New rental deals: Commercial leases in the retail sector are evolving

An ‘exclusive zone’ clause ensures that two tenants don't end up in close-enough retail proximity to interfere with each other’s customer traffic. (AP)
An ‘exclusive zone’ clause ensures that two tenants don't end up in close-enough retail proximity to interfere with each other’s customer traffic. (AP)


  • Dominant retailers have begun to exercise clout as tenants. Apple’s rental deal in Mumbai’s Jio World Drive mall, for example, has an ‘exclusive zone’ clause designed to keep rival brands at a distance. Other clauses to protect tenant and landlord interests are emerging too.

The retail sector in India has grown hugely. It is now placed at $1.2 trillion, fuelled by rising consumer spending, swift urbanization and a burgeoning middle class that’s youthful by world comparison. In an effort to meet growing demand, homegrown as well as foreign brands are scaling up their operations and physical presence. 

With prominent single and multi-brand retailers such as Apple, Reliance Retail, Tata’s Trent, Shoppers’ Stop, etc, all vying to fulfil fast-growing urban demand, India saw record-high leasing of space by retailers in 2023. While the phenomenon of ‘ghost malls’ does exist, we also saw renovations of shopping malls and hypermarkets that were struggling to retain footfalls, especially after the covid pandemic. 

In recent years, real estate developers have been launching better designed and located retail spaces to attract large tenants whose requirement runs into several thousand square feet.

Historically, in India, landlords have driven lease negotiations with tenants, drawing up terms based on their own standard template. This has been changing. In today’s times, organized retail players with a major national presence seem just as capable of tilting the scales in their favour as high-profile international tenants.

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In April 2023, iPhone-maker Apple struck lease agreements for its first Apple retail stores in Delhi and Mumbai, thereby officially marking its physical presence in the country. The lease agreement for Apple’s 20,000-sq-ft space in Reliance Jio World Drive mall, located in Mumbai’s posh BKC area, features an ‘exclusive zone’ clause that restricts the landlord from leasing space to 22 competing technology brands near the store, as specified by the tenant. This is one of the first such instances in the Indian retail sector of an ‘anchor’ tenant leveraging its dominance to obtain such favourable terms.

An ‘exclusive zone’ is a tenant-requested clause designed to ensure that two similar tenants do not end up in such close retail proximity that they interfere with each other’s customer traffic. In such cases, landlords are wary of the restriction being too wide, effectively acting as a restraint on their space-rental business. 

Fortunately for Apple, past rulings of law courts in India suggest that such a restrictive clause does not violate any Indian law, considering that its objective is not restrictive of trade but to facilitate the retailing of a company’s products in a specified geographical location (and also that the restriction ends with the expiry of the lease tenure).

Across the world, big shopping malls rely on an anchor retailer to attract footfalls. This is also evident in India, where some shopping centres have turned into loss-making ‘ghost malls’ after their anchor tenants shut shop. Anchor retailers are in a position to use this dependence to their advantage by negotiating the lease rent and corresponding terms in anticipation of market downturns.

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There also exists a ‘co-tenancy’ clause that enables an anchor tenant to exercise the right to pay reduced rent if the shopping centre fails to achieve a pre-negotiated occupancy level of nationally recognized tenants “open and operating" within a specified period of time. As tenant departures could also reduce the whole shopping centre’s traffic, specific conditions could be stipulated as the trigger for rent reduction. If occupancy falls below a certain threshold along a timeline, for example, this clause could be invoked.

There can be complexities. An anchor tenant with market clout, for example, may want to reduce the rent payable to, say, a fixed percentage of its gross sales till the time the co-tenancy occupancy threshold is attained. This may invite its own disputes. To begin with, the landlord and tenant may have different interpretations of who qualifies as a “nationally recognized tenant" or what an “open and operating" store means. 

Further, the legality of an anchor tenant using a unilateral formula to determine rent in response to a breach of the co-tenancy clause has been contested in US courts, where it has been held that “co-tenancy provisions will be generally enforceable, unless they are substantively unreasonable."

While lease rent in India is governed by the rent control legislation of respective states and is a result of the sum agreed upon by both parties, India’s apex court has made it clear that “both the landlord and tenant are empowered under the law to approach the rent controller for fixing ‘fair rent’ during the subsistence of the lease."

Apart from choosing what concessions to extend to an anchor tenant, there are certain terms under a lease that landlords can negotiate to protect their interests. For any big retail centre, store occupancy drives traffic and a shuttered anchor will inevitably hurt smaller tenants. Dark storefronts and corridors put customers off. To combat this, landlords can introduce the right to ‘re-capture’ space in lease agreements. 

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This would empower them to take back rented space from an anchor tenant in the event the latter is not open for business for a defined period of time during the week. Landlords could also demand monetary compensation from such a tenant. In general, though, with organized retail expected to expand further and Indian spending on the rise, we can expect to see retailers with significant clout and market presence driving a hard bargain with landlords for retail spaces.

These are the author’s personal views.

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