In the Spotlight: Renewing a Retail Lease

At the time that the existing lease was executed, typically the landlord and the tenant had certain construction obligations in order to place the leased premises in a condition that would allow the tenant to open for business. However, over the course of the existing lease, depending upon the length of time of the initial term of the lease, there may arise certain construction concerns for upgrading the condition of the leased premises. Of particular concern is the storefront sign and the storefront itself, since these are the two most visible aspects of the leased premises to the general public. A landlord may also want to consider upgrades to the interior of the leased premises which may be necessary at the time that the lease is being renewed. For instance, a landlord may want the tenant to install new floor covering or new wall covering. The landlord may also want tiles to be replaced, broken or worn fixtures to be repaired or replaced, and new interior signage to be implemented. A good practice is to have the landlord and the tenant perform a walk-through of the leased premises and determine those areas of construction work that the landlord requires the tenant to perform at the time that the lease is being renewed.

Since the tenant, at the time of renewal, is open for business, it may want to address certain construction concerns that it may have. For instance, the tenant may want to be able to close for business for a short period of time without being deemed in violation of the lease for its failure to continuously operate for business. Also, a tenant may want to be able to perform certain of its construction work at night, after the building of which the leased premises forms a part, has closed for business. This right to perform construction after standard business hours often requires an upfront agreement between the landlord and the tenant. In addition, the landlord may have certain additional concerns raised by the after-hours construction work, including security, lighting and construction noise after a certain hour of the day. All of these understandings and agreements should be carefully documented in the amendment to lease, so that the construction work is able to be performed in a manner that is acceptable to both the landlord and the tenant.

In addition, to the extent that there is any construction work which the tenant requires the landlord to perform, such construction work should be addressed at the time of the lease renewal. For instance, if there is an area of the common areas adjacent to the leased premises which is uneven or susceptible to a “tripping hazard,” the tenant may want to require the landlord to perform this work at the time of the lease renewal, as well. Similarly, if the heating, ventilating and air conditioning of the leased premises are being provided by the landlord, and if those systems have aged, the tenant may want the landlord to commit to performing certain repair or replacement work on the heating, ventilating and air conditioning system, at the time that the amendment is executed.

Waiver of Claims

During the course of the initial term, the landlord and the tenant may have certain disputes that may never have been fully resolved. Some of these types of disputes may include leaks in the leased premises that the tenant believes the landlord is obligated to repair; rent or reconciled charges that the landlord believes the tenant owes; or certain operational issues that the landlord'fs onsite manager has brought to the attention of the tenant. Both the landlord and the tenant should review their lease files, in order to determine whether any claims exist at the time that the amendment is being executed. Because all of the decision-making parties are generally present at the time the amendment is executed, this is an excellent time for the parties to try to resolve any disputes that have existed over the initial term.

Once it has been determined that all of the disputes have been resolved, then except for those matters that are raised in the amendment, all other claims or obligations should be waived and released by both the landlord and the tenant, so that the parties can “start fresh” with the renewal term. If the agreement is not to “start fresh,” but rather to preserve those claims during the renewal term, then such claims should also be specified in the amendment, so that both the landlord and the tenant are aware that each party is preserving his/her rights under the existing lease during the renewal term.

Extended Guarantees

Both the landlord and the tenant should determine at the time that the lease is renewed, whether any original guarantors of the lease are going to continue to be guarantors during the renewal term. Often, the guarantors were initially required because the landlord was providing a substantial construction allowance for the tenant'fs buildout of the leased premises, or it was a relatively new tenant business for which the landlord did not have sufficient historical business background with which to accept the tenant without a guarantor. However, if the tenant has been present at the leased premises for a number of years and if the tenant has produced a solid history of paying its financial obligations on a timely basis and also satisfying its other obligations under the lease, the tenant may choose to request that during the extended term, the guarantor is no longer required by the lease.

While many factors will go into determining whether a guarantor is or is not required for the extended term, at a minimum, an analysis should be performed by both the landlord and the tenant, in order to determine whether a guarantor is required.Further, a guarantor may determine it no longer wants to be personally liable under the terms of the lease, and if the landlord is requiring a guarantor for the extended term, the tenant would need to be in a position to obtain a substitute guarantor for the tenant'fs obligations.

If the guarantors are going to remain as guarantors of the tenant'fs obligations during the renewal term, it is also good practice to have the guarantors re-affirm their guarantees during the extended term, so that it remains clear that the guarantors will remain personally liable under the lease during the extended term and that the guarantors are not being released in any way at the time of the execution of the amendment to the lease.

Security Deposits

Similar to the guarantor concept addressed above, the tenant may have been required to establish a security deposit with the landlord at the time that the initial lease was executed because of the financial condition of the tenant at that time, or because the tenant may not have had a long business history, and/or because the landlord and the tenant may not have had a long business relationship, if any, prior to entering into the initial lease. However, at the time that the lease is being amended and the term of the lease is being extended, the tenant may want to determine whether a security deposit, at least in the amount that was initially required by the landlord, is still necessary. In addition, the security deposit may have been required because the landlord was placing a substantial investment in the construction buildout of the leased premises. Theoretically, the construction allowance will have been fully amortized over the initial term of the lease, and as a result, the landlord no longer has the investment stake in the leased premises that once existed. As a result, the tenant may want to determine whether the full amount of the security deposit is still necessary.

Conversely, if the tenant'fs history in timely making rent payments during the initial term was less than stellar and during many months the tenant paid its monthly rent late and/or was delinquent in the performance of other lease obligations, the landlord may determine that the initial security deposit is not adequate in order to protect the landlord'fs risk during the extended term. If such is the case, a landlord may want to consider increasing the security deposit or taking a different type of security (e.g., a secured interest in a real property, a letter of credit, etc.), in order to adequately secure the landlord during the pendency of the extended term.

Too often, landlords and tenants do not even look at the security deposit at the time that the lease is being renewed and this oversight either leads to the landlord'fs being under-secured during the extended term or causes the landlord to maintain funds that the tenant could otherwise use because the security deposit continues to be maintained by the landlord, even though the risk does not justify it.

Addressing New Terms

Because of the ever evolving areas of technology, marketing and business operations, a tenant should carefully evaluate its business, not only as it exists at the time the lease is being amended, but also where the tenant believes its business will be situated in the years that are encompassed by the extended term. Topics such as Internet use, satellite television, marketing efforts within the common areas, paperless surveys taken with handheld electronic devices, and changes in the permitted use originally negotiated in the initial lease, should all be areas where a tenant reflects and reviews its business operations and determines whether those concepts need to be addressed or modified within the amendment to the existing lease.

A good practice is to have the operations manager, as well as the business operator, review their current business operations and their projected operations, and determine whether those business operations would be protected under the existing lease. If such is not the case, then those topics should be addressed in the amendment to the lease.

Conclusion

By carefully evaluating its business operations and its existing lease, the tenant can avoid a difficult situation in which a critical piece of its business operations is prevented because of an outdated provision in the lease. And by carefully considering issues like construction work, past claims, guarantees, security deposits and new or evolving business operations, a landlord and a tenant can effectively utilize an amendment to extend a term of a renewed lease, while at the same time reviewing critical topics that need to be addressed for a vibrant business operation for the tenant and a successful building operation for the landlord.

Glenn A. Browne, a member of this newsletter'fs Board of Editors, is a shareholder in the law firm Braun, Browne & Associates, P.C. which is located 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.

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When the occupancy of a retail tenant is going to be renewed in its present location, landlords and tenants often simply agree to the new rent structure and the new term, and then document those understandings in a short amendment to the existing lease agreement. However, it would benefit both the landlord and the tenant to give some thought to certain of the terms in the existing lease, and whether those terms still are applicable to the occupancy of the space for the new extended term. In particular, landlords and tenants should evaluate additional construction work that may be needed, waiver of any claims that may exist (or resolution of those claims), extension of guarantees, reworking security deposits and addressing various issues that may not have been applicable at the time that the existing lease was executed.

This article examines the topics that should be contemplated in an amendment to an existing lease, and also discusses the manner in which these issues may be addressed.

Construction Work

At the time that the existing lease was executed, typically the landlord and the tenant had certain construction obligations in order to place the leased premises in a condition that would allow the tenant to open for business. However, over the course of the existing lease, depending upon the length of time of the initial term of the lease, there may arise certain construction concerns for upgrading the condition of the leased premises. Of particular concern is the storefront sign and the storefront itself, since these are the two most visible aspects of the leased premises to the general public. A landlord may also want to consider upgrades to the interior of the leased premises which may be necessary at the time that the lease is being renewed. For instance, a landlord may want the tenant to install new floor covering or new wall covering. The landlord may also want tiles to be replaced, broken or worn fixtures to be repaired or replaced, and new interior signage to be implemented. A good practice is to have the landlord and the tenant perform a walk-through of the leased premises and determine those areas of construction work that the landlord requires the tenant to perform at the time that the lease is being renewed.

Since the tenant, at the time of renewal, is open for business, it may want to address certain construction concerns that it may have. For instance, the tenant may want to be able to close for business for a short period of time without being deemed in violation of the lease for its failure to continuously operate for business. Also, a tenant may want to be able to perform certain of its construction work at night, after the building of which the leased premises forms a part, has closed for business. This right to perform construction after standard business hours often requires an upfront agreement between the landlord and the tenant. In addition, the landlord may have certain additional concerns raised by the after-hours construction work, including security, lighting and construction noise after a certain hour of the day. All of these understandings and agreements should be carefully documented in the amendment to lease, so that the construction work is able to be performed in a manner that is acceptable to both the landlord and the tenant.

In addition, to the extent that there is any construction work which the tenant requires the landlord to perform, such construction work should be addressed at the time of the lease renewal. For instance, if there is an area of the common areas adjacent to the leased premises which is uneven or susceptible to a “tripping hazard,” the tenant may want to require the landlord to perform this work at the time of the lease renewal, as well. Similarly, if the heating, ventilating and air conditioning of the leased premises are being provided by the landlord, and if those systems have aged, the tenant may want the landlord to commit to performing certain repair or replacement work on the heating, ventilating and air conditioning system, at the time that the amendment is executed.

Waiver of Claims

During the course of the initial term, the landlord and the tenant may have certain disputes that may never have been fully resolved. Some of these types of disputes may include leaks in the leased premises that the tenant believes the landlord is obligated to repair; rent or reconciled charges that the landlord believes the tenant owes; or certain operational issues that the landlord'fs onsite manager has brought to the attention of the tenant. Both the landlord and the tenant should review their lease files, in order to determine whether any claims exist at the time that the amendment is being executed. Because all of the decision-making parties are generally present at the time the amendment is executed, this is an excellent time for the parties to try to resolve any disputes that have existed over the initial term.

Once it has been determined that all of the disputes have been resolved, then except for those matters that are raised in the amendment, all other claims or obligations should be waived and released by both the landlord and the tenant, so that the parties can “start fresh” with the renewal term. If the agreement is not to “start fresh,” but rather to preserve those claims during the renewal term, then such claims should also be specified in the amendment, so that both the landlord and the tenant are aware that each party is preserving his/her rights under the existing lease during the renewal term.

Extended Guarantees

Both the landlord and the tenant should determine at the time that the lease is renewed, whether any original guarantors of the lease are going to continue to be guarantors during the renewal term. Often, the guarantors were initially required because the landlord was providing a substantial construction allowance for the tenant'fs buildout of the leased premises, or it was a relatively new tenant business for which the landlord did not have sufficient historical business background with which to accept the tenant without a guarantor. However, if the tenant has been present at the leased premises for a number of years and if the tenant has produced a solid history of paying its financial obligations on a timely basis and also satisfying its other obligations under the lease, the tenant may choose to request that during the extended term, the guarantor is no longer required by the lease.

While many factors will go into determining whether a guarantor is or is not required for the extended term, at a minimum, an analysis should be performed by both the landlord and the tenant, in order to determine whether a guarantor is required.Further, a guarantor may determine it no longer wants to be personally liable under the terms of the lease, and if the landlord is requiring a guarantor for the extended term, the tenant would need to be in a position to obtain a substitute guarantor for the tenant'fs obligations.

If the guarantors are going to remain as guarantors of the tenant'fs obligations during the renewal term, it is also good practice to have the guarantors re-affirm their guarantees during the extended term, so that it remains clear that the guarantors will remain personally liable under the lease during the extended term and that the guarantors are not being released in any way at the time of the execution of the amendment to the lease.

Security Deposits

Similar to the guarantor concept addressed above, the tenant may have been required to establish a security deposit with the landlord at the time that the initial lease was executed because of the financial condition of the tenant at that time, or because the tenant may not have had a long business history, and/or because the landlord and the tenant may not have had a long business relationship, if any, prior to entering into the initial lease. However, at the time that the lease is being amended and the term of the lease is being extended, the tenant may want to determine whether a security deposit, at least in the amount that was initially required by the landlord, is still necessary. In addition, the security deposit may have been required because the landlord was placing a substantial investment in the construction buildout of the leased premises. Theoretically, the construction allowance will have been fully amortized over the initial term of the lease, and as a result, the landlord no longer has the investment stake in the leased premises that once existed. As a result, the tenant may want to determine whether the full amount of the security deposit is still necessary.

Conversely, if the tenant'fs history in timely making rent payments during the initial term was less than stellar and during many months the tenant paid its monthly rent late and/or was delinquent in the performance of other lease obligations, the landlord may determine that the initial security deposit is not adequate in order to protect the landlord'fs risk during the extended term. If such is the case, a landlord may want to consider increasing the security deposit or taking a different type of security (e.g., a secured interest in a real property, a letter of credit, etc.), in order to adequately secure the landlord during the pendency of the extended term.

Too often, landlords and tenants do not even look at the security deposit at the time that the lease is being renewed and this oversight either leads to the landlord'fs being under-secured during the extended term or causes the landlord to maintain funds that the tenant could otherwise use because the security deposit continues to be maintained by the landlord, even though the risk does not justify it.

Addressing New Terms

Because of the ever evolving areas of technology, marketing and business operations, a tenant should carefully evaluate its business, not only as it exists at the time the lease is being amended, but also where the tenant believes its business will be situated in the years that are encompassed by the extended term. Topics such as Internet use, satellite television, marketing efforts within the common areas, paperless surveys taken with handheld electronic devices, and changes in the permitted use originally negotiated in the initial lease, should all be areas where a tenant reflects and reviews its business operations and determines whether those concepts need to be addressed or modified within the amendment to the existing lease.

A good practice is to have the operations manager, as well as the business operator, review their current business operations and their projected operations, and determine whether those business operations would be protected under the existing lease. If such is not the case, then those topics should be addressed in the amendment to the lease.

Conclusion

By carefully evaluating its business operations and its existing lease, the tenant can avoid a difficult situation in which a critical piece of its business operations is prevented because of an outdated provision in the lease. And by carefully considering issues like construction work, past claims, guarantees, security deposits and new or evolving business operations, a landlord and a tenant can effectively utilize an amendment to extend a term of a renewed lease, while at the same time reviewing critical topics that need to be addressed for a vibrant business operation for the tenant and a successful building operation for the landlord.

Glenn A. Browne, a member of this newsletter'fs Board of Editors, is a shareholder in the law firm Braun, Browne & Associates, P.C. which is located 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.

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