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Temporary Tenants: Risks to Consider
Temporary tenants, which can represent perennial favorites or novel concepts, can serve the needs of customers, create the appearance of a more viable project by filling up vacant storefronts and provide a source of much needed income while landlords search for long-term tenants in this troubled economy. However, the possible negative impact of each temporary tenant must be considered. For example, will the temporary tenant: (1) bring in customers who are unlikely to cross-shop (2) negatively affect the appearance and image of the center, or (3) cause problems with existing tenants? There are also some issues that may be lurking beneath the surface.
Leasing Commission Agreements: Landlords should review existing commission agreements to determine whether and how they address temporary tenants. To reduce brokerage costs on short term deals, the center manager, rather than a leasing broker, could lease up temporary space. If a commission must be paid, and there is substantial risk that the tenant might not stay for the full term, consider some alternative payment schemes. For example, the commission could be: (1) payable at the end of the term (if it is shorter than one year), (2) payable annually but only for so long as the tenant operates in the space, or (3) subject to a "claw back" provision, under which the commission is returned upon an early termination.
Extra Charges: Temporary tenants frequently pay gross rent and don't contribute to common area maintenance costs, taxes, or marketing fees. In new leases with tenants who do pay such charges, where possible the landlord should exclude the GLA of temporary tenants in the calculation of such charges. If a temporary tenant requires certain portions of the common area to be dedicated only for use by its customers, requires special crowd control measures, or causes the landlord to incur other additional costs, the landlord should retain the right to allocate all such extra costs to the temporary tenant.
"Boilerplate" Issues: Existing tenants' leases may require that the landlord operate a "first class" or typical "retail" center, yet temporary uses, especially in the aggregate, might not satisfy such requirement. Even the use of seemingly innocuous terms like "shopping center" (instead of the more neutral term "project") and references to "stores" rather than "occupants" could pose problems. Landlords should consider revising lease forms accordingly and also modifying the applicable language if the opportunity arises in the context of lease amendments and renewals.
Co-Tenancy: Existing leases should be examined before a landlord relies too heavily on temporary tenants to meet co-tenancy requirements (which may . expressly exclude temporary tenants or non-retail tenants). Where possible, landlords should avoid agreeing to such exclusions in new leases. If a lease does not permit the inclusion of temporary or non-retail uses to satisfy a co-tenancy requirement, the landlord, when calculating occupancy, should consider excluding such GLA entirely from both the numerator and the denominator of the fraction representing the percentage of occupied space.
Sheldon Halpern, Rosie Rees and Katherine Casale contributed to this column.
