How to Respond to 11 Common Tenant Demands During Phased Development
Developing a shopping center in phases may be a good option for you if you want to begin the project even when conditions for the whole development of it are incomplete. “Phasing” allows you to construct one phase after you get commitments from tenants that they'll lease space in that phase, and then continue constructing additional phases as you get commitments from more tenants.
You might construct a center with three or more phases over several years. It could be challenging to attract tenants to your phased development though, if they don't want to put up with construction noise and debris on a long-term basis and if they are worried about the uncertainty inherent in phased construction.
Be aware that a standard lease probably won't address many of the special demands relating to the center's phasing that apprehensive tenants will bring up during negotiations. But be wary of giving in to demands that could restrict the flexibility needed to properly develop and design your center, or that could hamper the construction process, increase your costs, or hinder your attempt to finance or sell the center if necessary.
That's why it's important to consider using the following responses to 11 common demands that tenants of phased developments make. Your responses to these demands will depend on many factors, including the tenant's negotiating power and your ability to predict the timing, configuration, and tenants of future phases, says Los Angeles real estate attorney Sheldon A. Halpern. The responses should be tailored to your own situation, he adds.
11 COMMON TENANT DEMANDS
Site Plan Must Identify Entire Developed Center
A tenant will most likely demand that the site plan provide a detailed layout of the entire center, with accurate dimensions, and a configuration of the center and development. Otherwise, the tenant will argue that it won't get an accurate picture of how the center will turn out.
Don't give in to this demand, says Halpern, who focuses his practice on shopping centers and mixed-use projects. Make it clear to the tenant that the site plan isn't meant to show a detailed layout, exact dimensions, or the configuration of the entire center, he notes; its purpose is merely to show the general location of the tenant's space. Halpern suggests that you add the following language to the disclaimer on your site plan, and that you use capital letters so the tenant will notice the language:
Model Language
This exhibit is diagrammatic only. It is intended only to show the general location of the premises and is not intended to show the exact dimensions or configuration of the shopping center, the identity of the occupants of the shopping center, or the extent or scope of the development thereof.
Site Plan Must Identify Permissible Building Areas
The tenant may also demand that the site plan clearly identify the center's building areas, showing the precise locations where buildings may be constructed.
You can agree with larger tenants that the site plan should show building areas. But give yourself some flexibility in the buildings' construction. Make sure that the building areas are drawn larger than the contemplated buildings, and make the areas even more flexible for future phases, advises Halpern.
You Must Construct Entire Center as Shown on Site Plan
The tenant may demand that you promise to complete the entire center—including all future phases—substantially as shown on the site plan, so you won't construct a center that the tenant doesn't want or expect.
Tell the tenant that you shouldn't be obligated to build all of the future phases just because they're indicated on the site plan, says Halpern. Over time, you may discover that building all of the future phases doesn't make sense financially because there may not be enough demand from customers or prospective tenants. You don't want this tenant forcing you to construct phases you may not need. Also, existing or future leases may set limitations on future phases that aren't indicated on the site plan. Halpern recommends that you add the following language to the site plan's disclaimer:
Model Language
The shopping center may be constructed in phases, and landlord shall not be under any obligation to construct phase 2 or phase 3, as designated on the site plan.
You Must Provide Parking as Shown on Site Plan
Because customer parking is a major concern for retailers, the tenant will want you to promise to meet a certain parking ratio and provide parking spaces near its store. And it may want control over the number and location of curb cuts and access roads not only in its phase but in the entire center, so that customers' cars will have easy access to its store from the roadways around the center.
The tenant should not control parking, curb cuts, and access roads in the entire center. As a compromise, give the tenant some control over parking ratios, curb cuts, and access roads in its phase of the center, but not in future phases, says Halpern. For example, agree to get the tenant's approval if you want to change the number or location of important curb cuts and access roads in its phase, he says. But make it clear that its approval is unnecessary if you plan to change unimportant curb cuts and access roads. (You'll need to iron out with the tenant which curb cuts and access roads are important and which aren't.) Tell the tenant that it can't control the precise location of parking areas in its phase or in future phases, because you may need to adjust those areas to accommodate other tenants that come into the center, Halpern adds.
Tenant's Exclusive Will Apply to All Phases
The tenant will demand that its exclusive use right apply to the entire center, including all future phases.
Tell the tenant that its exclusive will apply only to its phase, not to any future phase, says Halpern. If the tenant balks at your response, try this as a compromise: Agree that the exclusive can apply to designated portions of future phases, but not to all of the future phases, he says. Also, the exclusive must not apply to any big-box tenants or any portion of the center that you've sold, because you can't control either the big boxes or the new owner's uses, he adds.
He notes, however, that a reciprocal easement agreement (REA) imposed on portions being sold could deal with the new owner's future uses, but if that compromise is agreed to, the tenant should agree that you are not responsible for the new owner's violations—that you should have the option to proceed against the new owner or permit the tenant to do so directly.
Only You May Develop Entire Center
The tenant may demand that, for continuity purposes, only you may develop the entire center. That would mean you couldn't sell all or any portion of the center to anyone else (or finance portions of the center separately).
Reject this demand. You want the flexibility to sell or finance all or any portion of the center if opportunities arise, says Halpern. And if the sale goes through, tell the tenant that you expect to be released from your lease obligations as they relate to the sold portion of the center when the new owner “assumes”—that is, takes over—those obligations, he adds.
Model Lease Language
If Landlord shall transfer or convey the Shopping Center or any part thereof, Landlord shall be released, relieved, and discharged from all of its covenants, obligations, and liabilities under this Lease with respect to the portion transferred and with respect to any period after the effective date of the transfer, provided that the transferee assumes such covenants, obligations, and liabilities with respect to the portion transferred and with respect to the period after the effective date of the transfer.
Center's Governing Documents Must Be Recorded
If you sell a portion of the center, you and the new owner should enter into an REA, which sets out the entrances, exits, construction, maintenance, and operational rights relating to more than one property. The tenant will want the REA to say how and when the construction will occur, and to place design controls on the center's development.
If the tenant's space is located in the center's first phase, you may not want to include too much detail in the REA for the future phases, warns Halpern. If you must address the future phases in the REA, at least get the right to amend the REA to provide further and more accurate details as you become aware of them, he says. He notes, however, that a large tenant may insist on the right to approve any REA amendments, but if it is given such a right, it should agree not to withhold its consent if the tenant's rights under its lease are not materially and adversely affected.
Memorandum of Lease Must Refer to Entire Center
If you or the tenant records a memorandum of lease, the tenant will demand that it must refer to the entire center, not only to its phase.
Giving in to this demand could be dangerous. If the tenant has an exclusive or approval rights and the memorandum of lease applies to the entire center, third parties might get the impression that the exclusive and approval rights apply to the entire center, not just to designated portions of it, Halpern warns. If you must give in to this demand, make it clear in the memorandum of lease what portions of the center are burdened by the exclusive and approval rights.
You Won't Let Construction Interfere with Tenant's Business
The tenant may require you to promise that the construction of the future phases won't interfere with its ability to run its business. And it may demand that you ensure that all access points around its space are kept clear—including the center's main entrance.
Agree only that the construction work won't materially interfere with the tenant's business operation, says Halpern. That is, the construction won't cause major interference, but it may cause some interference. Also, promise only to make reasonable efforts to prevent the construction work from interfering with all access points near the tenant's space, including the center's main entrance, he says. That way, you will limit any requirement that you do anything extraordinary or extremely costly to keep those access points clear, Halpern explains.
Model Lease Language
Tenant acknowledges that construction will inevitably create more interference (including, without limitation, noise) with Tenant's business operations than would arise in the absence thereof. Landlord agrees that the construction work won't materially interfere with the operation of Tenant's business at the Premises, and Landlord shall use commercially reasonable efforts to minimize such interference and keep all access points near the Premises—[insert locations]—and the main entrance of the Shopping Center free from obstructions.
You Must Limit “Staging Areas”
The tenant may require you to limit the size and location of any “staging areas”—that is, areas where construction materials will be brought and stored, and where construction vehicles will park. And it may require you to erect a fence around the staging areas to protect its employees and customers from construction materials.
Tell the tenant that you'll agree to limit only those staging areas near the tenant's space, but not elsewhere, says Halpern. And provide a fence only if you're permitted to do so by local laws and codes, he says.
You Must Bar Construction Work During Certain Months
The tenant will want you to bar construction work during its biggest sales months (such as the year-end holiday season). Agreeing to this demand could cause substantial disruption to the construction process, warns Halpern. Agree to it only if you're negotiating with a major tenant, he says. At the very least, you should have the right to complete any construction that started before the holiday or busy season and should not be burdened by this restriction if the tenant is not operating, he adds.
Insider Source
Sheldon A. Halpern, Esq.: Partner, Pircher, Nichols & Meeks, 1925 Century Park East, Ste. 1700, Los Angeles, CA 90067; www.pircher.com.
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