Lease Audit Information

TOPIC OF THE WEEK:

A growing concern for many retailers has been the significant increase in kiosks, pushcarts and retail merchandising units (RMUs) in the common areas of shopping centers. This is a concern for a number of reasons, including: 1) the sales generated by these common area tenants or licensees takes away sales from the regular in-line tenants, 2) these common area tenants can clutter the common areas and deter customers from exploring the center and/or reaching an in-line destination, and 3) the in-line tenants pay for the maintenance and operation of the common areas, but rarely do the common area tenants share in such costs and rarely do Landlords credit CAM with any contribution or portion of the rent paid by the common area tenants.

Most Landlords are aware or at least beginning to recognize that retailers are concerned:

"We've caused some retailers to despise us; we've prostituted common areas in search of NOI [net operating income] growth. [Inline] retailers object to the sheer magnitude of merchandise and the 'cloud of merchandise' they find in front of their storefront," said Duffy Weir, vice president of specialty leasing and marketing for The Rouse Co., Columbia, Md., during a joint retailer/developer panel at ICSC's Temporary Tenants Conference. (Shopping Centers Today, April 2001)

While most leases give the Landlord the right to use the common areas as it pleases, the majority of leases that are more than a few years old do not contemplate income generated in the common areas, because this was not a prevalent issue at the time. Many centers had a few kiosks, such as the Sunglass Hut or Things Remembered, but the effect on the common areas and the income generated by these tenants was limited. However, in recent years Landlords have discovered that they can make millions of dollars, in some cases, by filling up the common areas with kiosks, pushcarts and RMU's at the expense of the in-line tenants who pay for the maintenance and operation of the common areas. (See "Shopping Centers Today", February 2001 and April 2001 issues or "Shopping Center World" July 2000 issue.) Some Landlords even include the cost of the pushcart or kiosk in the CAM costs!

In our opinion, the practice of not crediting the income generated in the common areas to the costs in which the in-line tenants share is a violation of the Landlord's fiduciary responsibility to act in the best interest of the tenants. There is also an implied covenant of good faith and fair dealing in all contracts which would be overridden only by an express term in the contract. Unless there is specific language in the lease to the contrary, Landlords should not profit at the expense of the tenants.

As reflected in the above quotation, some Landlords are beginning to understand that this practice is not fair and that it undermines a key principle in successful shopping center management: if the tenants are successful, the shopping center will be successful. If Landlords credited this income to CAM, it would greatly reduce the occupancy costs of the in-line tenants, which in turn may reduce the number of vacancies in the center. This could result in a higher occupancy percentage and greater rental income for the Landlord.

We also feel that the reduced occupancy costs would go a long way toward alleviating the concerns of the in-line tenant over lost sales and cluttered common areas. Hopefully more Landlords will start to agree with this way of thinking and start to work with their tenants instead of against them.

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