Negotiate Flexibility to Change Shopping Center at Later Date

The design, practicality, and price of interior retail space are big ticket items when a tenant is deciding to lease space in a shopping center. But what a tenant can get and for what price doesn’t matter if other elements at the center don’t work for the tenant. Just as landlords like certainty on their side of the deal—and, accordingly, try to use lease forms that achieve that goal—tenants want to make sure that the crucial items they fought for in a deal today won’t go down the drain later. So don’t be surprised when, before a prospective tenant signs a lease for space in your shopping center, it wants to know certain additional information about the center to make sure that the space will be advantageous to its business over the long haul.

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. Tenants may also have a concern about temporary/seasonal kiosks and carts; they could ask either about specific kiosks and carts that are already at the center, or your overall plan for giving space to these types of sellers.

Once a tenant makes its decision to rent space in the center based partly on these items, it’ll want to nail them down. That’s when you have to protect your interests by avoiding being locked into the center’s current layout.

Be careful when providing site plans to a tenant. It can accidentally lock you into plans for your center that you may want to change later without a hassle from the tenant. You never know what will happen that will require you to reconfigure any number of things at your property, and you need the freedom to do so. Here’s how you can reserve the flexibility you need—and model lease language to achieve this.

Aim to Make Site Plan Nonbinding

During negotiations, it’s common practice for owners to use a site plan (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. 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. Typically, tenants try to be as specific as possible and owners try to keep the site plan as general and nonbinding as possible.

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.

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. 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 also important to formally reserve your right to modify the site plan.

Leave Room for Growth of Center

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 lease terms that may last 25 years or more. Redevelopment and pad sites are two common reasons for a site plan change, so think about the likelihood of those issues affecting you.

A very detailed site plan could hamper your right to redevelop your property, among other ramifications like making selling and, maybe, financing it more difficult. 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. 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.

Often, there’s a big economic benefit to owners who have freestanding pad sites in the center’s parking lot. The more pads that you’re able to fit into the parking field, the more lucrative these pad sites are; 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.

You could also want an 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.

And you need to balance two elements. An owner’s main prerogative is to maintain flexibility to make changes to the center. If a big box goes dark, you’ll want the ability to fill the space with any suitable tenant you can attract, which sometimes is not a traditional retail use—that is, tenants like movie theaters, churches, and bowling alleys. Remember that it’s crucial to try to keep “use” flexibility and “design” flexibility for yourself. However, you’ll have to balance this with tenants’ main prerogative—to lease the center they were promised, without any changes.

Prepare for Three Requests

There are three key items that tenants will be especially concerned with, so prepare to deal with the following:

Item #1: Visibility. 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. A tenant doesn’t want a pad building in front of it that’s three stories high when its space is only one. A large tenant would try to negotiate some sort of “no-build” area in its parking field so you won’t be able to build a pad site or other structure that would block visibility. In this case, expect for it to push for a “no-build” term in the lease.

Item #2: Parking. 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. A no-build term does double duty for protecting visibility and parking, so be prepared to deal with this request on two fronts during negotiations.

Item #3: Access. Access is also a big issue for tenants as far as the site plan is concerned. They’re protective of their access and circulation, especially if they receive deliveries every day.

Make Negotiation a Win-Win

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. Avoid binding the entire shopping center down. 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. That’s because it could try to use its permission for the unauthorized change as leverage to extract some other kind of concession. 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.

Craft Lease Language to Protect Your Interests

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.

Practical Pointer: Our Model Lease Language would give the owner the right to change or eliminate the name of any tenant or the nature or use of any tenancy shown on this site plan. Be aware that this is a big statement that may conflict with use clause language in the lease that protects the tenants from certain types of uses at the center. You should expect a reaction to this language and be prepared to acknowledge that it doesn’t negate any promises made regarding the nature or tone of the overall tenancy at the center. 

Insider Source

Elizabeth Ferrara: 1-800-Flowers.com & associated brands, One Old Country Rd., Ste. 500, Carle Place, NY 11514; www.1800flowers.com.