Beyond the Basics: Leasing and Operational Audit Issues

Lease Considerations

Opening co-tenancies: What occupancy levels in the shopping center, if any, are necessary to require a tenant to open for business initially? If the occupancy levels are not achieved by a certain time period or certain events are not satisfied, what type of termination rights or rent abatements rights are set forth in the lease? [See sample provision.]

Operating co-tenancies: What occupancy levels in the shopping center, if any, are necessary to require a tenant to remain open for business? If the occupancy levels are not maintained for a certain time period or certain events are not satisfied, what type of termination rights or rent abatements rights are set forth in the lease? [See sample provision.]

Termination rights: What specific termination rights are set forth in the lease? Termination rights may include rights for a tenant to terminate the lease for lack of a stipulated amount of annual gross sales by a certain time period. For example, a tenant would have the right to terminate the lease if the tenant does not achieve a certain amount of annual gross sales by the expiration of the third year of the lease term. [See sample provision.]

Assignment and subletting rights: What types of transfers (exit strategies) are permitted or prohibited in the lease? Of those types of transfers, which transfers may be executed with or without the landlord's consent? What are the standards for the landlord's consent?

Operational Considerations

Operating covenants: Does the lease contain a covenant to operate continuously from the premises? Does the lease contain any specific rights to close for inventory, alterations and the like?

Hours of operation: Does the lease contain specific operating hours? Are there any conditions or variations to the requirement to be open a specified number of hours per week? For example, the tenant will be required to operate the hours that a certain percentage of other tenants operate or are obligated to operate at the shopping center.

Gross sales: A detailed and concise review of current and past gross sales statements can be a very useful tool for measuring the performance of a tenant in a shopping center by spotting positive or negative trends in gross sales. Obviously, you need to consider whether or not a tenant is in a business that has seasonal sales cycles in which its gross sales will fluctuate. Nevertheless, a comparison of annual comparable sales segregated into monthly or quarterly periods will be a useful measure of performance.

Late payments and defaults: A review of current and past late payments in base rent and/or additional rent can be a useful tool for monitoring the performance of a tenant, as well as a review of current and past defaults (both monetary and nonmonetary).

In summary, while there is no definite procedure to implement in lease audits, it is important to remember that a periodic review of your leases and leasing strategies as compared with your company's goals and expectations is a useful tool in adding value to your company's business.

Whether you work for a national retail chain or a local retail tenant, you should consider periodically performing lease audits to determine what type of short-term and long-term strategies to implement in an effort to keep your business viable. A lease audit that reviews and identifies risks and liabilities will assist you in developing and/or fine-tuning a business strategy that benefits your company.

What Type of Issues Should You Review?

Generally, there are two categories to review: leasing issues and operational issues. There are a vast array of topics in both categories to consider; however, the initial topics for lease considerations would include, but are not limited to, review of: opening co-tenancies, operating co-tenancies, stipulated termination rights, assignment and subletting rights, operating covenants and hours of operation. Operational considerations would include, but are not limited to: review of current and past gross sales statements to spot positive or negative trends in gross sales, review of the level of percentage rent payments over the term of the lease, review of current and past late payments in base rent and/or additional rent, as well as a review of current and past defaults.

Lease Considerations

Opening co-tenancies: What occupancy levels in the shopping center, if any, are necessary to require a tenant to open for business initially? If the occupancy levels are not achieved by a certain time period or certain events are not satisfied, what type of termination rights or rent abatements rights are set forth in the lease? [See sample provision.]

Operating co-tenancies: What occupancy levels in the shopping center, if any, are necessary to require a tenant to remain open for business? If the occupancy levels are not maintained for a certain time period or certain events are not satisfied, what type of termination rights or rent abatements rights are set forth in the lease? [See sample provision.]

Termination rights: What specific termination rights are set forth in the lease? Termination rights may include rights for a tenant to terminate the lease for lack of a stipulated amount of annual gross sales by a certain time period. For example, a tenant would have the right to terminate the lease if the tenant does not achieve a certain amount of annual gross sales by the expiration of the third year of the lease term. [See sample provision.]

Assignment and subletting rights: What types of transfers (exit strategies) are permitted or prohibited in the lease? Of those types of transfers, which transfers may be executed with or without the landlord's consent? What are the standards for the landlord's consent?

Operational Considerations

Operating covenants: Does the lease contain a covenant to operate continuously from the premises? Does the lease contain any specific rights to close for inventory, alterations and the like?

Hours of operation: Does the lease contain specific operating hours? Are there any conditions or variations to the requirement to be open a specified number of hours per week? For example, the tenant will be required to operate the hours that a certain percentage of other tenants operate or are obligated to operate at the shopping center.

Gross sales: A detailed and concise review of current and past gross sales statements can be a very useful tool for measuring the performance of a tenant in a shopping center by spotting positive or negative trends in gross sales. Obviously, you need to consider whether or not a tenant is in a business that has seasonal sales cycles in which its gross sales will fluctuate. Nevertheless, a comparison of annual comparable sales segregated into monthly or quarterly periods will be a useful measure of performance.

Late payments and defaults: A review of current and past late payments in base rent and/or additional rent can be a useful tool for monitoring the performance of a tenant, as well as a review of current and past defaults (both monetary and nonmonetary).

In summary, while there is no definite procedure to implement in lease audits, it is important to remember that a periodic review of your leases and leasing strategies as compared with your company's goals and expectations is a useful tool in adding value to your company's business.