Leave Center's Site Plan Open to Change

Before a prospective tenant signs a lease for space in your shopping center, it will want to know certain information about the center to make sure that the space will be advantageous to its business. The information it's interested in will most likely include items like the location of the barriers, common areas, curb cuts, entrances, exits, loading zones, other tenants, and parking areas; the size of spaces; the means of access to a space; and the size and location of the center's buildings.

Once a tenant makes its decision to rent space in the center based partly on these items, it'll want to nail them down. After all, a tenant that bases a financial decision on them will want to make sure that they don't change later. But be careful when providing site plans to a tenant. Don't lock yourself into plans for your center that you may want to change later without a hassle from the tenant.

Keep Site Plan Simple

“During negotiations, owners may use a site plan, which is usually a depiction of the general layout of the ultimate buildout of the property, to show the prospective tenant where things will be located at the center,” says Northern Virginia real estate attorney and Insider board member David S. Houston. If the tenant approves of the site plan, it typically will be attached to the lease.

Site plans vary and, depending on the size, leverage, and bargaining power of the tenant, can be very general in nature or very specific, Houston points out. “Typically, tenants try to negotiate in specificity, whereas owners try to keep the site plan as general and nonbinding as possible,” he adds. Large tenants especially are more likely to push for binding plans. “Anchor or big box tenants probably can dictate where buildings can or can't be located now or in the future, the height of new buildings, and how many buildings and outparcels are allowed,” notes Houston.

Because the site plan is a significant part of the leasing process—often used in marketing for the property, discussed early on in negotiations, and included in the letter of intent—a tenant will want to have some control over whether you can make changes to the site plan and, if you want to change the property later, could try to claim that it relied on the site plan when making its decisions, says Houston. If a detailed site plan turns out not to be exactly accurate, the tenant might try to get out of its lease or sue you for misrepresentation. You could end up going through costly litigation if the tenant sues you for violating the lease or tries to stop your construction work.

By keeping a site plan as simple and vague as possible, it allows you to change the details of your site plan without the tenant's consent. It's important to reserve your right to modify the site plan.

Anticipate Need for Flexibility

Even if you intend to keep the center the same as it is now for the foreseeable future, your circumstances could change, especially during the course of long-term lease terms that may last 25 years or more. Consider these common reasons for a site plan change when weighing the importance of giving yourself flexibility to modify it:

Redevelopment. A very detailed site plan could hamper your right to redevelop your property. “If a certain tenant vacates the property, the owner might be better in the long run to take down that space and build something new in its place,” Houston points out. A redevelopment sometimes interferes with common areas, which must be moved or modified, or other areas of the property that were once attractive to the tenant.

Pad sites. “Often, there's a big economic benefit to owners who have freestanding pad sites in the center's parking lot,” says Houston. “The more pads that you're able to fit into the parking field, the more lucrative these pad sites are,” he adds. Gas stations and fast food restaurants built on pad sites can increase your profit and bring more traffic to the center. But you might not want to develop and lease pad sites at the time a prospective tenant approves of a site plan and signs its lease, and committing to a site plan that doesn't take into account the possibility of pad site buildings later can prevent you from taking advantage of them if the tenant objects then.

Overall development change. If you originally planned to split up the center into spaces for several tenants, but a large restaurant or even a movie theater expresses interest in combining and leasing all of those spaces, or you decide that you want a use you hadn't contemplated for certain spaces at the center, you'll want the freedom to do that.

Balance Two Elements

“An owner's main prerogative is to maintain flexibility to make changes to the center,” stresses Houston. If a big box goes dark, the owner wants the ability to fill the space with any suitable tenant it can attract, which sometimes is not a traditional retail use—that is, tenants like movie theaters, churches, and bowling alleys, he says. Houston emphasizes the importance to owners of trying to keep “use” flexibility and “design” flexibility for themselves. However, he points out that they'll have to balance this with tenants' main prerogative—to lease the center they were promised, without any changes.

Prepare for Three Requests

“From a tenant's perspective, what's important is visibility from either adjacent roads or within the center; that's why it will try to prevent anything from being built that would block or adversely affect its visibility,” says Houston. “A tenant doesn't want a pad building in front of it that's three stories high when its space is only one.” Sign visibility is also important.

Tenants are also protective about parking spaces that are going to be used by their customers—whether it's how many spaces they want or the location of the spaces, he says.

“A large tenant would try to negotiate some sort of ‘no build’ area in its parking field so the owner won't be able to build a pad site or other structure that would block visibility and/or take away parking,” says Houston. Expect for it to push for a “no build” term in the lease.

“Access is also a big issue for tenants as far as the site plan is concerned,” he adds. They're protective of their access and circulation, especially if they receive deliveries every day.

Negotiate Middle Ground

If you agree to a “no build” provision, height restrictions, or protected access for entrances the tenant uses, try to limit the area to only what's truly needed for that tenant's normal operation, recommends Houston. Avoid binding the entire shopping center down, he says.

For example, if the site plan protects from change an entrance that the tenant's customers would unlikely use and you later need to make a change to it, the tenant may not give you permission or a waiver, even if the change really has no effect on the tenant's business, warns Houston. That's because it could try to use its permission for the unauthorized change as leverage to extract some other kind of concession, he explains.

And don't give a “no build” right for the entire parking lot—just the number of spaces in front of the tenant's store.

“Of course, tenants will say that they don't want any change, but the goal during negotiations is to balance your right to flexibility with the site plan that the tenant wants to ensure,” Houston advises.

Use Disclaimer in Two Parts of Lease

You can use your lease and the site plan exhibit to ensure your flexibility to make changes to the center without the tenant's consent. First, put a site plan disclaimer in your lease where it talks about your control over the shopping center and its common areas. Also, if you have a new center or it hasn't been completed yet, consider instead starting the disclaimer by saying that the site plan is intended only to be an “approximate”—not exact—depiction of the center as it's currently expected to exist when the space is delivered to the tenant.

Remember that in the lease there should also be a reference to the site plan as an exhibit, on which you can type a second disclaimer that the plan is a “general layout and not binding” and is “subject to change in the future.” For language you can adapt and use in your lease's site plan, see our Model Lease Language: Reserve Right to Change Center Later.

Including these points in both the lease and on the site plan itself will clarify that the document isn't meant to be an exact depiction of the center, but a more general picture at the particular point in time that the lease is signed. The disclaimer also puts the tenant on notice that the contents of the site plan aren't permanent and that the tenant can't expect the site plan to remain unchanged during its lease term.

Insider Source

David S. Houston, Esq.: Pillsbury Winthrop Shaw Pittman LLP, 1650 Tysons Blvd., 14th Fl., McLean, VA 22102-4856; www.pillsburylaw.com