Our industry opposed AB 2538 (Nazarian; D-Sherman Oaks) a bill which seeks to ban a commonly used business-to-business contractual agreement in leasing of commercial space.  This particular bill is focused on retail property spaces but would open the door for going after all types of lease agreements.

This issue has such an impact on the retail industry that ICSC Vice President Herb Tyson flew out from Washington D.C. for a day of intense meetings to provide first hand accounting of how these lease provisions work.  In addition to ICSC, RILA, the California Retailers, CalChamber, NFIB (and many others, including individual retailers/tenants), have stepped up to oppose this measure as it would create a fundamental shift in the landlord-tenant relationship.

Called “radius restrictions,” these agreements benefit both the tenant and property owner by assuring that a local area doesn’t get saturated with stores — in exchange the retailer will see lower rent or a percentage rent deal and/or some other agreed upon benefit.

Additionally, these type of agreements can be used to help local government partners that have worked to see a project come to fruition (through infrastructure, financial incentives, etc.) are able to make sure investment benefits are maximized by working with a retail center that is able to attract – and hold onto – good tenants that bring in customers. It also serves to lessen the potential for “poaching” by nearby entities chasing tax revenue.  Lease radius restrictions can be an important tool for both parties, by ensuring projects are not undercut by another offer down the road (literally).

The notion of percentage rent and radius clauses is foundational to the retail properties industry. To get rid of it would lessen opportunities for start-ups, expanding merchants, and their local government partners, and inviting the state to start mucking around in contractual agreements of this type is agreed by all, to not be a good idea.

The bill will be heard on Tuesday in the Assembly Judiciary Committee.

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