"Be not denied access, stand at her doors, And tell them, there thy fixed foot shall grow." Twelfth Night, Act I, Scene 4
Despite the increasing speculation that Internet sales will eventually change the way people shop, especially for drug store-related items, retailers in the “drug store” business continue to regard parking availability as critical to a store’s sales volume. This concern can lead to difficult negotiations over the consequences of a loss of parking spaces during the term of a lease, particularly where loss of spaces is not within landlord’s control, such as eminent domain proceedings for widening roads and similar takings. The parking lot remains a battleground for lease negotiations.
While lease provisions often address the minimum parking needs in terms of zoning, the determination of the number of spaces necessary to keep a store viable is as much a matter of guess work as formula. Retailers and landlords have differing views not only on the number of spaces needed to support a store, but also on the remedy in the event the number of spaces fall below the “magic” number.
Corporate Experience v. Local Knowledge
In doing business with national retailers, land owners are often at a disadvantage in determining a true number of parking spaces necessary to support a store. Experience is on the side of the retailer whose calculation of the number of spaces needed for profitability, while being far from scientific, bears the marks of trial and error. A land owner, on the other hand, only has his or her site-specific observations to determine the number of spaces offered or deemed necessary to make the deal. Purported corporate experience vs. “local knowledge” usually leads to a negotiating impasse on these issues.
Often therefore, to be successful, such negotiations need to shift from concentration on the number of parking spaces needed to the “consequences” of having too few spaces. A land owner may be willing to reach some accommodation with the retailer if he or she knows that a parking shortage as a result of a taking, which reduces by one or two or even several the number of spaces available to the retailer, will not lead to a termination of the lease or worse, a draconian reduction, for the remainder of the lease term, of base rent. No landlord wants the rent cut in half due to a loss of parking spaces while the tenant appears to be enjoying an unabated stream of customers to the store.
Approaches to Negotiation
A recently conducted negotiation between a land owner and a chain retailer in a strip center with limited parking forced the parties to re-examine their approaches to not only the numbers, but the problem of a remedy, in connection with the potential reduction or loss of needed parking.
The retailer’s first position in these situations is often a demand for the right to terminate the lease if the available parking on-site falls below its estimated number of spaces needed for profitability, followed by the fall-back position of rent reductions that can result in dramatically reducing the basic rent. While demands for rent reductions are understandable, the real concern of the retailer is profitability.
The "Profitability" Test
If a store that loses spaces remains profitable, or is at least as profitable as when it enjoyed a full compliment of parking spaces, why should the rent be cut? After all, the adage that the proof is in the pudding should apply to parking space negotiations. If a reduction in parking spaces does not coincide with a reduction in profitability in the real world, then the retailer should agree to continue paying the full rent despite the loss of spaces. Similarly, if profitability declines coincident with parking space reductions, and then returns to normal, (i.e., the profitability trend or relative profitability continues at the same or increased levels as before the loss of parking spaces) rent, even if temporarily reduced, should be restored.
The “profitability” test can work for both landlord and tenant. Once a determination is made on the number of spaces the retailer needs to “start off with,” the parties should then be able to agree on a percentage reduction in rent which can be graduated depending upon the number of spaces lost. For example, the loss of 10 spaces below the fixed minimum may result in a 10 percent reduction in base rent, and so forth. However, at the end of the first year following the loss of spaces, the tenant, under the profitability test, must examine its records of gross sales. The tenant should be entitled to the rent reduction for the first year of reduced parking only if gross sales for the first year did not increase over gross sales for the year preceding the year of reduced parking by an amount equal to or greater than a three-year trend, or if gross sales for the first year of reduced parking did not equal or exceed a base line comparison figure. In the profitability test, the three-year trend is defined as the average of three annual changes (either plus or minus) in gross sales for each 12-month period of the 48 months immediately preceding a reduction in parking spaces. The phrase “baseline trend” in the profitability test means successive percentage increases in annual gross sales, each of which annual percentage increase equals the three-year trend, starting with gross sales for the year immediately preceding the parking reduction. The term “baseline trend comparison figure” in this context means an amount equal to gross sales for any 12-month period after a loss in parking spaces, as calculated using the baseline trend.
Illustration - Rent Reduction Calculation
An example of the calculation of the rent reduction in the event the number of parking spaces fall below a certain number based on a three-year trend measured against a baseline trend is as follows:
If a loss of spaces occurs on April 2, 2008, and if the three-year trend (i.e., the average of the three annual changes in the gross sales for the immediately preceding 48 months (April 1, 2004, through March 31, 2005, and April 1, 2005, through March 31, 2006, and April 1, 2006, through March 31, 2007, and April 1, 2007, through March 31, 2008) is 20 percent, and if gross sales for the 365-day period immediately preceding the loss of spaces (i.e., April 1, 2007, through March 31, 2008) has been $10,000,000.00, then (i) for the 12 months commencing on April 1, 2008, tenant is entitled to a rent reduction only if gross sales for the period from April 1, 2008 through March 31, 2009 exceeds gross sales for the period from April 1, 2007, through March 31, 2008, by less than 20 percent, or only if gross sales for the period from April 1, 2008, through March 31, 2009, is less than $12,000,000.00; and (ii) for the 12 months commencing on April 1, 2009, the tenant would be entitled to a rent reduction only if gross sales for the period from April 1, 2009, through March 31, 2010, exceeds gross sales for the period from April 1, 2008, through March 31, 2009, by less than 20 percent, or only if gross sales for the period from April 1, 2009, through March 31, 2010, is less than $14,400,000.00; and (iii) for the 12 months commencing on April 1, 2010, tenant is entitled to a rent reduction only if gross sales for the period from April 1, 2010, through March 31, 2011, exceeds gross sales for the period from April 1, 2009, through March 31, 2010, by less than 20 percent, or only if gross sales for the period from April 1, 2010, through March 31, 2011, is less than $17,800,000.00; (iv) and so on for each 12-month period.
While complex, the formula can ease the blow to landlords of rent reductions due to a loss of parking spaces beyond its control by preventing rent reductions that simply assume that loss of sales are attributable to reductions in parking when other factors may be increasing sales to levels, based on trends, that would have been achieved with the full compliment of parking spaces. From the retailer’s point of view, it is hard to complain about success or, in other words, to demand a reduction in rent when its expectations for profitability of a particular location are met or exceeded. By the same token, landlords do not have to take it on faith that fewer parking spaces will, necessarily, affect profitability and thus automatically result in a reduction of base rent.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
