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Review Lease Provisions to Make Sure They Address Big-Box Retail Issues By John R. Blake, Jr., Esq.

Tuesday, August 16, 2005 - By: John R. Blake, Jr.

By John R. Blake, Jr., Esq.

The trend in retail toward big-box retainers presents several particular concerns for landlords in crafting leases. The size and configuration of a big-box retailers' space require the landlord to pay special attention to the lease provisions dealing with the tenant's operations and tenant turnover.

Some shopping centers have adopted the big-box retail format, where the center anchored by two, three or more stores containing a large single-story, open floor plan buildings with uniform, box-like architecture. The big-box center typically is an outdoor type mall, with the stores fronting on a large parking area. A particular retailer's store facade may incorporate some features of its brand and act as an integral part of the signage.

The landlord must take into account these characteristics of big-box stores in negotiating the lease. If one big-box retailer goes dark or departs, it could have a drastic impact on the rest of the shopping center. Further, such space's large, open format may make it difficult for the landlord to relet the space in the event a tenant vacates or is evicted. The landlord must address in the lease these big-box issues in the event of an unplanned tenant departure.

Requirements for the retailer's minimum day to day operations will no doubt be enumerated in the lease. The store hours should be consistent with the other stores in the center. Also, the days and hours when the store can go dark must be specified, as a tenant with high visibility from the main thoroughfare could dampen activity at the shopping center if it closes earlier than the other tenants.

Because the universe of replacement tenants for a vacant big-box space is smaller, particular attention should be paid to the lease termination provisions. For the above-mentioned visibility reasons, a landlord needs the right to recover and relet the space if a big-box tenant ceases operation, even if the tenant continues to pay rent. The lease must provide that the landlord may recover all costs of preparing to relet the space, including subdividing the space, altering the facade of the building and constructing any tenant improvements to accommodate a replacement tenant. Also, as it may take longer to market a larger space, the landlord should resist limitations on the tenants' obligations to pay base and additional rent after termination.

The lease's assignment and sublet provisions take on greater significance for a big-box retailer. Because the big-box retail space is larger (and in many cases very adaptable), a big-box tenant may seek to sublet a portion of an underperforming store. Likewise, a co-branding arrangement, whereby a retailer will license or sublet a portion of its space to a complimentary retailer, may be an opportunity for a big-box retailer to take advantage of surplus, unproductive square footage. Unlike an outright sublet, the co-branding arrangement may be less formal, and there may be no clearly defined physical boundaries inside the store. Further, the co-branding arrangement may be more easily terminated than a typical sublease.

The important point for the landlord is that the lease's anti-assignment/sublet provisions should account for any type of arrangement whereby the space is shared, so that the landlord can maintain control over the shopping center. Further, the landlord should have the right to recapture the sublet space, or terminate the lease after a request to sublet or assign, if the sublet/assignment would operate to the detriment of the shopping center.

Related to the issue of tenant turnover is the issue of retailer's exclusive rights to sell certain products. By their nature big-box retailers offer a variety of products, and different retailer's product offerings can overlap (e.g. where the home center retailer offers auto care products which are also offered by another automotive retailer tenant). Ideally, leases in the big-box center should provide some flexibility to allow replacement tenants to sell products which may be similar to those offerings of existing tenants (provided that such flexibility does not effect too harsh an impact on the existing tenants), thereby giving the landlord some flexibility in finding replacement tenants.

The trend of big-box retailers is here, but landlords need to prepare now if the trend shifts or stops altogether. Being ready to deal with a large and vacant big-box space after the tenant leaves requires contemplating the possible reuses of such a space, and the possible replacement tenant.