Minimize Tenant Interference with Shopping Center Redevelopment

Don’t wait for a project to begin to address the issue. Put key redevelopment rights in the lease.

 

To survive and thrive in a brick-and-mortar environment, retail properties need to have state-of-the-art physical facilities. But because so many of the nation’s shopping centers were built in the 20th century, refurbishment and remodeling (which, for simplicity’s sake, we’ll refer to collectively as “redevelopment”) has become the order of the day. However, undertaking redevelopment is not only expensive but also fraught with legal obstacles. As too many a landlord has learned the hard way, those obstacles may include stout opposition from current tenants.

If you wait until after a project begins to address the issue, you’ll likely end up in a negotiation with the tenant holding the upper hand. A far more effective approach, experts say, is to clear the way for redevelopment proactively at the time tenants sign their lease. The strategy: Include language in the lease that gives you maximum leeway to perform the redevelopment work you deem necessary to improve the shopping center during the term of the lease.

Here’s a look at the key rights you need and a Model Lease Clause you can use to secure them. Also keep in mind that while this analysis is geared toward shopping centers, it can also be adapted to office, warehouse, industrial, and other commercial settings.

Uncooperative Tenants Can Undermine Redevelopment

Redevelopment work is messy, noisy, and disruptive. And the results it produces may not be appealing to all tenants, especially to the extent it makes the shopping center substantially different and less favorable than the one the tenant thought it was committing to. For example, a tenant located near the shopping center entrance may object that a plan to relocate the main entrance violates the lease and prevents it from using the property as it intended when it signed the lease.

While unhappy tenants are never a good thing, negative reaction might go beyond mere grumbles. Tenants who object to redevelopment projects may also:

• Withhold rent;
• Demand rent reductions, lease extensions at below market rates, or other concessions;
• Refuse to alter or install new signs or displays conforming to your center’s revised signage criteria;
• Move out and claim that the redevelopment work constitutes constructive eviction or a breach of the warranty of habitability;
• Sue you for damaging their business; and/or
• Go to court seeking declarative relief or an injunction barring you from carrying out the redevelopment project.

Example: An Illinois shopping center tenant sued to stop a landlord from building an outparcel in the parking area, claiming that the plan violated its nonexclusive lease right to use all of the common area in the center, including the parking areas. The court agreed and issued an injunction barring the landlord from completing the project. There was no clear-cut provision in the lease giving the landlord the right to alter the common areas displayed in the original site plan attached to the lease, the court reasoned [Madigan Brothers Inc. v. Melrose Shopping Center Co., 463 N.E. 2d 824].  

Even if tenants’ redevelopment-related claims prove invalid, the time, energy, and money you spend fighting them may drive up the costs of the project, generate delays, or even force you to cancel the work entirely.

GET 8 KEY REDEVELOPMENT RIGHTS IN YOUR LEASE

To effectively minimize potential tenant interference, spell out your redevelopment rights and reserve the right to exercise any or all of them at any time, and from time to time, at your sole and absolute discretion [Clause, par. 1]. To avoid being bound by your original site plan, a la the landlord in the Madigan Brothers case above, have the tenant acknowledge that the site plan is “diagrammatic only” and intended as neither a representation showing the exact configuration, number, location, or size of the property nor a warranty that the latter will remain the same without varying during the lease term [Clause, par. 2].

The heart of the clause spells out the kinds of rights you’ll need to carry out redevelopment projects during the lease term without being deemed to be in breach of the lease or the tenant’s warranty of habitability. Caveat: The Model Lease Clause takes a landlord-favorable approach that you might have to negotiate if the tenant is in a strong bargaining position.

1. Right to Temporarily Block Common Areas

Redevelopment work may require you to temporarily obstruct or close off parts of the common areas. So, give yourself the right to do this in advance. Otherwise, tenants might sue you, contending that temporary obstructions violate their lease rights and damage their business [Clause, par. 3(a)].

Negotiating Strategy: A savvy tenant may demand assurances that the temporary obstructions you create won’t negatively affect the visibility of or access to their store, according to a Chicago retail leasing attorney. It might also insist that you work with “commercially reasonable diligence” to remove the temporary obstructions you create. Although the tenant’s concern is legitimate, commercially reasonable diligence can be an onerous standard. The attorney suggests that you agree instead not to obstruct or close off the common area any longer than “reasonably necessary.”

In addition, don’t be surprised if tenants demand a rent abatement or other concession for any period during which they can’t conduct their business as a result of the obstruction. If you have to accept this demand, the Chicago attorney says that you should at least be sure to make the size of the abatement proportionate to the amount of space the tenant can’t use.

2. Right to Change Size, Location, and Appearance

Reserve the right to change the size, dimensions, and appearance of the shopping center or any part of the center. This should enable you to avoid disputes with tenants who believe that their space has been degraded or made less desirable by the redevelopment work. The clause will also protect you from lawsuits by tenants claiming that the redevelopment hurt their business [Clause, par. 3(b)].

Negotiating Strategy: Tenants may try to impose limits on your remodeling rights. For example, tenants located near the main entrance may want assurances that they’ll always be no farther than a specified distance from the new entrance. These restrictions may limit your redevelopment options, and attorneys say that you shouldn’t accept them unless the tenant is in an unusually strong negotiating position.

3. Right to Relocate Buildings, Structures, and Tenants

Give yourself the right to relocate the shopping center’s existing buildings, structures, and tenants’ spaces. This will protect you if tenants object to redevelopments involving relocations that adversely affect their current space [Clause, par. 3(b)].

Negotiating Strategy: One potential way to appease tenants who chafe at granting you blanket relocation rights due to concerns over access or sight lines is to designate an area in front or within a specific sight line of the tenant’s space as a “no-build zone.” Just make sure you make it clear that “no-build zone” status doesn’t impair your right to perform maintenance or routine operational changes, such as adding light poles or benches within the designated area.

4. Right to Construct New Buildings and Structures

Your redevelopment rights should include constructing additional buildings and structures in the center, common areas (such as kiosks), the tenant’s space, and areas adjoining the property. Be sure you can build not just horizontally but also vertically by adding stories to buildings. Also get the right to demolish and rearrange the center, in whole or in part [Clause, par. 3(c)].   

5. Right to Alter or Expand the Parking Facilities

Redevelopment projects involving parking areas are a particularly touchy issue with many tenants. So, be sure to get the express right to expand, reduce, alter, or relocate parking areas, including construction of multiple deck, elevated, or underground parking areas [Clause, par. 3(d)].

Negotiating Strategy: Parking area redevelopment rights clauses may be problematic if you’ve previously granted tenants parking-related concessions, such as an assured minimum number of reserved spaces in a designated area affected by the construction. As a result, you may have to negotiate a compromise that either respects or replaces the tenant’s parking benefits.

6. Right to Alter or Add Infrastructure

Certain redevelopment work may require changes to the center infrastructure, including those directly affecting a tenant’s space. For example, erecting a new floor may require you to run a new pipe through the tenant’s store. So, get the right to make infrastructural changes, including by adding pipes, risers, electrical wires and installations, columns, and utility lines [Clause, par. 3(e)].

Negotiating Strategy: Don’t be shocked if tenants push back on this one, such as by seeking to bar you from installing new columns in its prime sales or display areas or requiring you to hide new HVAC shafts and utility lines from public view. The need for compromise will be dictated by the situation and tenant’s bargaining clout.

7. Right to Grant, Terminate, or Modify Easements

Redevelopment might affect your current easements or agreements affecting the use of the property. For example, a project may require you to relocate cables that you’ve allowed a tenant or municipality to install in the parking areas under an easement. That’s why your lease should give you the express right to grant, modify, or terminate easements with both tenants and third parties [Clause, par. 3(f)].

8. Right to Add More Property

Make sure you have the right to acquire whatever additional property you need to complete your redevelopment projects [Clause, par. 3(g)]. Otherwise, tenants may challenge the project as illegally increasing the common areas and thus their CAM charges. (The counter argument to this is that the expansion will also draw more people to the center.)

Limit Your Liability to Tenant for Redevelopment

Having secured maximum rights to carry out redevelopment, also guard your flanks against the risk of liability to the tenant in connection with the undertaking. Attorneys advise that you can do this by getting the tenant to agree:

• That you won’t have any liability for redeveloping the shopping center, so, for example, the tenant can’t sue you for damage to its business if the redevelopment process causes it to lose customers or sales [Clause, par. 4(i)];
• To waive its right to go to court seeking an injunction or declaratory judgment blocking the redevelopment project [Clause, par. 4(ii)];
• That if it does take legal action against you in connection with the redevelopment, its sole recourse will be to seek money damages [Clause, par. 4(iii)]; and
• That it will pay all of the legal costs you incur in defending the tenant’s legal action if that action proves unsuccessful [Clause, par. 4(iii)].

Check for Other Lease Provisions Affecting Redevelopment

The final step is to scan your existing leases for other provisions that may be necessary to protect your redevelopment rights, such as a clause ensuring you the right to access the tenant’s property, if necessary, during the redevelopment process. You also need to verify that the redevelopment work won’t violate your current lease duties to tenants, such as a clause:

• Banning you from creating noise and vibration; and
• Requiring you to ensure that the tenant’s premises are readily accessible to customers at all times; and/or
• Banning you from relocating the tenant from its current premises.