Avoiding Large Problems in Small Stores

Schaufenster

Some retailers have embraced the strategy of opening a large number of small stores rather than focusing on a few flagships. Advantages include minimizing the chance of significant economic loss in any given location and increased exposure on a national level.

One drawback to this strategy is that, with the greater number of leases to be negotiated, there is an attendant possibility of large legal fees. The retailer could, with justification, believe that, since the rent is small for each location, the legal fees should be similarly modest.

However, the retail tenant’s counsel cannot be any less vigilant in negotiating these store leases. That is because certain types of liabilities can be very costly, no matter the size of the store or the amount of the rent. Those liabilities generally arise from problems with the physical condition of the store.

Landlords come in all sizes and shapes, and often different negotiation strategies are called for depending on who is on the other side of the table. But there is one thing all landlords have in common: they want the tenant to accept the premises “as is” and be responsible for all physical problems within the demised premises. “You have inspected it,” they will say, “or if you haven’t done so, you should do so at once.” But by the very nature of the small store strategy, the tenant is opening in locations where it is unfamiliar with local laws and may not wish to undertake the expense of hiring local architects and expediters to inspect and report on real or potential problems at each location.

Typically, the tenant retailer knows it will have to do work to prepare the store for its occupancy, but the tenant will likely also be unwilling to accept responsibility for any major construction needed to prepare the space for its occupancy. One would imagine that landlords would feel the same way, but often that is not the case. Even if we leave aside landlords who wrongly seek to conceal defective or environmentally unsafe conditions and look at honest landlords, we find that it is not uncommon for them to worry about their buildings being consistently up to code. Even if the building was in full legal compliance at the time of original construction, laws change, and repairs and replacements over time may not be in compliance with the updated code. The big fear is that, when a retail tenant applies to have its plans approved for its leased space, the building department will return with a laundry list of upgrades that are essential to bring the entire building up to code.

Retail tenants must anticipate and respect that fear, and savvy tenant counsel should be able to handle the concerns of the landlords with sensitivity (and often creativity) to help the landlords overcome their fears. The solutions that arise in these situations, when parties cooperate and reasonable compromises are made, can be mutually beneficial. But one thing is certain: the goal of counsel for the retail tenant is to do what is reasonably necessary to help keep costs both predictable and under control.

Credit: Steven J. Rabinowitz

Steve is counsel in Phillips Nizer’s Real Estate Law practice.