Fitness centers and gyms are a big business. According to Statista, there were more than 37,000 fitness centers in the U.S. in 2017. This is an increase of more than 5,500 compared to 2012. In an era with declining activity in retail, fitness center leases provide a growing opportunity for both landlords and tenants. After representing a number of fitness companies in their lease negotiations, I have come across some key provisions that should be discussed between the landlord and tenant at the letter of intent stage. Early agreement on these issues will lead to a more efficient path in the negotiations and will help a tenant identify the costs allocated between the parties in the lease agreement.
- Compliance with Law.
One common area of tension between a landlord and a fitness facility tenant is the delineation of responsibility for compliance with applicable laws concerning the condition of the lease premises. To a large extent, the economic impact on the tenant will depend on how the parties describe the condition of the lease premises when it is delivered to the tenant. A landlord, for instance, will often want to deliver the premises “as is,” which means that the tenant will ultimately be responsible for complying with all current and future laws and regulations. For purpose of this article, the phrase “compliance with laws” also includes private covenants applicable to a specific piece of property.
A tenant will want the premises delivered to it in compliance with all laws applicable to new construction with a clear definition of the work landlord is to perform before turning over the premises to the tenant (whether this is base building work, the actual build out of the tenant improvements or both). This is particularly important for a fitness facility that will often need specialized tenant improvements. Gathering this information ahead of time will help avoid any surprise costs a tenant may encounter.
For instance, if the landlord is responsible for constructing the tenant improvements and bringing any non-compliant areas up to the standard required by law for new construction, this shifts this cost and responsibility to the landlord. More often than not, however, the tenant will undertake the construction of its tenant improvements. In such an event, a tenant should hire an engineer who is an expert at building structures and systems to identify any areas which are not in compliance. The same should be done with a consultant who is an expert in the ADA and, in California, Title 24.
It is important for a fitness tenant to know the extent of changes required to comply with the law, so it can factor that cost into the cost of its initial build out to determine whether the tenant improvement allowance offered by the landlord is sufficient to cover these costs and also to estimate the additional time that will be required to bring non-compliant areas into compliance with existing law. Given that fitness facilities have very specific timelines when memberships surge (i.e. summer time and after the first of the year are opportune times to sign up new members), it is particularly important to plan ahead in order to account for a number of items that could require additional construction or possibly additional time to meet compliance and therefore extend the opening date beyond either of these lucrative time periods.
In order for the tenant to protect itself, notwithstanding that the tenant may otherwise agree to accept the lease premises in its “as is” condition, the tenant should push for a representation and warranty from the landlord that the lease premises and the adjoining property owned by the landlord (including all common areas) is in compliance with all laws including those affecting new construction (disregarding variances and grandfathered rights). A tenant should never assume the lease premises complies with all applicable laws just because it is in an empty shell condition.
- Condition of the Property.
When entering into a lease for a fitness use, it is imperative that the tenant pay particular attention to the condition of the building structure and systems and agree how they will be impacted during the build out of tenant improvements and which party is responsible for maintenance throughout the lease term. For example, will the tenant’s weight equipment materially increase the load on the structural members? In order to accommodate the specialized equipment, will the tenant need to penetrate the foundation or the ceiling?
One area where the condition of the premises can be a big ticket item is the quality and condition of building systems (e.g., plumbing, electrical, HVAC, internet, sewer, etc.). The issue which comes up most frequently for a gym tenant is the quality and condition of the HVAC.
Given the potential impact the condition of the premises will have on a tenant’s operating budget, it is advisable for the tenant to request certain representations and warranties from the landlord such as the following:
- the lease premises is structurally sound (the definition should be described in as much detail as the parties will agree upon);
- the lease premises should be seismically sound (this is even more important in California);
- the condition of all systems is working properly (including existing electrical, plumbing, lighting and HVAC systems serving the premises); and
- the lease premises is free of all hazardous materials.
- Neighbors.While a landlord’s priority might be to have a good mix of tenants on its property, it is important that the tenant be aware of the uses of other tenants surrounding its lease premises. This is particularly important for a fitness facility. Specifically, the tenant should discuss with the landlord any neighboring use where that neighboring tenant’s normal business operations may emit a strong odor. For example, everyone would agree that it is very unpleasant to exercise when one can smell nail polish remover from the nail salon on one side of the gym and the aroma of fast food on the other side of the gym. While it may be unreasonable to restrict the landlord from leasing to a tenant whose use may emit an odor from its premises, it may be reasonable to ask the landlord to require such uses to include certain ventilation equipment to channel the odor away from the fitness facility and to provide the tenant with certain remedies if this nuisance is not addressed in a timely and reasonable fashion.
- Assignment / Subletting.
A gym tenant should pay particular attention to the interplay between the permitted use provision and the assignment and subletting provision. If the “permitted use” is described narrowly, it will strongly impact the tenant’s options in the event the tenant wishes to assign or sublease. As a general matter, there is tension between the landlord and the tenant because the tenant will want to avoid a narrow use restriction both because it allows the tenant to expand its business over time and because it leaves open the universe of permitted uses that will allow the tenant to assign or sublease the space to a third party in the event the tenant’s business is not successful or should the tenant outgrow its space.
In the fitness industry there has been a growth in the number and type of specialty gyms: those that offer only spinning classes, aerial silk yoga, rock climbing – you get the picture. If the permitted use is described narrowly – for example “a studio for spinning classes and for no other use”, the universe of other fitness companies wanting that exact location and with that exact square footage can be very challenging to find.
When it comes to a sublease or assignment, a landlord’s primary concerns are: (i) it cannot accept any assignment or sublease that would cause the landlord to violate an exclusive use granted to another tenant, (ii) the proposed assignee or sublessee must be in a financial position to perform its obligations under the lease and (iii) the “tenant mix” at the property must be acceptable to the landlord. If the landlord insists on a narrow definition of the permitted use, the tenant should ask if the landlord will expand the category of parties to whom the tenant can assign and sublease. As a compromise, for example, the parties may negotiate that “Permitted Use” shall mean another use that does not violate any exclusive use given to another tenant of the property prior to the request to assign or sublease and reasonably acceptable to the landlord taking into account the tenant mix of those existing at the property.
A fitness company will want to start the process of signing up client members as soon as the ink is dry on the lease. The lease should therefore designate a location on the property where pre-sales can begin. Depending on the property, there may be a number of potential clients already working in the building/shopping center. Consider asking the landlord for an introduction to the other tenants. If the landlord sends out periodic mailings to the tenants, the landlord may even be willing to advertise membership for the fitness facility in that mailing. The tenant may wish to offer a “discount” to neighboring tenants to kick off its initial membership drive. If the specific facility offers early morning fitness classes or mid-day private trainings, these neighboring tenants may be geographically more inclined to use the facility during off-peak hours.
This article is by no means a comprehensive list as to all of the points unique to fitness center tenants. Rather it is meant to illustrate the importance of bringing legal counsel on board at an early stage of the site section process because these important considerations will ultimately affect the tenant’s bottom line.
What has been your experience either renting out to a fitness center or negotiating a lease with one?
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