Mr. Glincher

Hospitality Law

Commercial Leases: Making the Most of Retail Space

By Andrew Glincher, Office Managing Partner, Nixon Peabody LLP

Most managers are very conscious of maintaining the correct balance for their property. But what are the best techniques for achieving that?

The process starts with consideration of how to create a mix of shops and services that complements the needs of the hotel - to serve its clients and to create an image in the outside world. But they should also complement each other. For example, a large property may want to have more than one clothing retailer, but you would want them to specialize in different types of fashions. You might want to have multiple restaurants, but it might be a problem if more than one served Chinese food.

There are more subtle issues along these lines as well. What if, for example, a hair and nail salon in the hotel starts offering massages - thus competing with the massage services offered by your spa?

The way of dealing with issues like these is during the initial lease negotiations. Property managers should have as much control as possible and should negotiate use clauses that are very precise and try to anticipate future issues that may arise. Obviously, a lease for a retailer should dictate that the space be used only for retail purposes. But it should go further than that.

From the property's point of view, you would want to specify everything from the types of merchandise that will be sold to the types of displays the store contains. A restaurant lease would state the types of food that could be served. A spa or salon lease would include a list of services that would be permitted there.

Just as the management of the hotel is going to want to be as restrictive as possible, the tenant is going to want as much flexibility as possible. A restaurant owner will want the ability to change from a seafood restaurant to a steakhouse if the former is not successful. A high-end retailer will want the ability to offer lower priced merchandise if he finds a demand for that. How far you can go depends on the lease negotiations - how badly do you want that tenant and how badly does the tenant want to be at your location?

There is also a research component to this process. You need to explore the background of the potential tenant and its experience at other locations. Did they attract the type of clientele you expect to have at your property? Were they financially successful? Do they have a history of starting out positioning themselves as one thing and then changing along the way?

Just as you want to be able, as the hotel management, to prevent tenants from altering the use of their space, you want to maintain as much flexibility as possible for yourself. If a particular shop is extremely successful and helpful to the overall image of the hotel, and it wants to expand, you might want to relocate the tenant in the space next door. The lease has to enable you to do that.

You may feel that the clientele of the hotel has changed and that it would be beneficial to take space away from a retail establishment and use it to enable the expansion of a spa.

You may want to move tenants locations around, so that foot traffic flows more smoothly. It might make more sense to give a shop or restaurant that's inside the hotel new space that fronts the street, so it's visible to passersby who aren't staying at the hotel.

Again, the amount of flexibility you have will be determined by the type of lease you negotiate at the outset. Often, if the relocation clause comes with reasonable terms, and assuming you're offering the type of property they want very much to be included in, tenants will agree to it. The hotel management will probably have to agree to pay for moving expenses and possibly for unamortized tenant improvements to the original space. And you will likely have to provide ample notice and the opportunity to relocate to new space the tenant finds suitable. We've represented parties a number of times in exactly this type of situation and if both sides are reasonable, relocations can turn out to be a win-win situation.

The bottom line is that, given the importance of a property's retail space, and the possibility of a hotel's positioning changing over time, it is important to sweat the details and think through the contingencies at the outset, and give yourself as much control as possible if circumstances change in the future.

Andrew Glincher specializes in the negotiation and resolution of business and real estate disputes. Mr. Glincher has represented developers and owners of retail centers, hotels, movie theatres, office and industrial buildings and parks, utilities, restaurants, subdivisions, apartment complexes, assisted living housing complexes, long-term care facilities and condominium projects. Mr. Glincher is admitted to practice in Massachusetts, the U.S. Court of Appeals, Third Circuit, the U.S. District Court, District of Massachusetts and the U.S. Tax Court. Mr. Glincher can be contacted at 617-345-1222 or aglincher@nixonpeabody.com Extended Bio...

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