October 20, 2017
It’s Never Too Late to Close the Leasing Barn Door
Until you’ve signed on the dotted line, it’s all open for negotiation.
So, Mr. Retailer, you have met with some success, and it’s now time to renew your store lease, move to a new and improved location or, better yet, open a second store. The landlord sends you his 47-page lease written on legal-size paper and printed in size eight font. You, in turn, ship the lease off to your attorney for his or her review. And, like any good layer, their comments are largely limited to legal issues and language.
So, what’s wrong with this picture?
About halfway through your lease negotiations, you happen to visit the National Shooting Sports Foundation website and read this column, “How to Find the Right Storefront Lease.” It then dawns upon you that your leasing approach is all wrong and you are giving the landlord the advantage. In effect, you just let all the cows out the barn door!
Is it now too late to renegotiate the lease, even though the document has not been executed? The answer is no, it’s not too late, it’s just a bit more complicated.
When negotiating a new lease keep in mind that the landlord has most of the advantages. The landlord has vast experience and options, whereas your sole assets are that you have rent money and a good reputation. Thus, your best defensive position is to assemble a good cadre of advisors to help you negotiate the lease. In other words, if you have started down the leasing road by yourself, stop! Get some professional help before moving closer to lease execution. The issue isn’t so much when you seek help, but rather to make sure you do get it. The cost of such help will be dwarfed by its downstream benefits.
Your team should consist of your attorney, your accountant, a business advisor and you. Even if you are halfway through the negotiations before you assemble your team, you can reset the discussions at any point. Here’s how.
Each of your advisors should have considerable experience with leases, lease options and lease language. Have each of your advisors read the lease and present their comments to you in written form. Next, arrange a meeting or conference call with your advisors to discuss all the issues, then draft a letter to the prospective landlord clearly stating what you want deleted, added or modified. It’s not necessary to defend your positions—let the landlord defend theirs.
If the landlord says, “What’s going on? We already discussed X, Y and Z,” simply state “It’s back on the table. I need some changes.” Landlords need credit-worthy tenants and generally will make lease changes requested by the potential tenant provided such requests do not diminish landlord’s rights and protections. Your mission, then, is to insert tenant protections and define the landlord’s obligations under the lease.
In these negotiations, you should be cognizant of today’s internet effect on both landlords and tenants. Online shopping is now so prevalent that brick-and-mortar shopping centers and stores are suffering because of the internet effect. Experts project that, within the next 10 years, fully 25 percent of all shopping centers will close because of the proliferation of online shopping. Therefore, you need protective options and out clauses should the center significantly weaken. (Secondarily, if you make sales on the internet and give the consumer the option of picking up the products in your store, be sure to exclude such internet sales from the definition of gross sales if your lease calls for rent linked to gross sales.)
It is paramount that you get the lease correct and that the document contains all the protective language and paragraphs necessary to preserve your rights and options under the lease. If the landlord refuses to make reasonable changes to the lease at any time prior to the lease’s execution, then walk from the deal. Good tenants are hard to find. Be fair, be thorough and be prepared.