Don’t Limit Space to Just Retail Purposes

Don’t Limit Space to Just Retail Purposes

Selling products online is so much a part of many retailers’ business models that it’s common for tenants that are pulling in profits that way to use their brick-and-mortar spaces for purposes related to the business, but not to actually sell products. For example, depending on your business, if you have a successful website you might want to turn your store into a service center, a display room, or merely a counter where customers can return or exchange online purchases.

But if there isn’t merchandise for sale, the owner of the space might feel this undercuts its profits because uses like a service center won’t generate any percentage rent if you don’t make any sales there. And a space used only as a service center will probably draw fewer people to the owner’s center than a store that’s fully stocked with merchandise for sale, decreasing foot traffic that typically would benefit other tenants.

To avoid that situation, a savvy owner will try to use language in the lease’s use clause that requires you to: (1) conduct your business in a way that will generate the most gross sales; (2) keep your entire premises fully stocked with merchandise that’s available for immediate sale; and (3) be fully staffed at all times, which will allow customers to make purchases as easily and smoothly as possible.

Instead, try to negotiate the right to use the space how you want to, while still benefitting the owner’s bottom line. Be prepared to compromise by offering the owner a percentage of some sales that you make outside of the space to compensate for the lack of on-site sales. It’s crucial to avoid giving the owner more than it would collect from on-site sales, however. It shouldn’t have a windfall that will reduce your off-site profits.

Ask your attorney about how to estimate what the owner would reasonably be expected to gain from percentage rent on your space if you were selling merchandise. But make sure to come up with a way to calculate this based on how well you are doing. For example, it would be a mistake to promise an ongoing certain amount of percentage rent from online sales. You want the ability to adjust what you give to the owner. For example, the formula should take into account a situation where sales would far exceed or fall far below the profit that would come from actual sales in the location where you lease the space.