Hidden Risks of Leasing Retail Space

When leasing retail space, tenants generally negotiate key specific business terms, such as rent, term, termination rights and the scope of construction. However, there are often lesser known or “hidden” risks that may not be addressed by tenants in their lease negotiations. These types of risks include availability of utilities, ceiling heights, differing floor elevations within the space, unusable space within the premises, and zoning and parking restrictions, as well as access limitations. This article addresses certain of these concerns and discusses how a savvy tenant may choose to address these items within its lease document.

Availability of Utilities

Generally, tenants believe that any and all amounts of utilities that they require will be available to their premises. However, a tenant must be careful to confirm that there is sufficient capacity within the main utility closet at the building to supply the required service. If there is not, a tenant will often have to pay the cost of bringing such utility service that it requires to the premises. This may require the tenant to add new electrical transformers or other utility components to the building, or to import service from a much further distance than the tenant had expected in order to be able to connect.

Either of these options often can result in significant additional construction costs. As a result, tenants should not only identify in their lease what their utility needs will be, but also have the landlord represent that such utility service is available to the premises from the nearest utility room.

Ceiling Heights

Depending on store design, a tenant may require certain heights for its ceilings throughout the premises. Sometimes, this ceiling height requirement may even exceed normal heights of eight to 12 feet. As a result, a tenant should be certain to incorporate a provision in its lease requiring the landlord to warrant that throughout the premises there will be available at least the height that the tenant requires. That means no duct system, utility pipes or conduits, or other impediments running through the ceiling will prevent the tenant from utilizing the ceiling heights it requires.

Further, the tenant's lease should state that at no time during the term of the lease will the landlord permit installations to be placed in the premises that will interfere with or reduce the ceiling height of the premises in any manner whatsoever.

Differing Floor Elevations

Often, when two premises are being combined, the height of the floor may not be the same in all areas. As a result, the tenant is left with the cost of leveling the floor so that it is the same elevation throughout the entire premises. The cost of such leveling can often result in thousands of dollars of additional construction expenditures that the tenant did not have in its budget. As a result, a tenant should either incorporate a provision into the lease that requires the landlord to pay all costs of leveling the floor [so that the two separate premises have the same level height of the floor], or, in the alternative, an investigation should be made of the premises to make sure that the entire floor throughout the premises is at a level height. Either way, the tenant could protect itself from incurring substantial costs, which it had not anticipated because of the uneven level of the two floors within its premises.

In situations where the height of the floor is unknown (e.g., flooring underneath walls, flooring not readily accessible upon a walkthrough of the premises, etc.), the tenant should insist that the landlord bear the risk and cost of delivering a premises that contains a level floor with a consistent elevation.

Unusable Space

When evaluating a premises for construction, a tenant should determine whether there is any space within the premises that cannot be reasonably used for retail purposes ' due to columns, utility lines or other impediments that prevent the space from being utilized. Since most retail premises are leased on a per-square-foot basis, and since most leases require that there be no reduction due to unusable space, a tenant could be agreeing to expend a substantial amount of rent for space that it cannot use. Therefore, a careful inspection of the premises would allow the tenant to determine whether there is any space that is not usable.

Either the tenant should exclude this square footage from the calculation of its rent, or the tenant should determine whether this area should be subject to a different rental structure than the rent for the remainder of the premises. In the alternative, the landlord and the tenant could determine ways to make the subject space usable. However, a tenant should be mindful of space that it will not be able to use in its normal retail operations.

Zoning, Parking and Access Restrictions

Depending on the type of premises that is being leased, there may be substantial restrictions on the type of use that may be conducted within the premises, the availability of parking for the premises and the access to and from the premises. A tenant should evaluate, through a review of the documents that are recorded against the property, whether there are any use restrictions against the property. Further, the tenant should obtain a copy of the zoning map that affects the property to determine if there are any zoning restrictions that would prevent certain uses from being conducted within the premises. Also, a tenant should require a representation from the landlord that the premises are not restricted or prohibited from being used for tenant's intended purpose and use by reason of zoning, laws, ordinances or other individual or entities (e.g., the use does not violate any other occupants exclusive rights or other use restriction rights).

In addition, a tenant should determine whether there are any parking spaces that are restricted from use by other tenants, which may limit the availability of parking for the particular tenant's customers, including limitations on the time that a particular parking space can be used and limitations on the use of certain parking spaces for loading and unloading or other specific purposes. This type of evaluation is particularly important in parking fields where there are a limited number of parking spaces and where access from those parking spaces to the particular premises may result in a customer having to walk a large distance before having access to a particular premises.

Access to the retail facility is always critical. In particular, a tenant should know whether the parking lot for its premises can only be accessed from one side of the access street or both, whether there are any impediments to the access and whether there are other impediments in front of the premises preventing free access from pedestrian or vehicular traffic. Also, a tenant should ascertain whether customers will be required to pay for parking at the retail facility and whether shuttle service is provided from any parking field that is located a great distance from the shopping area. All of the foregoing can have an impact on sales for the premises because customers may not be willing to traverse impediments when trying to access a retail facility or expend time or money in accessing the retail facility.

Conclusion

By carefully evaluating the “hidden” risks associated with retail space, a tenant can avoid situations where there business is not able to prosper because of risks that could have been addressed in the tenant's lease negotiations.

Glenn Browne, a member of this newsletter's Board of Editors, is a partner in Braun, Browne & Associates, P.C., Riverwoods, IL.

When leasing retail space, tenants generally negotiate key specific business terms, such as rent, term, termination rights and the scope of construction. However, there are often lesser known or “hidden” risks that may not be addressed by tenants in their lease negotiations. These types of risks include availability of utilities, ceiling heights, differing floor elevations within the space, unusable space within the premises, and zoning and parking restrictions, as well as access limitations. This article addresses certain of these concerns and discusses how a savvy tenant may choose to address these items within its lease document.

Availability of Utilities

Generally, tenants believe that any and all amounts of utilities that they require will be available to their premises. However, a tenant must be careful to confirm that there is sufficient capacity within the main utility closet at the building to supply the required service. If there is not, a tenant will often have to pay the cost of bringing such utility service that it requires to the premises. This may require the tenant to add new electrical transformers or other utility components to the building, or to import service from a much further distance than the tenant had expected in order to be able to connect.

Either of these options often can result in significant additional construction costs. As a result, tenants should not only identify in their lease what their utility needs will be, but also have the landlord represent that such utility service is available to the premises from the nearest utility room.

Ceiling Heights

Depending on store design, a tenant may require certain heights for its ceilings throughout the premises. Sometimes, this ceiling height requirement may even exceed normal heights of eight to 12 feet. As a result, a tenant should be certain to incorporate a provision in its lease requiring the landlord to warrant that throughout the premises there will be available at least the height that the tenant requires. That means no duct system, utility pipes or conduits, or other impediments running through the ceiling will prevent the tenant from utilizing the ceiling heights it requires.

Further, the tenant's lease should state that at no time during the term of the lease will the landlord permit installations to be placed in the premises that will interfere with or reduce the ceiling height of the premises in any manner whatsoever.

Differing Floor Elevations

Often, when two premises are being combined, the height of the floor may not be the same in all areas. As a result, the tenant is left with the cost of leveling the floor so that it is the same elevation throughout the entire premises. The cost of such leveling can often result in thousands of dollars of additional construction expenditures that the tenant did not have in its budget. As a result, a tenant should either incorporate a provision into the lease that requires the landlord to pay all costs of leveling the floor [so that the two separate premises have the same level height of the floor], or, in the alternative, an investigation should be made of the premises to make sure that the entire floor throughout the premises is at a level height. Either way, the tenant could protect itself from incurring substantial costs, which it had not anticipated because of the uneven level of the two floors within its premises.

In situations where the height of the floor is unknown (e.g., flooring underneath walls, flooring not readily accessible upon a walkthrough of the premises, etc.), the tenant should insist that the landlord bear the risk and cost of delivering a premises that contains a level floor with a consistent elevation.

Unusable Space

When evaluating a premises for construction, a tenant should determine whether there is any space within the premises that cannot be reasonably used for retail purposes ' due to columns, utility lines or other impediments that prevent the space from being utilized. Since most retail premises are leased on a per-square-foot basis, and since most leases require that there be no reduction due to unusable space, a tenant could be agreeing to expend a substantial amount of rent for space that it cannot use. Therefore, a careful inspection of the premises would allow the tenant to determine whether there is any space that is not usable.

Either the tenant should exclude this square footage from the calculation of its rent, or the tenant should determine whether this area should be subject to a different rental structure than the rent for the remainder of the premises. In the alternative, the landlord and the tenant could determine ways to make the subject space usable. However, a tenant should be mindful of space that it will not be able to use in its normal retail operations.

Zoning, Parking and Access Restrictions

Depending on the type of premises that is being leased, there may be substantial restrictions on the type of use that may be conducted within the premises, the availability of parking for the premises and the access to and from the premises. A tenant should evaluate, through a review of the documents that are recorded against the property, whether there are any use restrictions against the property. Further, the tenant should obtain a copy of the zoning map that affects the property to determine if there are any zoning restrictions that would prevent certain uses from being conducted within the premises. Also, a tenant should require a representation from the landlord that the premises are not restricted or prohibited from being used for tenant's intended purpose and use by reason of zoning, laws, ordinances or other individual or entities (e.g., the use does not violate any other occupants exclusive rights or other use restriction rights).

In addition, a tenant should determine whether there are any parking spaces that are restricted from use by other tenants, which may limit the availability of parking for the particular tenant's customers, including limitations on the time that a particular parking space can be used and limitations on the use of certain parking spaces for loading and unloading or other specific purposes. This type of evaluation is particularly important in parking fields where there are a limited number of parking spaces and where access from those parking spaces to the particular premises may result in a customer having to walk a large distance before having access to a particular premises.

Access to the retail facility is always critical. In particular, a tenant should know whether the parking lot for its premises can only be accessed from one side of the access street or both, whether there are any impediments to the access and whether there are other impediments in front of the premises preventing free access from pedestrian or vehicular traffic. Also, a tenant should ascertain whether customers will be required to pay for parking at the retail facility and whether shuttle service is provided from any parking field that is located a great distance from the shopping area. All of the foregoing can have an impact on sales for the premises because customers may not be willing to traverse impediments when trying to access a retail facility or expend time or money in accessing the retail facility.

Conclusion

By carefully evaluating the “hidden” risks associated with retail space, a tenant can avoid situations where there business is not able to prosper because of risks that could have been addressed in the tenant's lease negotiations.

Glenn Browne, a member of this newsletter's Board of Editors, is a partner in Braun, Browne & Associates, P.C., Riverwoods, IL.