Commercial landlords often quip that successfully leasing a multi-tenant property requires the establishment of equilibrium between and among the tenants. Because anchor tenants have strong bargaining power, the landlord normally has to settle for thin returns on such important anchor space. Signing a good anchor, however, is crucial to securing small shop leases, which can be much more lucrative.
Small Shop Tenants Want Activity Generated by a Good Anchor
Since the small shop tenant’s success is generally dependent upon the foot traffic generated by the anchor, many small tenants will insist that their obligations begin in earnest only after the anchor has opened its doors. Moreover, experienced small shop tenants (or inexperienced tenants that are represented by experienced legal counsel) will want “dark space” provisions, sometimes called “co-tenancy requirements” that alter their obligations, should the anchor tenant vacate the premises. How can a landlord build sufficient flexibility into the small shop leases to protect its long-term goals and investment? Here are some thoughts.
Be Flexible in Defining a “Comparable” Tenant
Most standard small shop leases include provisions requiring the anchor tenant to be replaced with a “comparable” tenant. Undefined, that term is subject to a host of interpretations. The small shop lease should define what sort of tenant is deemed sufficiently comparable. For example, must the replacement anchor be of the same type of retailer as the original? May it be somewhat smaller in footprint? If so, how much small can it be? These matters need to be spelled out.
Most small shop tenants will be satisfied if the new anchor tenant is sufficiently strong to generate traffic. Accordingly, a big box store may often substitute for a department store. Consider making the provision even broader, if you can.
Be Flexible in Allowing Alternative Rent Terms
Rather than allow a small shop tenant to vacate if an anchor leaves, a commercial landlord should consider alternative rent payments during the period the anchor space is “dark.” Alternative rents can be in the form of a reduction in the fixed rent or, alternatively, an arrangement whereby the small space tenant pays a particular percentage of its gross revenues. Include a requirement, however, that the tenant actually prove its revenues fall after the departure of the anchor. Once a small space tenant gets established, its business may not be as dependent upon the anchor as it initially thought.
Condition the Small Space Tenant’s Rights
The right of the small space tenant to modification of the terms of its lease should be dependent upon it being in good standing. As a landlord, you don’t want to make concessions to a tenant that is already in default.
Real Estate and Business Attorneys in Milwaukee
Are you contemplating the development of real property? Are you a small space tenant in need of assistance in negotiating rental space? Are you currently involved in a dispute regarding the departure of an anchor tenant and your continuing obligations as a small space tenant? Any investment in real estate, whether as an owner-landlord or as a tenant, represents an important undertaking. Complex business and legal issues are involved. Skilled counsel is a key to success, particularly where there is disagreement between the various parties. The Milwaukee business litigation firm of Kerkman & Dunn has more than 50 years of combined legal experience representing property owners and business concerns in Wisconsin. Our firm has big firm talent and provides small firm attention. Call us at 414-278-7000 or complete our online contact form.
