LEASE AGREEMENT REFERENCE GUIDE 770: STRATEGIES FOR WAREHOUSE AND DISTRIBUTION DEALS $49.95
STRATEGIES FOR WAREHOUSE AND DISTRIBUTION DEALS
This LARG looks at warehouse and distribution leases. The first section considers the effects of wholesale increases of the amount of office space in industrial parks. The Lease Clause Critique contains a broad assortment of lease clauses from a pro-tenant distribution center deal with comment.
Squeezing More Office Space into Industrial Parks
It is fairly common for industrial premises to have some component of office space related to the primary industrial or warehouse use. Such office use normally takes about 15-20% of the floor area of the premises. There has been a tendency for industrial tenants to increase the amount of the space devoted to office use during the terms of their leases, without the landlord's consent, and often to his detriment.
This often happens when the tenant increases the proportion of office space contained in the facility by moving in some of its general administrative staff, and squeezing down the amount of space used for distribution and warehouse activities. The landlord usually anticipates that a portion of the industrial space will be used for office purposes by the tenant, but normally assumes that it will only be for the administrative staff supervising the distribution function contained in the leased space. The landlord usually does not expect that the space will be used for general office purposes by the tenant.
Economics usually drive this conversion--it is normally much cheaper for the tenant to rent industrial space than office space. Many tenants are under pressure to reduce their operating costs to remain competitive in their industry, and this includes reducing occupancy costs for rented facilities. This means when they consider closing facilities to reduce costs, they will often close the one with the highest per square foot rent, if all other factors are equal. During cost containment efforts, tenants frequently get out of their expensive office lease downtown and consolidate their operations in the cheaper industrial space side by side with their distribution operations. This can also happen following a merger of two companies or following a corporate acquisition, in the course of eliminating duplicate facilities.
The Impact of Conversion
If a substantial amount of space in an industrial park or complex is converted to office use, it can be bad for the landlord and bad for the other tenants in the complex. Industrial space rents for less money than office space--the industrial landlord would no doubt have negotiated a higher rent if he knew the space (or more of the space than anticipated) would ultimately be used for general office purposes.
Office uses also normally generate more traffic and require more parking than industrial uses. Industrial parks are planned and zoned with much less parking than office parks, because the ratio of people to building area has been traditionally much lower in an industrial park. If much of the space in the industrial park is converted to office use, the parking for the park will be inadequate. Even worse, the peak traffic flows for industrial park will gravitate toward conventional rush hours (i.e., between 7 and 10 a.m., between 3 and 6 p.m., and during the lunch hour). This increased traffic can have an appreciable negative impact upon the tenants in the park who are actually engaged in distribution activities, and who must move trucks in and out in order to perform that function.
As the last straw for the landlord, the increased parking needed by tenants who have converted additional space to office use in the park may jeopardize or violate the industrial park's city or county zoning and use permits.
Conventional Protections Needed
Some industrial landlords tend to be more relaxed than their office counterparts in the negotiation of many lease clauses dealing with use, improvements, and compliance with existing law and regulation by the tenant during the term of the lease. The industrial landlord concerned with substantial conversion of industrial space to office space in its industrial park without its consent should negotiate the following sort of protections, at a minimum:
An adequate use clause which requires that the office use in the premises be directly related to the distribution or industrial function housed in the facility.
Square footage maximums for the amount of office space that may be contained in the premises. These can take the form of blanket prohibitions for more than a certain amount of office space, or requirements for the landlord's prior written approval if the square footage amount is to be exceeded. Similar restrictions may also provide for increased rental payable by the tenant if the cap is exceeded.
Requirements that the tenant obtain the landlord's approval for improvements to be made to the space during the term of the lease. The tenant must normally make improvements to the premises if the office component is substantially increased during the term (i.e., HVAC and electrical modifications, drywall, etc.). Industrial tenants often have the right to make improvements to their premises without the landlord's consent.
Express covenants by the tenant to comply with all zoning and use permits applicable to the premises. It may not be a bad idea to specifically incorporate the actual language of such permits or zoning entitlements in the lease or as an exhibit, particularly if it is quite specific concerning parking and permitted uses.