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Retail Views

Retail store leasing: The risks and rewards

By C. Jaye Berger, Esq.

Negotiating and signing a retail store lease in New York City is unlike any other city. The rewards are potentially great, but so are the risks.  There are many issues that must be negotiated before a lease is actually signed. This article will discuss a few of the topics which I find of particular importance when I negotiate these types of  leases.

First, it is important to have an opportunity to thoroughly inspect the space before signing the lease. The reader may laugh and say “Doesn’t that go without saying ?” Not really. In New York City, a new tenant may commit to a space before the existing tenant even knows that his lease is not being renewed or before the space in a new building is even completed. Thus, the opportunity to really look around may be limited before the lease is signed. It is more a matter of whether you are ready to grab a store in a good location before everyone else hears about it.

Every five years there is a cycle of Local Law 11 work in New York City, which requires that sidewalk bridges be placed at the ground level of buildings over six stories high. The sidewalk bridges can extend twenty feet on either side, making their presence an issue for tenants in the neighboring buildings. If such work is going on in the building you are interested in renting or next door to that building, knowing when that bridging will come down can be a major concern and subject of negotiation.

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Retail leases in NYC are unlike any other.

Subletting is another big issue. The landlord has agreed to allow your company to open up a store  in the space, based on your company’s financial reports and possibly also because of the owner’s personal guaranty. When all or a portion of the space is sublet, the other party may not have the same solid financials that you do and may create more cause for anxiety with the landlord. The right to sublet cannot be assumed, the terms must be negotiated into the lease.

No matter how successful a company is, in many, if not in most instances, the landlord will ask for a personal guarantee by one or more of the principals. People who do not live in New York City may find this objectionable, if not downright insulting, but they are still going to have to agree to this if they want to rent here. With a standard guarantee, if the lessee is in default, the guarantor can be fully liable for the full term of the lease. With a “good guy” guarantee, if the lessee is a “good guy” and gives up the space without a protracted legal battle, then the personal guarantee will end when the keys are turned over, along with the broom clean space. Guarantees can have many conditions with time prerequisites before they apply, so tenants must be careful to comply with the provisions.

When I negotiate retail leases, especially for out-of-towners, one of the biggest issues is the amount of security that it required. It used to be that one or two months security was needed. Now security can be  as much as six months rent or a letter of credit.

The amount of renovation to be done by the landlord is negotiable. More and more landlords take the position that they will offer a few  months without rent or for half rent for the tenant to take care of their renovation and they do not want to be involved in the process. Other landlords agree to make arrangements for a certain amount of work to be done by them and the rest to be done by the tenant. This can become complicated if the work which has to be done by the landlord must be completed before the work by the tenant can start. If there are any delays by the landlord, there may be problems with the tenants work and the date on which the store can open.  Store owners should be careful to work with an attorney knowledgeable in construction.  Cost overruns and time delays are common.

Leases can be complicated in this area and there are many issues which need to be negotiated. Come to the table with a good broker and an attorney who is knowledgeable in this area and you will be off to a good start.

 

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