Specify “First-Run” Movies in Lease with Multiplex Theater

If you have a multiplex movie theater tenant in your center, you’ll want it to show the latest popular movies so that it will attract crowds. That’s because movie crowds create foot traffic and other sales at your center. The whole center can benefit from this type of tenant. And a tenant like this could potentially pay you lots of percentage rent. In this scenario, everybody wins. Or do they? Not if your lease contains a loophole that wipes out these benefits.

If you have a multiplex movie theater tenant in your center, you’ll want it to show the latest popular movies so that it will attract crowds. That’s because movie crowds create foot traffic and other sales at your center. The whole center can benefit from this type of tenant. And a tenant like this could potentially pay you lots of percentage rent. In this scenario, everybody wins. Or do they? Not if your lease contains a loophole that wipes out these benefits.

     The use clause in some leases may say only that the tenant will operate as a movie theater and may not require the movies to be new—that is, “first-run.” If the tenant is free to show movies that are old or were previously released in your area—"second-run movies”—it typically will draw a smaller theater crowd and bring fewer shoppers to your center.

     The tenant may make less money showing those movies. That might lead to its not being able to afford its rent. Other tenants might also suffer if they depend on traffic from the theater. And some tenants might have requirements in their leases that a movie theater is operating at the center. If the theater is forced to go out of business, it can create a domino effect of problems for you with those other tenants.

     What can you do? Try to plug this loophole by requiring the tenant to show only first-run movies.

Understand Tenant’s Motivation

Why would a tenant want to show second-run movies? There are several reasons. First, it’s sometimes difficult to get first-run movies from a distributor. So the tenant may have to resort to second-run movies rather than keep some of its screens dark. Second, it’s less expensive for the tenant to show second-run movies, and the tenant may be anxious to keep its costs down.

     Or, some tenants may want to show second-run movies for tactical reasons—not out of necessity.

     Example: A movie theater has a continuous operations clause and a noncompetition clause in its lease. The theater is part of a chain that built another movie theater within the noncompete area. As a result, the chain has to pay percentage rent to the center on both theaters. The chain asks the owner to reduce its percentage rent on the two theaters, but the owner refuses. So the chain threatens to show only second-run movies at the first theater to decrease the theater’s attendance and the traffic to the rest of the center. The chain could do this if there’s no clause in the lease that the owner could use to stop it.

     You can avoid this result—which can make the difference between your center being financially viable or not—by requiring first-run movies in your tenant’s use clause. To do this, add the following language to your lease:

Model Lease Language

As a material inducement for Landlord to enter into this Lease, Tenant hereby covenants and agrees to operate as a first-class multiplex movie theater and to show only so-called first-run motion pictures, as opposed to so-called second-run or sub-run  motion pictures, at all times, on each of its screens in the Premises, during Tenant’s operating hours.

Compromise for Second-Run Success

If the tenant argues that some second-run movies are profitable (for example, updated versions of old movies with a “cult” following), so they won’t hurt business at your center, you can compromise to meet the tenant’s need to show second-run movies and your desire for it to show first-run movies. Here are two approaches:

     Offer choice of “comparable” manner. Require the tenant to operate in a manner comparable either to the other primarily first-run theaters in your geographic area or to the other theaters in its chain. That means your tenant can show second-run movies only if the other theaters in the area or in its chain are also showing second-run movies. And if the other theaters in the area or in the chain are showing only first-run movies, then your tenant must also show first-run movies. To set up this compromise, add the following language to the lease where you discuss the tenant’s primary use.

Model Lease Language

…a first-class multiplex movie theater consistent with a first-class retail/entertainment center for presentation of motion pictures similar to [choose one: other primarily first-run theaters in [insert geographic location, e.g., South Tampa] Area or other theaters in the Tenant’s chain].

     Limit second-run screens. With enough first-run movies to fill all of its screens being hard to find, a multiplex may complain about not being allowed to show second-run movies if the other theaters in the area or in its chain are showing only first-run movies. You can compromise by letting the tenant show second-run movies on a few of its screens—say, one screen for each 10 screens the tenant operates at your center. You can add the limit to your lease by using the following language, placed after the Model Lease Language that requires the tenant to operate in a manner comparable to other theaters in the area or in its chain:

Model Lease Language

…; provided, however, that Tenant shall have the right to show so-called second-run or sub-run motion pictures on not more than [insert #, e.g., two (2)] screens in the Premises at the same time.