One of the first questions a store owner that is considering a store closing sale ask is, “What about my retail store lease”. I’ve talked with hundreds of small retailers over the last two years that are experiencing very difficult times. This has caused many of them to consider a store closing sale or going out of business sale.
Retail Store Lease Fine Print
My suggestion to an owner considering a store closing sale is to look at the fine print in their retail store lease. With a little luck it will contain a clause that is relatively common in many retailer’s leases. It is the “co-tenancy clause”. It allows for tenants to demand cuts in rent or even penalty-free pullout if key tenants or a specific number of stores leave the mall or strip center.
The breach of a co-tenancy clause typically allows the retailer to pay as little as half of the rent. While the landlord searches for a new tenant (it’s now much tougher to find that new tenant) and if one is not found within the specified grace period, the retailer can break its retail store lease without the usual cancellation fee.
Rent in a Retail Store Lease
Rent is among the largest expenses for a small retailer. As sales continue to decline, the fixed cost of rent eats away at the already thin profit margin or increases the losses that the small retailer is experiencing.
Bankruptcies of major national and regional retailers led to many mall and strip center vacancies. In 2016, at least 3000 retail stores closed.. So far in 2017, another 7,000 + stores have closed their doors.
The decision on what to do about their retail store lease has always been a major concern for small retailers. Especially when they are considering closing their store and running a going out of business sale. The abrupt increase in the number of national chains closing retail store fronts has made the enforcement of a co-tenancy clause a possible out for the small local retailer.
As always, when dealing with legal issues like leases, I always recommend that you consult with a lawyer.
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