Interview with Szymon Łukasik, Cresa Poland
Cresa is the first commercial real estate firm in Poland to represent tenants exclusively. It draws on the best US practice, delivering services solely for one party of a transaction to ensure that there is no conflict of interest in relations with clients.
Szymon Łukasik, Head of the Retail Department, Cresa Poland, speaks about when owners of shopping centres are entitled to terminate store leases and how tenants could protect their interests.
TOPIC: What are the grounds for lease termination?
Tenants have the upper hand in some shopping centres, but in most cases, particularly at successful retail schemes, they are in a weaker position when in conflict with a landlord.
Here’s a true story. A retailer operating stores in several shopping centres recently asked us for advice as he sensed that there was some trouble ahead. He said that his shopping centre manager kept a close eye on everything he was doing as if looking for a reason to inflict a penalty.
The manager complained that the store had once opened a few minutes late or closed too early, that the staff had a cigarette break or that there were fewer products on shelves than in neighbouring boutiques. Despite making timely payments, the tenant had a feeling that the landlord wanted to get rid of him, either by not renewing the lease or by leasing his space to someone else.
Is there anything the tenant can do in this case?
Szymon Łukasik, Head of the Retail Department, Cresa Poland:
Though it may sound trite, the tenant should do his best not to give the landlord any reason to exercise his rights under the lease agreement, including the right to terminate.
What should the tenant do in the first place?
He should talk to his store staff right away to investigate the landlord’s complaints. It’s a good idea to have the staff properly instructed and made aware of the tenant’s other duties under the lease agreement – in addition to conducting sales – and of potential consequences of any failure on this front. They should know the shopping centre rules and regulations well and be trained in the procedures.
How much time does the tenant have to sort things out before the shopping centre owner orders him to close his store?
It depends on specific lease provisions. That’s why it’s also reasonable to incorporate a provision on a seven-day or longer notice to cease and desist from defaults that could result in lease termination. In the absence of such a provision, the store could be forced to close any time by a notice of termination resulting from the tenant’s default if the landlord wanted to get rid of the tenant. The landlord may also charge contractual penalties until the tenant has vacated and restored the premises to their original condition.
What’s the effect of such an additional notice?
The store won’t close overnight at the slightest pretext. The tenant will have more time to explore the issue or improve performance to avoid contractual penalties, and will also have the default clearly spelt out in a written notice.
When is the owner entitled to terminate or refuse to extend a lease agreement? What charges will the tenant find hard to refute?
Such charges may include: untidy premises, stock-up levels that differ from those in neighbouring stores, complaints about the store staff, late openings or early closings, too many breaks during the day when the store is temporarily closed, etc. However trivial these may seem, they may be considered valid charges under a lease agreement or shopping centre rules and regulations, the latter usually being an integral part of the agreement.
Any other reasons for lease termination?
They are usually expressly set out in a lease agreement. For instance, if the contract says that the tenant is required to report all damage to the store and fails to do so – even if the cleaning staff have damaged the store front or entrance door – the landlord has a right to terminate the lease. Not because of the damage itself, but because of the tenant’s failure to take action
Does the owner have a right not to renew the lease agreement?
Yes, the owner of a retail scheme always has a right to replace a tenant with a better one – from his perspective, of course – when the lease expires. That’s why it’s in the tenant’s best interest to incorporate a provision in the lease allowing the tenant to extend the lease, preferably on the same terms and conditions, that is to maintain the lease relationship.
This is very convenient, and if the tenant secures an option to extend, the landlord will require the tenant intending to remain in the shopping centre to notify the landlord at least six months before the lease expires – this would be equivalent to lease renewal. If the tenant fails to do so, the landlord will have a free hand and time to find another retailer.
What else is important for a lease to continue?
When drafting a lease agreement, the tenant should make sure that it includes the tenant’s right of first refusal. It will be a guarantee that prior to the lease expiry the landlord will have to re offer the premises to the same retailer first. To be honest, this is no guarantee that the lease will continue, but the tenant will have priority in conducting negotiations with the landlord.