Drafting a commercial lease is complicated. There are a number of factors to consider and an array of options with respect to structuring the deal. The old “location location location” adage is very much in play when negotiating these leases. This article discusses a few of those factors, foot traffic and breakpoint.
When a tenant negotiates a lease with a landlord because the location has significant foot traffic, like a mall, then the amount of foot traffic bears significantly upon the negotiation. In high foot traffic areas like Cherry Creek Mall or the 16th Street Mall, tenants want to place responsibilities on the landlord in the event that foot traffic decreases. Operators of such malls are able to woo tenants and charge high rents because of foot traffic volume. Tenants want to keep it that way. When negotiating a lease in such areas, a tenant should demand a clause that targets foot traffic. That is to say, a tenant can demand that the mall have an overall vacancy threshold. If the mall’s vacancy falls below the threshold, the tenant will have remedies. Depending on the circumstances and the negotiation, the tenant can demand the ability to break the lease. Another prophylactic remedy is to tie rent payments to vacancy rates. For instance, a tenant can create a 75% threshold wherein any vacancies below 75% allows the tenant to reduce rent payments by 25%. This is justified because the tenant wants to be in the mall because of the high foot traffic. Similarly, a tenant can negotiate a clause with respect to anchor store vacancies. Anchor stores drive significant foot traffic from which other stores in the mall benefit. If the anchor stores go, then the mall takes a hit. For example, a tenant might be able to break the lease or reduce the rent if two or more of the anchor stores vacate the premises.
Another negotiating option is tying rent payments to the performance of the tenant’s business. The parties can negotiate a base rental price that is relatively low and then create a formula wherein the tenant pays the landlord a percentage of earnings that are above a certain point. That point is known as the breakpoint. If the tenant’s sales do not reach the breakpoint, then there is no payment above the base rent.
A breakpoint can be either artificial or natural. An artificial breakpoint is when both parties agree on a number to be the breakpoint, whereas a natural breakpoint is based on a formula wherein the breakpoint is calculated based on how the parties agreed to the base rent payments.
When negotiating a breakpoint, a landlord will insist on the ability to audit the tenant’s sales to determine whether the tenant is being honest about its sales above the breakpoint. In such an instance, the tenant should insist on a defined timeframe as to when the landlord is allowed to audit the tenant’s books.
For questions about landlord/tenant law or other real estate legal needs in Colorado, contact the Law Offices of Eric L. Nesbitt, P.C. at 303-741-2354 or Info@NesbittLawOffices.com.