Retail Leasing: Meaning, Working, Types and Agreement

What is Retail Leasing?

Retail leasing is defined as the process of leasing out commercial space to a businessman for the purpose of conducting retail business. The property owner is a “Lessor” and the businessman or the tenant is a “Lessee”. The core terms and conditions of the lease are mentioned in a document known as a “Lease Agreement”. The lease agreement outlines various aspects such as the duration of the lease, rent amount, permitted uses of the property, and the responsibilities of each party. For example, leasing space in shopping centers, malls, retail buildings, or mixed-use developments.

Geeky Takeaways:

• Retail leasing is an important component of the commercial real estate sector under which property built for retail store operation is leased out to the businessmen to conduct some retail business.
• Under retail leasing, there are two parties the landlord (Lessor) and the businessman or the tenant (Lessee).
• The terms and conditions of the lease are outlined in a document known as a ” Lease Agreement”.
• Retail Leasing is most common in the case of leasing commercial buildings, malls, shopping centers, etc.

How does Retail Leasing Work?

1. Determining the Budget and Space Size: The first step for the tenant is to determine the budget and how much space is needed to conduct the business. Figuring out budget and space is important to prevent unnecessary financial burden and wastage of space. On the other part, the landlord should list the property with real estate brokers, online dealers, and signage to make the property available for lease.

2. Conducting Initial Inquiry and Evaluating Potential Location: After determining the budget and space, the next step is to reach the landlord or the broker to grab the basic information about the available space, including visiting the site, size, location, terms, and rental rates. Moreover, it is important to evaluate the potential of the location and the foot traffic that impacts the sales, success, and customer base of the business.

3. Negotiation and Lease Agreement: Once the tenant decides and makes up his mind to lease the property and the landlord agrees to lease out the property to the approaching party, both parties then negotiate on terms and conditions including, rent structure, lease term, improvement allowance, maintenance responsibility, and other provisions. Once deciding upon these terms, an agreement is crafted that outlines the basic terms of the lease known as a ” Lease Agreement”.

4. Improvements and Occupancy: The landlord may improve or modify the space or premises as per the needs of the tenant and the lease agreement. The tenant takes possession of the retail space upon completion of such improvements. The rent is paid either upon occupancy or after a specified period as per the agreement.

5. Lease Management and Lease Renewal or Termination: Throughout the lease term, both parties manage the agreement by shedding off their responsibilities honestly. Once the lease expires both parties may agree to either renew the lease by negotiating and revising the terms of the lease, or in case of breach of the agreement, the lease may be terminated.

Types of Retail Lease

There are several types of retail leases with different structure and terms, including:

1. Full Service Gross Lease: In Full Service Gross Lease, the tenant is responsible for paying a fixed amount of rent to the landlord and the landlord takes up the responsibility to pay the operating expenses like property taxes, insurance, maintenance, utilities, and common area expenses (CAM). This structure of lease imposes a predictable burden on the shoulder of the tenant, however, the the cost of operating expenses may be incorporated into the base rent.

2. Net Lease: Net lease structure shifts the burden of operating expenses from landlord to tenant and the landlord bears the cost of basic building structure only. The operating cost paid by the tenant depends on the type of net lease agreed upon by both parties:

• Single Net Lease (N Lease): Under this structure, the tenant bears the cost of property tax in addition to the base rent.
• Double Net Lease (NN Lease): Under this structure, the tenant pays base rent plus property taxes and insurance.
• Triple Net Lease (NNN Lease): Under this structure, the tenant pays property taxes, insurance, and Common area maintenance (CAM) expenses along with the base rent amount.

3. Percentage Lease: Percentage Lease is a retail lease structure under which the tenant is liable to pay a certain percentage of their gross sale over a predetermined threshold to the landlord in addition to the base rent. The landlord benefits directly from the tenant’s sales performance and this is common in shopping centers and malls.

4. Modified Gross Lease: A modified Gross Lease is a mixture of gross and net lease structures. Under this type of lease, the tenant pays the fixed base rent plus a portion of operating expenses. Both parties negotiate and split the operating expenses that are clearly outlined in the agreement document. The burden of both the parties is distributed.

5. Ground Lease: Under this, land is leased out by a landlord to a tenant for a specific period, generally for a longer lease term. The tenant takes up the responsibility to construct and maintain the building on the leased land, while the landlord retains ownership of the land. The lease agreement outlines the provisions related to rent structure, property improvements, renewal, and lease termination.

6. Short-Term or Pop-Up Lease: A short-Term or Pop-Up Lease is a lease agreement with a shorter lease term say for a few weeks to several months. Short-term leases enable the landlord to earn income during off-peak periods and are suitable for tenants who want to test new markets, promote seasonal products, or capitalize on special events without committing for a longer duration.

What is a Retail Lease Agreement?

A retail lease agreement is a legally binding document that outlines the provisions, terms, and conditions of the lease. It is often known as a retail lease or lease contract that is crafted to establish the rights and responsibilities of both parties. The key elements of a retail lease agreement include,

1. Parties Information: Name of both the parties entering into the lease agreement.

2. Description of the Property: Space description including size, location, boundaries, and any common areas attach to the premises.

3. Lease Term: The time duration of the lease, along with any provision for renewal or termination.

4. Rent Structure: The agreement outlines the provision related to the amount of rent, payment structure and method, rent adjustments over the lease term, etc.

5. Improvements and Built-Ups: The agreement clarifies the improvements the landlord needs to make before the handover of the property.

6. Operating Expenses: The agreement mentions the name of the party responsible for paying the operating expenses such as property taxes, insurance, maintenance, utilities, and common area maintenance (CAM) fees.

7. Usage and Maintainance of the Premises: The agreement describes the permitted use of the retail space along with the provision of repair and maintenance.

Difference between Retail Lease and Commercial Lease

Basis	Retail Lease	Commercial Lease
Suitability	A retail lease is suitable for properties like shopping centers, malls, or standalone retail buildings.	A commercial lease is suitable for a variety of properties like office buildings, industrial facilities, warehouses, and mixed-use developments.
Usage	The leased property should be used for retail activities only	The premises can be used for a variety of purposes, such as offices, manufacturing, storage, distribution, etc.
Lease Terms	Witness longer lease terms as businesses need time to grow.	The lease term varies from short-term to long-term depending on the nature of commercial property, market conditions, and tenant requirements
Rent Structure	Fixed rent, percentage rent, or a combination of both is common.	Rent structure depends on types of lease like gross lease, net lease, or modified gross lease is common.
Operating Expenses	Operating Expenses are borne by the landlord most often.	Operating Expenses are passed on to the tenant depending upon the type of net lease opted.
Focus	Tenants focus on foot traffic and visibility as it directly affects sales.	The focus of the tenant is grabbed by the location’s suitability and functionality.

Retail Leasing – FAQs

What factors should I consider when searching for retail space?

Consider your business needs (size, location, budget), target demographic, foot traffic patterns, and proximity to competitors.

What are some key things to negotiate in a retail lease agreement?

Negotiate rent, lease term, permitted uses, maintenance responsibilities, renewal options, and potential allowances for renovations or signage.

Can a retail space be customized to fit the needs of my business?

Depending on the lease agreement, tenants may have the option to customize the retail space to suit their specific requirements, subject to landlord approval.

Who is responsible for maintenance and repairs in a retail lease?

Provision created to maintenance and repair responsibilities are outlined in the lease agreement. However, landlords are usually responsible for structural repairs and common area maintenance, tenants may be responsible for maintaining the leased premises.

What type of lease structure should I offer for my retail space?

Consider factors like the location, operating costs, and the type of businesses you want to attract. Gross leases offer predictability, while net leases can shift some responsibility to tenants.