Take Tenant's Use Abuse Seriously

Mixed-use properties have become increasingly popular—and lucrative in recent years. If the office building you own can accommodate retail space, you may want to think about the possibility of leasing a portion or all of the ground floor space to a store. If you’re concerned that leasing to a retail store on the first floor may interfere with the business operations that go on directly above it, don’t worry. If done properly, using lease terms that limit the tenant’s use of the space can limit your risk.

The best way to get control over how a tenant makes use of the space is to specifically prohibit it from engaging in certain activities during certain hours. If the lease says only that the tenant can use and occupy the premises for whatever retail purpose the owner has in mind (for example, a clothing store), the owner may be giving the tenant more leeway than it wants to. A tenant limited to this use may be able to play disruptively loud music during business hours—as long as it still primarily operates as a clothing store.

To ensure that a retail tenant won’t engage in certain kinds of potentially disruptive behavior, its lease should list and specifically exclude this behavior. That way, the tenant will understand what’s expected of it before entering the space. And if the owner has a problem with the tenant’s use, a court will be more likely to rule in the building owner’s favor. For tips on drafting your use clause for a retail store in your office building and listing activities you want to exclude, check out “Negotiating Narrow Use Provisions” in the November 2011 issue of the Insider, and available on our Web site.