LEASE AGREEMENT REFERENCE GUIDE 510: STRATEGIES FOR NEIGHBORHOOD SHOPPING CENTER LEASES $49.95
STRATEGIES FOR NEIGHBORHOOD SHOPPING CENTER LEASES
This LARG looks at a series of clauses negotiated by a supermarket in a neighborhood shopping center lease. As one might expect, all of the provisions are extremely pro-tenant. Supermarket and superdrug tenants are the key to the financing and development of neighborhood centers--as a result, they possess great leverage. The extent of that leverage is evident in the clauses that follow.
The Supermarket Flexes Its Muscles In The Neighborhood Center
The series of clauses that follows is typical of those negotiated by supermarkets in a neighborhood shopping centers. Generally, such centers have two large anchors, the supermarket and the superdrug. These anchors normally take the lion's share of the space in the center (e.g., 40,000 square feet or more each) for their stores; the balance of the center is usually leased to smaller retail tenants in the 1,000 to 6,000 square foot range.
As noted above, the leverage enjoyed by such retail anchors is formidable. The lease clauses that follow are fairly typical in their degree of control over the development, operation and future redevelopment of the shopping center. They contain a series of representations and warranties (i.e., statements by the landlord concerning the center that the tenant relies upon) which protects the tenant from several events that could have a negative impact upon the tenant's business.
The tenant has also negotiated a number of covenants (i.e., promises by the landlord concerning the center) beginning in Section 12.02 in which the landlord agrees to refrain from various activities which the tenant views as harmful to its interests. The tenant has negotiated express remedies (e.g., termination and cure and deduct rights which give it the right to remedy specified items and deduct the cost from the rent under the lease) for landlord breaches. Finally, the tenant has negotiated broad prohibitions concerning, and controls over, the other retail tenants in the complex.
LANDLORD'S WARRANTIES AND COVENANTS
12.01 As of the date hereof Landlord makes, and as of the Rent Commencement Date Landlord shall reaffirm, the following covenants, representations and warranties for the benefit of Tenant:
(a) Landlord has the full right and power to grant the estate demised herein, and to execute and deliver this Lease and perform its obligations, all without notice to, or the consent of, any other person or entity.
Comment: Section 12.01 (a) contains a representation by the landlord that it is empowered to enter into and execute the lease with the tenant, and that the landlord need not obtain the consent of any third party to do so. This sort of warranty should cause the landlord to review the loan covenants contained in its financing documents for the shopping center carefully. Normally, the lender's approval of all space leases for the shopping center is required, and it is almost always required for major tenants such as the supermarket and the superdrug. Assuming the landlord has obtained the lender's approval of the lease, this warranty should be no problem. If the development entity (i.e., the landlord) is a partnership, this warranty would also apply to any approvals or consents required by other general partners (or if the landlord is a corporation, from various corporate officers or the board of directors).
(b) That, so long as Tenant is not in breach of its duty to pay rent, or in the performance of any of its other covenants and agreements hereunder, beyond the applicable grace periods, Tenant shall peaceably and quietly have, hold and enjoy the Leased Premises, and all rights, covenants, appurtenances and privileges pertaining thereto, from and after the date hereof and throughout the Term of this Lease, without interference by Landlord or anyone claiming by, through or under Landlord.
Comment: Section 12.01 (b) is a quiet enjoyment clause in favor of the tenant. In this clause, the landlord warrants that the tenant will have quiet enjoyment of the premises, provided it is not in default under the lease. Under this clause, the tenant is to have quiet enjoyment of the premises without interference from the landlord or anyone claiming by, through or under landlord. This is the normal scope of protection contained in a quiet enjoyment clause.
Many aggressive tenants negotiate to expand the scope of quiet enjoyment protection by proposing a clause that guarantees peaceful possession of the premises without interference from anyone. This would include interference from third parties, notably other tenants, over which the landlord may have little or no control. While the added protection may be comforting for the tenant, it poses expanded risk for the landlord.
(c) That, without limiting the foregoing, no other tenant or other occupant of the Retail Complex has any estate or rights which are inconsistent with the estate or rights of Tenant set forth in this Lease.
Comment: Section 12.01 (c) contains a representation by the landlord that no other tenant or occupant in the shopping center has rights which are inconsistent with the tenant's lease. Such a warranty could be troublesome for the landlord in a variety of contexts. If this lease gives the tenant exclusive rights to sell certain lines of merchandise in the shopping center, then inconsistent or even loosely worded use clauses in the leases of other tenants could be a problem. This "no inconsistent rights" warranty should cause the landlord to review all of its other signed deals for the center, particularly with regard to access, signage, parking, use and exclusives.
(d) That, if at any time during the Term hereof, the title of Landlord shall fail or it shall be discovered that Landlord's title is or was insufficient or inadequate to grant the estate hereby demised (or if Landlord breaches any of the other provisions of this Article 12), and Landlord shall fail to cure such breach or defect within thirty (30) days after Landlord receives notice thereof (or, if such violation cannot be cured within such thirty (30) day period, then within such longer period of time as is necessary, provided Landlord commences such cure within such thirty (30) day period and thereafter diligently proceeds to complete such cure), then in such event, Tenant shall have the option:
(i) to correct such breach or defect and deduct the reasonable expenses thereof (including fees of counsel), with interest thereon (at the Highest Legal Rate), from the next ensuing payments of rent next due under this Lease, or, alternatively
(ii) to terminate this Lease, upon ten (10) days written notice to Landlord.
If Tenant elects to exercise either of the foregoing remedies, such exercise shall be with full reservation of Tenant's right to damages (if any) and to equitable relief, including specific performance, together with a full reservation of any other right or remedy available to Tenant at law or in equity.
Comment: Section 12.01 (d) pertains to failures of the landlord's title and gives the tenant an express right to correct such defects and deduct the costs from the rent next coming due, or to terminate the lease upon written notice to the landlord. Even though the landlord has cure periods available to it to cure title problems, this provision could present big problems for the landlord. What, exactly, is a title problem that makes the landlord's title "insufficient or inadequate to grant the estate hereby demised?"
Does that mean, for example, that an access easement in favor of another tenant that is technically inconsistent with access rights in favor of this tenant would give the tenant the right to terminate the lease? What if the "failure of title" has no material impact whatsoever upon the tenant's operations? Although a tenant right of termination for real failures of title is a reasonable remedy, the landlord should carefully think through this sort of warranty and ensure that its precise wording does not let a disgruntled tenant out of its lease for title problems that have no real impact upon the tenant's business operation.
Also note that the express remedies of cure and deduct and lease termination are not the tenant's sole and exclusive remedies for such failures of title. Even though the tenant terminates the lease, it can subsequently bring a damage action in addition to the termination for alleged landlord breaches. Finally, these two express remedies apply to any other landlord breach of the warranties or covenants contained in Article 12.
(e) Notwithstanding the foregoing time limits specified in Section 12.01 (d) hereof, in the event of an emergency, danger to person or property, or substantial interference with Tenant's Gross Sales, such shorter period of time as the circumstances of the situation may require shall apply.
Comment: Section 12.01 (e) modifies (i.e., shortens) the landlord's thirty day cure period which must run prior to the tenant's exercise of its remedies in the event of a failure of title or other breaches under Article 12. In the event of an emergency, or danger to persons or property, the landlord is required to cure within a "shorter period of time as the circumstances of the situation may require." What does that mean? It probably means that a court will have to determine the duration of a reasonable cure period based upon the circumstances, if the landlord and tenant cannot agree between themselves. Also note that the cure periods specified above would be shortened by an event that constitutes a "substantial interference with the tenant's gross sales."
(f) Landlord has not made, and shall not make, any commitments or representations to any applicable governmental authority, or to any adjoining or surrounding property owner, which would in any manner be binding upon Tenant or interfere with Tenant's right or ability to conduct its business in the Leased Premises, all in full accordance with the provisions of this Lease, and Landlord has no knowledge of any such commitments or representations made by any of Landlord's predecessors in title.
Comment: Section 12.01 (f) contains a warranty by the landlord that it has not made any commitments or representations to governmental authorities or adjacent property owners which would interfere with the tenant's right to conduct its business in the premises. That warranty also covers representations or commitments made by the landlord's predecessors in title to the extent the landlord knows about them.