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Retail Tenant Law

Developing Shopping Center Outlots—Beware of Existing Tenants Rights

It is common for retailers to purchase or ground lease “outlots” in a shopping center. Often this means that the shopping center owner carves out a parcel within the existing parking field of the shopping center, and ground leases or sells the new “parcel” to the retailer to redevelop as a freestanding retail store site, with a new building and related site improvements such as sidewalks, landscaping, lighting, utility installations, and perhaps even dedicated parking areas and driveways.

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.

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Tom Bhisitkul