Leasing Retail Space: Negotiating the Right Deal

Letter of Intent (LOI)

Retail space negotiations are complicated and time-consuming. Once you have located the retail space which is ideal for your business, the next step is to negotiate an agreement which protects you and is acceptable to the landlord. Industry practice for retail space is to negotiate a letter of intent before negotiating the lease.

Use an Attorney!

Engage an attorney to assist in the letter of intent negotiation. It probably seems that the letter of intent is informal and can easily be negotiated without an attorney. However, there are issues you should address in the letter of intent which may not be obvious if you have not previously negotiated letters of intent for retail.

Wow! This is Complicated

Common factors for a retail space letter of intent include: defining the parties (leasor and leasee aka landlord and tenant), defining the space, defining the rent including any percentage rent, defining the basis for calculating sales or net income if they are involved in calculating rent, the initial term, any renewal options, rent for renewal options period, the day at which lease payments commence, the date of occupancy, the condition of the space when the landlord provides it to the tenant, tenant improvement allowances provided by the landlord, who performs the tenant improvements, is the tenant required to use union labor for tenant improvements, is the tenant required to use a general contractor for tenant improvements (TI), who pays for the cost of the ADA compliance, who maintains what (i.e roof, HVAC, electrical, plumbing, etc), who pays which expenses, calculating the payment for CAM (common area maintenance), free rent, and identification of the broker and payment of the brokerage fee if relevant.

You Mean There is More!

Other issues which you may want to address in the letter of intent include expense escalations, co-tenancy issues, eminent domain, foreclosure, maintenance standards, definition of the amount of leaseable space, personal guarantees, purchase option, subleasing, required hours of operation, dedicated parking, who is responsible for obtaining variances related to signage and usage of the retail space, expansion options, first right of refusal, can the tenant keep the TI allowance not needed for construction, can the landlord relocate the tenant if the space is needed to accommodate another tenant, late payment fees, the mechanics of providing notice of default and any options for the tenant to cure the default, mechanics of dispute resolution between the landlord and tenant, and a right to terminate if your sales do not stabilize at a minimum level.

Complete LOI First

Complete and obtain an executed copy of the letter of intent before beginning on the lease agreement. The primary objective of the letter of intent is to negotiate and agree upon the business issues. The lease documents these agreements. Discuss fees to negotiate the lease with your attorney. Agree upon an hourly rate and estimate of the total fees. Agree the attorney will call if it appears the cost is going to exceed the estimate.

The following sections of the leasing retail space article focuses upon issues which merit commentary.

Percentage Rent

Percentage rent -- make sure the agreement regarding percentage rent is clear. If percentage rent is based on sales, define sales. For example, is sales-tax remitted to the city and state included in sales? It is even more difficult to define net profits, which is why most percentage rent leases are based upon sales instead of profits. Attempt to look at the definition of net profits from a detached perspective. If you gave the definition to a six grader, could they understand it?

Renewal Options

Renewal options -- tenants love them and landlords prefer to avoid them. In general, a larger number of shorter renewal options are better for the tenant. In addition, shorter notice periods to announce the tenants intend to renew are desirable for the tenant. Landlords prefer as much notice as possible regarding whether or not the tenet plans to renew.

Renewal Option Rental Rates

Renewal option rental rates -- tenants typically want fixed rental rates for renewal periods. Landlords typically want the rental rate based upon market rent. Agreeing upon market rents can be difficult and expensive. Reasonable people can disagree regarding the level for market rent for a retail space. For example, should the premium for an end-cap space be 10% or 100%? Retail space is not fungible. It recently signed lease for retail space within the same center provides insight into market rent. However, in most cases it will not clearly defined market rent.

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