To Plan or Not to Plan

modern and fashion clothes store

In most cases, a new store tenant will require work to be done to make the premises suitable for its purposes. As a rule, a landlord will insist that no work can be done without prior approval. That puts the prospective tenant on the horns of a dilemma while negotiating a lease: if an architect is hired to design the plans while negotiations on the lease are ongoing and the lease is not ultimately signed, time and money invested in the premises will be lost. If the plans are not prepared, however, the opening of the store may be delayed as the landlord goes through the approval process, or worse, the landlord forces the tenant to change the plans. The result: the tenant may not get the store it wants on the date the tenant needs it.

Whether or not to advance the money for plans is always an individual consideration, depending on the relationship with the landlord and the time pressure to open the store.

Even if the tenant prepares the plans and the landlord approves, there is still the issue of getting the approval of the local authorities. Estimating the time that it will take to get approvals is crucial in calculating when the store will open. Without that information, planning for seasonal inventory can be thrown off, with potentially serious business consequences. Ideally, a tenant would have a contingency in every lease for cancellation if the plans are not approved by the authorities. However, it can be difficult to get landlords to agree to that in good measure because of an inability to predict what plans the prospective tenant will submit and what the official reaction to them will be.

However, if the plans are already completed and approved, the municipal authority will likely have someone who would be willing to meet with the tenant’s architect to give an indication of whether there will be problems and to provide an estimate of how long the approval process might take. In some cases, the government representative would also be able to alert the tenant as to any existing problems in the building, especially if the landlord has not been cooperative. It is, therefore, often a good idea to pay a visit to the local building department once plans are completed and approved.

Credit: Steven J. Rabinowitz

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


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.


Preventing Trouble From “Popping Up”

For lease sign

Pop-up stores have become fashionable among small businesses and large companies alike because they offer a company the opportunity to sell merchandise and to test retailing concepts with minimal investment.  They are also advantageous for landlords who hope to rent space that is temporarily being carried without rental income.

From the perspective of tenant counsel, however, there can be difficulties.  Because the whole point of the exercise is to offer customers a temporary retail experience at minimal financial exposure, the client is seeking to avoid expending large sums on legal fees.  If the client concludes that there is very little financial risk due to the short-term commitment, there can be a tendency to ask for minimal or even no involvement by counsel.

Complicating matters, the landlord is also looking to minimize legal fees, with similar pressures on its counsel to hold down fees.  The attorney for the landlord will therefore often send its standard lease form with only minimal modifications to tailor the lease to the pop-up concept.  Because standard form commercial leases typically impose maximum liabilities on the tenant (which is contrary to the pop-up concept, at least from the tenant’s point of view), the tenant’s lawyer may well find it difficult to deliver a fair lease at the right price.

As an example, the lease form from landlord might provide that, in the event of fire damage, the landlord has a substantial time to rebuild.  That makes no sense for a pop-up store.  The draft lease may also provide for tenant to make all sorts of repairs to the premises, often including building systems.  That is hardly an expectation of the tenant when signing a lease for temporary space.  Compliance with law can prove tricky under the best of circumstances.  Even a long-term tenant must protect itself from expenditures in case the premises need to be brought up to code.  Although the pop-up tenant must of course comply with applicable law, it likely will not want to be responsible for any expense to the pop-up due to deficiencies in the building or the leased premises.  The date of delivery of the leased premises is also an issue.  A landlord typically wants a grace period if it is late in delivery.  For a pop-up tenant, for whom every day of a short-term rental will likely count, any delay in delivery could spoil everything.

Fighting out the applicable clauses concept-by-concept and line-by-line with the landlord’s attorney cannot lead to satisfaction for anyone due to time constraints and the desire to keep down legal fees.  In my experience, the best way to handle the problem is to put in an “omnibus” clause such as:

Notwithstanding anything in this Lease to the contrary, the parties agree that Landlord shall be responsible for all repairs, ventilation, utility lines, maintenance and compliance with laws regarding building repairs that commercially reasonable parties would expect a landlord to perform, taking into consideration the length of this lease and the demised premises’ use as a “pop-up” store, and all other provisions of the lease (including, without limitation, casualty, condemnation, access to premises for improvements, failure to timely deliver possession, and use of existing facilities such as electrical wiring and meters) shall be deemed so modified in the light of the same reasonable expectations.  No “To Let” or “For Sale” signs shall be permitted at the Premises.

Credit:  Steven J. Rabinowitz

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