2018 ICSC Materials (01259856).DOC



2019 Michigan Continuing Education Program

for Real Estate Professionals

February 14, 2019

Suburban Collection Showplace

Novi, MI

The Evolving Anatomy of a Retail Lease: Changing with the Times

Moderator

Jonathan W. Anderson, Esq.

Partner

Varnum LLP

Grand Rapids, MI

Telephone: (616) 336-6709

E-mail: jwanderson@

Panelists

Eugene A. Franks, Esq.

Vice President of Real Estate and General Counsel

Family Farm & Home, Inc.

Muskegon, Michigan

Telephone: (231) 722-8335

E-mail: eugene.f@

Robert A. LaBelle, Esq.

Senior Attorney

Williams Williams Rattner & Plunkett, P.C.

Birmingham, MI

Telephone: (248) 642-0333

E-mail: ral@

Thomas W. Litzler

Executive Vice President & Chief Operating Officer

Schostak Brothers & Company

Livonia, MI

Telephone: (248) 357-6222

E-mail: litzler@

From the substantial, real-world expertise of our panel of developers, tenants and their attorneys, this session examines crucial components of the retail lease, pitting the perspectives of the landlord against those of the tenant and how the "times" - the economy, demographics, and technology - have impacted what parties feel they need in their leases. This session will, of course, discuss the economic terms, but it will also cover certain non-economic issues that can have a dramatic effect on the long term success of a center or a store. Special attention will be given to CAM exclusions and audits, percentage rent, construction allowances, tenant "exit strategies", and exclusives. This session is designed to enhance your understanding of how certain lease terms can affect your clients and deals, add value to the service a broker can provide and help each party add dollars to the bottom line.

Outline

I. Exclusive Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 2

II. Percentage Rent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 6

III. Common Area Maintenance; Operating Expenses. . . . . . . . Page 13

IV. Exit Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 17

V. Tenant Improvement Allowance. . . . . . . . . . . . . . . . . . . . . . Page 21

I. Exclusive Use

A. Exclusive Use Clause Defined

An exclusive use clause gives a tenant the right to sell certain named products or conduct a certain line of business within a stated area. This protects a tenant against competition by limiting the landlord's future development and leasing activities at its center. Exclusive rights can complicate the administration of retail centers since there is often substantial overlap among retailers.

B. What Tenants Request

1. Tenants often request extensive lists of "protected" products. The list sometimes ends vaguely with "and similar items."

2. Some tenants request prohibitions against specific named competitors, to whom the landlord will not lease space.

3. A savvy tenant will request that the exclusive use language be stated in a memorandum of the lease, which is recorded with the County Register of Deeds to give notice of the tenant's exclusive rights.

4. The tenant should avoid potential antitrust violations resulting from requesting prohibitions on discount retailers.

C. How Landlords Respond

1. The landlord should limit the exclusive use to a type of business and not to the sale of particular items. This could protect the landlord, for example, from violating an exclusive use clause in a bookstore lease when a convenience store in the center sells paperback books.

2. The landlord should limit the exclusive use to leases signed after the date of the tenant's lease, to avoid possible violations of the tenant's exclusive use rights by pre-existing tenants. The exclusive rights may also be described as subject to rights of current tenants under current leases. Tenants may ask for protection when the landlord is asked to consent to an assignment of a pre-existing lease when the assignee's proposed use would violate the exclusive clause.

3. The landlord may negotiate exceptions to the exclusive use based on square foot area of the competitor (for example, protection would not apply to or prohibit tennts under 5,000 square feet); by floor space or linear feet of shelf space; or by a percent of overall sales (for example, not more than ten percent of the competing tenant's gross sales may be derived from sales of the "protected" items).

4. The landlord may limit the protection to a designated protected area less than the entire center.

5. The landlord may state that the protection does not apply to additional land that may be added to the center.

6. The landlord may limit the protection to only apply to those periods when the protected tenant is operating for its stated use at the center.

7. The landlord may negotiate to obtain the tenant's consent to specific named potential competitors.

D. When the Exclusive Use Clause Matters

1. At the negotiation of the letter of intent.

2. At the time of purchase of an existing shopping center.

3. When a landlord violates the exclusive use rights.

a. Tenant will seek the right to terminate the lease.

b. Landlord will seek to limit its exposure to a reduction in base rent.

Drafting examples are attached as Exhibit A.

Exhibit A

Sample Exclusive Use Provision

(Starbucks) Exclusivity. So long as Tenant is operating the Premises as a Starbucks, Landlord shall not use or allow any other person or entity (except Tenant) to use any portion of the Landlord's Parcels, Developer Parcel 1 or Developer Parcel 2 primarily for the sale of (a) freshly ground or whole coffee beans, (b) espresso, espresso-based and coffee-based drinks, (c) tea or tea based drinks, (d) gourmet, brand-identified brewed coffee or (e) blended coffee-based beverages, including without limitation, those containing any of the following: ice, coffee, espresso, tea, milk, cream, juice and/or fruit. Without limiting the foregoing, this restriction shall also apply to kiosks and carts. The foregoing exclusive use clause shall not apply to any occupant of any portion of the Landlord’s Parcels, Developer Parcel 1 or Developer Parcel 2 whose leased premises exceeds Five Thousand (5,000) square feet in area. Notwithstanding anything in the foregoing language of this section to the contrary, (a) the occupant of the premises to be operated as Noodles and Company may sell brewed coffee, tea, or blended beverages provided that the sale of brewed coffee, tea, and blended beverages does not exceed 15% of such occupant’s annual gross sales at this location; (b) the occupant of the premises to be operated as Moe’s Southwestern Grill may sell brewed coffee, tea, or blended beverages that do not contain coffee or espresso provided that the sale of brewed coffee, tea, and blended beverages not containing coffee or espresso does not exceed the greater of 5% of such occupant’s annual gross sales at this location or $35,000 per calendar year and (c) any other occupant of any portion of the Landlord’s Parcels, Developer Parcel 1 or Developer Parcel 2 may sell brewed coffee, tea, or blended beverages that do not contain coffee or espresso provided that the sale of brewed coffee, tea, and blended beverages not containing coffee or espresso does not exceed the greater of 5% of such occupant’s annual gross sales at such location or $35,000 per calendar year.

(Staples) Exclusive Use. No part of the Center, nor any property within one (1) mile of the Center owned by Landlord or by an entity under common control with Landlord, shall be used for the sale, leasing or distribution of equipment (including computers and telecommunications equipment), furniture or supplies for business or office (including home office) use, or the provision of business or office services (including copying, printing, telecommunications, packing, shipping and business equipment repair services) (collectively, the "Exclusive Goods and Services"). Landlord shall not advertise any other providers of the Exclusive Goods and Services within the Center or on any Landlord’s Parcel or Center specific internet web site, nor shall Landlord provide the general public with direct internet access (via link or otherwise) to any such other providers of the Exclusive Goods and Services;

(Competing Business Provision (Quasi-Exclusive)) Provided (1) Tenant shall be continuously operating its business in the leased premises as a __________________________, and (2) Tenant is not in default hereunder, Landlord agrees that if Landlord hereafter enters into another lease agreement which expressly permits a [insert number over acceptable stores] store to open within the Shopping Center during the lease term of this Lease whose primary business is _______________________________ (such additional store in the Shopping Center whose primary business is ________________________ shall be defined as a "Competing Business"), and if Tenant’s Gross Sales from the leased premises during the twelve (12) month period following the opening of the Competing Business are more than 20% less than Tenant’s Gross Sales from the leased premises during the twelve (12) month period prior to the opening of the Competing Business and less than Minimum Gross Sales in effect for such period, then commencing after the date Tenant submits its last Gross Sales report covering the twelve (12) month period following the opening of the Competing Business and continuing until the Competing Business ceases to exist in the Shopping Center, minimum rent and Minimum Gross Sales shall both be reduced by a percentage equal to the percentage reduction in Tenant’s Gross Sales from the twelve (12) month period prior to the opening of the Competing Business and the twelve (12) month period after the opening of the Competing Business. Gross Sales for the twelve (12) month period following the opening of the Competing Business shall be proportionately increased to the extent Tenant shall not have continuously operated its business for at least three hundred sixty-two (362) days during such twelve (12) month period. The provisions of this paragraph shall not be effective until Tenant shall have given Landlord written notice of the opening of the Competing Business and the opportunity during the thirty (30) day period following such notice to cause such Competing Business to cease to exist in the Shopping Center. The provisions of this paragraph shall only be effective if Tenant shall have continuously operated its business in the leased premises during the days and hours required by the terms of the Lease during the twelve (12) month period following the opening of the Competing Business. The provisions of this paragraph shall not apply to (a) the operation of a business which is owned in whole or in part by, or operated by, Tenant or by any licensee, franchisee, assignee, sublessee or affiliate of Tenant, or by any entity related in any other manner to Tenant or to any licensee, franchisee, assignee, sublessee or affiliate of Tenant, (b) the operation of a business resulting from an order or other action of a bankruptcy court, (c) the operation of a business specializing in [similar use insert] nor (d) any Competing Business which is permitted in the Shopping Center under the terms of a lease agreement entered into prior to the date of this Lease or to the renewal, relocation, or term extension of such agreement.

II. Percentage Rent

A. Definition. So-called "percentage rent" is where the tenant pays an agreed upon percentage of sales above a threshold as additional rent. The concept of percentage rent reduces the fixed rental obligation of tenant, allowing tenant to pay a portion of its rent in percentage rent which is only paid if tenant’s sales exceed the agreed upon threshold. This concept also allows landlord to share in tenant’s success, which provides a greater incentive to both parties for tenant to succeed at this location. (See Exhibit B, Examples 1-2.)

B. Combination Rent. One method of viewing shopping center leases suggests rental can be calculated in two ways, resulting in three combinations: (1) 100% base rent, (2) 100% percentage rent, and (3) a combination of base and percentage rent. In each case, the total rent is intended to cover the landlord’s expenses and yield a profit, but the extent to which percentage rent is included as part of the total rent calculation is a measure of the degree to which the landlord and tenant "partner" in making the tenant and the shopping center a success.

C. Definitions and Issues.

• Calculating Percentage Rent. Percentage rent is calculated by multiplying the percentage rental rate by tenant’s sales in excess of the agreed upon threshold level of tenant’s gross sales for the lease year. This threshold is referred to as the "breakpoint." The lease must carefully define the applicable terms for calculating percentage rent, such as "gross sales," "breakpoint," "percentage rent rate."

• Breakpoint. The breakpoint is the level of gross sales for any lease year above which tenant pays percentage rent. If the breakpoint is not exceeded in any particular lease year, tenant would not be obligated to pay percentage rent for such lease year. Tenant may be able to negotiate an increase in the breakpoint throughout the term of the lease, the theory being that tenant’s sales need to increase over time so an increase in the breakpoint will provide landlord with the same amount of percentage rent toward the end of the lease term. Often the "natural breakpoint" is used in the lease. The natural breakpoint is calculated as the annual base rent divided by the percentage rent rate.

• Gross Receipts. The concept of gross sales or gross receipts is often heavily negotiated although certain standards have become common over the years. Gross receipts is the sum of all income derived from the business conducted on the premises (and may include revenue generated from non-sale items) less exclusions.

i. Tenant will deliver a gross receipts report to landlord to substantiate the sales to which percentage rent applies. Tenant is usually obligated to certify the report as true and correct. Landlord may have the right to audit tenant’s gross receipts to confirm gross receipts are not understated or exclusions are not overstated. The parties will also negotiate the time period during which landlord has an audit right and the consequences that result if the audit discovers an error.

ii. The list of exclusions is negotiated and can be quite lengthy but a representative example would include third party credit company charges, refunds, transfer of merchandise between tenant’s stores, gift cards and gift certificates until they are converted to sale by redemption.

iii. The issue of when internet sales are credited to the leased premises must also be carefully considered from both parties’ perspectives. With sales by retailers increasingly being conducted over the internet, a landlord could find the originally anticipated percentage rent stream being eroded. Assigning an internet sale to the store from whose inventory the internet sale is consummated (or could have been consummated) is one method of preserving percentage rent. On the other hand, a tenant could find itself paying percentage rent multiple times on the same sale, especially if gross receipts are calculated differently under different leases.

iv. If tenant has multiple stores in the market, the savvy landlord will negotiate that tenant include all income generated from other stores within a radius to be included in gross receipts to avoid cannibalization of tenant’s sales at landlord’s store by tenant’s other stores (where percentage rent may not be payable), in an effort to reduce total percentage rent paid.

• Failure of Gross Receipts to Meet the Breakpoint. The lease may provide that if tenant does not generate percentage rent, landlord may recapture all or a portion of the premises on the theory that the business may not be successful and, in such event, it may be in the best interest of both parties to terminate the lease and move on. Since the great recession, some tenants are more vigilant in negotiating termination rights if it has not paid percentage rent within a certain period of time to determine if the store will be successful. As an alternative to lease termination, landlord and tenant may negotiate for an automatic increase in minimum rent if percentage rent is not generated with an agreed upon time period. A lease may also provide that tenant’s right to exercise options to renew is extinguished if tenant has not paid percentage rent during the primary term.

• Implied Continuous Operation. Attendant to the options discussed above when percentage rent is not being achieved is the issue of whether a tenant has an implied obligation to operate and operate fully from the demised premises if it has agreed to pay percentage rent. The caselaw has generally focused on the original intent of the parties in establishing percentage rent, the percentage of total rent represented by percentage rent, and the extent to which the landlord’s initial profit projections were dependent on the payment of percentage rent. From the tenant’s perspective, it would be wise to include in the lease a caveat against implying a continuous operation obligation, if that was not in fact the intent of the parties.

Exhibit B

Sample Percentage Rent

Example 1 (Landlord Friendly Percentage Rent)

In addition to Base Rent, Tenant shall pay Percentage Rent to Landlord for each Lease Year during the Term, in the manner and at the times hereinafter specified. "Percentage Rent" means the amount by which ________ percent (____ %) of Tenant's Gross Sales for each Lease Year exceeds the Base Rent paid by Tenant to Landlord for such Lease Year. "Gross Sales" means the sum of the following: (i) the entire gross amount of the price, fee, commission, charge or other consideration charged or received, whether wholly or partly for cash or on credit or otherwise, for all goods, wares, merchandise, services or other business activities sold, leased, licensed, delivered, performed or made, in, at, upon or from any part of, or through any use of the Premises by Tenant, or by means of any mechanical or vending device, or from orders secured or received in the Premises by telephone, mail, house to house or other canvassing by personnel operating from, reporting to, or under the supervision of, any employee, agent or representative of Tenant located at or operating out of the Premises, or which Tenant, in the normal and customary course of its operations, would credit or attribute to its business in the Premises, or by other means, whether or not filled elsewhere; (ii) all gross income or receipts of Tenant made or received from any operations or use, in, at, upon, from or of the Premises, which is neither expressly included in nor expressly excluded from Gross Sales by other provisions of this Lease; and (iii) all deposits of any kind received by Tenant from and not refunded to purchasers or customers in connection with any transactions, operations or use in, at, upon, from or of the Premises. For purposes hereof, Gross Sales excludes (or if included there shall be deducted, but only to the extent previously included in Gross Sales): (A) the net amount of any bona fide cash or credit refunds made by Tenant upon any sale from the Premises where the merchandise sold, or some part thereof, is thereafter returned by the purchaser to and accepted by Tenant (but not exceeding in amount the original selling price of the item in question); (B) exchanges or transfers of merchandise between stores of Tenant, if any, where such exchanges are made solely for the convenient operation of Tenant's business and not for the purpose of consummating a sale which has been made at, in, upon or from the Premises, or having the effect of depriving Landlord of the benefit of a sale which would have otherwise been made in, at, upon or from the Premises; (C) returns by Tenant to shippers or manufacturers; (D) sales of fixtures by Tenant, which are not stock in trade and other than in the ordinary course of business, after substantial use thereof in the conduct of Tenant's business in the Premises; and (E) the amount of any city, county, state or federal sales, use, gross receipts, luxury or excise tax on sales which is both added to the selling price (or absorbed therein) and paid to the taxing authority by Tenant (but not by any vendor of Tenant). Each transaction on an installment basis (including so-called "lay-away sales"), or otherwise involving the extension of credit, shall be treated as a sale, transaction, or event for the full price in the month in which such transaction occurred, irrespective of the time of payment or when title passes. No deduction from Gross Sales shall be allowed for uncollected or uncollectible credit accounts or charges, bad debts, or returned checks. For purposes of this Section, and all other provisions of this Lease regarding Percentage Rent, all references to "Tenant" includes all subtenants, licensees, concessionaires, or any other person, firm or entity occupying or operating in or from any part of the Premises; and Gross Sales includes all items, categories and exclusions set forth above with respect to any such subtenant, licensee, concessionaire, person, firm or other entity.

(a) Reports and Payment. Percentage Rent for each Lease Year shall be paid in monthly installments computed on Tenant's Gross Sales for each month of such Lease Year. On or before the fifteenth (15th) day following each month of each Lease Year, Tenant shall furnish to Landlord a true and accurate statement of all Gross Sales for such month, showing in detail all items, deductions, exclusions and additions included in the calculation of such month's Gross Sales. Such statement shall otherwise be in such form as Landlord may from time to time prescribe and shall be certified as correct by an authorized representative of Tenant. Tenant shall pay with such statement estimated Percentage Rent computed on Tenant's Gross Sales made during the month covered by the statement and the amount of Fixed Minimum Rent paid by Tenant to Landlord for such month. Within thirty (30) days after each Lease Year, Tenant shall furnish to Landlord a true and accurate statement of the Gross Sales of Tenant for such Lease Year, showing in detail all items, deductions, exclusions and additions included in the calculation of Gross Sales for such Lease Year, the amount of all estimated Percentage Rent paid for such Lease Year, the amount of Fixed Minimum Rent paid for such Lease Year, and the actual amount of Percentage Rent due for such Lease Year. Such statement shall otherwise be in such form as Landlord may, from time to time, prescribe and shall be certified as correct by an authorized representative of Tenant. Tenant shall pay with such statement the balance of any Percentage Rent due from Tenant for such Lease Year. If Tenant has paid to Landlord an amount greater than the Percentage Rent actually due for such Lease Year, then Tenant shall receive a credit against Tenant's next payment of Fixed Minimum Rent in the amount of such overpayment.

(b) Books and Records. Tenant shall maintain and keep on the Premises, or at its principal office, accurate, true and complete books and records and accounts of all Gross Sales, including books of account or general ledger, daily bank deposits, sales tax reports, and cash register tapes and receipts. Such books, records and accounts shall be maintained in such manner, and include such records, as would be required by a certified public accountant to perform an audit to determine, or produce an audited statement of, Tenant's Gross Sales. If upon examination of Tenant's accounting system or records Landlord's accountant or representative determines that sufficient documentation is not maintained, retained, recorded or available to verify Tenant's actual Gross Sales, Tenant shall pay for the cost of such examination and, in addition, should Landlord deem it necessary to cause a reconstruction of records for the determination of Gross Sales for any period being audited, Tenant shall pay such additional fees as may be incurred for such reconstruction. The receipt by Landlord of any statement, or of any payment of Percentage Rent for any period, shall not bind Landlord as to the correctness of such statement or of such payment. Tenant shall, for a period of three (3) years after the end of each Lease Year, keep safe and intact all of its books, records and accounts maintained hereunder.

(c) Inspection and Audit. Tenant shall, during normal business hours and upon not less than three (3) days prior notice, provide to Landlord, and its authorized representatives, access to Tenant's books, records, and accounts hereunder for inspection, review and/or copying. Landlord and its authorized representatives shall also have the right, at any time and from time to time upon not less than three (3) days prior notice, to audit all of Tenant's books, records and accounts maintained hereunder. If Tenant at any time causes, makes, or causes to be made an audit of Tenant's business conducted in or upon the Premises, Tenant shall furnish Landlord a copy of such audit, together with an opinion thereon by the auditing certified public accountant. If any Landlord's audit hereunder, or any audit supplied by Tenant hereunder, shows that Gross Sales or Percentage Rent as set forth on Tenant's statement for any Lease Year were understated by more than two percent (2%), or if either such audit shows that Tenant has failed to maintain its books, records and accounts in the manner required by subsection (b) so that Landlord is unable to verify the accuracy of Tenant's statements, then Tenant shall pay Landlord the cost of such audit (unless the audit was performed by Tenant) and, in addition to payment of the costs of Landlord's audit, Landlord may terminate this Lease. Tenant shall promptly pay to Landlord upon completion of any audit hereunder any Percentage Rent found due as a result thereof, together with Interest thereon from the date payment was required to be made until the date actually paid hereunder. Nothing contained in this subsection (c) shall excuse Tenant from its obligations to maintain accurate and complete books, records and accounts, to report accurately Gross Sales and the amount of Percentage Rent due, and to pay the Percentage Rent actually due, and the rights and remedies of Landlord hereunder shall be in addition to, and not in lieu of, any other rights or remedies under this Lease on account of Tenant's failure to comply with its obligations hereunder. Acceptance by Landlord of any monies paid to Landlord by Tenant as Percentage Rent, as shown by any statement furnished by Tenant hereunder, shall not be an admission of the accuracy of such statement or of the amount of such Percentage Rent payment.

Example 2 (Tenant Friendly Percentage Rent)

a) In addition to the Base Rent (which includes any adjustments thereto pursuant to Section during the term of this Lease Tenant shall pay Percentage Rent to Landlord, for each Lease Year (as hereinafter defined), equal to the dollar amount, if any, by which Tenant's Gross Sales (as hereinafter defined) during such Lease Year multiplied by the Percentage Rent Rate of ________ percent (____%) exceed the Minimum Rent for such Lease Year.

b) The first payment of Percentage Rent shall be paid on or before the twentieth (20th) day after the last day of the first full calendar quarter of the Term hereof, and thereafter Percentage Rent shall be paid on or before the twentieth (20th) day after the end of each succeeding calendar quarter during the Term. The amount of each payment of Percentage Rent shall be equal to the amount, if any, by which the Gross Sales made by Tenant during said quarter multiplied by the Percentage Rent Rate exceed the Minimum Rent for such quarter.

c) Within twenty (20) days after the close of each Lease Year during the Term hereof, Landlord and Tenant shall determine the Gross Sales for such Lease Year and the amount paid by Tenant to Landlord as Percentage Rent. If such determination shows that Tenant, during such Lease Year, has paid an amount less than required by this Section, the Tenant shall pay the full amount of the difference to Landlord within thirty (30) days after such determination. If such determination shows that Tenant, during such Lease Year, has paid an amount greater than required by this Section, Tenant shall be entitled to a credit against Tenant's next payment of Percentage Rent in the amount of such overpayment.

d) "Gross Sales" shall mean the entire amount of the actual sales price, whether wholly or partly for cash or for credit, of all goods and merchandise (including food and beverages) of every sort whatsoever sold, and the charges for all services performed, and all other amounts received from the sale, barter or otherwise of all business conducted, at, in, from or upon the Demised Premises, including, without limiting the generality of the foregoing, all deposits made by purchasers, all orders taken in or from the Demised Premises although said orders may be received by telephone or mail or procured from the Demised Premises by house-to-house or other canvassing, all sales by vending machines on the Demised Premises, and all sales by any sublessee, assignee, licensee or concessionaire, in, at, from or upon the Demised Premises. Each sale upon installment or credit shall be treated as a sale for the full price in the month during which such sale shall be made, irrespective of the time when Tenant shall receive payment from its customer (but any interest or carrying charge on such a sale shall be excluded as hereinafter provided). If goods or merchandise shall be rented or leased, each rental transaction shall be deemed a sale and each lease transaction shall be deemed a sale upon credit. All sales originating at the Demised Premises shall be considered as made and completed therein, even though bookkeeping and payment of the account may be transferred to another place for collection, and even though actual filling of the sale and actual delivery of the goods or merchandise may be made from a place other than the Demised Premises. The following items are excluded from Gross Sales: (1) The selling price of all goods and merchandise returned by customers and accepted for full credit, or the amount of discounts and allowances made thereon; (2) Goods returned to sources, or transferred to another store or warehouse owned by or affiliated with Tenant (but only where such return or transfer is made for the convenient operation of the business of Tenant, and not for the purpose of consummating a sale which has theretofore been made at, in, from or upon the Demised Premises, nor for the purpose of depriving Landlord of the benefit of a sale which otherwise would be made at, in, from or upon the Demised Premises); (3) Sums and credits received in the settlement of claims for loss of or damage to food or merchandise, but only to the extent previously reported as part of Gross Sales; (4) Cash refunds made to customers in the ordinary course of business, but this exclusion shall not include any amount paid or payable for what are commonly referred to as "trading stamps"; (5) Interest, service or sales carrying charges, or other charges, however denominated, paid by customers for the extension of credit on sales, and which were not included in the sales price of the merchandise or goods; (6) Gift certificates, or like vouchers, until such time as the same shall have been converted into a sale by redemption; (7) Sums collected for any sales or excise tax imposed directly upon Tenant by any duly constituted governmental authority, but only if collected separately from the selling price of the goods or merchandise, or services, and collected from customers; (8) Sales of fixtures, equipment or property which are not a part of Tenant's stock in trade; and (9) All sales to employees of Tenant, not to exceed, however, two percent (2%) of Gross Sales, and provided that said sales are at a discount.

e) Tenant agrees to furnish, or cause to be furnished, to Landlord, statements of the Gross Sales hereinabove described. A monthly statement shall be submitted within twenty (20) days after the close of each calendar month, and an annual statement shall be submitted within twenty (20) days after the close of each Lease Year. Each such statement shall be certified by a certified public accountant or an officer of Tenant. In addition to said statements, upon request of Landlord, Tenant shall furnish to Landlord a copy of any state and local sales and use tax returns filed with regard to the Gross Sales from the Demised Premises, or reflecting all or any part of such Gross Sales.

f) Tenant shall record, at the time of sale, all receipts from sales or other transactions, whether cash or credit, in a cash register, or in cash registers, having a cumulative total which shall number consecutive purchases. Tenant shall utilize, and cause to be utilized, an accounting system in accordance with good retail practice which will accurately record all gross sales, and Tenant shall keep on the Demised Premises, or such other location as may be approved by Landlord in writing, for at least eighteen (18) months after the expiration of each Lease Year, records conforming to such accounting systems showing all Gross Sales for such Lease Year, including all tax reports, sales slips, sales checks, bank deposit records, cash register tapes, sales journals, general ledgers, and other supporting data.

g) From time to time upon reasonable advance notice for a period of six (6) months following a Lease Year, Landlord shall have the right, by its accountants or other representatives, to audit all statements of Gross Sales, and in connection with such audit to examine Tenant's accounting system and all of Tenant's records (including supporting data, sales and use tax returns, and income tax returns) of Gross Sales for such Lease Year. If any such audit discloses a deficiency in the payment of Percentage Rent, Tenant shall forthwith pay to Landlord the amount of the deficiency, together with interest from the date when such Percentage Rent should have been paid. In addition, if Tenant's statement for the subject Lease Year should be found to have understated Gross Sales by more than [four percent (4%)] and Landlord is entitled to any additional Percentage Rent as a result of said understatement, then Tenant shall pay Landlord's reasonable costs and expenses of outside consultants.

h) Any information obtained by Landlord pursuant to the provisions of this Section shall be confidential and shall not be disclosed except to carry out the purposes hereof, except in any litigation or arbitration proceedings between the parties and except further that Landlord may disclose such information to prospective or actual buyers or lenders.

i) Nothing in this Section or this Lease is intended or shall be construed to imply an obligation by Tenant to continuously operate from the Demised Premises or to determine the business operations of Tenant, including, without limitation, the extent to which to stock the store or hire employees or how to best distribute goods and services among Tenant’s stores and/or warehouses.

III. Common Area Maintenance; Operating Expenses

A. Overview. With a "gross" or "triple net" lease, the landlord desires to charge the tenants with all of the expenses of maintaining the property. These are included in retail leases as common area maintenance or "CAM" charges or "Operating Expenses". It is typical for the charges to relate to all expenses of operating the center. Since these expenses can approach the same dollar amounts as base rent, the CAM provisions are carefully negotiated. Operating Expenses typically include all expenses incurred by the landlord in connection with the ownership, management, maintenance, operation and repair of the shopping center.

B. Tenant's Pro Rata Share.

i. A lease will typically provide that a tenant pays a proportionate share of operating expenses based on the ratio of its leasable area to the leasable area of the entire center. There are many possible variations to this formula, however, and a lease may make special adjustments for anchor tenants or out lots that pay some of their own common area charges directly.

ii. What is included as the area of the leased premises or of the shopping center will also have variables, such as (1) limiting to only retail floor space, (2) the effect of unleased space on the shopping center square footage calculation, (3) whether special adjustments for anchors are passed through to non-anchor tenants, (4) the effect of expansion or contraction of the shopping center, and (5) whether to include non-retail space in a mixed center.

C. Limits on Operating Expenses.

i. Tenants seek to exclude various expenses that tenants believe should be borne by the landlord, as landlord’s development costs, landlord’s costs for its own business rather than operating the shopping center, or just landlord’s "cost of doing business" in general. These may include capital expenditures, financing costs, employee costs, broker commissions, attorneys’ fees, and other management and administrative fees. (See Exhibit C for a fairly comprehensive list of exclusions from operating expenses sought by tenants.)

ii. Capital expenses, such as full-scale replacement of the parking lot (or building roof) or capital investments in machinery, are often sought to be excluded by tenants, especially tenants with a shorter lease term, but this is resisted by landlords who see such expenditures as an integral part of operating a shopping center. Some compromises include (1) including in operating expenses the cost of capital expenditures amortized over its useful life, and (2) creating a reserve to which contributions are made yearly and tenants paying their proportionate share of the contributions. Exclusions for depreciation may also be handled in this manner.

iii. Landlord’s employee and administrative expenses, including wages and benefits, are also sought to be excluded by tenants. Landlords again may argue that it is a necessary component of operating the center, especially if the tenant wishes the landlord to invest sufficient time and resources on running this center. Landlords may also suggest it reduces overall operating expenses by not having to hire a more-expensive third party to manage the center. Compromises include (1) setting a fixed management fee as a percentage of (or cap on) the operating expenses, and (2) averaging employee expenses over all centers owned or operated by the landlord.

iv. Careful attention must be paid to the inter-relationship of the operating expenses and general maintenance and repair sections of the lease to prevent duplicating costs or leaving gaps as to which landlord or tenant is responsible to perform or pay. For example, in some shopping center leases, some costs are negotiated to be the landlord’s cost without reimbursement, such as structural building maintenance and repair. The exclusions to operating expenses would need to include such costs to prevent unintended re-insertion of the cost to tenant.

v. Other exclusions to be negotiated may include advertising (which landlord might not otherwise do for the center, unless compensated), artwork (which seems a luxury that a landlord should pay itself, but might be a special draw for customers), costs reimbursed by other sources, such as insurance or governmental awards, and expenses disproportionately benefitting only some of the tenants of the shopping center (such as anchors).

vi. Tenants who seek to control their operating expenses may also insist on a cap on certain types of expenses or on annual increases in operating expenses. This may be a percentage such as 3% or 5%, typically applicable only to "controllable" expenses. Expenses relating to snow and ice removal or insurance costs, for example, are not typically capped under these provisions. Alternatively, landlords may charge tenants a fixed operating expense with negotiated annual increases. This may assist a tenant in planning for expenses, but may also be viewed by tenants instead as an unwarranted "profit center" for landlords.

D. Annual Reconciliation and Audit Rights. Following the end of each lease year, the landlord will provide a reconciliation of operating expenses (at least where operating expenses are not fixed). Parties may negotiate whether the tenant has audit rights, and what limitations there may be on those audit rights. If the audit reveals errors, the extent of those errors may be used as a barometer for whether or not the tenant is reimbursed for the audit expenses or even if the landlord is now in breach of the lease. There may also be further appeals included in the lease.

Exhibit C

Sample Operating Expense Exclusions

Common Area Maintenance (CAM) Exclusions. Tenant shall not be responsible for, and the following shall not be included in the Common Area Maintenance Costs: (A) any costs or expenses associated with constructing or installing the Common Areas; (B) any costs or expenses associated with replacing the Common Areas except to the extent caused by the gross negligence or willful misconduct of Tenant and then only to the extent Landlord did not maintain insurance or was not required pursuant to this Lease to maintain insurance against such risk; and (C) the Common Area Maintenance Cost Contribution Exclusions. As used herein, the term "Common Area Maintenance Cost Contribution Exclusions" means all of the following: (1) annual management and/or administrative fees in excess (in the aggregate) of [three percent (3%)] of the Common Area Maintenance Costs less the management and administrative fee, the cost of Common Area utilities, and the Landlord's Insurance; (2) depreciation and amortization (subject to the other provisions hereof, other than depreciation of equipment acquired for use and maintenance of the Common Areas pursuant to generally accepted accounting principles consistently applied, but not including the cost of the original investment therein); (3) expenses incurred by Landlord for repairs, restoration or other work occasioned by fire, windstorm, or other insurable casualty or condemnation to the extent insurance proceeds are collected in connection therewith (or such proceeds would have been available if Landlord (or the Condominium Association or Property Owners Association, as the case may be) had maintained the insurance required under this Lease); (4) interest, principal, points and fees, amortization or other costs associated with any debt, secured by a mortgage to which this Lease and/or the Shopping Center is subject; (5) costs of Landlord's overhead and administrative expenses (including but not limited to costs paid to third parties to prepare tax returns and accounting reports and obtain financing), which would not be chargeable to the Common Area Maintenance Costs in accordance with generally accepted accounting principles, consistently applied (provided that the foregoing shall not be construed to prohibit Landlord (or the Condominium Association or Property Owners Association, as the case may be) from collecting the administrative/management fee as provided herein); (6) amounts paid to persons or entities affiliated with, controlled by, controlling of, or under common control with, Landlord (or the Condominium Association or Property Owners Association, as the case may be) to the extent such amounts are greater than would have been charged by an unaffiliated third party in an arms-length transaction on a competitive basis; (7) costs incurred by Landlord as a result of Landlord's breach of this Lease; (8) acquisition costs of the Shopping Center (or any portion thereof); (9) any costs incurred in connection with the construction, reconstruction, development, redevelopment or expansion of the Shopping Center (including, without limitation, the Common Areas); (10) management, maintenance, repair, replacement or operation of any buildings in the Shopping Center; (11) any real and personal property taxes, assessments, and all other charges of any nature whatsoever which are assessed, levied, imposed, charged, or become a lien upon the Shopping Center or any portion thereof (including, without limitation, any fine, penalty, or cost added thereto) or the Real Estate Tax Exclusions (as this term is defined in Section ^ below) (provided that this exclusion is not intended to impact Tenant's obligations with respect to Real Estate Taxes as set forth in Article ___ below); (12) any fines, penalties or additional costs imposed upon Landlord (or the Condominium Association or Property Owners Association, as the case may be) due to actual or alleged violations of law; (13) costs exceeding those obtainable through competitive bidding; (14) costs and expenses associated with the removal and cleanup of any Hazardous Substances for which Landlord is responsible hereunder; (15) incurred to repair, change, improve, replace or correct defects in the initial construction or design of the Common Areas, ordinary wear and tear excepted; (16) any insurance premium for coverage not part of the Landlord's Insurance (whether carried by Landlord or the Condominium Association or Property Owners Association, as the case may be); (17) the costs and expenses of leasing or procuring new tenants including leasing commissions paid to agents of Landlord or other brokers by any tenant; (18) the costs and expenses of renovating space for new tenants or in renovating space vacated by any tenant in the Shopping Center; (19) expenses incurred in connection with performance of special services for a tenant of the Shopping Center that are not standard for all tenants; (20) advertising, public relations and promotions attributable to Landlord's efforts to increase or maintain the occupancy rate in the Shopping Center; (21) costs incurred by Landlord for other tenants' alterations; (22) any cost or expenses of any nature whatsoever which Landlord shall incur in connection with the management, operation, maintenance, repair and replacement of the Common Areas which is specifically reimbursed to the Landlord from any source, or charged directly to the tenant on whose behalf it was incurred (whether or not the same shall finally be paid), or for which Landlord is otherwise compensated or recoups such expense by way of set-off, reductions or recovery allowed, or otherwise; (23) salaries or other compensation due any employee, and any portion of Landlord's payroll, material and contract costs of other services charged to tenants; (24) cost of utilities charged directly to and payable directly by individual Shopping Center tenants and occupants; (25) cost of painting and decorating; (26) depreciation of any buildings or other improvements in the Shopping Center; (27) costs and expenses of operating, maintaining, repairing and/or replacing any Shopping Center Signs upon which Tenant's signage is not located; and (28) costs of capital improvements and all costs of a capital nature under generally accepted accounting principles consistently applied, including but not limited to: (I) alterations to and replacements of capital items, including reserves accrued by Landlord therefor, (II) costs of equipment, tools and/or improvements not normally expensed in one year, (III) expenditures for compliance with Governmental Requirements in effect prior to occupancy of the Land by Tenant, (IV) costs incurred by Landlord with respect to goods and services to the extent that Landlord is entitled to reimbursements for such costs pursuant to other leases or occupancy agreements, and (V) any compensation paid to clerks, attendants or other persons in commercial concessions operated by Landlord in the Shopping Center.

IV. "Exit Strategy" Concerns

Many of the provisions discussed in these materials would comprise what could be together called the Tenant’s "exit strategy". They are of particular importance to retail tenants with long term leases (10+ years). Of the many reasons which might induce a Tenant to close a store, there are included: (a) the space is larger or smaller than it turns out was needing for this market; (b) sales generated from the location are not as much as anticipated; (c) sales generated from the location are more than anticipated and a larger premises is needed to capture unrealized sales; (d) the Tenant’s business model has changed; or (e) the premises or the center or both are out-stripped by the newest / biggest / brightest / better positioned center in the market. Considering these at the outset of lease negotiations is wise for the Tenant, who must conform the lease terms to the long term business plan, and a concern for the Landlord, who has to make the center profitable and financeable in the here and now.

o Operating covenant - Must the lease contain one? If so, does it bind the Tenant to operate, for how long, and for what use? Does the provision permit the Tenant to replace its own operation with that of an assignee or subtenant who will also be bound by the operating covenant?

o Use and alteration of the premises – The more broadly the use clause is drafted, the greater the flexibility in marketing the premises or changing use (e.g., "any lawful retail use" vs. a specific "permitted" use).

o Landlord consent – Even if Tenant has negotiated a right to assign and sublet without Landlord’s consent (see below), other provisions can in effect re-introduce Landlord’s consent right, such as consent to change in use, alterations or sign changes.

o Use Restrictions and Exclusives - By what restrictions is the Tenant or any lease assignee or subtenant bound as to use of the Premises: (a) other tenant’s exclusives (some of which may not apply to Tenant (or its assignee) but which may apply to a subtenant), (b) shopping center ("obnoxious") use restrictions, (c) other owner or tenant consents needed for alterations, (d) rights to continued space on pylon or monument signs for assignees or subtenants

o Assignment / Subleasing:

▪ What are the Landlord’s consent rights, if any? Sole discretion vs. consent "not to be unreasonably withheld". Enforceability of consent withholding.

▪ Whether or not Landlord is required to agree to "non-disturbance" provisions with subtenants. Same consideration with respect to Landlord’s mortgagee as to a sublease.

▪ Is Tenant permitted to "go dark" for a sufficient enough time to enable the assignee or subtenant to alter the Premises and re-open without violating operating covenants or triggering recapture provisions?

o Radius restriction: If I need to relocate within a market (to smaller / bigger / better located premises), does my new location fall within the bounds of any radius clause? If so, what are the Landlord’s remedies if I breach that clause?

For Landlord’s long term bottom line, Landlord knows that the greater the flexibility Tenant has with exit strategy clauses, the greater the control Tenant can exert over other lease terms in the face of a threatened exit by the Tenant, including occupancy and use, negotiating leverage for reducing rent, shortened lease terms, other lease concessions at other Landlord-owned centers, etc. A Landlord that granted overly broad exit strategies at the outset of the lease may find itself in a poor negotiating position with the Tenant later, especially if that Landlord must contend with mortgage payments affected by an anchor tenant’s ability to force rent and lease concessions or if that Landlord must seek consents from mortgagees to agree to lease concessions. Allowing generous exit strategies may also negatively impact the Landlord’s cotenancy provisions in other leases: the easier it is for tenants to exit the shopping center, the more likely it will be that cotenancy thresholds will be breached. Realizing and dealing with these issues during the original lease negotiations is much preferable to dealing with them later under the pressure of Tenant departures and mortgage foreclosure.

Drafting examples are attached as Exhibit D.

Exhibit D

Sample "Exit" Provisions

Sample "Go Dark" Provision:

Tenant may, at its sole option, cease to conduct business in the premises ("Go Dark"), after giving Landlord at least sixty (60) days prior written notice thereof (a "Go Dark Notice"), provided (a) Tenant is not then in default; (b) Tenant continues to pay to Landlord all rent and all other sums payable under this Lease as and when due; and (c) Tenant continues to fully perform all of the other terms and provisions of this Lease. At any time following receipt of a Go Dark Notice or otherwise in the event of Tenant’s cessation of operations from the premises for a period of sixty (60) consecutive days or more (excluding temporary closures for casualty, condemnation, remodel [in each case not to exceed sixty (60) days in any five year period], or delays of the type set forth in Section ____ hereof), Landlord, in its sole discretion, shall have the right to recapture possession of the premises and terminate this Lease by providing Tenant with written notice of Landlord’s election to do so (the "Recapture Notice"). Thereafter, Tenant shall return the premises to Landlord in the condition required pursuant to this Lease upon expiration on or before sixty (60) days after Tenant’s receipt of the Recapture Notice.

Kick-Out Provision (Mutual):

In the event Tenant does not achieve ‘Gross Sales’ (as hereinafter defined) of at least _______________________ Dollars ($___________) during the _____ lease year of the term hereof, then Tenant provided it shall not be in default, shall, for a period of sixty (60) days, and Landlord shall, for a period of one hundred eighty (180) days, after the last date that Tenant is obligated to furnish to Landlord its written report of Gross Sales required pursuant to Section ____ hereof, have the option, upon sixty (60) days prior written notice to the other party, of terminating this Lease, provided Tenant shall not have such option if Tenant shall have achieved the above stated Gross Sales figure during any lease year prior to such stated lease year. In the event that neither party exercises the foregoing options to terminate this Lease within the required time period, then each such option shall, upon expiration of the applicable period, become null and void and be of no further force or effect. In the event Tenant fails to submit a certified report of Gross Sales within the time permitted pursuant to Section ____ of the Lease, then such information as Landlord shall have available to permit Landlord to make a determination as to the amount of Gross Sales achieved by Tenant during the period covered by Landlord’s option to terminate shall be the basis for Landlord exercising its termination right and Tenant shall not be permitted to reinstate the Lease after termination for any reason or cause whatsoever, including, but not limited to, the submittal by Tenant of a subsequent sales report either certified or uncertified. The Gross Sales to be evaluated under this paragraph shall include only regular retail sales to individual customers and shall not include any wholesale, commercial, bulk, corporate, intra-company or warehouse transfers or sales of merchandise or services. Tenant shall only be permitted to exercise its option to terminate this Lease for failure to achieve certain Gross Sales during a particular time period if Tenant shall have operated its business in accordance with the requirements of Section ____ on each day during the entire time period in question. The above stated Gross Sales figure shall be reduced by 1/360th to the extent any lease year in question is less than three hundred sixty (360) days in length and, at Landlord’s sole option, the above stated Gross Sales figure shall be reduced by 1I360th for each day during the above stated time period that Tenant shall not have operated its business in the leased premises.

Kick-Out Provision (Tenant Only):

In the event Tenant does not achieve ‘Gross Sales’ (as hereinafter defined) of at least ________________ Dollars ($__________) during the _______ lease year of the term hereof, then Tenant shall, provided Tenant shall not be in default, for a period of sixty (60) days after the last date that Tenant is obligated to furnish to Landlord its written report of Gross Sales required pursuant to Section ___ hereof, have the option, upon sixty (60) days prior written notice to Landlord, of terminating this Lease provided Tenant shall not have such option if Tenant shall have achieved the above stated Gross Sales figure during any lease year prior to such stated lease year. In the event that Tenant does not exercise the foregoing option to terminate this Lease within the required time period, then such option shall, upon expiration of the applicable period, become null and void and be of no further force or effect. Tenant shall only be permitted to exercise its option to terminate this Lease for failure to achieve certain Gross Sales during a particular time period if Tenant shall have operated its business in accordance with the requirements of Section ____ on each day during the entire time period in question. The above stated Gross Sales figure shall be reduced by 1/360th to the extent any lease year in question is less than three hundred sixty (360) days in length and the above stated Gross Sales figure shall be reduced by 1/360th for each day during the above stated time period that Tenant shall not have operated its business in the leased premises.

V. The Tenant Improvement Allowance

1. "Tenant Improvement Allowance" defined.

A tenant improvement allowance reimburses a tenant (or pays a tenant or its contractor in the first instance) for the cost of the construction of tenant improvements in the leased space. This assumes that the tenant has certain construction responsibilities in addition to whatever construction responsibilities the landlord may have. The allowance is often negotiated in the context of negotiating the rent, since if the allowance increases, the project becomes more expensive for the landlord and so the rent is likely to increase as well.

The amount of the allowance sought by the tenant will depend on the nature of the tenant improvements. Is the space part of new construction where the landlord has provided for a defined base building level of improvements? Is the space being renovated for reuse by the tenant? Are the tenant improvements so substantial that the allowance will not fully cover the costs, so that tenant will have to bear some of the costs of completing the improvements out of its own pocket?

2. Kinds of expenses covered by the allowance.

Allowances almost always may be used for the cost of construction paid to the contractor and its subcontractors, typically referred to as the "hard costs." Allowances will often, but not always, cover certain "soft costs". These costs may include architectural, design and engineering fees. In some cases, an allowance may cover the cost of acquiring improvements that may be removed from the premises at the end of the term, such as shelving. For a tenant with extensive shelving needs, this can be a negotiating item. Some landlords will allow a tenant to apply any unused portion of the allowance to future rents.

3. How the amount of the allowance is determined.

In some cases, the allowance will be a fixed dollar amount. This may occur where the landlord has a construction budget with a specific line item for the allowance, so the amount is fixed in the lease. More commonly, the allowance ties to the number of square feet within the premises, just as rent does. One question to consider is whether the allowance ties to the area of rentable square feet or the number of usable square feet. In most cases, the allowance ties to rentable square feet, but there are some scenarios where landlords will pay the allowance only on the usable square foot area (the usable measurement is typically smaller than the rentable measurement). The tenant should consider whether the allowance will change if the design of the space expands (or contracts) during construction, or if the final measurement done after completion shows a discrepancy in the actual versus the stated area.

4. When the tenant receives the allowance.

This is a key question for the tenant who incurs costs for building out the space with their contractor. A tough landlord may require the tenant to fully complete the leasehold improvements and pay the contractor in full before the landlord reimburses the tenant. A more cooperative landlord may pay the allowance over time. This could be in a series of stages, such as three equal payments over the course of the project, or payment on a monthly basis, based on the percentage of completion for the month ended. The landlord may want to have some holdback, similar to a retainage under a construction contract. This could be 10% of the requested amount, which the landlord would temporarily retain as security for satisfactory completion of the project. The lease should specify when the landlord is obligated to pay the allowance to the tenant (within a stated number of days after the satisfaction of conditions). The tenant should keep in mind that if the payment procedure is not flexible from the tenant's perspective, the tenant will have an unhappy and unpaid general contractor-- or the tenant will need to finance the cost on its own until it is reimbursed by the landlord.

5. Conditions that landlords attach to payment of the allowance.

A landlord typically imposes a number of "strings" on payment of the allowance to protect the landlord against potential difficulties. The tenant should keep in mind that the tenant cannot simply submit a bill for the month and expect payment within a few days after that.

The landlord will often require that the tenant not be in default under the lease at the time the landlord makes a payment of the allowance. In the course of construction, the landlord may require inspections to confirm progress, an architect certification of the percentage of completion, and partial waivers of lien. When the project is finished, the landlord may require "as built" drawings and the issuance of a certificate of occupancy. In some cases, when the landlord is financing the construction, the landlord's lender may require the tenant to sign a subordination agreement or a lease estoppel certificate as a condition of payment.

6. Tenant protections if the landlord does not pay the allowance.

In times of financial uncertainty, this can be a practical problem for a well-financed tenant, where the landlord does not have corresponding financial strength. This can be addressed in several ways during the lease negotiation process. The tenant could require the landlord to post a letter of credit in the amount of the allowance as security for payment. Alternatively, the tenant could insist on a guaranty of payment of the allowance by a financially strong guarantor. A tenant may be comfortable with a lender "comfort letter", by which the lender attests to the financial strength of the landlord, but does not give particulars. In other cases, a tenant may require evidence of appropriate liquid assets.

If the parties have not negotiated security for the tenant, and the landlord does not pay the allowance, the tenant should consider the option of offsetting rent against the allowance owed to the tenant. This requires the tenant to finance the work itself and to obtain reimbursement on a monthly basis, as rent comes due, until the amount of the unpaid allowance has been taken as an offset. In such a case, the tenant should charge interest at the default interest rate otherwise specified in the lease.

If, on the other hand, the tenant defaults and the landlord later terminates the lease, some landlords will seek to recover the unamortized portion of the tenant improvement allowance as a portion of their damages.

Sample language is attached as Exhibit E.

Exhibit E

Sample Improvement Allowance

Amount. Landlord agrees to pay, or reimburse to Tenant at the option of Tenant, an allowance to Tenant of per rentable square foot of the Premises ("Improvement Allowance"). The Improvement Allowance may be decreased, at Tenant’s option, based on the actual rentable square feet of the Premises, if the rentable square footage of the Premises is determined to be less than the approximate rentable square footage set forth in Section 1(a) of the Lease.

Procedure. Tenant shall be entitled to receive the Improvement Allowance as Tenant’s Work progresses, according to the procedure set forth herein. The amount of any written request for payment or reimbursement by Tenant shall be paid within thirty (30) days after Landlord has received a certificate for payment of such expenditure from Tenant, and a partial lien waiver from Tenant’s general contractor, and has had a reasonable opportunity, at its option, to inspect the Premises to determine that the work for which reimbursement is being sought has been performed, or otherwise is a reimbursement for costs incurred by Tenant relating to the Premises, including by way of example, but without limitation, the cost of exterior signage, carpeting, light fixtures and other building improvements, architectural fees, engineering fees and attorneys’ fees.

Final Payment. Any unpaid portion of the Improvement Allowance, shall be paid to Tenant within ten (10) days after the last to occur of the following: (i) completion of Tenant’s Work, excluding punch list items, (ii) acquisition of a temporary or final certificate of occupancy, or other certificate or document permitting legal occupancy of the Premises, and (iii) acquisition of a final lien waiver from Tenant’s general contractor.

Right of Offset. If Landlord does not timely pay the Improvement Allowance when due to Tenant pursuant to subparagraphs (2) or (3) above, the same shall bear interest at the Default Rate specified in the Lease, and Tenant shall be entitled to offset such unfunded Improvement Allowance, together with interest thereon as aforesaid, against Tenant’s Rent next falling due under this Lease until such Improvement Allowance, together with such interest, has been offset in full; provided, however, that such right of offset shall not relieve Landlord of its obligation to fund such Improvement Allowance on a timely basis as required above.

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