Plugging Loopholes

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Typically, when an owner agrees to allow a tenant to assign or sublet its space, it uses lease provisions that require the tenant to give it some or all of its profits from any sublet or assignment. If your lease says that these profits include the sale of any of the tenant’s personal property, namely furniture and equipment, you might think that you’ve covered all your bases and that the tenant must pay you under those circumstances.

Shopping centers have been benefiting from a proliferation of kiosks and carts selling everything from hair styling tools to cell phone accessories to skin care products. Why have kiosks taken off in recent years? Kiosks have a low cost but a great potential to reap benefits. The cost of renting to a kiosk as compared to an in-line store is minimal. In fact, you can charge a high minimum fee. And, because a kiosk needs only a small amount of space, it can afford to pay more per square foot than other tenants.

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.

Some of your office building tenants that are only halfway through their lease terms may already be complaining that their space is looking shabby and the rent they'll be paying during the last few years of their leases will be higher than the outdated space will be worth at that point. For example, the rent at year seven of their 10-year leases won't reflect the reality of peeling paint and frayed and stained carpeting. They may already have negotiated an agreement for you to repaint and recarpet their spaces at a set future date—and pay for all or part of the work.

Although most leases give tenants the right to a rent abatement when their office or retail space becomes unusable after a fire, flood, or similar casualty, they fail to adequately define when the abatement period will end. Merely saying that the abatement period will continue until the space is no longer “unusable” is vague, and gives the tenant ammunition to take advantage of you. Plug this loophole by placing limits in your lease specifying how long the abatement will last.

Your lease with a retail tenant probably gives it certain special rights and remedies. For instance, the lease may include a cotenancy clause that lets the tenant abate its rent if you don't replace another tenant—typically, an anchor—when it goes dark. Or it may include an exclusive that lets the tenant sue you for damages or terminate its lease if the exclusive is violated. And it might have a performance kickout right that lets the tenant terminate its lease if its gross sales don't meet a minimum sales threshold during a set time period.

Most shopping center owners provide off-site traffic improvements—such as special signage and lighting in areas leading to the center—to their tenants. These improvements benefit both owners and tenants because they help increase customer traffic, which means more sales at the center. And these improvements may also help control the flow of vehicles into and out of the center, reducing the risk of accidents.

If the lease with your strip mall or shopping center tenant doesn't include provisions allowing you to control its right to choose and change its trade name, you are giving it the power to cause serious problems. At the very least, a tenant's illegal or unsuitable use of a trade name may give your center a bad reputation. In the worst-case scenario, it could result in a lawsuit if the tenant's competitor claims that the trade name was stolen from it and believes that you knowingly permitted the trademark violation.

In today's market, more tenants are leaving their leases early if their businesses are in trouble. Consequently, owners that are left in the lurch with broken lease agreements and a sudden loss of rental income must be prepared to quickly turn over tenants to fill vacant space. Creating “universal space,” which is all purpose and, therefore, easier to re-rent immediately, is a solution that saves time and money.

When a commercial tenant stays in its space after its lease term expires, it becomes a “holdover” tenant. The most common reason for a holdover is the tenant's inability to move because its new space isn't ready yet. As a result of a tenant's mismanaging its relocation, a lengthy holdover situation can become a very complicated and costly trap for the owner. Avoid this trap by discouraging tenants from holding over: Include a costly and inconvenient holdover clause in the lease agreement.