tenant leases

Malls Replacing Retail With Fulfillment Centers May Harm Long-Term Prosperity

Business Columns

Tenant Leases Come With A Certain Expectation For Foot Traffic At Malls

By Judith Bachman

Mall owners nationally are embracing the idea of leasing vacant anchor stores to e-commerce entities like Amazon for fulfillment center or ghost kitchens. Filled space is better than vacant space, no? Well, that depends. Non-retail uses – which dampen foot traffic – may inadvertently hasten the demise of the mall rather the save it.

The overlooked risk here stems from the interconnected operating covenants that retail leases often include.

judith bachmanAn operating covenant is a lease provision by which a tenant commits to remain open for business during the term of their lease. These provisions require tenants to do more than just pay rent; they must also actually operate their store throughout the lease. Operating covenants are designed to ensure that there are open venues throughout the mall. This helps every mall tenant since each one of them wants the mall to have the maximum foot traffic possible.

Some operating covenants go beyond just a commitment from the tenant itself to remain open. They can be tied to the continued operations of other tenants, particularly anchor tenants. An anchor tenant is a large tenant with brand recognition that will, hopefully, attract customers both to its store and to the mall, as a whole.

To induce tenants to lease space in a mall, the landlord may require in the tenant’s lease that anchor tenants will operate their business throughout the term of the non-anchor’s lease.  Such a covenant might read: “If at any time during the lease the Anchor Tenant is not open for business for more than thirty (30) days, then tenant, at any time thereafter, shall have the right to terminate this lease by giving landlord ten (10) business days written notice of its election to do so.”

In addition to co-operating covenants tied to anchor tenants, there may also be broader co-operating covenants for the entire mall.

These co-operating provisions provide an escape for tenants if the mall does not have a minimum number of open retail stores, as a whole. Such a provision might be: “If, for more than thirty (30) days, less than fifty (50%) percent of the gross leaseable area of the Mall is occupied by retail tenants who are open for business, then tenant shall have the right (a) to terminate this lease upon ten (10) days business days written notice, or (b) to an abatement of rent until such time as more than fifty (50%) percent of the gross leaseable area of the Mall is occupied by retail tenants who are open for business.”

If a mall, like The Shops at Nanuet, replaces an anchor tenant like Macy’s with an Amazon order processing center, that might trigger the ability of other tenants in the mall to terminate their own leases or stop paying rent.

If the Shops’ tenants have co-operating covenants tied to either the presence of an anchor tenant or the operation of minimum number of retailers in the mall, they can close their stores without penalty, or stop paying rent.  With this domino effect of closures or rent abatements, resort to e-commerce businesses as tenants may not be the salve that mall owners are searching for.

Judith Bachman is the founder and principal of The Bachman Law Firm PLLC in New City. judith@thebachmanlawfirm.com 845-639-3210, thebachmanlawfirm.com