Hunton Retail Law Resource

Bankruptcy filings of big box retailers such as Sears, Shopko and Charming Charlie have left landlords with difficult space to fill, especially at a time when few retailers are looking to expand and open new brick-and-mortar stores. Charming Charlie will close all of its 261 stores in 2019 (35 of which are located in Texas) while Sears announced 80 new store closures at the beginning of 2019 in addition to the 220 store closures it announced last year. Sears owned 687 stores at the time it filed for Chapter 11 bankruptcy last October. In March, Shopko announced that it would close all of its 370 stores in connection with its bankruptcy filing at the beginning of this year. With other big box retailers including David’s Bridal and Bon-Ton both trying to hold onto their retail stores despite entering Chapter 11 protection, there is uncertainty as to how much empty space landlords will be left to fill. Due to the current state of the retail market, landlords may need to get creative in order to lease important anchor tenant space left empty by these recent bankruptcy filings.

Below are three ideas landlords should consider to prevent this hard-to-fill space from remaining vacant:

1. Subdivide big box space to accommodate multiple small shop retailers

Subdividing empty space previously filled by big box retailers will provide landlords with many more tenant options and may improve the tenant mix of a shopping center. One downside landlords should consider is the initial capital required to reconstruct the premises into multi-tenant space. Depending on how common area charges are defined in a lease, a landlord may not be able to pass through this initial cost to its tenants. It is also important that landlords make sure they are not violating any co-tenancy lease requirements by subdividing anchor space.

2. Convert retail space into office space

Converting retail space into office space provides much-needed foot traffic to struggling retail centers. Office tenants bring numerous employees who will likely make use of shopping center restaurants and shops. Landlords should be sure to double-check whether there are any restrictive covenants recorded against the property that would prohibit office use as well as prohibited uses set forth in leases with other tenants within the shopping center. In addition, landlords should confirm that the space is properly zoned for office use.

3. Partner with a municipality to offer space for community use in exchange for incentives

 A city may provide incentives such as grants and tax credits to landlords that are willing to redevelop big box space into city parks or other community uses. This helps landlords avoid footing the cost of a renovation, relieves landlords of hard-to-fill anchor space and still provides foot traffic to the shopping center. Landlords should take into account the potentially lengthy process of negotiating with a municipality and additional requirements that the municipality may impose on them.

While the ideas above are by no means an exhaustive list of options for landlords facing big box vacancies, they do provide outside-the-box alternatives for landlords to consider in this ever-changing retail market where e-commerce is king.