Bernie Kennedy, co-managing member at Bond, Schoeneck & King, addresses the current retail market

A question and answer session with co-managing member (partner) at Bond, Schoeneck & King (Bond) Bernard "Bernie" Kennedy. Kennedy is a trusted legal advisor on retail leasing, contracts, real estate and litigation. Earlier this year, he merged his firm, Kennedy and Gillen, with Bond, one of New York State's preeminent law firms, which has nine offices in New York, including New York City and Garden City, and one in Naples, Florida. For the last 20 years, Kennedy has provided general counsel services to King Kullen Grocery Co., Inc., which has 45 retail locations, two subsidiaries and more than 4,000 employees on Long Island. He has a recognized expertise in commercial leasing, particularly shopping center leasing, and represents both landlords and tenants in leasing transactions throughout the metropolitan area, including a growing list of independent supermarket operators throughout New York City. How did you begin your career handing retail leases? In 1989, when King Kullen asked me to negotiate a lease amendment to a long-term lease for one of its retail stores, I was thrust into a transaction filled with unfamiliar terms and issues like "common area expenses," "rights of recapture" and "cost of living" rent increases. Fortunately, working under an experienced lease negotiator, I quickly became familiar with the major issues and workings of the retail lease, and the benefit of working with experienced legal counsel. My litigation experience has always kept me in good stead as well when negotiating commercial leases. If you understand the risks and know what it means to litigate, it helps you understand how and when to draw the line on the big issues during negotiations. Today, I represent both landlords and tenants, and leading local and national developers in negotiating shopping center leases. I also represent supermarket companies throughout the New York Metropolitan area, in particular small companies or families owning a handful of stores. These people are true entrepreneurs in every sense, hardworking and, unlike the larger supermarkets and national tenants, they need the full breadth of my expertise, lacking separate real estate departments to do sophisticated marketing studies or lease digests. What are the major issues in retail leasing and have those issues changed? Apart from the typical "business" issues-rent, rental increases, taxes and common area expenses-the major issues for negotiation have been pretty consistent, and include the right to assign and sublet, the use clauses, and the provision (usually at the beginning of the lease) on governmental approvals and construction. On assignment and subletting, the tenant should look for as much flexibility as possible to insure an exit strategy in the event the location doesn't work out. Ideally, the tenant would want to have the right to assign or sublet for "any lawful retail use" without having to obtain landlord consent and, if the landlord insists on the obligation to get consent, to make it the landlord's obligation not to "unreasonably withhold" such consent. From the landlord's perspective, the greater the restrictions on assignment or subletting, the more likely it is the landlord will be able to control the tenant mix in the shopping center as well as the quality of the tenant, which is critical to the success of all the tenants. The "use" clause goes hand in hand with the assignment and subletting provisions, since the broader the use permitted, the easier it will be for the tenant to exit the location if necessary and the narrower the use permitted, the easier it will be for the landlord to control the mix of uses at the center. The use clause can also serve as a vehicle for protecting the tenant's ability to maximize sales at the center. A pizzeria would not want to compete in the same shopping center with another pizzeria but, at the same time, the landlord would not want any protective use clause or "exclusive" to prevent the sale of frozen pizzas from a supermarket located in the shopping center. The provision on "approvals" is important because it determines the conditions to the effectiveness of the lease as well as when the tenant will commence paying rent. This is critical and close care should be paid to negotiating this provision. From the tenant's standpoint, close scrutiny should be given to any language which might result in the tenant having to start paying rent prior to the date it opens for business. So for instance, if the provision says that the rent will commence 5 months following the delivery of possession of the premises to tenant, then the negotiator for the tenant must be careful to see that "delivery of possession" is defined to include all of the work the tenant expects the landlord to perform and that 5 months is a reasonable time period for the tenant to perform construction, fixturing and obtain a certificate of occupancy. From the landlord's perspective, the negotiator wants to steer clear of language that gives the tenant too much control in determining the rent commencement date. For instance, it is probably never a good idea for a landlord to agree to allow the rent to commence within a certain time period "following the date tenant obtains a building permit to perform tenant's work" without also including requirements that the tenant act diligently, apply for the permit by a certain date and give the landlord the right to step into the process if the tenant is moving too slowly in the permitting process. Have there been any major changes in retail leasing issues in the recent past? In the shopping center context, many national tenants are requesting, and often getting landlords to agree to allow them to terminate their leases in the event they do not reach a certain amount of gross sales by a certain date, typically around the fifth lease year. Another provision ties the rent and/or the obligation to continue to operate to the continuation of the operation of an "anchor" tenant. These national tenants have much greater leverage in negotiations than any local retailer. Another emerging trend sees retailers such as Walgreen's and CVS locating their stores as stand-alones with drive-thru lanes rather than as a part of a shopping center. Since these operators have turned into small food markets, they no longer have as much interest in being part of a shopping center with say, a supermarket as an anchor tenant. As a free-standing store, they are no longer subject to the types of restrictions that limit what products they can and cannot sell. Why did you choose to merge your firm with Bond, Schoeneck & King? I was looking for a firm that wanted to expand its presence on Long Island, and had a platform on which to expand my practice. Bond is interested in growing the firm's practice, logically and carefully, and has an existing real estate practice covering the entire state of New York as well as Florida including development, financing and leasing. Other practice areas, including environmental and tax certiorari, support the real estate practice. Bottom Photo caption: John Kanas, president First United Bank (2nd from right), was the featured speaker at a July Long Island Metro Business Action (LIMBA) breakfast co-sponsored by Bond, Schoeneck & King. Shown (from left) are: co-sponsor Ken Greenberg, president of Austin Williams; Bernie Kennedy, member, Bond, Schoeneck & King; Kanas and Ernie Fazio, president, LIMBA.