Leave Room for Growth with Flexible Radius Clause
It’s common for retail tenants to agree to a percentage rent arrangement in their lease with the owner of a shopping center or strip mall. That is, the owner will reap a predetermined percentage of certain profits made by the tenant, in addition to base rent. Owners are fiercely protective of this type of income stream. It’s easy money. So they’ll try to protect their interest in percentage rent by ensuring that your profits at other locations—which they aren’t entitled to—don’t diminish what they’ll get. And this is a huge problem for you, if your business plan hinges on the ability to open other locations.
Expect to have to heavily negotiate flexibility in a radius clause that the owner very likely will insist on. A radius clause—that is, a clause barring you from opening another store within a certain distance, or radius, of your existing location—would prevent you from diverting sales to a new store, in effect competing with yourself and depriving the owner of percentage rent. If you violate the radius clause, the owner can use the special remedies set out in the clause against you.
One way to make a radius clause more flexible is to list exclusions from it. If a radius clause isn’t limited in certain ways, you could violate it too easily. For instance, if you’re negotiating a lease, but already operate another store under the same trade name within the radius, you could find yourself in violation of the radius clause as soon as you sign the lease. Here are items you should exclude from the radius clause:
- Your stores that are already open and operating when you sign the lease;
- If you’re part of a chain that operates stores under more than one trade name, stores operating under a different trade name from the store the lease is for;
- Stores of any company that in the future assigns its lease to you or that you (or your affiliates) buy, consolidate, or merge with;
- Stores of any company that might buy you in the future;
- All existing and future licensed department arrangements (those are license agreements or sublets with a major store to set up an area or department inside that major store where your product(s) will be offered for sale). For example, you might have signed a license agreement to operate a shoe department inside a big-box variety store; and
- Off-site sales (such as sales made by catalog, mail order, or on the Internet).
To get these exclusions, ask your attorney about adding the following language to the radius clause:
Model Lease Language
The radius restriction set out in Clause [insert #] hereof shall not apply to:
a. Existing stores, and the renewal, expansion, or relocation of such existing stores within the same shopping complex;
b. Stores owned or operated by Tenant or its affiliates under a different trade name;
c. Stores acquired by purchase, assignment, or merger by Tenant or its affiliates subsequent to the date of this Lease;
d. Stores operated by any future acquirer of Tenant’s business;
e. All existing or future licensed departments owned or operated by Tenant within a larger store; and
f. Sales made outside of a traditional retail store, including, without limitation, catalog, mail order, and Internet sales.
For four more ways to modify a radius clause so it works to your advantage, see “Protect Your Interest in Opening New Store Locations,” available to subscribers here.