Leasing retail space in New York City is unique. Whether it’s a “landlord’s market” or a “tenant’s market,” retail and restaurant leases in New York City are more voluminous, more complicated and more landlord-orientated than in other parts of the country.
Here are some useful tips for negotiating these kinds of leases in New York City. This is certainly not an exhaustive list of all the issues you will run into, but you will get the idea.
If you don’t have the clout to use your form (or even if you do), or you don’t have an in-house attorney wise in the ways of New York City retail leasing, retain an experienced New York City retail leasing attorney. The initial draft of the landlord’s form that is sent to you, in most cases, will be heavily weighted in favor of the landlord. Worse yet, often, the form of lease is the landlord’s office form, slightly modified for a retail or restaurant use, with many provisions that are not appropriate for a retail lease, or omitted, and particularly burdensome without significant modification.
Ownership Structure of the Building
Understand your landlord’s structure and its financing. New York City buildings typically have a multi-layered ownership structure with “sandwich” positions, such as a ground lease, with complicated financing. Obtain a title search, and representations from the landlord, so you know what you need in addition to the lease to protect your investment (particularly in a difficult economy). For all but the smallest of leases, you should obtain a nondisturbance agreement from any superior titleholder (such as a ground landlord) and all mortgagees.
Cooperatives and Condominiums
This is related to the issue of knowing your landlord’s structure. You need to determine if the building is a cooperative or a condominium (the lease should have specific provisions covering these structures so it will alert you; if not, see our note above regarding the title search — that will alert you).
Cooperatives. If you are leasing from the owner of a unit in a cooperative building, your lease is a sublease. You must, therefore, review the proprietary lease and the cooperative rules and regulations to determine if consents are required and that your use and the provisions of your lease are consistent with those documents. You should also obtain a non-disturbance agreement from the cooperative corporation to protect you if your landlord defaults under its proprietary lease.
Condominiums. If the building is a condominium, you must review the condominium declaration and rules and regulations to, again, determine if consents are required and to confirm that your use and the provisions of your lease are consistent with those documents. Here, too, you should obtain a non-disturbance agreement from the condominium association to protect you if your landlord defaults in the payment of common charges, as most condominium associations have lien rights for non payment, which are superior to your lease.
Hire consultants and contractors who have significant experience constructing similar space in New York City; and make sure they know if you can build what you want, at your expected cost, within your desired time frame. New York City buildings (particularly older buildings) often present unique construction issues, including outdated or insufficient systems, structural defects, asbestos removal, and compliance with a myriad of laws relating to all aspects of construction. You and your team must be fully familiar with the physical aspects of the space and the building, and consider all applicable laws (such as the Landmarks law). The landlord’s lease will, most likely, place these burdens on you, but some of these may be more appropriately the landlord’s responsibility (and you need to know what they are). Whether or not the landlord takes on any of these responsibilities, make sure that delays don’t eat into any free rent period.
Protect yourself against the inevitable erection of scaffolding in front of your space. Scaffolding in New York City has become an epidemic. Laws requiring façade work result in scaffolding being erected and, perhaps, remaining for extended periods. Your lease should provide for a number of protections, such as no interference with access, scaffolding only when the law requires it, adequate lighting and signage. You should also, to the extent possible, prohibit scaffolding from being erected during your grand opening or the holiday season. Business is often hurt when the scaffolding is in place. You should try to obtain rent relief during this period although, given the expectation that scaffolding will be required at times during the term, it is rare to obtain it.
Don’t take responsibility for sidewalks. Landlords often want the ground floor tenant to be responsible for maintaining the sidewalks abutting its premises (including removing snow, ice and debris, and compliance with law). Many landlords will accept some or all of these responsibilities. If you can’t negotiate your way out of them, make sure your store manager is aware of these responsibilities and that your insurance covers any injuries occurring on the sidewalks.
Get your fair share of the use of the loading dock. In mixed-use buildings, the loading dock is often shared by all of the building’s occupants. This can wreak havoc, especially in larger buildings with a variety of tenants. Ideally, the building will have a dock master who will coordinate the use of the loading dock. If not, and you have leverage, you should negotiate for priority rights to the loading dock during certain hours and an alternate means of loading and unloading if the main loading
dock is unavailable.
Protect your visibility and access. Identify those areas outside of the premises that are critical to your use (such as accessways to the loading dock) and visibility, and make certain that those areas cannot be changed or obstructed without your approval.
Communications and HVAC Equipment
Ask for the right to install a satellite dish or other communications equipment (and, perhaps, HVAC equipment) on the roof or a setback of the building, with riser space to connect your space. Although technology changes might make external communication equipment unnecessary in the future, many retailers still use these devices to communicate with their home offices.
Guard against competitors. You can try, but exclusives are rare in New York City, and can only cover your building. Keep in mind, a competitor can open next door — in another building.
Ask to self-insure. Again, you can try, but unless you have a sufficient (meaning, very large) net worth, most landlords will not agree.
Make sure your standard signs and advertising matter are allowed. Most landlords start with the proposition that any signs or advertising matter (in fact, any installation that can be seen from the street, which in many instances is the entire interior of the space) require the landlord’s consent. This is unworkable. You can’t be asking for permission each time you change an interior sign or installation. Have the landlord agree that signs similar to your other locations in New York City (or, if none, that meet some standard) do not need the landlord’s approval.
Additional Rent — Real Estate Taxes and Building Expenses
Know what you will pay in addition to base rent. It is common to pay your share of increases in real estate taxes above a base year (it is less common for a New York City retail tenant to pay a share of building expenses above a base or percentage rent). You need to know and understand several key issues: the way your share is determined (often not just your proportionate share of the space leased, but a share based on your proportionate share of the building rent — usually a much larger proportion); the appropriateness of your base year (if the building is not “fully assessed” during your base year, there is a potential for enormous increases; this may need to be mitigated by complicated formulas for a newly constructed building or a building under construction); and whether the building is subject to any real estate tax abatement during your base year which will be phased-in over a number of years and create unexpected increases in your real estate tax payment.
Assignment and Subletting
Make sure that you can realize on the value you create. Most landlords start with the proposition that any assignment of the lease or sublease requires the landlord’s approval. You need to know that you can sell your business (stock or assets), or merge, and have your lease included, without the landlord’s consent. If you have the clout, you should negotiate for even more liberal assignment and subletting rights.
Restaurants present additional unique challenges, including:
- operational issues, such as adequate venting, pest and rodent controls, noise and crowd control, outside dining areas and disposal of grease and other refuse;
- business issues, such as the landlord’s requirement of a large security deposit due to relatively high rates of failure and high construction costs, a radius restriction, a continuous use covenant and landlord zones of control if the restaurant is visible to the interior building lobby or the street; and
- a liquor license contingency, if you intend to serve alcohol.
Retail and restaurant leases are complicated documents in any geographic area, covering a myriad of concepts; however, as evidenced by the issues discussed in this article, retail and restaurant leases in New York City have their own unique considerations.
The authors, Mitch Baron and David Rabinowitz, are directors in the Retail Group of Goulston & Storrs, resident in the firm’s New York office. They can be reached at email@example.com and firstname.lastname@example.org.
This information should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer concerning your situation and any specific legal questions you may have.
This article originally appeared in Shopping Center Business, May 2012.
© 2012 France Media, Inc. www.shoppingcenterbusiness.com