Retail evolution and the need for lease language changes
May 21, 2017
Experiential retail. Bricks and mortar stores as distribution points. Online sales returns. Showrooming. We are continuously bombarded with articles about the death of retail, the evolution of retail, stores closures, the death of retail being exaggerated, announced stores closings, announced store openings. While there seems to be little agreement about the future of retail, there is little doubt that retail continues to evolve. And, with that evolution, changes are needed to leases and lease language.
- Many leases and most operating agreements (Reciprocal Easement Agreements (REAs), Construction, Operating and Reciprocal Easement Agreements (COREAs) and other similar documents) typically have restrictions against uses which may be found in a shopping center such as:
- Residential
- Education
- Entertainment (movies, theaters)
- Vehicle sales and rental
- Office
- Health clubs and exercise facilities
These restrictions often run with the land (meaning they are perpetual with no expiration). Often, these restrictions existed to limit the impact on parking. However, some existed to ensure 「a first class」 shopping center. But, outstanding properties live Oak Brook Center outside of Chicago and Avalon (pictured in the photo) outside of Atlanta have Tesla dealerships. Some of the best centers in the country, Ala Moana Center, Natick Mall, Phipps Plaza, have residential incorporated or immediately adjacent. As retail evolves, these restrictions have to be eliminated, or altered. Without changes, a developer’s ability to allow a center to evolve will be limited. I used to laugh when I would read a restriction against a distillery. Who would ever consider something like that? Today, breweries and distilleries are desired tenants in mixed use properties – that experiential retail. Do you really want to be denied an Equinox Fitness or Soul Cycle due to a use restriction. Use restrictions must evolve.
- Retailers trying to marry e-commerce with bricks and mortar often use their store locations as distribution points. However, if you take a look at a gross sales definition, reported gross sales include sales generated 「in, at, on or from the demised premises.」 While a sale may have been made online, in certain instances, the sale is finalized 「from」 the demised premises. On the other hand, if a retailer makes a sale online, but allows the consumer to return it to a retail location, the sale may have never been reported, yet the return is used to reduce reported gross sales for the location. The definition of gross sales must evolve.
- Also affecting the definition of gross sales will be the concept of showrooming – where the store may be a showroom only. Touch, experience, try on. The order may be placed at the retail location, or subsequently online. Leases have to evolve to recognize the value of the sale which, in some part, is attributable to the physical location.
From the late 1950s to the early 1970s, it was very common for department stores in regional malls to have absolute approval rights over other tenants which would be permitted to operate in the mall (or at a minimum, in their respective entry court). Right around 1973, due to anti-trust lawsuits which were being brought at the time, most department stores issued unilateral agreements rescinding their approval rights.
For the health and survival of the industry, we may need to see some unilateral rights, restrictions, and language definition rescissions granted from tenants to landlords and vice versa so that centers can evolve.