Just when retailers thought the challenge of the Great Recession was finally behind them, another challenge – lurking for years – is rising fast: Amazon.
Hundreds of articles have been published with advice on how “brick and mortar” retailers can differentiate their physical stores from Amazon’s encroaching online business. Among other things, these articles push personal-level customer experiences, such as workshops, wine tastings, and unique social events that cannot be provided through Amazon’s website.
All of these ideas are wise and good, but retailers should remember that when it is time to get a loan or refinance, the lender will be looking closely at the legal and business structure of the company, to make sure that the company can capitalize on future growth opportunity and quickly jettison failing parts of the business.
To that end, below are a few brief ideas to help you structure your store leases in the Age of Amazon:
Alternate Term Length : A tenant concerned about a long-term commitment for a new business or in a new market may desire a shorter initial term with more renewal terms. The tenant that once agreed to a ten-year initial term and 2 five-year renewals now may want an initial five-year term and three five-year renewals. With this, the tenant can get out of the lease earlier if the business does not support the space, but also has reserved rights if the business does well.
Termination, Contraction, and Expansion Rights : If business is slow, reducing the space or exercising an early termination right (both often with a landlord fee) might be a cost-effective way to reduce the lease obligation. Alternately, if business is better than expected, a right to expand into adjacent vacant space may be useful for a tenant that initially leased a smaller space due to economic uncertainty.
Permitted Uses, Assignment, and Subleasing : Having sublease or assignment provisions with minimal landlord conditions is ideal in case a tenant wants to quickly unload an underperforming site. The permitted use clause also should be as broad as possible because it will maximize the audience of prospective subtenants and assignees that may be able to take the space.
Delayed Delivery of Space : It normally is critical for a tenant to have new premises delivered by a landlord on time so that the tenant can open for business as scheduled and begin to generate revenue as budgeted. To this end, consider providing in the lease that, in the event the premises are delivered late, then tenant receives one day of rent abatement for each day of delay, two days of rent abatement for each day over thirty days of delay (this credit is in addition to pushing back the rent commencement date), as well as a right to terminate if the delay is beyond 90 days.
Retail Co-Tenancy : For retail tenants, a co-tenancy provision allows a tenant to pay reduced rent when certain conditions are not met. Usually, the condition is that certain other stores, such as anchors or a certain percentage of stores in the center, have to be open for business. The reasoning is that a tenant is spending a lot of money for a particular site and center, and if that center is not operating as it should due to the economy or Amazon, then the tenant should receive a remedy.
Preempting Landlord Problems – Self-Help and Rent Abatement : Tenant protections from landlord financial difficulties can be useful if lenders are wary of loaning to your retail landlord. Landlords with many store vacancies due to Amazon’s encroaching business might be affected by this. Self-help provides a tenant the right to fulfill landlord’s lease obligations if the landlord does not do them and then deduct the cost from rent. A rent abatement provision provides for rent abatement if landlord fails to fulfill its lease obligations after a certain waiting period.
Lease provisions like these may provide flexibility to grow profitable parts of a retail business and quickly wind down other failing parts of that same business. Amazon does not appear to be going away any time soon, so a proactive business strategy is the key to keeping a retailer profitable and growing.