It is common for retailers to purchase
or ground lease “outlots” in a shopping center. Often this means that
There are no buildings on the outlot,
and it is not leased to any other tenant (all of the other tenant leases in the
center are for spaces in the main building in the center, or are for buildings
on other outlots in the center). So, what possible rights could the existing
tenants have in this remote outpost on the periphery of the shopping center
property?
It is easy in these situations to focus
primarily on the engineering aspects of the outlot development—e.g., where can
the building be sited to create good visibility of its storefront and signage;
how can the parcel be designed to achieve the required number of parking spaces
the retailer needs for the store site operations (for zoning or operational
purposes, or both); how can the driveways be laid out to best integrate and tie
into the existing driveways and traffic systems of the existing shopping
center, etc. It is also easy to gloss over the potential rights of the other
existing tenants or occupants of the shopping center in the parcel that the
Landlord has purported to carve out for this purpose. Afterall, the outlot
parcel is simply a remote corner of the parking field. There are no buildings
on the outlot, and it is not leased to any other tenant (all of the other
tenant leases in the center are for spaces in the main building in the center,
or are for buildings on other outlots in the center). So, what possible rights
could the existing tenants have in this remote outpost on the periphery of the
shopping center property?
The answer is—potentially quite a bit,
and in ways that may not be readily apparent to either the shopping center
owner (ground landlord) or the outlot purchaser or ground tenant (let’s call
this party the “Outlot Developer”). The rights that existing tenants can have
in shopping center parking fields and other common areas classically consist of
parking rights and access (driveway) rights, but can also include other types
of rights such as development restrictions (e.g., “no-build areas” or
restrictions on height, scope or other vertical installations) to protect the
visibility of other tenants’ storefronts and signage, exclusives or prohibited
use restrictions, parking ratio requirements, protected or exclusive common
areas, and other types of controls. These existing tenant rights are truly
“traps for the unwary” to which well represented Outlot Developers will be
attentive (and to which their attentive counsel will be “wary”).
In some cases, the existing tenants’
rights in the outlot will be fairly readily apparent through standard due
diligence. If, for instance, the shopping center owner has created a Reciprocal
Easement Agreement (REA) or Declaration of Easement, Covenants and Restrictions
(ECRs) to establish a system of common easements and restrictions governing the
entire shopping center, the REA or ECR will be matters of title record and will
be readily discoverable as part of the Outlot Developer counsel’s standard
title and survey. In many cases the REA or ECR will include a plan of the
overall shopping center that identifies and delineates the access and driveway
easements that have been created for the common benefit of all tenants and occupants
of the center, and will also set forth common use restrictions that apply to
occupants of the center, as well as development restrictions that may apply to
all or certain select areas of the shopping center. The Outlot Developer’s
counsel will obviously need to carefully review the REA or ECRs to determine
whether these common easements and development restrictions affect the outlot
at issue, and to be sure that the Outlot Developer’s intended use of the outlot
will not run afoul of the various exclusive and prohibited uses established
under the REA or ECR. If there are conflicts the Outlot Developer’s counsel
will (of course) need to raise these issues as objections to the
landlord/seller during the due diligence period, and drill down clearly on what
needs to occur to cure the issue. For instance, if the REA or ECR needs to be
amended (e.g., to relocate an easement or modify development restrictions that
conflict with the development of the outlot) then the mechanism for amendments
has to be reviewed closely to determine who has the authority to effect the
amendment and whether the consent or joinder of third parties (including in
many cases ground tenants of other outlots or even inline tenants for whose
benefit the use restriction or development restriction was created) is
necessary.
Discovering and reviewing recorded REAs
or ECRs, however, is only the first (and probably the easiest) step in
investigating possible existing rights in the outlot at issue. Other rights of
existing shopping center tenants and occupants are usually contained in their
individual leases with the shopping center owner/landlord. A major tenant of
the center, for instance, may have been granted its own “no build” area in
portions of the common parking field in front of its store in order to protect
visibility of its storefront from the public streets and other common areas of
the center. Such existing tenant will almost certainly have been granted the
general rights (in common with other tenants) to use the common parking, driveways
and other common areas of the shopping center, but may also have been granted
“protection” over certain particular driveways and curb cuts that are
particularly important for direct and convenient access to the tenant’s store
(and therefore cannot be closed or modified without the tenant’s consent), or
even exclusive rights to use certain parking areas in proximity to such store.
The major tenant will also (almost certainly) have been granted exclusive use
restrictions to protect against competitors operating, or competing business
lines being conducted in, the same center, as well as broad “prohibited” use
restrictions that preclude noxious uses from being conducted in the center
(such as adult/pornography oriented businesses, flea markets, and shooting
ranges) but which invariably also contain uses that might really only be
considered undesired to that particular tenant (e.g., a gym, entertainment
center, movie theater, etc.). These rights, development restrictions, and use
restrictions created for the benefit of that particular major tenant may not be
captured in an REA or ECRs, and may only be ascertainable through other means.
In many cases, these rights and restrictions will be ascertainable from a short
form “Notice of Lease” or “Memorandum of Lease” that the particular tenant and
the landlord record in the title records to put the general public on notice of
the existence of the lease and of the special shopping center rights and
restrictions granted to the tenant.
Accordingly, counsel for the Outlot
Developer should review all notices of lease that are in the title record for
existing tenants of the shopping center to ascertain all of the idiosyncratic
rights and restrictions that have been granted to those tenants, and to ensure
that the proposed development and use of the outlot at issue do not run afoul
of those rights and restrictions. If it would (or could) then the Outlot
Developer and/or the shopping center owner/landlord will need to go (hat in
hand) to the existing tenant to request a waiver of the rights or restrictions
at issue, and perhaps be prepared to loosen the pocketbook.
As noted above, the rights and
restrictions in REAs, ECRS, and Notices of Lease will be matters of public
record, and should be fairly readily ascertainable to the Outlot Developer’s
counsel through the exercise of ordinary diligence. But what about other
(usually smaller) tenants who have not recorded a Notice of Lease, and thus the
existence of their leases (let alone their rights and restrictions thereunder)
is not a matter of public record? The Outlot Developer might simply conclude
that, because the smaller tenants have not recorded notices of lease, the
Outlot Developer is a “bona fide purchaser” (or bona fide ground tenant) who
has purchased or paid value for the outlot without record notice of any rights
the smaller tenants may have in the center common areas. But… is the Outlot
Developer really an “innocent” purchaser or ground tenant? Notwithstanding that
they have not recorded notices of lease, those smaller tenants are likely
openly and obviously operating businesses in the shopping center, with visible
signage and storefronts, and with apparent rights to do so (no one is kicking
them out). So, it should be apparent to the Outlot Developer that these smaller
tenants have rights to occupy their respective spaces in the center, and
probably have written leases establishing those rights. It will also be open
and obvious that they and their employees and customers are using the common
parking areas, driveways and parking areas of the center, and so it should be
apparent to the Outlot Developer that these tenants probably have rights in
those common areas. Thus, simply because a tenant does not have a recorded
notice of lease does not mean that the Outlot Developer has no notice of the
tenant or of the tenant’s rights in the center. Quite to the contrary, the
Outlot Developer’s actual notice of the tenant, and in particular of the
tenant’s apparent rights in the common areas of the shopping center, probably
places on the Outlot Developer a duty to inquire as to what rights those
tenants may have in the common areas, and in particular what rights they may
have in the outlot at issue. Fulfilling that duty of inquiry can be laborious
and painstaking (the details of which are probably the subject of a separate
article).
In summary, shopping centers are
complicated arenas with a host of different parties, a host of different
leases, contracts, and land use instruments, and a host of different (and
sometimes competing) rights and restrictions. Accordingly, it is important for
any purchaser or ground tenant of a shopping center outlot to thoroughly
analyze the various legal documents in play in the center, untangle and
understand the rights of the various existing tenants and other interest
holders in the center, and determine clearly whether its proposed development
and use of the outlot conflicts with such existing rights. Woe is the outlot
developer who binds itself to decades of ground rent for the outlot, spends millions
of dollars designing, permitting and constructing a new store facility on the
outlot, and then receives a demand letter from an existing tenant demanding
that improvements on the outlot be removed and that the parking spaces and
driveways formerly located on the outlot be immediately restored.
As always, it is in the interest of the
outlot developer (and of the landlord under a ground lease) to be represented
by knowledgeable and experienced commercial leasing and development attorneys
who can sort through these complexities, identify these types of issues, and
ultimately map out practical solutions to resolve them.
https://www.lawmtm.com/shopping-center-outlots-existing-tenant-rights.html
Originally posted November 30, 2018 on tlawmtm.com:
https://www.lawmtm.com/shopping-center-outlots-existing-tenant-rights.html
Tom is a former REBA President and principal of the firm (Moriarty Troyer & Malloy LLC) and chair of its Commercial Real Estate Department. Tom has over 20 years of experience in representing Fortune 500 companies, national and local banks, retailers, shopping center owners, and investors in all facets of acquisition, development, operation and leasing of commercial real estate throughout the country
