Plugging Loopholes

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The exclusive right to sell a product or provide a service at a shopping center is invaluable to a tenant. The tenant won’t have any direct competition for profits, which sometimes means that it can set prices that would otherwise have to be lower to lure customers away from other businesses. But exclusives can be tricky when it comes to this type of price setting.

If you’re unsure that a prospective tenant will be able to pay its rent, getting a guaranty can assuage your fears and protect you from not being able to collect what the tenant owes. While a tenant might be able to produce a third party who’s willing to act as a guarantor on the tenant’s promise to pay—that is, the guarantor will step in and perform the lease obligations of the tenant if the tenant fails to do so—that strategy works only if you can actually hold the guarantor to its promise.

You might think that if you sue a tenant that has stopped paying rent and abandoned or been evicted from its space, it’s only fair that the tenant pays you what it owes in damages. If you’re surprised to find out that some tenants end up paying only a fraction or even none of the damages the owner requests, you’ve probably failed to include language in your lease that ensures you’ll be able to collect what you need to make up for the default.

Many retail space owners, and especially mall owners, give themselves a relocation right. That is, the right to relocate the tenant to a different space in the center or mall under certain circumstances. Negotiating a relocation right can be tricky—if you don’t draft this provision correctly you could end up thwarting your own efforts to have some flexibility. Using vague terms is the quickest way to negate your intent for the provisions.

Many people don’t know that retailers—namely drug stores, grocery stores, discount department stores, home improvement stores, music stores, and book stores—have special deals with manufacturers, vendors, or suppliers to promote certain products. And that might not mean much to you as a shopping center or mall owner—but it should, since it’s a missed opportunity to collect percentage rent on those fees.

Are you fully protected if your tenant moves out at the end of its lease and leaves the space in such terrible shape that it’s unrentable right away? Your lease probably requires the tenant to pay for any costs and repairs that may be necessary, but that may not be effective to cover all of your losses. For instance, if the space sits vacant while you take six months to repair it, you would wind up not collecting rent—but you would still have to pay taxes and utilities.

Shutting down the electricity in a tenant’s space may become necessary at some point, either because of circumstances in the center or building, such as repairs or an upgrade to the electrical system, circumstances out of your control, such as an order from the utility company, or an emergency situation like flooding or a fire. But if your lease doesn’t carve out your right to electricity shutdowns, you could be on the hook for damage they cause to a tenant’s business.

When a tenant performs alterations in its space, there’s always the risk that they won’t be performed properly or that one or more mechanic’s liens will be filed against your property. Both of these issues can be costly and have long-lasting ramifications. Traditionally, many owners have tried to avoid those situations by requiring a tenant that plans to do construction to provide bonds before the work starts. But bonds can be a problem for both you and the tenant.

Sadly, public violence has escalated in the past few years, with attacks in workplaces, entertainment venues, and malls. Regardless of the security measures you take to prevent or deal with violent attacks occurring on your property, some things will always be out of your control. From time to time, you should check to make sure your insurance policies provide adequate coverage. That’s still not enough, however. You should require your tenants to always maintain adequate coverage as well.

Standard commercial net leases require the tenants to pay a pro-rata share of property taxes on an office building or shopping center based on how much of the space each occupies. As a result, when improvements cause the property’s tax assessment to go up, the big tenants pay the lion’s share of the tax increase. As long as the big tenants actually benefit from the improvement—whether to their own space or the common areas—it’s reasonable and fair for them to pay more than their smaller neighbors.