Carve Out Your Rights if Center Undergoes Redevelopment

March 31, 2012
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A redevelopment of the center where you rent space can be a welcome opportunity to have an aging property or one that was not well planned from the outset refreshed and modernized. But a redevelopment can also be a nightmare for tenants that have no control over the aspects of the work that could gravely impact their businesses.

By the time you see indications of an upcoming redevelopment—for example, construction work or changes to signage, common areas, or parking areas—starting at the center, it's less likely that you'll be able to convince or force the owner to cater to your needs during the process. That's why it's crucial to protect your interests ahead of time. A carefully negotiated redevelopment clause in your lease can help you carve out rights that will protect you from the negative effects a redevelopment could have on your business.

We'll give you a Model Lease Clause: Limit Owner's Right to Redevelop Center without Your Consent, as well as a Model Agreement: Give Consent to Redevelopment that Doesn't Disturb Your Business, which you can adapt and use after the owner requests your consent for its redevelopment plans.

Address Common Issues in Lease Clause

When owners redevelop a center to make it look and operate better, it's advantageous for tenants. But a problem arises when owners move forward with a redevelopment program without taking the retailer's position into consideration, says Phoenix real estate attorney Camilla Titterington. “Retailers don't want to close, and they're also aware that customers won't want to come to a center that's being pulled apart,” she explains.

When we negotiate a lease, we have approved a site based on what the owner has proposed today, Titterington says. But some owners already anticipate making changes to the premises at a later date. “The first protection to put in the lease is to be very clear about expectations with respect to the center. For example, tell the owner that when it delivers the space to you, you expect it to look a certain, previously agreed-upon way. And have the owner agree that it will refrain from doing certain things, like building items in certain areas or altering portions of the common areas.

Some owners won't fully agree to these requests because they want to reserve the right to redevelop or make changes to the center later. Instead, they'll agree that they won't make changes without the tenant's consent “not to be unreasonably withheld.” “The problem with ‘reason’ is that it differs between the owner and tenant,” warns Titterington. This can lead to arguments later, as both sides contend that they're acting “reasonably.” Titterington recommends pushing harder and making it clear to the owner that once the lease is entered into, the owner may not do those things, regardless of whether they're “reasonable” and regardless of the issue of “consent.” Require the owner to check with you before making any changes, and let the owner know that you'll put it in default if you're not consulted.

Your lease clause, like our Model Lease Clause, should include provisions that address the following items:

Protected area. State that the owner won't undertake any construction or redevelopment in and around your premises that you specify as a “protected area” without your consent. Attach a lease exhibit specifying the protected area [Clause, pars. 1, 2].

Noninterference. State that the owner will make its best efforts to prevent any interference with your business and the operation of the shopping center, and won't plan any redevelopment during the holiday shopping season. State that, except in cases of emergency, a violation of this provision will entitle you to a rent abatement [Clause, par. 3].

Don't agree that in order for you to abate rent as the result of the redevelopment, the redevelopment must have “materially adversely” impacted your store. A redevelopment of any kind is going to impact a tenant, but you shouldn't have to prove that it's “material” and “adverse.” Under that requirement, if a tenant tries to abate rent because of something that's going on with a redevelopment, the owner is going to say that it's not material and adverse. Likewise, the tenant will argue that it is. The tenant is then stuck in the position of having to provide all sorts of evidence, and ultimately, the situation could lead to litigation.

Access. Have the owner agree to maintain pedestrian and vehicular access routes to and within the protected area during any redevelopment activities [Clause, par. 4].

Tailor Notice Period to Nature of Changes

“It's critical that a retail tenant have plenty of time beforehand to understand what's going to be done at the center; that way it can work with the owner on the implications for its customers,” advises Titterington, who is Acting Head of Real Estate Legal at national retailer PetSmart, Inc. Advance notice of a redevelopment and the individual changes that will be made is important, but owners will try to limit it to between five and 10 days. Tenants should push the owner to let them know about a redevelopment plan as soon as it's in place.

“The issue of notice is one of the most important items to negotiate,” says Titterington. “As a retailer, the longer time period you can have, the better. That way you can get managers and employees prepared and work with marketers who can let customers know what to expect,” she says. “Advance notice can protect the relationship between a tenant and its customers,” she stresses.

However, don't be surprised if you have to compromise on some points. Ask yourself what things are “critical” to your business—for example, utilities—and focus on getting the owner to let you know far in advance about redevelopment aspects that could greatly affect those important items. Titterington points out that you can specify notice periods of longer or shorter length according to what areas of the property will undergo work.

For example, construction on an outparcel of the center or a small portion of the parking lot that wouldn't affect the tenant could have a shorter notice period—say, 10 days. But a tenant should push to get more advance notice—say, 30 days—if work is to be performed in a protected area—that is, an area that under the lease terms the owner agreed to not alter, such as a common area in front of its store, or an access drive that may impact deliveries. “The tenant should consider the element that it's being given notice of when asking for a notice period,” says Titterington.

Put Conditions on Your Consent in Agreement

What if the owner wants to do a redevelopment of the center that involves changes to your protected area and it seeks your consent? Draft a separate agreement with the owner, like our Model Consent Agreement, that includes the following protections as conditions of your approval:

No additional costs. A redevelopment could create additional common areas or elements at the center that you didn't anticipate paying to maintain when you signed your lease. Specify that you won't incur any additional costs as a result of the construction. If buildings are being added, you can address that as well. Have the owner agree that any costs it incurs to keep new common areas or buildings clean as a result of the new construction should be paid by the owner, not you as the tenant, says Titterington [Agr., par. 1].

Utilities. Heat and air conditioning are sometimes affected by a redevelopment. Some HVAC changes could require these and other utilities to be temporarily cut while work is being performed. The owner should accommodate you as much as possible. After all, lights are essential to your operation and customers won't want to be in an uncomfortable space that's too hot or cold. However, some businesses will be affected more than others—for example, restaurants and grocery stores with food that must be kept at a certain temperature [Agr., par. 2].

Operating hours. Many owners don't understand the nature of retail businesses: They need to be open to be profitable, notes Titterington. “A poorly planned redevelopment or one that begins with very little, or no, notice to a tenant can gravely impact its sales if it causes the tenant to temporarily close or reduce its hours,” she warns. “Our view is always the customer's view—that's what we're considering in a redevelopment situation where operating hours need to be taken into account,” she says. Customers need to be able to access the store easily and at convenient hours. A reduced operating hours schedule deters customers who can shop only at certain times or on certain days.

Certain times of the year are especially important when it comes to operating hours, as well as parking availability. Make the owner agree that there won't be any construction during the heavy holiday sales season [Agr., pars. 6, 7].

Parking and access. A redevelopment could also affect the parking spots you're entitled to under your lease with the owner—that is, they could be reduced or relocated to an area that's less convenient for customers and your employees. And while it's important to make sure that customers' access to your space isn't blocked, don't forget to ensure that deliveries can be made to your store. Require the owner to keep access drives open and unobstructed [Agr., pars. 8, 9, 10, 13].

Visibility and signage. Owners generally understand that they should cover the cost of replacement signage if a tenant's signs must be taken down during construction or signs indicating the tenant's location if its visibility has been diminished by renovations. But it still behooves a tenant to specify in the agreement that it wants certain types of signage—for example, professionally made banners—that say it's still open during construction [Agr., par. 14].

Safety and security. There's a safety aspect to redevelopments that tenants need to be aware of, says Titterington. Store employees need a safe place to park. During redevelopments, if lighting fixtures or signs that provide light are taken down, it can leave an unsafe situation for anyone coming out of the tenant's space after dark. So require the owner to provide adequate and additional lighting for safety, as well as adequate fencing around dangerous equipment or materials [Agr., pars. 11, 12, 15].

Remedies. Specify that, in the event the owner violates any requirement set forth in your agreement, you'll have the right—in addition to any other remedies available to you in the lease—without a notice or cure period, to immediately abate base rent until the violation is cured [Agr., par. 20].

Know What You Need and How to Ask for It

If you request that the owner do or not do certain things once a redevelopment is underway, it could easily argue that you're being unrealistic or difficult. And you'll have little power to stop it. It's crucial to get these issues into the lease ahead of time. But strike a balance between insisting on what you need and being reasonable in your requests. Determine what aspects and areas of the center are important to your business, such as common areas and access drives, so that products can be delivered to you. Then, when making your requests, stick to items that, if changed, would be detrimental to your business.

Owners generally won't agree to leave all aspects of a center, such as common areas, untouched at a tenant's request. Create your own reasonableness standard to follow when negotiating. Your reasonableness standard should be based on the customer's perspective, notes Titterington.

Small tenants, especially, should know what they need and reduce it appropriately. For example, as a small tenant, you need parking, but you don't need the entire parking field to be open—just enough spots to accommodate your customers. And you might not need a rear access drive either. Don't ask for more than you need. You're more likely to get your requests by knowing your need as a retailer and pushing for items that fill that need.

Insider Source

Camilla Titterington, Esq.: Acting Head of Real Estate Legal, PetSmart, Inc., 19601 N. 27th Ave., Phoenix, AZ 85027; ctitterington@ssg.petsmart.com.

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