Choosing your words carefully in retail leases.

A lack of precision in drafting retail leases can cause significant problems for owners and tenants alike. Confusion and unnecessary litigation can result if those representing the interests of owners and the tenants are not highly specific when drafting retail leases in general and "use clauses" in particular.

From an owner's perspective, the proper wording for a use clause in a retail lease is critically important. Phrases and words that do not have a precise, inherent meaning, and therefore are open to interpretation, are a common trap. A "deli" is a perfect example. One person's "deli" is another's "restaurant." What exactly is a deli, and what does it sell? Does it have cooking facilities? Is there seating? Table service? The truth is, the word "deli" alone is too broad for effective, descriptive use in a lease, and can create difficulty for owners and tenants in determining the scope of products or services a tenant can offer at the premises.

When food is involved, it is especially important to specify whether there will be on-site food preparation and on-site consumption. If this issue is left silent in a retail lease, the owner faces unanticipated complaints and liabilities from resulting smoke, grease, rubbish, and fire department, building department and health department regulations and issues.

Suppose that a deli begins offering pizza although there is a pizzeria tenant in the same building? At the outset, this may challenge the viability of the pizzeria tenant, an unintended result of the owner's leasing efforts. Where landlord and tenant see a mutual gain, carefully drafted restrictive covenants control uses, preventing unintended competition among tenants. This, in turn, maintains peace, helps prevent litigation and the attendant expense, and helps ensure that the viability of one tenant will not challenge that of another.

Another frequently used phrase that often causes difficulties, particularly for owners, is "related" or "accessory" use. In one recent instance, a gourmet chocolatier in a building wanted to sell what it viewed as "complementary" items. What is complementary or accessory to chocolate? What would be the outer boundaries of those items deemed "related" to chocolate? This is not a problem until the "related," "accessory" or "complementary" products begin to compete with another tenant, or expand into an area that is undesirable to the owner, or that discourages potential tenants that do not compete with the chocolatier, but for the expanded use. From a tenant's perspective, the best security is to require a restrictive covenant from the owner that prohibits the owner from leasing space to a potentially competing tenant.

Another frequent, but problematic, phrase in a retail lease is products of a "first-class nature." But what do the phrases "first class" and "luxury goods" mean? They mean different things to different people. While phrases such as "first-class," "premium," "luxury" or "high end" are used frequently for lack of a more concise phrase, additional illustrative language in support of those phrases more fully portrays the intentions of the parties and helps to prevent ambiguities when construing the lease in case of a dispute.

While precision in drafting use clauses is of particular importance to owners, they also may need to have some flexibility in that regard.

Tenants require an exit strategy if their business does not perform. If this happens, some tenants may seek to redirect the retail effort. The most simple and direct way for a tenant to protect itself is to secure the right to sublet the space or assign the lease if the concept fails, without limiting the potential sublet or assignment uses to only those particular concepts previously attempted by the tenant.

While the assignment or subletting is usually subject to the owner's approval, customarily that approval cannot be unreasonably withheld.

While the tenant should seek the right to sublet or assign for the broadest possible use (e.g., any lawful use), the owner should carefully consider those uses it would not permit at the premises, and those uses that might potentially compete with other tenants at the building or with the leasing of other available space at the building.

Owners and tenants can minimize the possibility of expensive litigation by ensuring upfront that the language inserted into leases explains exactly how tenants can use their space, what types of goods can be sold from their space and what methods of operation are permitted.

By working together, tenants can achieve the flexibility to achieve success and owners can help ensure the success of their projects by managing the various tenancies to facilitate the success of all tenants at the expense of none.

ROBERT CYRULI

CYRULI SHANKS & ZIZMOR LLP