As I write this blog, the rest of my family is getting ready for Easter Sunday Mass. I can be ready in five minutes so I have a little time. There is the major religious significance of today, but there are also secular, lease-related consequences of retailers and retail venues operating today.
Sometimes ignored in leases are the tenant’s required operating hours. Often, it will be presented simply as 10 am to 9 pm Monday through Saturday and 11 am to 6 pm on Sunday. It will usually address that the center will not be operating on Thanksgiving and Christmas. This clause does get negotiated, but not nearly as often as you might think. This is where tenants will negotiate their right to close two days per year for inventory. This is where the Chick-fil-as of the world state that they will not be required to operate on Sundays. This is where you might see a tax preparation firm negotiate their right to operate only certain months of the year. This is where supermarkets address their right to operate 24/7, and where restaurants and theater negotiate their late night operating hours.
It is also where you will see language to the effect of “and other hours as landlord may require.” Sophisticated tenants will respond to that language with a sort of cotenancy (not a true cotenancy) language that states “only if at least two department stores and 70% of the inline tenant” are also operating.
These clause are in the lease to provide a united front. To ensure that a customer does not come to the center and find currently operating retailers essentially not operating. While the required operating hours may be pretty easy to find in the lease, the consequences of not operating are often sprinkled throughout the lease.
In minimum rent, you may find language that provides for one or two day’s minimum rent as a penalty for each day that the tenant is not operating. Sometimes in percentage rent or in the definition of reported gross sales, you may find that the breakpoint is reduced for each day that the tenant does not operate, or that reported gross sales gets “grossed up” (proportionately increased) for each day that the tenant does not operate. The bottom line is that there are financial implications to a tenant not operating when required.
And, it actually goes the other way too. If you have a supermarket that had been a 7 am to 9 pm operation convert to a 24 hour operation, your concession allowing for the conversion of the operation should also address the new “after hours” charges. You will now have parking lot lights running an additional 8-10 hours. Typically, a tenant will be required to pay after hours charges proportionately with other tenants also operating after hours. If your theater or restaurant is required to pay fixed CAM, but then requests to operate additional hours, that landlord concession should also include an increase in the fixed CAM to account for increases in lighting, security, janitorial and other similar variable expenses.
One other thought related to hours and landlord supplied utilities. If your lease contains a base charge for either electricity or tenant HVAC, it is usually based upon a standard expectation for operating hours similar to those addressed above (10-9 and 11-6). If you have tenants operating outside of those hours (think about a food court tenant that opens early to cater to mall walkers or a salon or optician that opens early for appointments, there may be a need to adjust the tenant’s charge. And, though it is a rare occurrence, there are still counties throughout the US with blue laws prohibiting many retail locations from opening on Sundays. When those laws are lifted and a center begins operating, adjustments are needed to account for these additional hours.
– Just once instance where a non-financial covenant of a lease has a financial impact
(And, I did finish before my family was ready to leave!)