Give Yourself an ‘Out’ If New Location Doesn’t Work for Business

October 27, 2017
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Although the other locations of your retail business might have done extremely well, be aware that a new location captures a slightly different customer base. But you can have flexibility if things don’t work out there, by building into your lease a “performance kickout right,” which is key in an uncertain business location. Business owners ideally have high hopes when they set up shop, but cautious optimism during lease negotiations can save the day. A performance kickout right allows you to terminate the lease if gross sales fall below or don’t reach a certain dollar amount during a “performance period”—that is, a set period of time during the first few years of the lease.

Most owners don’t want to include this provision, because it essentially gives you an easy out if your business goes south or the location turns out to be bad. If you are fortunate enough to be a desirable tenant with solid bargaining power, the owner will probably give in and include it—but the owner won’t make exercising the clause easy. It’s key for you to keep control over your performance kickout right.

One way to do this is to be aware of events the owner will insist on in the provision that cancel out your right to exercise the performance kickout. One thing you can do to preserve your right is to send timely notice. The owner will require you to give notice if you plan on exercising the performance kickout right. The lease provision will probably impose a deadline for notice after the end of the performance period (such as 30 days) and say that if you fail to meet the deadline, your right to exercise the performance kickout right will be terminated.

As soon as you determine that you’ll be exercising the right, send notice to the owner and make sure that you comply with all of the notice requirements listed in your lease. For example, if the lease requires you to provide written notice, don’t give the owner oral notice that you plan to vacate the space.

Also, clarify the definition of “continuous operation.” Some owners will try to terminate the performance kickout right if you don’t use 100 percent of the leased space or continuously remain open during the building’s or center’s business hours, and will regard you as being in violation of the lease terms for not “continuously operating.” If you have agreed to continuously operate, make sure you stay open during business hours. And when negotiating this clause, clarify that the 100 percent occupancy requirement applies only to the selling area, and not to the storage and office areas.

For five more ways to keep control over your performance kickout right, see “Take Seven Steps to Keep Lease for New Location Flexible,” available to subscribers here.