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CLICKS AND CLAUSES

Yesterday’s leases may need revision in today’s multichannel world

By Debra Hazel

Mallgoers take a break from windowshopping to browse the Web at a BigFatWow kiosk.

A typical day at the mall: Shoppers drop by a store to pick up or return items ordered over the Internet. Others interrupt their browsing to use in-mall Internet kiosks. And even before arriving at the center at all, some have visited the center’s Web site, looking for information or shopping online.

Each situation offers greater choice and convenience to consumers. But some leasing lawyers warn that the meeting of physical space, catalogs and cyberspace could remake the traditional shopping center lease.

“At a strategic level, the issue confronting merchants who either have or are planning to use three channels is, what is the interplay between them?” said Mark Borsuk, managing director of The Real Estate Transformation Group, San Francisco. “It’s going to become a much more difficult world for property owners of a certain tenant level.”

It’s not just new agreements that will be affected, said another observer.

“Basically, there are a number of instances where you have retailers with existing leases that are two, three, four years old that have not caught up with the dot-com revolution. They do not take into provision tenants going online with impunity. Landlords have not taken the opportunity to update their leases, and retailers don’t take into consideration their dot-com counterparts,” said Gene Sykes, a Phoenix-based leasing consultant who has worked on both the retailer and landlord side.

Items to be negotiated could include the relationship between Internet and mall purchases; just how much Web access a mall should offer; and more theoretical relationships between mall and store Web sites.

While Westcor Partners lists its tenants’ locations on its Web site, it does not link to any of their sites.

“You’ve got to completely reinvent this agreement. Intellectual property and telecommunications law will interweave with the lease,” Borsuk said, necessitating what he calls the “wired lease.”

Perhaps the most basic, and most frequently encountered point of discussion, is crediting in-store returns of Web-purchased merchandise. Doing so could decrease percentage rent.

“You have to go to the precursor, the catalog,” Borsuk said, noting that store pickups of catalog sales do count in percentage rent. “If you use the catalog precedent, this will be resolved because there’s a historic precedent.”

The growth of the factory outlet industry also provides a precedent, said William Whiteside, vice president and partner at Westcor Partners, Phoenix. Customers began buying items from an outlet and returning them to the traditional mall store.

“Either the store didn’t take it back, or did, and tried to take it off their sales. So our lease language has been very clear: We do not allow stores to take a credit against their sales,” he said, adding that the situation has not arisen very much.

Westcor does not discourage Internet returns, however.

In-mall Internet access kiosks could provide another point of negotiation. In theory, shoppers could comparison-shop the competition. The retailers who do pay rent and CAM are then at a disadvantage.

“You can sell merchandise from that unit that’s not at my center. It’s a concern,” said Andrew Shedlin, CLS, SCSM, president of The Andrew Shedlin Cos., a Highland Park, Ill.-based consultancy.

While the question does come up, it’s extremely unlikely, said Brent Earles, executive vice president of sales and marketing for BigFatWow, an Irving, Texas-based company that puts Internet kiosks in centers.

“When conversations are first initiated with mall developers, questions arise, ‘Will this cannibalize sales?’ It’s a normal question or angst. But that isn’t the way people shop,” Earles said.

A recent BigFatWow survey of between 350 and 500 shoppers found that only 4% of respondents would use in-mall Web access locations to buy a product, he reported.

“Why is that? Because the customer says ÔI came to the mall to buy it, not to read about it on the Internet,” Earles said.

As a result, no mall has requested that sites of competing retailers be blocked, a move Earles said he would discourage; a customer who tried to visit a site, only to be prevented from doing so, could be alienated. The company does not, however, accept advertising from stores that compete with retailers in the mall.

Other issues, for now, are more theoretical than practical, including the Web’s effect on store size. Some retail stores could seek flexibility to downsize stores after just a few years, turning their physical locations into little more than catalog showrooms, according to Borsuk. Yet none of this is occurring now, said Robert Michaels, president and COO of Chicago-based General Growth Properties, nor does he foresee it anytime soon.

Retailers must amortize the cost of a store over time, he observed, and that would preclude shortening lease times too much.

Some possible pitfalls involve intellectual, rather than physical, property. The linkage between a developer’s Web site and a tenant’s, which might be considered a courtesy offered a business partner, could be fraught with potential legal problems. If a landlord’s site links to one that has violated a patented business process, or copyrighted or trademarked material, it, too, could be held liable, Borsuk warned.

Westcor thus far has avoided the problem altogether, not linking from its Web site to its tenants’ sites.

“If someone has in mind to get to a Westcor site, it’s for a definite reason such as mall locations or hours. If they want to get on the Web site for MaxMara, they’ll go there directly,” Whiteside said.

Malls providing broadband to retailers also could pose legal questions, including what happens if power or access is interrupted.

“What happens if there’s a problem analogous to the utility clause in a lease? Privacy also could be a problem,” if a hacker breaks into a landlord-provided system, Borsuk warns. “You have to think about how it could happen and protect yourself.”

The easiest answer, according to Whiteside, is to have a separate agreement covering such possibilities — in essence a second lease.

With all of these possibilities, both Shedlin and Borsuk believe that an Internet law specialist may need to become part of the leasing process. Michaels isn’t so sure.

“We’ll learn as we go,” he said.

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