Get Right to Change Use of Specialty Building or Center

Don’t get boxed in by implied use restrictions.

Like some landlords, you may run your property as a specialty facility, like an office building that leases only to medical practices or a shopping center that houses only outlet stores. While specializing has its advantages, it can also exert an enormous drag on your business, especially when the industry sector you target experiences difficult financial times. Being limited to just one type of tenant can also be a disadvantage even in a good economy. That’s why it’s crucial to have the freedom to expand your tenant mix and reach out to other kinds of businesses.

The problem is that your current lease may not give you that freedom. Specifically, it might require you to lease the building or center to tenants for only a specific kind of use. Even if the lease includes no language that expressly spells this out, such restrictions might be implied particularly where you impose express limits on tenants’ use of their own space.

Court Bars Landlord from Changing Furniture Center’s Use

The owner of a four-building shopping center in New York got a costly firsthand lesson on the dangers of getting locked into a particular use via implication. The landlord’s vision was to build a “first-class interior design showroom center” exclusively for the contract furniture trade. Sure enough, other than a few support tenants, every tenant in the center was a contract furniture company. And every lease included language limiting the tenant’s use of the space to showrooms and sales to the contract furniture trade. Leases also included the landlord’s promise to run the center “as a first-class commercial building intended to be used for showrooms and other related uses.”

When the economy went into recession, many of the tenants had to close down and the landlord found it increasingly difficult to find new contract furniture companies to replace them. The center began to lose money, and the landlord had to default on a loan. Faced with such hardships, the landlord started to lease out space to other kinds of tenants, including a videotape duplication company and a local government agency. The landlord also reconfigured the layout of some of the buildings, which made it hard for customers to travel from one showroom to another as had been previously envisioned.

Relations with the remaining contract furniture tenants reached a breaking point when the landlord tried to consolidate them all into one building. Tenants were asked to relocate to smaller spaces, extend their leases, agree not to open any other showrooms in New York City, and waive any claims they had against the landlord. A tenant refused to accept the proposal and sued the landlord to get out of the lease and recover damages. The federal court sided with the tenant, holding that the landlord violated the lease. Nothing in the lease expressly required the landlord to rent only to contract furniture showrooms, the court acknowledged. However, it concluded that taken together, all of the lease provisions created an implied restriction barring the landlord from leasing to any tenant outside of the contract furniture showroom business [Herman Miller, Inc. v. Thom Rock Realty Company, L.P., 46 F. 3d 183 (2d Cir 1995)].

How to Guard Against Implied Use Restrictions

The best way to ensure that you don’t end up getting boxed in by implied use restrictions is to address the issue head on in your lease. Here’s a negotiating approach and set of model lease clauses you can use to implement it, which you may want to consider.

Starting Point: Hardball Stance

Start the negotiation by demanding the right to change the use of your building or center at your sole discretion at any time and for any reason. There are certain things you’ll need to add to your lease clause to execute this strategy.

Use Clause Addition: First, add language to the part of the lease that describes the tenant’s permissible use of the premises to indicate that you aren’t making any representations that the rest of the building or center will be used for any specific purpose. Attorneys also suggest giving the tenant the right to change its own use of the space with your prior written consent, to the extent the change is necessary to harmonize with the uses you allow at the property. Such a provision indicates that the tenant is aware of and accepts the prospect of your making changes in the property’s use in the future.   

Model Lease Language

Landlord makes no representation that any other portion of the [Building/Shopping Center] is, or will be during the Lease Term, utilized for Tenant’s permitted use. Landlord shall not unreasonably withhold the consent to any changes of such Tenant’s permitted uses requested by Tenant if the proposed change in use is in keeping with the then current composition of uses permitted by Landlord in the [Building/Shopping Center].

“Right to Change” Clause: Next, add a clause giving you the express and unrestricted right to change the use, size, quality, character, and/or tenant mix of the building or center at any time at your sole discretion.

Model Lease Language

Landlord shall have the right, in its sole business judgment, from time to time during the Lease Term to alter, in full or in part, the size, quality, and character of the common area, leasing area, leasable area, and tenant mix of the [Building/Shopping Center], as well as the use(s) to which the [Building/Shopping Center] may be put.

No Promises or Representations Clause: Reinforce your rights by having the tenant acknowledge that none of the lease provisions create any “restrictive covenant”—that is, implied promise restricting your right to use the building or center in any way you want and to lease to any tenant you wish.

Model Lease Language

Tenant hereby specifically acknowledges and agrees that this Lease imposes no restrictive covenants upon Landlord or [Building/Shopping Center], and that this Lease does not and shall not be deemed to contain any representation by Landlord that any particular tenant or type of tenant shall occupy or continue to occupy premises in the [Building/Shopping Center] during the Lease Term.  

Fall-Back Strategies When Compromise Is Necessary

Expect tenants to push back on allowing you sole discretion over future uses, especially when they’ve gone out of their way to lease space in a specialty building or center. And if tenants have the bargaining strength, you’ll probably have to make concessions. Here are some potential compromise options to consider.

Right to Make “Necessary” Use Changes: Instead of absolute discretion, reserve the right to make future use changes only when they’re necessary to maintain and preserve the building or center.

Model Lease Language

Landlord shall make good faith efforts to maintain the [Building/Shopping Center] primarily for [insert current use]; however, if the future commercial leasing market or demographic or other economic factors over time dictate, in Landlord’s sole business judgment, a higher and better use of the [Building/Shopping Center] that varies, in whole or in part, from its current use, then Landlord shall have the right to alter the tenant mix and use(s) to which the [Building/Shopping Center] may be put.

Use Changes Allowed at Defined Vacancy Rates: While it’s something of a compromise, the “necessary changes” approach still leaves you as the sole arbiter of when changes are necessary. So, don’t be surprised if tenants object to the proposal and demand clarification of what exactly constitutes necessity to impose changes. Tenants will likely insist on some kind of objective standard. One possibility is to tie the right to make use changes to future vacancy rates.

Model Lease Language

Landlord shall make good faith efforts to preserve the current use and tenant mix of the [Building/Shopping Center]; however, if more than ____% of the gross leasable area in the [Building/Shopping Center] presently being utilized for such use is then vacant, Landlord shall have the right to alter the tenant mix and use(s) to which the [Building/Shopping Center] may be put.

Limited Right of Tenant to Terminate: Some tenants may see any changes in a specialty building or center’s use, regardless of the circumstances, as defeating the purpose of entering into the lease. For these tenants, the only acceptable compromise will be getting the right to walk away when and if the landlord makes changes to the current specialty use or tenant mix. If you agree to give tenants termination rights, just be sure that you:

• Let the tenant exercise the right to terminate only if the change affects a substantial part or percentage (the exact definition of which you’ll have to negotiate) of the building or center;
• Give yourself latitude to make temporary and short-term changes by imposing a time limit for the tenant’s termination rights to vest, e.g., no sooner than 12 months after the triggering change in use occurs; and
• Require the tenant to give you at least 60 days’ notice of its election to terminate so that you’ll have ample time to find a replacement tenant or renegotiate a new deal with the current one.

Model Lease Language

In the event Landlord exercises its right to alter the current use and tenant mix of the [Building/Shopping Center], and as a result thereof more than ____% of the gross leasable area in the [Building/Shopping Center] is utilized for purposes other than [insert current use] and such condition continues for more than ____ consecutive months, then Tenant shall have the right to terminate this Lease upon ____ days’ notice.