In a retail commercial lease, an often overlooked part of negotiating the retail lease terms is the Permitted Use clause.
What are some elements of a Permitted Use Clause?
Exclusive Permitted Use
What this means is you want to negotiate as specific of an exclusive use clause as you can in your lease so you can run your business without a direct competitor leasing a space near you. Of course, your lease use clauses do not cover neighboring retail centers and units that are owned by other Landlords, so always check out neighboring centers for the tenant mix.
What do we mean by specific? Here is a good example:
One of the clients that we have worked with owns a franchise ice cream store. During the life of the franchise ice cream’s store lease, the landlord leased a space two doors down to a frozen yogurt business. The franchise ice cream store owner was upset as frozen yogurt is direct cold dessert competition to his business. The landlord pointed out that lease had an exclusive on ice cream, not other cold dessert products. The landlord understood that there would be some effect on the franchise ice cream tenant, so it was a negotiating leverage point that we used to obtain a concession in the lease rate. This is a good example of a landlord working to improve his business in cooperation with their tenants.
Nominal or incidental sales
Another clause to negotiate carefully is the incidental sales clause. Incidental sales means that a small percentage of revenue can be derived from a certain service or product. For example, the wording of an incidental sales clause can be the following: “…no more than 10% of revenues can be from sales of coffee…’ A good example would be a bakery that also sells bagels next to a dedicated full time coffee house. In this case, the bakery would be open early morning and could serve coffee to morning customers as they come in to pick up orders.
Naturally, the execution of such a clause is very tricky, as how can the landlord and the coffee house verify that the sales of coffee at the bakery are not exceeding 10%. Thus, try to avoid letting the landlord grant nominal or incidental sales to competitive uses for your business, as they are extra work to administer for all parties involved.
Prohibition from lessee tenant to open another location within a specified radius
This is a common clause in leases that prohibits tenants from opening other units or locations too close the retail center in which the lease applies. This is commonly inserted by landlords to minimize the reduction in foot traffic to the location by having the lessee open up a new unit nearby that would divert potential foot traffic. Foot traffic counts are important for landlords, as they are a key component in a landlord justifying the asking lease rates for the retail center. The higher the foot traffic counts, the more appealing the retail center is to other tenants. So, keep in mind that landlords will be firm on lease conditions as they relate to retention and growth of foot traffic.
This is a sampling of lease use clauses, for more information and assistance with negotiating your leases, contact our Client Care Manager, Sonia Chhabra by telephone (888) 926-9193 or email email@example.com