Storage Space in a Retail Facility

Therefore, tenants should attempt to incorporate the terms of the storage space agreement into the retail lease that they are negotiating. The storage space provision would reference the Term of the storage space agreement as being the same Term contained in the lease for the retail facility. Similarly, if the lease were ever amended, modified or extended, the Term for occupancy of the storage space would likewise be modified, amended or extended.

In addition, if the storage space agreement was contained in a lease and not in a separate license agreement (which license agreement could be terminable at will by the landlord), a tenant could assure itself that it would have the use of the storage space for the full Term of the lease for the retail premises. As addressed below, the landlord may retain certain relocation rights regarding the storage space, but a tenant could attempt to prevent the landlord from having the right to terminate the storage space agreement altogether.

In any event, a tenant should be certain to state in the lease document that the provisions relating to the storage space supersede any previously executed storage space agreements or understandings and all previously executed storage space agreements are terminated, null and void and of no further force or effect.

Rent

Generally, the rent for storage space is limited to a base rent amount and the cost for utility services. Landlords are able to provide this type of rent structure, since in most retail leases, storage space areas are excluded from the gross leasable area of the retail facility and as a result, all tenants at the retail facility share in the additional rent cost (e.g., taxes, operating costs, insurance, etc.) of the storage spaces within the retail facility. As a result, a tenant can help reduce its rent cost by paying for storage space rent in a separate area within the retail facility, as opposed to causing a portion of its retail premises to be used for storage purposes.

However, in situations where the retail lease provides for the payment of percentage rent, a tenant can further attempt to improve its rent deal by requesting that the base rent that is payable for the storage space be included in the base rent that is being paid for the retail premises. By including the base rent from the storage space into the base rent for the retail premises, when the breakpoint is calculated for purposes of determining percentage rent owed, the breakpoint will be increased (due to the addition of the base rent for the occupancy of the storage space), thereby reducing the amount of percentage rent that would be owed by the tenant, if in fact the tenant is paying percentage rent and gross sales exceed the breakpoint.

Relocation

Generally, landlords will want to maintain their flexibility in being able to relocate a tenant's storage space from one location to another location within a retail facility, if the landlord determines the storage space can have a higher and better use as retail premises. While tenants may be amenable to allowing the storage space to be relocated, there are several terms that should be addressed in the storage space provision regarding this relocation:

• The landlord should provide at least ninety (90) days' written notice of the landlord's intention to relocate the storage space and state that such relocation is based upon the utilization of the storage space being utilized;
• The landlord should pay the full cost, not of only relocating the tenant's property from the former storage space to the new storage space, but also for performing any construction work within the new storage space, in order to bring the new storage space to the same level of construction as existed in the former storage space;
• The new storage space should be of substantially the same size, configuration, height and build-out as the former storage space;
• The new storage space should be substantially the same distance from the tenant's retail premises, and located on the same level of a multi-level shopping center, as the former storage space; and
• The new storage space should be free from any hazardous materials (or the landlord should remediate any hazardous materials) prior to delivering the new storage space to the tenant.

The tenant would then commence utilizing the new storage space once the landlord had put the tenant in possession of the new storage space with all of the above stated items addressed, prior to the tenant's leaving its former storage space. In addition, the landlord should represent to the tenant that the utility services available to the new storage space would be at least equal to those utility services available to the tenant at the former storage space.

Construction and Utilities

When addressing a storage space provision, a tenant should be certain that adequate utility services are available to the storage space premises (or the landlord will make sure adequate utility services are available, at the landlord's sole cost). Further, the landlord and tenant should agree upon the level of build-out, if any, that will be present at the storage space. To the
extent that there are any specialized needs for the tenant at the storage space, such special needs should be expressly set forth in the storage space provision and the storage space should be in the condition required by the terms of the storage space provision at the time the retail premises and the storage space are delivered to the tenant.

Conclusion

By carefully addressing the storage space provision in a lease agreement, a tenant can avoid the pitfalls of not having available to it a storage space during the entire Term of the lease. Further, the tenant can avoid paying for storage space that it no longer needs, or avoid incurring costs that the tenant did not expect to incur for its occupancy of the storage space.

Sample Storage Space Provision

Storage Space: Landlord leases to Tenant and Tenant leases from Landlord for the entire Term of this Lease that certain storage unit consisting of approximately _____ square feet known as storage space #____ and designated on EXHIBIT S attached hereto (the “Storage Space”). All the terms and provisions of this Lease, including but not limited to the expiration date of this Lease, shall be applicable to the Storage Space; provided, however, Tenant shall pay a base rent of $____ per month for the Storage Space plus all electrical charges for electricity consumed at the Storage Space. Tenant shall not be required to pay any other additional rent or charges for Tenant's occupancy of the Storage Space, including but not limited to, the charges for taxes, insurance or operating costs. Tenant shall take the Storage Space in its “as is” condition, except for any existing hazardous materials located in the Storage Space (which hazardous materials Landlord shall remove, at Landlord's sole cost, prior to delivering the Storage Space to Tenant). Tenant, at its sole cost and expense, shall have the right to upgrade the Storage Space provided Tenant has submitted final plans and specifications for said upgrade and Landlord has delivered written approval of said plans and specifications to Tenant. Any and all separate storage agreements or other types of lease or license agreement previously executed by the parties covering the Storage Space shall automatically terminate as of 11:59 p.m. on the day prior to the Commencement Date, without additional documentation by the parties.

Upon ninety (90) days' written notice to Tenant, Landlord shall have the right to relocate the Storage Space to another location in the Shopping Center (“Relocated Storage Space”), provided that the following terms and conditions are satisfied by Landlord:

A) The Storage Space is immediately converted into leasable retail space by Landlord;

B) Landlord shall pay all costs associated with relocating Tenant's property and movable fixtures from the Storage Space to the Relocated Storage Space and Landlord shall perform all work, including preparing all plans, obtaining all governmental approvals and paying all permit fees required to improve the Relocated Storage Space to at least the same level of construction as existed in the Storage Space;

C) The Relocated Storage Space shall be of substantially the same size, configuration, height, and level of construction as the Storage Space;

D) The Relocated Storage Space shall be substantially the same distance (or closer) from the Premises as the Storage Space was to the Premises and the Relocated Storage Space shall be located on the same level of the Shopping Center as the Storage Space;

E) The Relocated Storage Space shall not contain any hazardous materials at the time Landlord delivers the Relocated Storage Space to Tenant; and

F) Tenant shall not be obligated to vacate the Storage Space until Tenant is able to occupy the Relocated Storage Space.

Landlord represents to Tenant, upon which Tenant relies, that the utility services available to the Relocated Storage Space will be at least equal to the type and quality of the utility services available at the Storage Space.

Glenn A. Browne, a member of this newsletter's Board of Editors, is a shareholder in the law firm Braun, Browne & Associates, P.C. in Riverwoods, IL. Mr. Browne's law practice is concentrated in the areas of purchase and sale of real estate, commercial leasing and lease-related matters.

With the high cost of rentable area within a retail facility, tenants increasingly are searching for ways to reduce their rental costs, while at the same time creating enough space to house their necessary equipment, storage and inventory. One method that tenants may use to reduce their rental cost is to lease storage space in addition to the retail floor area that the tenant will need to display and sell its goods. However, when leasing storage space within a retail facility, tenants should be certain to address certain terms concerning the storage space, which may include coordinating the expiration date of the storage space agreement (the “Term”) to coincide with the Term of the retail lease, rent issues, relocation issues and construction and utility issues. This article addresses those concerns, and suggests some ways in which a tenant can be certain that its storage space agreement works in concert with its retail lease.

Term

Quite often, landlords will seek to utilize a license agreement or other ancillary document for establishing a tenant's occupancy of storage space. This method of documentation creates several problems for the tenant. First, quite often, the Term of the storage space agreement will not be drafted in a manner that coincides with the Term of the tenant's retail lease. As a result, a tenant could be in an unenviable position of having its retail lease expire, while at the same time having to pay for the lease of storage space, even though the tenant is no longer an occupant at the retail facility. Further, when retail leases are modified, amended or extended, the tenant does not always remember to modify the storage space agreement at the same time. As a result, the fact that the terms for the retail lease and the storage space agreement do not coincide leads to unfortunate results.

Therefore, tenants should attempt to incorporate the terms of the storage space agreement into the retail lease that they are negotiating. The storage space provision would reference the Term of the storage space agreement as being the same Term contained in the lease for the retail facility. Similarly, if the lease were ever amended, modified or extended, the Term for occupancy of the storage space would likewise be modified, amended or extended.

In addition, if the storage space agreement was contained in a lease and not in a separate license agreement (which license agreement could be terminable at will by the landlord), a tenant could assure itself that it would have the use of the storage space for the full Term of the lease for the retail premises. As addressed below, the landlord may retain certain relocation rights regarding the storage space, but a tenant could attempt to prevent the landlord from having the right to terminate the storage space agreement altogether.

In any event, a tenant should be certain to state in the lease document that the provisions relating to the storage space supersede any previously executed storage space agreements or understandings and all previously executed storage space agreements are terminated, null and void and of no further force or effect.

Rent

Generally, the rent for storage space is limited to a base rent amount and the cost for utility services. Landlords are able to provide this type of rent structure, since in most retail leases, storage space areas are excluded from the gross leasable area of the retail facility and as a result, all tenants at the retail facility share in the additional rent cost (e.g., taxes, operating costs, insurance, etc.) of the storage spaces within the retail facility. As a result, a tenant can help reduce its rent cost by paying for storage space rent in a separate area within the retail facility, as opposed to causing a portion of its retail premises to be used for storage purposes.

However, in situations where the retail lease provides for the payment of percentage rent, a tenant can further attempt to improve its rent deal by requesting that the base rent that is payable for the storage space be included in the base rent that is being paid for the retail premises. By including the base rent from the storage space into the base rent for the retail premises, when the breakpoint is calculated for purposes of determining percentage rent owed, the breakpoint will be increased (due to the addition of the base rent for the occupancy of the storage space), thereby reducing the amount of percentage rent that would be owed by the tenant, if in fact the tenant is paying percentage rent and gross sales exceed the breakpoint.

Relocation

Generally, landlords will want to maintain their flexibility in being able to relocate a tenant's storage space from one location to another location within a retail facility, if the landlord determines the storage space can have a higher and better use as retail premises. While tenants may be amenable to allowing the storage space to be relocated, there are several terms that should be addressed in the storage space provision regarding this relocation:

• The landlord should provide at least ninety (90) days' written notice of the landlord's intention to relocate the storage space and state that such relocation is based upon the utilization of the storage space being utilized;
• The landlord should pay the full cost, not of only relocating the tenant's property from the former storage space to the new storage space, but also for performing any construction work within the new storage space, in order to bring the new storage space to the same level of construction as existed in the former storage space;
• The new storage space should be of substantially the same size, configuration, height and build-out as the former storage space;
• The new storage space should be substantially the same distance from the tenant's retail premises, and located on the same level of a multi-level shopping center, as the former storage space; and
• The new storage space should be free from any hazardous materials (or the landlord should remediate any hazardous materials) prior to delivering the new storage space to the tenant.

The tenant would then commence utilizing the new storage space once the landlord had put the tenant in possession of the new storage space with all of the above stated items addressed, prior to the tenant's leaving its former storage space. In addition, the landlord should represent to the tenant that the utility services available to the new storage space would be at least equal to those utility services available to the tenant at the former storage space.

Construction and Utilities

When addressing a storage space provision, a tenant should be certain that adequate utility services are available to the storage space premises (or the landlord will make sure adequate utility services are available, at the landlord's sole cost). Further, the landlord and tenant should agree upon the level of build-out, if any, that will be present at the storage space. To the
extent that there are any specialized needs for the tenant at the storage space, such special needs should be expressly set forth in the storage space provision and the storage space should be in the condition required by the terms of the storage space provision at the time the retail premises and the storage space are delivered to the tenant.

Conclusion

By carefully addressing the storage space provision in a lease agreement, a tenant can avoid the pitfalls of not having available to it a storage space during the entire Term of the lease. Further, the tenant can avoid paying for storage space that it no longer needs, or avoid incurring costs that the tenant did not expect to incur for its occupancy of the storage space.

Sample Storage Space Provision

Storage Space: Landlord leases to Tenant and Tenant leases from Landlord for the entire Term of this Lease that certain storage unit consisting of approximately _____ square feet known as storage space #____ and designated on EXHIBIT S attached hereto (the “Storage Space”). All the terms and provisions of this Lease, including but not limited to the expiration date of this Lease, shall be applicable to the Storage Space; provided, however, Tenant shall pay a base rent of $____ per month for the Storage Space plus all electrical charges for electricity consumed at the Storage Space. Tenant shall not be required to pay any other additional rent or charges for Tenant's occupancy of the Storage Space, including but not limited to, the charges for taxes, insurance or operating costs. Tenant shall take the Storage Space in its “as is” condition, except for any existing hazardous materials located in the Storage Space (which hazardous materials Landlord shall remove, at Landlord's sole cost, prior to delivering the Storage Space to Tenant). Tenant, at its sole cost and expense, shall have the right to upgrade the Storage Space provided Tenant has submitted final plans and specifications for said upgrade and Landlord has delivered written approval of said plans and specifications to Tenant. Any and all separate storage agreements or other types of lease or license agreement previously executed by the parties covering the Storage Space shall automatically terminate as of 11:59 p.m. on the day prior to the Commencement Date, without additional documentation by the parties.

Upon ninety (90) days' written notice to Tenant, Landlord shall have the right to relocate the Storage Space to another location in the Shopping Center (“Relocated Storage Space”), provided that the following terms and conditions are satisfied by Landlord:

A) The Storage Space is immediately converted into leasable retail space by Landlord;

B) Landlord shall pay all costs associated with relocating Tenant's property and movable fixtures from the Storage Space to the Relocated Storage Space and Landlord shall perform all work, including preparing all plans, obtaining all governmental approvals and paying all permit fees required to improve the Relocated Storage Space to at least the same level of construction as existed in the Storage Space;

C) The Relocated Storage Space shall be of substantially the same size, configuration, height, and level of construction as the Storage Space;

D) The Relocated Storage Space shall be substantially the same distance (or closer) from the Premises as the Storage Space was to the Premises and the Relocated Storage Space shall be located on the same level of the Shopping Center as the Storage Space;

E) The Relocated Storage Space shall not contain any hazardous materials at the time Landlord delivers the Relocated Storage Space to Tenant; and

F) Tenant shall not be obligated to vacate the Storage Space until Tenant is able to occupy the Relocated Storage Space.

Landlord represents to Tenant, upon which Tenant relies, that the utility services available to the Relocated Storage Space will be at least equal to the type and quality of the utility services available at the Storage Space.

Glenn A. Browne, a member of this newsletter's Board of Editors, is a shareholder in the law firm Braun, Browne & Associates, P.C. in Riverwoods, IL. Mr. Browne's law practice is concentrated in the areas of purchase and sale of real estate, commercial leasing and lease-related matters.