Restricting how the tenant can use its space can protect you, says Washington commercial property expert and manager Richard F. Muhlebach. Say in the lease that the retail tenant can use the space for the purpose specified, and for no other purpose. Otherwise, for example, a bookstore with a small café area could transform itself into a full-fledged restaurant. Or a retail tenant could change its use to one that’s not compatible with the building’s image or tenant mix. Show this language to your attorney before using it to restrict a retail tenant’s use.
Model Lease Language
Tenant shall use the Premises only for operation of [insert type of business] (the “Required Business”) and for no other purpose.
Issue #2: Continuous Operations During Certain Hours
Have the retail tenant agree to continuously operate for a minimum number of hours. And specify which hours these are. For example, if the retail tenant is an office supply store, you may want it to be open when your office tenants are at work. And you may want a dry cleaner tenant to stay open late enough for your office tenants to pick up their cleaning on the way home. But for safety and security reasons, you may not want the retail tenant to operate in its space past a certain hour, Muhlebach points out.
Model Lease Language
Tenant shall open for business in the Premises no later than [insert date] and shall continuously operate the Required Business in the Premises during the following hours:
(i) Monday through Friday: [insert hours of required operation]; and
(ii) Saturday, Sunday, and holidays: [insert hours of required operation].
In no event shall Tenant stay open for business after [insert time].
Practical Pointer: Renting to a retail tenant is an opportunity to provide helpful services for office tenants, which can help retain existing tenants and attract new ones. While you must protect yourself when renting to a retail tenant, you should also take advantage of the coincidental, nontraditional synergy it may provide.
Issue #3: Business Image
Retail tenants tend to be flashier than office tenants. That’s because when they’re in a center or mall, they’re competing with other stores to attract foot traffic. Typically, office tenants aren’t under the same pressure to pull in random customers. Here’s how you can help the retail tenant to blend into your building.
Require tenant to operate under its best-known trade name, in “first-class” manner. If the retail tenant has a recognizable trade name and a good reputation, require it to operate in your building under that trade name instead of under one that’s less well known. This will add to the prestige of your building and attract more customers. Also require the retail tenant to operate in a first-class manner, similar to other first-class businesses operating in first-class office buildings in your area.
Set improvements quality standard. Requiring the retail tenant to install new, first-class fixtures, equipment, and furniture in its space can achieve this. A tenant that installs worn-looking items could give customers a bad impression of the space and your building.
Model Lease Language
Tenant shall operate the Required Business under the trade name [insert trade name] and in a manner commensurate with the service, dignity, and ambiance of similar first-class businesses that are operated in first-class office buildings located in [insert applicable geographic region].
Ban inconsistent activities. You should also ban certain activities, such as the sale of secondhand, damaged, defective, or out-of-style merchandise; auctions; liquidation, “going-out-of-business” and “moving” sales; or a pawn shop, by the retail tenant that could harm your building’s reputation or desirability. To do this, add the following language:
Model Lease Language
Tenant shall not conduct, maintain, or carry on its business in any manner which, in the sole judgment of Landlord, may harm or tend to harm the business or the reputation of Landlord or the Building’s desirability as a high-quality building for offices of financial, insurance, legal, accounting, and similar prestigious institutions, or reflect, or tend to reflect unfavorably on the Building, Landlord, or other Tenants or occupants, or which might confuse or mislead, or tend to confuse or mislead the public; and Tenant shall immediately discontinue any such conduct upon written demand of Landlord. Sales, business, and/or activities prohibited by the foregoing include, without limitation [insert banned practices, e.g., a pawn shop].
Ban obstructions. Don’t let the retail tenant obstruct the building’s common areas and lobbies when selling or storing merchandise, or in any other way. Obstructions could impede the flow of traffic in the building, create an eyesore, and anger your office tenants. Also, bar retail tenants from operating an “open store front” through which they sell products—for example, tobacco products, candy, and newspapers. Similarly, bar tenants from conducting “sidewalk sales.” Both can obstruct sidewalk traffic and are unattractive.
Model Lease Language
Tenant shall not keep or display any merchandise in or on or otherwise obstruct any Common Areas or other facilities of the Building. In no event whatsoever shall Tenant have an “open store front” or storefront window at the Premises by which it may conduct business directly with customers on the sidewalk. Furthermore, in no event shall Tenant use the sidewalks adjacent to the Premises for the sale or display of goods and merchandise.
Control design elements, signage, and storefront. You’ll want the retail tenant’s store to fit in aesthetically with the building. To do that, keep control over the retail tenant’s “design elements”—that is, the finishes, materials, fixtures, equipment, furnishings, and decorations it uses. Require the retail tenant to submit plans and specifications of its design elements for your approval, along with other submissions required by the work letter, says Muhlebach. Don’t allow any changes to the design elements without your prior written approval. Also, don’t allow the tenant to install any flashing or intermittent lights, laser lights, or neon lights that can be seen from outside the space.
Model Lease Language
Tenant acknowledges that Landlord has a strong interest in the finishes, materials, fixtures, equipment, furnishings, decorations, and other aesthetic considerations of the Required Business (the “Design Elements”) and how such Design Elements relate to the balance of the Building. All Design Elements shall be set forth in plans and specifications that Tenant shall submit to Landlord for approval in accordance with Exhibit [insert number] of this Lease. There shall be no change in any of the Design Elements at any time during the term of this Lease without Landlord’s prior written approval, which may be withheld based on Landlord’s determination of aesthetic considerations appropriate for the Building. In no event will Tenant install any flashing or intermittent lights, laser lights, neon lights, or similar lighting technology that is discernible from outside the Premises.
If your retail tenant’s signage isn’t compatible with your building’s exterior, it can ruin the building’s appearance. For example, you don’t want a retail tenant to put tacky neon signs on your building’s elegant, black granite exterior. So make sure the retail tenant must get your approval to install any signage that’s visible from outside its space. You don’t need to require your approval of interior signs that are professional and in good taste, as long as you can force the retail tenant to remove any interior sign that you find objectionable. Also, ban the installation of exterior lighting, decorations, transmitters, and storefront changes, unless the retail tenant gets your consent.
Model Lease Language
a. Tenant shall not place or install any sign on the exterior of the Premises or Building, nor shall Tenant place in any display case, windows, entrance doors, or any other area visible to public view from the outside of the Premises, any signs, flashing signs, animated signs, or otherwise, without first obtaining in each instance, Landlord’s prior written consent and approval which may be withheld in Landlord’s sole and absolute discretion.
b. Tenant may utilize dignified interior signs that are neat, professionally printed, and in good taste without obtaining Landlord’s approval to the extent that they do not detract from the dignity and character of the Building; provided, however, that Tenant agrees to remove such interior sign if Landlord shall object thereto.
c. Tenant shall not:
(i) Install any exterior lighting, decorations, transmitter or receivers, fence, aerial, or mast anywhere on the outside of the Building or Premises; or
(ii) Make any change to the storefront;
without the prior written consent of Landlord, which may be withheld in Landlord’s sole and absolute discretion.
Issue #4: Crowd Control
Problems can arise if the retail tenant draws so many customers that crowds gather in the building’s lobby and other common areas near the store. Someone could get hurt if a crowd becomes disorderly—and that person might sue you. So require the retail tenant to police and control crowds in the common areas to your satisfaction. Otherwise, the responsibility will fall on your shoulders, since typically you’re responsible for what goes on in the common areas.
Also, get the right to require the retail tenant to hire and pay for extra security guards and/or install moveable theater ropes and stanchions alongside the store’s entranceway if the retail tenant isn’t keeping adequate control of the crowds. Obligate the tenant to follow any other directions that you give for controlling crowds. And get the right, if the retail tenant refuses to comply with the required crowd controls or any other directions you gave, to carry them out on the retail tenant’s behalf and at its expense.
Model Lease Language
a. Tenant shall police any queues of customers and crowds that form outside of the Premises to Landlord’s satisfaction to make sure that such waiting customers and crowds do not impede pedestrian traffic flow in and out of the Building or become disorderly. Tenant shall prevent its customers from queuing, and crowds of its customers from forming, inside the Building’s lobby. Tenant agrees to follow Landlord’s other directions regarding orderly queuing and crowd control.
b. If Landlord determines, in its sole judgment, that Tenant has not complied with Paragraph a hereof, Tenant will, upon Landlord’s direction and at Tenant’s sole cost and expense:
(i) Hire a security guard or guards; and/or
(ii) Install temporary and removable crowd control devices in areas designated by Landlord.
c. If Tenant fails to comply with Landlord’s directions pursuant to Paragraphs a and b hereof, Landlord shall have the right to do so on Tenant’s behalf, and Tenant shall reimburse Landlord for the cost and expense of doing so.
Issue #5: Loading and Storage
Retail tenants are likely to get frequent and large deliveries. To prevent disruption to your building and tenants, restrict those deliveries to a designated entrance. Restrict them to times set by the building’s management, suggests Muhlebach. You don’t want deliveries when the tenants’ employees are arriving for work, taking a lunch break, or leaving work, he notes. If the retail tenant is on the ground floor, the best entranceway may be the back door to the retail tenant’s space, if there is one. If the retail tenant isn’t on the ground floor, require it to use only the freight elevator servicing its portion of the building—rather than the passenger elevators—for deliveries, he says.
Also, obligate the retail tenant to prevent vehicles that are unloading its merchandise from interfering with the use of the lobby and the building, recommends Muhlebach. And require the retail tenant to coordinate any deliveries through the lobby with your building’s management, he adds.
Model Lease Language
Tenant shall prevent the loading, unloading, or delivery of merchandise, supplies, or other property outside the area and entrance designated therefor from time to time by Landlord. If the Premises is not located on the ground floor of the Building, Tenant shall use only the freight elevator servicing the retail portion of the Building for transporting any merchandise, supplies, and other property to and from the Premises. If Tenant is located on the ground floor of the Building, all loading, unloading, and deliveries to and from the Premises shall be made only through [insert location], or through such other manner as Landlord shall direct and at times designated by Landlord or the Property Manager. Tenant shall prevent any parked or standing trucks, trailers, or other vehicles, or equipment engaged in such loading, unloading, or deliveries in a manner that, in Landlord’s opinion, interferes with the use of any portion of the Building including, without limitation, the Common Areas. Deliveries through the Common Areas shall be coordinated with the Property Manager and shall occur only at such times as the Property Manager deems appropriate.
Issue #6: Sounds, Odors, and Vibrations Inside Building
Retail tenants can bring noise and odor problems with them that can be a nuisance to your office tenants. For example, a manicure salon or dry cleaner might generate chemical odors, notes Muhlebach. So bar any noxious or objectionable odors, fumes, or noises from the space. Require the retail tenant to vent and exhaust odors from the space by installing the vent/exhaust systems that you require and that comply with the law, he says. And add that the retail tenant mustn’t allow any music or other similar sounds to be heard outside the space without your consent. If you’re worried about potential noise problems with a retail tenant, require it to install soundproofing at its space, says Muhlebach.
Model Lease Language
Tenant shall not allow any noxious or objectionable odors, fumes, or noises to emanate or escape from the Premises. Tenant shall properly vent and exhaust odors from the Premises, installing such system(s) that Landlord, in its sole judgment, requires and that complies with all relevant laws and governmental regulations. Tenant shall not permit any music or other similar sounds to be heard outside the Premises without Landlord’s prior written consent.
Issue #7: Trash Disposal
Trash disposal can be a big issue with retail tenants. Unlike most office tenants, retail stores can generate unusually large amounts of trash when unpacking shipments, says Muhlebach. And businesses that sell food—even those that aren’t restaurants—require frequent trash pickups. Don’t let the retail tenant accumulate trash outside of the space, except in compactors or approved receptacles.
If the retail tenant will require more trash disposal services than your building provides to its office tenants, let the retail tenant contract separately with the building’s disposal company and get billed directly by that company, says Muhlebach. Another option is to let a retail tenant that needs additional services contract separately with the building’s disposal company for them, and then agree to have you provide the additional services at its expense, he suggests. If the retail tenant gets a separate Dumpster, make sure that it’s kept clean, frequently emptied, and placed in a location that you choose.
Model Lease Language
a. Tenant shall not store or permit accumulations of any trash, garbage, rubbish, or other refuse inside or outside of the Premises except in compactors or other receptacles approved by Landlord.
b. If required by Landlord, Tenant shall at its sole cost and expense contract separately for trash removal services with the Building’s trash disposal contractor. If Tenant shall obtain a separate Dumpster or other appropriate equipment for trash removal, then Tenant shall:
(i) Place its Dumpster in a location selected by Landlord from time to time;
(ii) Maintain its Dumpster in a neat and sanitary condition; and
(iii) Empty the Dumpster as often as necessary (but at least [insert frequency, e.g., daily]) to avoid overloading, leakage, spillage, pest and rodent problems, and unsanitary conditions.
Issue #8: Pest Extermination
Pest control will be particularly important if your retail tenant sells food. So it’s a good idea to require the retail tenant to arrange for separate pest control services at its expense, says Muhlebach. To make sure that the pest control is done properly, require the retail tenant to use a licensed pest extermination contractor.
Model Lease Language
On a monthly basis, or sooner if reasonably deemed necessary by Landlord, Tenant shall, at its sole cost and expense, promptly cause the Premises to be treated for pests by a licensed pest extermination contractor.
Finance, Logistics Considerations
Depending on the nature of the retail tenant business and its negotiating power, you may need to consider these other points when negotiating your lease:
Percentage rent. Instead of paying a flat rent, many retail tenants pay a monthly minimum rent, plus rent based on a percentage of their gross sales. Calculating percentage rent requires a lot of effort on your part. You must collect gross sales reports from your retail tenants and have your accountant calculate what’s due to you, says Muhlebach.
Operating expenses. A retail tenant may refuse to pay a share of any operating expenses that benefit the office tenants but don’t directly benefit the retail tenant. For instance, the retail tenant may insist on excluding the following from operating expenses: electricity for office space when the retail tenant’s space is separately metered; janitorial services provided to office space but not to the retail space; maintenance/repairs for building HVAC equipment when the retail tenant has its own HVAC equipment; and elevator service if the retail tenant is on the first floor.
Safety and security. In addition to long lines and crowds, retail tenants can cause unique security problems that you should consider before leasing. Consider making the retail tenant agree in the lease to eliminate any security problems it causes, suggests Muhlebach. For example, if visitors to the retail tenant vandalize your building, the retail tenant will have to increase the building’s security at its own expense to prevent future incidents.
Insurance. Retail tenants may have different insurance requirements from your office tenants. Before signing a lease with a retail tenant, talk to your insurance broker and find out what additional or different insurance requirements you may need to impose to give you full protection, says Muhlebach.
Licenses. If the retail tenant will need governmental licenses and permits to occupy the space, make the retail tenant responsible for getting, paying for, and complying with those licenses and permits.
Parking. Your retail tenants’ patrons may overtax your parking lots and take up spaces your office tenants use. As a result, you may need to designate reserved parking for your office tenants, says Muhlebach. Another possibility is to section off part of your parking lot for retail patrons to use, he adds.
Restaurant Considerations
If your office building is in an out-of-the-way location where there isn’t convenient access to restaurants or shops that sell food, you may consider leasing to a restaurant tenant, whether it’s cafeteria style or a sandwich and salad shop. It might seem like a restaurant would fall under a retail use, but be careful: There are additional protections that you’ll need to put into a lease with a food-service tenant or restaurant in your building. Namely, you’ll want to include nuisance provisions—and make them narrow. That’s because many restaurants generate noise, play loud music, attract customer lines or crowds, or offer products that potentially create odors—prompting office tenants to complain.
Anticipating this, you should try to restrict the tenant’s right to make noise or offer potentially annoying products as much as possible while still allowing it to get the benefit of leasing in your building. For advice on evaluating whether to rent to a restaurant tenant in your office building, and important lease provisions to consider, see “Leasing to a Restaurant? Due Diligence You Must Consider at the Outset,” in the April 2011 Special Issue of the Insider, and available here.
Insider Source
Richard F. Muhlebach, CPM, CSM, CRE: Woodinville, WA; rmuhlebach@comcast.net.