April 14, 2005

Considerations for Retail Space In an Office Building

Holland & Knight Newsletter
Irwin J. Fayne
A successful relationship between an office building owner and a retail tenant involves educating each party to the particular attributes of the other party’s business. Retail tenants typically have little or no appreciation of office building concepts that are normally inapplicable to a single story shopping center or mall, and it is important for the retail tenant to be made aware of those concepts at the beginning of business discussions. Examples of these types of office building concepts include:

1. Limited availability of parking for employees and customers, usually confined to a parking garage and often involving parking charges

Customer parking is critical for the retail tenant who is accustomed to nearly unlimited parking in shopping centers. Depending on the relative bargaining positions of the parties, the office building landlord may need to provide monthly parking permits for certain of the retail tenant’s employees, ensure that there are at all times sufficient customer parking spaces and provide parking validation for up to two hours of parking by the tenant’s customers.

2. Imposition of hourly charges for use of the building’s chilled water loop during non- business hours of the building

Business hours of the retail tenant usually include nights, Saturday afternoons, Sundays and holidays, all of which are typically deemed non-business hours for the office building. Given the high cost of services during those hours, the retail tenant should investigate installing its own HVAC equipment that is not dependent on the building’s chilled water loop or other systems, subject to availability of space.

3. Operating expenses that are atypical of a retail project

Again, depending on relative bargaining position, the retail tenant may avoid having to contribute to expenses that benefit the office tenants but provide no direct benefit to the retail tenant. Examples of these types of operating expenses include: electricity for office space where the retail space is separately metered; janitorial services provided to the office space but not the retail space; maintenance/repairs for building HVAC equipment where the retail space derives HVAC through the retail tenant’s separate equipment; and utilities and other costs attributable to common area bathrooms on upper floors that are not available to customers of the retail tenant.

4. Requirements pertaining to alterations that are unique to office buildings

Examples of these alteration requirements include: certain construction activities, such as floor drilling, are often prohibited during office building business hours in order to avoid complaints of office tenants; charges may be imposed for use of freight elevators and loading docks; performance of work may be limited to union affiliated workers; payment and performance bonds may be required from the tenant’s contractor; and landlord may impose charges to review MEP (mechanical, electrical and plumbing) portions of the tenant’s plans and/or to supervise performance of the tenant’s work.

5. Access limitations

Access to the retail space may be derived through building common areas instead of existing directly between the retail space and the street. During non-business hours of the office building, such access may be limited, controlled, or even worse for the retail tenant and its customers, unavailable to anyone not having card entry to the building.

Retail tenants interact with the public and therefore impact public perception of the office building, both positively and/or negatively. The office building owner’s goal is to ensure that the retail tenant’s customers have a positive experience with the retail establishments in the building, thereby promoting desirability of the building’s rentable space and generating sales – obviously important if the office building owner’s income stream includes percentage rents from its retail tenants. The office building landlord, therefore, needs to impose terms and conditions particular to retail operations, preferably by simply attaching a retail requirements rider to the office building owner’s standard lease form, thereby maintaining uniformity in leasing for all space in your building. The retail requirements rider should address the following points:

1. Limit use of the premises for operation of a defined business.

2. Require the tenant to open for business in the premises by a date certain, and to continuously operate the defined business in all of the premises during minimum defined business hours.

3. Require that the defined business be operated under a defined trade name and in a manner commensurate with the service, dignity and ambiance of similar first-class businesses that are operated in first-class office buildings located in the geographic area in which the office building is located.

4. Prohibit the tenant from conducting its business in any manner which, in the judgment of the landlord, may harm the business or reputation of the building’s desirability as a high-quality building for offices of financial, insurance, legal, accounting and similar prestigious institutions, or which may confuse or mislead the public. In this regard, specifically prohibit the following:

• the sale of second hand goods, surplus articles, insurance salvage stock, fire sales stock, any other damaged or defective merchandise, liquidation stock, bankruptcy stock or other distress or “end of line” stock

• the sale of out-of-style, job lot quality or any inferior merchandise

• any auction or bulk sale (other than a bulk sale in conjunction with an assignment or sublease made pursuant to the provisions of the lease)

• liquidation sale, bankruptcy sale, “going-out-of-business” sale, “moving” sale or any other similar sale

• any other special sale or sales other than such as are incidental to the normal routine of the tenant’s business with its regular customers

• a pawn shop or any of the services usually offered by a pawn shop

• a department store or a store similar thereto

• the sale of any X-rated, pornographic, lewd, or so-called “adult” newspapers, books, magazines, films, pictures, video tapes or video disks

5. Require the tenant to install and maintain new, first-class fixtures, equipment and furniture.

6. Prohibit the placement or display of merchandise or solicitation of business in the building common areas.

7. Prohibit installation of any exterior equipment, signage (except as expressly identified in the lease), lighting or decorations outside of the premises.

8. Require the tenant to police any lines that form outside of the premises to ensure that waiting customers do not impede pedestrian traffic flow or become disorderly.

9. Impose requirement that all design elements of the premises (such as finishes, materials, fixtures, equipment, furnishings, decorations and other aesthetic considerations) will be subject to landlord’s determination of aesthetic considerations appropriate for the building.

10. Prohibit any odor, fume, noise, sound or vibration to be experienced outside of the premises and inside the building.

11. Impose requirements relative to the tenant’s disposition of trash consistent with particulars of the building’s operation.

12. Require the tenant to keep the inside and outside of all windows and plate glass clean; and prohibit the maintenance of any articles or signage of any kind on, against or within three feet of any glass in the doors and windows of the premises, or in the vestibules or entry of the premises.

13. Require the tenant to cause the premises to be treated for pests by a licensed pest extermination contractor.

14. If the defined business consists of a restaurant or other establishment providing food and/or beverages for on-premises consumption, impose the following additional requirements: prohibit the sale of alcoholic beverages for off-premises consumption and require the tenant to maintain liquor liability insurance for which landlord is named as additional insured; address maintenance of exhaust ducts and grease traps, and disposition of grease removed from grease traps.

By educating the retail tenant to the particular attributes of office building leasing of which the retail tenant may be unfamiliar and by imposing requirements on the retail tenant such as those in the described retail requirements rider, the office building landlord will likely ensure a positive and successful business experience with both the retail tenant and its customers.

For a more in-depth discussion of this topic, including model lease language provided by Irwin Fayne, see upcoming issues of the newsletters “Commercial Lease Law Insider” and “Commercial Tenant’s Lease Insider,” both published by Vendome Group, LLC. 1.800.519.3692 • http://www.vendomegrp.com.

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