Retail Lease Agreement for Commercial Real Estate

Does owning a retail shopping center seem like a good investment? Higher cap rates, multiple tenants who have survived e-commerce and COVID? One of the critical elements of a well-run retail center is having a clear understanding of retail NNN leases. Fear no more! In this article, we’re going to take a deep dive into the world of retail lease agreements and break down each section for you.

In this article, we will provide legal insights into each section of a Retail Lease Agreement suitable for a shopping center or a flex retail space with multiple tenants. This can be used for an anchored complex, but it’s also a template lease that has options for gross sales reporting. Retail lease forms are a crucial aspect of managing retail real estate, and it is essential to have a good understanding of what a retail lease agreement clause means and how you should approach it.

Video Walkthrough of Retail Lease Agreement

Identifying Parties

We’ll start by identifying the parties involved, making sure that the tenant’s legal names and addresses are correctly spelled and legally authorized to enter into the agreement, and it is essential to ensure that all parties sign the lease agreement to make it legally binding. The trade name of the tenant is also important to specify at the time of signing.

Listing the trade name is essential because we see a fair number of disputes caused by wild names that the landlord would not have approved. For example, the Tenant’s legal name could be Burlington – 437, LLC. Without knowing the trade name, the tenant may want signage that says “V@p3 4LL day!” While the trade name may have been on file, it does not give the Tenant the right to display that name on building signage. The landlord prefers to know exactly what the Tenant intends to display to the public.

Finally, trade names are useful for determining if a prior exclusive use would prohibit this tenant. We often see larger companies operate multiple franchises. Just because RR Retail #3, LLC operates a dessert franchise, we want to know in advance if the portion of ice cream sales violates a prior exclusive use prohibiting “Baskin-Robbins”.

Terms of the Lease

Next up, we’ll dive into the terms of the lease, including the duration of the lease and renewal provisions. We’ll explain what demised premises are and why it’s crucial to measure them accurately to avoid discrepancies that could affect the rent and lease commencement date. Paying attention to the renewal provisions and notice periods is crucial as this will determine whether the tenant can renew the lease at fixed terms or not.

Lease Term (Duration):

With lower quality tenants, they will want shorter lease terms (1-3 years), which is normal, but will also restrict the amount of Tenant Improvements you as a Landlord should invest in the space. Given the shorter lease term for you to amortize and recoup those TI fees, shorter leases cause smaller TIs. The alternative is to increase base rent tremendously to recoup costs, but with lower quality tenants they tend to also be price sensitive.

For most national or regional retail tenants, you should expect 5-10 years of initial term with some type of renewal. Do not give renewals lightly, they are a valuable option solely in favor of the tenant. Even a renewal at fair market value doesn’t help the landlord. Understanding your relative leverage during deal negotiations is critical to extracting the best deal.

Renewal lease length can follow a rule of thumb of either half initial term or equal to initial term. Total length of multiple renewals can be quite long if the tenant has a history in the area.

Demised Premises:

In order to properly measure the space in terms of individual suites, it is necessary to utilize the BOMA standards. The landlord does not dictate how the space should be divided, hence the aforementioned standards are imperative.

Measurement will be taken from the widths and centers of the interior walls, as well as the outside of all exterior walls, thereby granting the tenant access to the entirety of the space, which can be divided according to their preferences. Nevertheless, certain discrepancies may still arise.

Therefore, audit rights or the ability to make changes may be included in the lease later on. While the landlord may assume that the tenant is receiving 9,000 square feet, following the aforementioned standards may reveal a significantly lesser area, such as 8800 square feet. In such a scenario, the rent may be reduced accordingly and the lease commencement date may be altered.

Liquor License and Delivery of Premises

A contingency in the lease agreement that says the lease doesn’t start until the tenant obtains a liquor license can be included for restaurants or bars. This can be a long delay for a liquor license, which can impact the tenant’s ability to generate income. It’s important to put guardrails or outside hard timeline dates when agreeing to contingencies for lease or rent commencement.

The landlord’s delivery condition of the space can range from “as is” or up to a turnkey finish.  It is important to understand that there are two categories of responsibility with four different scenarios: who will perform the work and who will pay for it. The tenant can perform the work and the landlord can pay, the tenant can perform the work and pay for it, the landlord can perform the work and the tenant will pay, or the landlord can perform the work and pay for it. This can affect the tenant’s finances and the landlord’s responsibility to maintain the premises.

Capital Expenses and Use and Care of Demised Premises

Capital Expenses:

How are they defined and who pays for them are of utmost importance to avoid tenant audits. Defining common area maintenance charges and differentiating them from non-common area maintenance charges requires significant attention. Standard operating expenses, exclusion, and use in care are also included. Often a landlord will be touching and performing work on the same system (e.g. parking lot), but some of those expenses will be passed through to the tenant as repairs, but some will be capitalized as an improvement cost. The lease should list common expense types and the agreed upon allocation.

Use and Care of Demised Premises:

The right to self-help is a major factor in the lease agreement. Landlords are reluctant to grant tenants the authority to conduct repairs themselves and offset rent payments. Bigger landlords will never agree to self help, but only until a bigger tenant demands it. Tenants, on the other hand, desire the ability to repair damages and deduct the expenses from their rent. A common legal solution is to either extend the required notices to the Landlord or create interest and other elements that compensate the parties fairly.

Maintenance Obligations and Utilities

Maintenance Obligations:

These are standard requirements. It is crucial to specify which party is responsible for maintaining the sidewalks, roof, exterior landscaping, and other related items are often landlord’s responsibility. HVAC systems, glass walls, sealants, gutters, and windows, are also frequent items that can go either way in terms of reasonable expectations of maintenance.

Utilities:

This is an interesting clause, as they can involve tap fees or charges that are required to establish the connection. The responsibility of paying for these fees can be a source of debate between the landlord and tenant. However, specifying the responsibility for paying these fees in the lease agreement will eliminate any confusion or debate.

Other Items: Terminations

Lastly, the lease agreement also includes provisions for default and termination, outlining the consequences of defaulting on rent payments or violating any of the other terms of the agreement. It is crucial to understand the consequences of defaulting on the lease agreement and to negotiate reasonable default provisions. Tenants will want more protections and time to cure any alleged default, while a landlord wants immediate resolution.

Exclusives

Desirable retail tenants will request some type of exclusive use prohibition within the same shopping center. For example, a pilates and yoga studio will not permit a competing yoga studio to also open a location at the same property. However, there is a lot to unpack starting with the scope of the exclusive. How do you define a competing use? Yoga studio may be defined as more than 50% of revenue generated from group yoga classes. How do you define property? The landlord must be careful to not promise more than they can deliver. For example, a landlord can only protect for new leases, but may not have control over existing tenants. In addition, many retail properties have outparcel sites that the landlord does not own, not control the use. Being aware of your limited scope is critical to negotiating the exclusivity clause.

For each property, we recommend a brief summary of the exclusions currently in effect, this is easy for brokers to understand and to include as an exhibit of each new lease.

Restrictions

A similar, but different restrictive covenant is often requested by larger tenants that prohibit landlords from leasing to other types of tenant uses, not necessarily ones in competition. These are common restrictions such as pornographic stores, tattoo shops, and pawn stores. However, some of the restrictions may seem overly broad to a landlord e.g. prohibiting liquor sales, gyms, or gun sales. We typically will add disclaimers for either a distance prohibition (e.g. 100’ from the tenant) or revenue limitations (e.g. permit gun sales in an Academy Sports if less than 25% of revenue).

SNDA

But wait, there’s more! We’ll even touch on Subordination and Non-Disturbance Agreements (SNDAs), which are required by every national tenant but often ignored by smaller tenants.

You can refer to my other videos where I discuss SNDAs. However, this is undeniably relevant and serves to safeguard not only the tenant and landlord but also the lender. A well-drafted SNDA benefits all parties involved by removing ambiguity in the event of a borrower default. That said, an SNDA does represent a cost incurred by the landlord, you should be aware of the implications before agreeing to provide SNDA rights to every tenant.

Conclusion

In conclusion, this walkthrough of the sample retail lease agreement highlights the importance of paying attention to each section of the agreement and negotiating favorable terms. It is essential to have legal advice before signing the lease to ensure that you fully understand the terms and avoid costly mistakes. In this way, you can ensure the success of your retail center.

Download the Retail Lease Agreement

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We regularly update the template (see version notes). Paid contributors to the template receive a new download link via email each time the model is updated.

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Frequently Asked Questions about Retail Lease Agreements for Commercial Real Estate

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Version Notes

v1.0

• Initial release

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