November 01, 2003

Leasing Retail Space in a “Street” Location: Sidewalk Sheds, Multiple Floor Premises, and Other Tenant Concerns (2003, 17:06)

Leasing Retail Space in a “Street” Location: Sidewalk Sheds, Multiple Floor Premises, and Other Tenant Concerns

Probate and Property,  November/December 2003, Volume 17, Number 6

By Eric G. Menkes
Eric G. Menkes is a partner with Duval & Stachenfeld LLP in New York, New York.

Lawyers who represent retailers often have a good deal of experience negotiating shopping center leases, but they may not have similar experience negotiating retail leases in “street” locations—storefronts in urban settings. Although many of the same issues appear in all retail leases, a number of issues are unique to the street location lease, and counsel familiar with these issues can save his or her client significant headaches and perhaps money along the way.

Two of the most significant issues for tenants are the presence of sidewalk sheds and scaffolding and the likelihood that the tenant will be leasing multiple floors in a building that has previously had retail tenants only on the ground floor.

Sidewalk Sheds

Retail tenants in an urban environment often must contend with scaffolding and corresponding sidewalk sheds that property owners regularly affix to the facades of their buildings. This issue is probably the most significant one facing retail tenants in an urban environment that shopping center or “big box” retailers do not confront. The scaffolding and sheds are typically installed for compliance with municipal requirements that a building exterior’s brickwork be regularly inspected or repaired (often known as “pointing”), for capital improvements to the exterior of the building, or for tenant work, undertaken by either the landlord or other tenants in the building.

Whatever the reason, the result is the same—a decline in customer sales. Sidewalk sheds intimidate consumers. They are dark, limit access, and often serve as a focal point for garbage to collect and homeless people to congregate. In-house counsel at large retailers have confirmed that without fail, sales drop at stores where sidewalk sheds are installed.

For retailers this situation is vexing. On the one hand, landlords are entitled to make necessary changes to their buildings, whether they are obligated to comply with a legal requirement or to make necessary capital improvements or tenant renovations. On the other hand, retail tenants pay premium rents for unfettered visibility. If the scaffolding and sidewalk sheds remain for extended periods of time, reduced sales can drive a tenant out of business.

Tenant’s counsel can address this issue in a number of ways. The most obvious is to require the landlord to use its best (or at least reasonable) efforts to minimize the time the scaffolding or sidewalk shed remains in place. Simple as this may sound, such a provision would give the tenant real leverage in a dispute with a landlord, and tenant’s counsel should be wary of a landlord that will not agree to such a basic provision.

Counsel should also require that the landlord not install scaffolding during the fourth quarter of any calendar year, typically the busiest for a retailer. Landlords may not always be amenable to such a provision, however, because the scaffolding may be necessary as a result of force majeure or other emergency conditions.

Perhaps of most importance, tenant’s counsel should ask for a rent abatement if the scaffolding or sidewalk shed remains for an extended period of time. A landlord should be obligated to remove the scaffolding after 90 or perhaps 180 days at most.

Landlords are of course loath to agree to rent abatements of any sort. But even if the landlord agrees to some kind of rent abatement after a certain period of time (which landlords are more willing to do in a soft market such as this one), it may try to negotiate a time extension if the scaffolding must remain as a result of force majeure acts. This request should be fought vigorously, because a landlord could successfully argue that virtually any reason for allowing scaffolding to remain could be a force majeure event. If necessary, the tenant should agree instead to a longer period of time for the scaffolding to remain before a rent abatement commences.

Landlords may also try to provide that they will allow for an abatement only if the scaffolding is not installed as a result of compliance with legal or insurance requirements. This provision should be fought as well, because the requirement for scaffolding is almost certain to be driven by compliance with legal requirements. For example, in New York City, Local Laws 10 and 11 require regular inspections of buildings for facade repairs and also require the prompt undertaking of the necessary repair work. As a result, scaffolding will in all likelihood be installed on almost every building facade at some point during the average tenant’s lease.

Another concern is how much of a rent abatement the tenant is entitled to. Obviously this is a matter of negotiation. For example, the tenant may receive an abatement of 25% of the base rent for the time the scaffolding remains in place after the 180th day and then 50% of the rent if the scaffolding remains in place after the end of the first year.

In another example, a lease may provide for an abatement of the tenant’s base rent at the same percentage that its gross sales were reduced during the period the scaffolding remained in place. Accomplishing this involves comparing the gross sales for the current year to gross sales for an earlier year when no scaffolding was in place. Because gross sales should always increase as a result of inflation (even if the amount of business does not change), a Consumer Price Index escalator also needs to be incorporated. These provisions are best employed in a percentage rent lease, in which the tenant is already monitoring its gross sales and reporting them to the landlord. The sample clause below uses this concept.

The height of the sidewalk shed is another matter to be taken into account. Landlords can be required to erect double-height sidewalk shed structures that clear the tenant’s windows and signage. Although this solution is not perfect, it certainly has the effect of increasing the light coming into the premises and increasing visibility and thus distracting potential customers less. Such a solution, however, could become a problem to the tenants leasing space on the floors immediately above the retail space, but that problem would have to be dealt with by the landlord, not the retail tenant.

Another concern is the spacing of the shed’s support columns. In one lease for high-priced retail space, for example, the parties attached a schematic drawing of how any scaffolding would be installed. This showed the location of the support columns as well as an exterior elevation that identified the locations of the necessary cross-bracing and the height of the shed’s plywood siding.

Tenant’s counsel should negotiate for the right to have the client’s signage on the exterior of the shed. It is appropriate for the landlord to pay for this signage. The size of the signage should be specified, and the tenant should have the right to install signage that incorporates its mark or logo. Perhaps most important, the landlord should be prohibited from leasing the entire sidewalk shed to an advertiser that may not be located in the building. Imagine a landlord allowing the entire sidewalk shed exterior to be used by a competitor of its own tenant. Not only would the large sidewalk shed wrapping the building dwarf the tenant’s premises, but it would also have the ironic effect of directing its business to a competitor.

The following sample clause incorporates these negotiation points:

Sidewalk Sheds and Scaffolding.

(a) In the event Landlord shall be required to install or cause to be installed any sidewalk sheds or scaffolding abutting or covering all or any portion of the storefront portion of the Premises, Landlord shall use reasonable efforts to minimize the period of time during which such scaffolding must remain in place and the extent to which the same shall impair the visibility of the Premises. All such scaffolding shall be double-height scaffolding. Upon Tenant’s request, Landlord shall install, at its sole cost and expense, signage on such scaffolding identifying Tenant. In no event shall any signage or advertising appear on such scaffolding other than that identifying Tenant.

(b) In the event any such sidewalk shed or scaffolding shall impair the visibility of the Premises and shall remain in place for more than six (6) months, then for each month from and after such sixth (6th) month, the Fixed Rent shall be modified to an amount equal to the lesser of: (A) the Fixed Rent otherwise payable hereunder pursuant to Section ___ hereof, and (B) the product of (I) the Fixed Rent otherwise payable hereunder pursuant to Section ___ hereof, and (II) a fraction, the numerator of which shall be the Gross Sales (as such term is defined in Section ___ hereof) for the month immediately preceding such sixth (6th) calendar month (the “ Scaffolding Gross Sales Test Month”), and the denominator of which shall be the product of (i) the Gross Sales for the corresponding calendar month in the most recent year during which there was no scaffolding impairing the visibility of the Premises (the “ No Scaffolding Gross Sales Test Month”), and (ii) the sum of (1) the percentage by which the Consumer Price Index (as hereinafter defined) shall have increased, if any, from the No Scaffolding Gross Sales Test Month to the Scaffolding Gross Sales Test Month, and (2) 100 percent.

(c) As used herein, the “ Consumer Price Index” shall mean the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics of the United States Department of Labor, New York, N.Y.–Northeastern N.J. Area, All Items (1982–84=100), or any successor index thereto, appropriately adjusted. In the event that the Consumer Price Index is converted to a different standard reference base or otherwise revised, the determination of adjustments provided for herein shall be made with the use of such conversion factor, formula or table for converting the Consumer Price Index as may be published by the Bureau of Labor Statistics or, if said Bureau shall not publish the same, then with the use of such conversion factor, formula or table as may be published by Prentice-Hall, Inc., or any other nationally recognized publisher of similar statistical information. If the Consumer Price Index ceases to be published, and there is no successor thereto, such other index as Landlord and Tenant shall agree upon in writing shall be substituted for the Consumer Price Index. If Landlord and Tenant are unable to agree as to such substituted index, such matter shall be submitted to the American Arbitration Association or any successor organization for determination in accordance with the regulations and procedures thereof then obtaining for commercial arbitration.

Multiple Floor Premises

Because of the high cost of leasing ground floor space, retail tenants in the last decade or so have begun to lease premises comprising multiple floors, below-grade basement space, and/or second floor space simultaneously with the ground floor space. Rents for the basement and second floor space are obviously considerably lower than those on the ground floor, thus saving the retail tenant money on the blended rent. In many instances these spaces have never been occupied for retail purposes. This situation raises a number of issues.

ADA Concerns

Virtually all retail stores are public accommodations. If the tenant intends to use the basement or second floor spaces for retail use (and, under certain circumstances, even if the tenant does not so intend to use these spaces for retail use), the Americans with Disabilities Act and other local handicapped access laws will likely require that all floors be served by an elevator or lift. Because leasing multiple floors is a relatively new trend, there is a reasonable chance that the multiple floors have never been used for retailpurposes. As a result, the tenant may be required to install a lift or elevator, an expensive proposition.

A knowledgeable tenant’s counsel can save his or her client significant expense if the elevator issue is identified early in the negotiation. A commercial office building is likely to have elevators serving multiple floors. Tenant’s counsel should require (1) that there be access from each floor’s elevator lobby to the premises and (2) that the landlord make the building’s elevators available for the tenant’s use during the hours that the retail tenant expects to be open for business (and not only during the “business hours” that the office tenants upstairs are using the building).

Often, honoring this request will mean no additional expense for the landlord, because there is little cost in maintaining the elevators during nighttime and weekend hours and the landlord is likely to have a security guard or porter on duty during these hours. If tenant’s counsel neglects to negotiate these rights in the lease, however, the tenant may face a landlord reluctant to agree to the change after the lease has been executed and the access requirement is discovered.

Rest Rooms

The need to provide restrooms can be addressed in similar fashion. If the second story of the building is multi-tenanted, then there will likely be a public rest room off the floor’s common corridor. If the tenant has access to this common corridor and is permitted under the lease to use this rest room, then the tenant could avoid the expense of constructing its own restrooms within the premises. Again, this is not a material concession for the landlord, but one that can result in significant savings for the tenant.

Certificate of Occupancy

In buildings where the retail tenant is taking over basement space previously used for storage or a second floor space previously used for offices, tenant’s counsel needs to be extra careful in reviewing the building’s certificate of occupancy. In all likelihood when the building was constructed, retail use was contemplated only on the ground floor. Tenant’s counsel will need to determine—before the lease is signed—that retail use is in fact permitted as a matter of law on these other levels and, if not, what the timing and costs associated with modifying any certificate of occupancy will entail. Tenant’s counsel should (1) obtain a representation in the lease from the landlord as to the uses permitted by law, (2) review the actual certificate of occupancy, (3) specify who is responsible for amending the certificate of occupancy, if this is necessary, and (4) have termination rights if such an amendment is not possible.

Tax Payments

Retail tenants typically pay a proportionate share of a building’s real estate taxes. Depending on the nature of the property and the deal, the tenant will pay either its proportionate share of the entire property’s taxes or its proportionate share of any increases in the taxes above a specified base year.

The assessed valuation is typically a hybrid of various factors—fair market value, recent sales price, rent roll, the extent of capital improvements, or a combination of these factors. In any event, a ground floor retail tenant is likely to be paying a per-square-foot rental rate far in excess of the rate paid by commercial tenants located elsewhere in the property and thus contributing substantially more to a property’s assessed valuation. For this reason, landlords are likely to determine that the retail tenant’s proportionate share should be based upon more than the actual percentage of the property that the premises constitute. The retail space is likely to be more heavily “weighted,” and as a result the retail tenant will pay a disproportionately larger share.

Landlords are entitled to some additional credit here. Retail rents can be as high as 10 times the rents paid by office tenants upstairs. But because the proportionate shares of all tenants in the building should theoretically equal 100%, if the retail tenant has a higher percentage, the office tenants should have a reduced percentage.

There is no correct formula for calculating the correct proportionate share, and this is a negotiated business point. Tenant’s counsel, though, should be alert to the fact that this percentage is as flexible as the base rent and can be negotiated in the same fashion. In short, a retail tenant’s proportionate share is market-driven.

Commercial Condominiums

In the event a building has been converted to condominium ownership, the “landlord” of a retail space will not own the entire building. The implications for a retail tenant will be significant. The landlord’s obligations for buildingservices, repairs and maintenance, and casualty and condemnation will be governed by the terms of a condominium declaration and the actions of the condominium’s board of managers.

Under these circumstances, the landlord of the retail space may be unable to covenant to provide heat, to repair the building’s structure, to rebuild following a casualty, or to expeditiously remove sidewalk sheds. All of these obligations are governed by the condominium scheme and can have significant impact on the retail tenant. Accordingly, tenant’s counsel needs to familiarize himself or herself with the terms of the condominium declaration.

In addition, counsel should determine if the landlord of the retail space has representation on the condominium’s board of managers. If so, the tenant should be able to compel the landlord to vote a specified way on matters affecting its interests.

Other Issues

Signage/Visibility

Owners of commercial office buildings are less likely to agree that they will be reasonable in approving a retail tenant’s signage. The owner has a legitimate concern because an unattractive retail presence can adversely affect the rentals commanded from the many tenants located in the balance of the project. Of course, tenants want maximum flexibility, both for their own needs and that of subtenants and assignees.

If a landlord is unwilling to be reasonable in approving signage, the tenant should have a signage prototype pre-approved in the lease. In addition, the tenant might ask that its signage be deemed acceptable if it is employed in a certain number of stores in the tenant’s chain or, alternatively, if it is consistent with that of another specified retailer. Moreover, tenants should have landlords represent that no other tenants in the building have approval rights to signage.

Landlords of commercial buildings also often seek to include language whereby the landlord has the approval of anything displayed in the windows of the premises; these are often referred to as “control zones.” Tenant’s counsel should object strenuously to suchprovisions.

Heat

The tenant needs to recognize that heat supplied by a landlord in a commercial office building is typically provided only during “business hours.” A retailer is likely to be open during nights and weekends, which are not customary “business hours.” Tenants should either (1) obtain the landlord’s agreement to provide heat during these hours or (2) understand the cost of supplying its own heat during these nonbusiness hours.

Deliveries

Tenant’s counsel needs to understand his or her client’s needs for deliveries (at what hours are deliveries likely to arrive and how will they find their way into the premises) and make sure that the building can accommodate these needs. Retail space in office buildings often has limited means of access.

Conclusion

Lawyers familiar with leasing generally can be of special service to their tenant clients who desire to lease retail space in street locations, but only if they recognize the special problems that are unique to these spaces. With proper knowledge of these particular issues, tenant’s counsel can address these matters in the lease negotiation, thereby preventing surprises to the client after the tenancy begins.