How to Make Sure Leases Don't Violate Center's Governing Document

If your center is like many, you probably signed a “governing document”—such as an operation and easement agreement, a reciprocal easement agreement (REA), or a declaration of covenants, conditions, and restrictions—with the owner of an adjoining center or an anchor or big-box retailer at your center. A governing document typically places certain restrictions—such as parking, use, signage, or construction restrictions—on your center.

It is essential that you observe the restrictions in the governing document to avoid lawsuits by the other center's owner or an anchor—parties that very likely would be formidable opponents in court. However, some owners forget about their governing document's restrictions when they negotiate their leases. As a result, they end up agreeing to add clauses to their leases that could trigger violations of the center's governing document.

For example, suppose your REA sets out where your center's entrances and exits will be located. However, you agree in a strong tenant's lease to move an entrance closer to the tenant's space—a location not permitted by the REA. It is too late to discover after you sign the lease that changing the entrance's location will violate the REA. At that point, you are in a no-win situation: If you don't move the entrance, the tenant will sue you for violating the lease; if you move the entrance, the other party to the REA will sue you for violating the REA.

Protect Yourself with Two-Step Strategy

You can avoid finding yourself in that very undesirable situation, says Denver attorney Bonnie Larson-de Paz. She recommends following this two-step strategy:

Step #1: Make sure lease and governing document are consistent. Before signing a lease, review the governing document and the lease. Make sure that the lease's clauses are consistent with the terms and restrictions of the governing document, says Larson-de Paz. If there is an inconsistency, modify or delete the offending lease clause, she advises.

Step #2: Add protective language to lease. Add language to the lease that protects you and alerts the tenant to the existence of the governing document, says Larson-de Paz. The language should do the following:

• Make lease “subject to” governing document. Require the lease to say that it is “subject to” the terms and provisions of the governing document and to its modifications, amendments, and revisions, says Larson-de Paz. By including “subject to” language, you make sure the governing document's provisions must be followed if the governing document and lease ever conflict, she explains.

Add the following language to your lease, says Larson-de Paz:

Model Lease Language

Landlord and [insert name of anchor] (the “Anchor”) have entered into a [insert name of governing document, e.g., Reciprocal Easement Agreement], dated [insert date] (the [insert abbreviation, e.g., “REA”). This Lease is in all respects subject to the terms and provisions of the REA and to all modifications, amendments, and revisions thereof.

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Practical Pointer: Expect a strong tenant to demand that you modify that lease language to limit your ability to enter into modifications, amendments, and revisions of a governing document on your own, says Larson-de Paz. For example, you may have to agree to include the following additional language, she says: “Notwithstanding the foregoing, Landlord shall not enter into any modifications, amendments, or revisions of the REA if they would materially adversely increase Tenant's obligations under this Lease.”

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• Require tenant's business to comply with governing document. Give the tenant an incentive to conduct its business in a way that will not cause it or you to violate the governing document, she explains. State in the lease's use clause that the tenant must maintain and conduct its business in strict compliance with the governing document, as well as any laws, rules, regulations, and orders of insurance underwriters, advises Larson-de Paz.

Model Lease Language

Tenant shall at all times maintain and conduct its business, insofar as the same relates to Tenant's use and occupancy of the Premises, in a lawful manner, and in strict compliance with any maintenance and/or easement agreement, including but not limited to the REA, all governmental laws, rules, regulations, and orders and provisions of insurance underwriters applicable to the business of Tenant conducted in and upon the Premises, including those with respect to storage, handling, discharge, and transport of any pollutant, contaminant, or hazardous, toxic, or dangerous substance.

CLLI Source

Bonnie Larson-de Paz, Esq.: Shareholder, Isaacson Rosenbaum P.C., 633 17th St., Ste. 2200, Denver, CO 80202; (303) 292-5656; blarson@ir-law.com.