Once thought to herald the demise of brick and mortar stores, online shopping is proving to be a critical element in the revival of the in-person retail shopping experience. The advent of online shopping forced a substantial reckoning in the retail space during the late 1990s and early 2000. Recent data, however, shows that brick-and-mortar stores are proving to be a critical element in the continued success of online shopping for both the shopper and the retailer, and conversely, online shopping is playing a role in getting people into stores again.

In a world where curbside pick-up was practically non-existent four years ago, consumers now expect to be able to shop seamlessly from the web and in person and have their choice of how to get their hands on those goods. E-commerce orders involving stores in some aspect of fulfillment rose from 27 percent in 2015 to 42 percent in 2023. Shopping in a retail store and online shopping has become more integrated as retailers offer in-store pickup and return of goods purchased online. In addition, stores are being adapted to serve as fulfillment centers for online orders.

And while it is probably in the best interest of both landlords and tenants to permit this evolution of retail stores and how they function in support of omnichannel shopping, there are considerations and potential unintended consequences for both for both parties.

Use of Retail Stores as Warehouse and Fulfillment Centers

Many big box retailers are taking advantage of their size to have their stores function as warehouse and fulfillment centers for local delivery and pickup options. Stores with smaller footprints can function in this manner as well by reducing their selling footprint or by having frequent deliveries. Both tenants and landlords should consider whether local zoning permits warehouse uses. In addition, landlords need to consider use restrictions, particularly in existing older leases and easement restrictions, which may prohibit warehousing in the shopping center. For those tenants who share loading docks or function with front door deliveries, the increased use may present a disruption to neighboring tenants.

See an article recently published by Hinckley Allen entitled “The Retail Pivot: Land Use Considerations Amidst Industry Transformation” for additional thoughts on the zoning impact of the changing retail landscape.

Calculation of Gross Sales

Establishing the impact of online orders and returns can be critical in understanding how a store is performing and determining percentage rent. How are online sales that are picked up in stores to be treated in the calculation of gross sales? Is it included as a sale from the store? Similarly, should returns of online orders be permitted to impact the calculation of gross sales? The inclusion of goods purchased online and returned to a particular store could depress and distort the true calculation of gross sales from that store in the absence of language specifically addressing this.

Exclusive Use Provisions

Many exclusive use provisions include an incidental exception which permits another retailer to sell a limited number of the protected retailer’s exclusive goods. Often, those incidental exceptions are calculated by means of the selling floor space devoted to the sale of the exclusive goods. An example provision might state:

The incidental sale of the exclusive goods is permitted in no more than an aggregate of 5% of such tenant’s or occupant’s sales floor area (which shall include an allocable portion of the aisle space adjacent to such sales floor area(s).

The volume of product sold online and picked up from a store could exceed the potential volume of sales from a floor area restriction, yet the restriction technically would not be violated. As illustrated, it might be helpful to add language capping the percentage of sales of a protected product that can be sold directly from the store and/or sold online and picked up from the physical store. Inclusion of such language would necessitate the landlord having access to sales information in the event the tenant is not required to report gross sales. And, the protected tenant with the exclusive, will want access to that information as well.

Landlords and tenants should be aware of the potential impact of using retail stores to service online shopping. Tenants, in particular, need to be aware of this trend and how it can impact their own retail experience, even if they do not utilize their bricks-and-mortar stores as part of their online presence in the market; another tenant’s use of their store in such a manner could impact all tenants in one way or another.