Retail lease agreement checklist
The lease can be a lengthy document. Here are the most common terms you will find in a retail lease.
Length of term
Length of term refers to the length of the retail lease.
Fixed minimum rent (FMR)
Fixed minimum rent refers to the base rent for the space.
Common area maintenance (CAM)
Landlords charge a fee to maintain the common area. Review the language to understand how the landlord calculates this number.
Real estate taxes (RET)
The landlord will provide you with an estimate of annual taxes based on your store size. Review the language to understand how the landlord calculates this number.
The landlord will include an annual increase. There may be separate increases for base rent and CAM. Make sure you understand how your occupancy costs will increase and when they occur.
The landlord will list “other costs,” including percentage rent, a security deposit, marketing fee, and utilities:
- Utilities: It’s essential to understand if you will contract utilities through a utility provider or the landlord. If the landlord provides utilities, they may charge an administrative fee. The tenant can negotiate any fees
- Additional percentage rent: Sometimes landlords will include a percentage rent clause on top of your occupancy costs. A tenant would pay a percentage of sales over a specific sales threshold. For example, you would pay the landlord 10% of any sales over $500,000 made that year
There are a couple of helpful ways to reduce retail leasing costs:
- Rent abatement: Rent abatement allows tenants to receive free rent during a specific period. Often, landlords will provide rent abatement during the first few months of the lease
- Pure percentage rent: Paying a pure percentage rent can reduce your risk. If a landlord insists on a base rent, you can negotiate a lower rent with a higher percentage rent clause
The delivery date is the date the landlord will deliver the space to you.
Sometimes the landlord will need to do construction before delivering the space. Delays could mean additional costs for you. Ensure there are penalties if they miss the delivery date.
Rent commencement date
The rent commencement date is the date you will start paying rent. Negotiate ample time between the delivery date and the rent commencement date to allow for any delays. Landlords may also include penalties if you are not open for business.
Landlord delivery requirements
How will the landlord deliver the space? If the landlord is going to do construction before delivering the store, they should provide a Landlord Work Letter.
Tenant improvements refer to your build-out. Some landlords will have specific requirements for store design. Be sure to ask if your landlord has a tenant criteria package and review the requirements with your architect and contractor.
Tenant allowance (TA) is money from the landlord you can use toward your build-out costs. TA is also called tenant improvement allowance (TIA).
The landlord offers TA for qualified tenant improvements. Qualified improvements refer to improvements done to the space. You can’t use the allowance toward just any business expenses (i.e., POS system, merchandise, etc.).
The landlord usually pays the tenant allowance after the build-out is complete. The landlord will also require that you provide lien waivers and receipts.
Often landlords will require you to pay back the tenant allowance if you vacate the space before the lease expires. Ensure you understand any penalties before signing the lease.
The permitted use refers to what you can sell in your store.
Understand who will maintain the common area. What are the responsibilities of the landlord and the tenant?
You should also include language that landlords can’t block your space with kiosks or seasonal activations (i.e., Santa sets).
Understand your rights and responsibilities for repairs. If there are leaks, who will fix them? What is the timing?
Early termination clause
An early termination clause allows you or the landlord to terminate the lease early. A termination clause, or “kick out,” can help mitigate your risk if your store isn’t performing.
There can be a co-tenancy clause if you are leasing space in a large shopping center. With a co-tenancy clause, landlords will need to have a minimum amount of tenants open. It can also require that specific tenants remain open (i.e., department stores).
Tenants will have the right to pay a lower rent or terminate the lease if the landlord violates the co-tenancy clause.
Landlords will ask tenants to provide financial statements before signing a lease. Sometimes a landlord will ask tenants to sign a personal guarantee as security. A personal guarantee allows the landlord to go after a tenant’s assets if they don’t pay the rent.
If you must sign a guarantee, understand the terms. You can request that the guarantee “burns off” as you make rent payments to reduce your exposure.
Hours of operation
Often, shopping center landlords will require tenants to be open during specific hours. Can you close for the holidays? What happens if you close unexpectedly? Ensure there is language in the lease that best suits your business.
Option to extend
Tenants can negotiate an option to extend. The option gives the tenant the right to renew the lease for a specific period when the lease expires.
A reinstatement clause states how the tenant will return the space to the landlord when the lease expires.