Restrictive Covenants in Commercial Developments

The operation of a shopping center is hardly static. There are the initial considerations for the tenant mix and design of a shopping center. Further, there are the subsequent considerations concerning redeveloping and remarketing a shopping center over time to remain competitive in the trade area. The provisions in an REA could possibly hinder both the landlord's and tenant's efforts to meet such challenges of providing what their customers want at the time and in the manner their customers have come to expect.

The Initial Restrictions

These initial recorded restrictions will set the stage for the character of the development to follow and should be given thorough consideration by the “first generation” of occupants of the shopping center. These restrictions are often imposed by the landlord, but may also be imposed by leasehold anchor tenants, other significant tenants whose leases are necessary for financing initial development of the shopping center, adjacent property owners and lenders. Generally, these restrictions will address:

1) Construction Process ' The construction process, including architecture and design considerations; parking ratios; building location, building configuration (including height, size, color and other design criteria); setback requirements; signage (on and off-site) and landscaping to ensure the consistency of the presentation of the shopping center; and

2) Use Restrictions ' Use restrictions limiting or precluding certain protected retail uses for any existing or proposed occupants (eg, exclusive and radius clauses) and other use restrictions prohibiting obnoxious or undesirable uses (eg, manufacturing facilities and other non-retail uses) for the benefit of the landlord and all tenants of the shopping center. The anchor tenants and other big box tenants at almost any shopping center will undoubtedly try to impose certain restrictions to protect their use from competition from other tenants, as well as from other future development of the shopping center by the landlord.

Expansion and Redevelopment

The initial recorded restrictions that provided protection and other benefits to the landlord and the first generation of tenants can, in the second generation of the shopping center's life, work to hinder the shopping center's ability to adapt and change to keep pace with consumer demands and market conditions. Many shopping centers in the “second generation” of life are either in the process of expansion or in need of redevelopment.

In order to evaluate the feasibility of a shopping center's expansion or redevelopment properly, a thorough analysis of all the restrictive covenants encumbering the shopping center should be performed. The express and/or implied covenants, conditions and restrictions affecting the shopping center can inhibit expansion or redevelopment efforts in ways that are sometimes unpredictable.

1) Use Restrictions. Existing use restrictions may or may not inhibit expansion or redevelopment of a shopping center, depending upon the developer's redevelopment or expansion goals. In evaluating the applicable restrictive covenants, consideration should be given to the following:

• Are there any specific use restrictions that may prohibit the introduction of new occupants or new uses into the shopping center? For example, a recorded restriction may prohibit a landlord from replacing traditional department stores with discount department stores or category killers or may contain certain exclusive rights that may prohibit certain kinds of users and/or uses. Alternatively, a recorded restriction may have been negotiated in which a change in use by a tenant or occupant will terminate the exclusive use restriction or trigger a buy-back right for the landlord.
• Are there any implied use restrictions that may prohibit expansion and redevelopment? For example, a landlord may be prohibited from changing a retail shopping center to a mixed-use facility if the terms of the REA do not specifically permit the change in the nature of the shopping center. Implied use restrictions may also arise by virtue of the attachment of a site plan or other rendering of a shopping center to the REA. A site plan may negatively affect expansion efforts beyond what is depicted on it, if the site plan is determined to be a binding term of the REA.
• Is the intent of a use restriction susceptible to alternative meanings? Restrictions can have alternative and evolving meanings.

2) Construction Restrictions. Construction restrictions can clearly limit expansion and redevelopment efforts. Expressed restrictions may hinder expansion and redevelopment efforts. Examples of express construction restrictions in an REA would include:

• A provision that creates a “no build area” or “permissible building area”;
• A provision that no additional buildings may be built without the consent of one or more of the occupants;
• A provision that restricts uses of the common areas for any purposes other than the mutual nonexclusive uses for which those areas were designated;
• A provision for parking ratio requirements for different types of uses in the shopping center; and
• A provision prohibiting interference with existing access and visibility, and permitting short term or seasonal sales areas.

Implied restrictions may also negatively affect the expansion and redevelopment of a shopping center. One of the most obvious implied restrictions may result from the attachment of a site plan naming certain tenants and occupants by their trade name, showing the size and configuration of the stores in relation to each other and the portion of the shopping center allocated to common and parking areas. Many courts have held such a site plan to be a sufficient implied representation for access and visibility from which each occupant expects to benefit throughout the term of its occupancy. Other examples of implied construction restrictions may include:

• common areas creating easements for access, visibility, parking etc.;
• the definition of the “Premises” incorporating appurtenant rights creating implied covenants with respect to existing access and visibility; and
• the definition of the “shopping center,” which does not include future expansion areas, therefore precluding the developer from expanding the shopping center or permitting tenants on adjacent land to share the common areas.

3) Parking Ratios and Prohibitions. Anchor tenants and other occupants with leverage will have taken steps to protect the accessibility to and size of parking areas close to their portions of the shopping center. As part of the expansion or redevelopment process, the following questions should be asked:

• Are there any expressed covenants or conditions regarding the size and/or location of parking fields or access points?
• Can any tenant or other party claim implied covenants or conditions with respect to parking or traffic flow from the attachment of site plans as exhibits?
• Can any tenant or other party claim implied covenants or conditions with respect to parking or traffic flow from the developer's compliance with code parking requirements that have now been modified or superseded?
• Will restrictions imposed on the shopping center encumber out parcels?
• What about after-acquired property by the landlord?

In summary, to create value initially for each respective party and to maintain the long-term viability of a shopping center, it is essential to draft an REA with clear, precise language to avoid ambiguity and the need for interpretation by the courts.

Recorded restrictive covenants in commercial developments present many issues. Two important factors to consider when granting such covenants include: 1) the reoccurring impact that they may have over the life span of a shopping center, and 2) the potential impact of such covenants on the current and future objectives of landlords and tenants who are parties to them.

The recorded agreements between property owners (and sometimes major tenants) that set forth the guidelines for the construction, management and operation of a multi-parcel commercial retail development are generally known under a variety of names such as “conditions covenants and restrictions,” or “reciprocal easement agreements” or “operation and easement agreements” (collectively an “REA” for purposes of this article); yet whatever the name of the recorded agreements, they are generally intended to add value to the shopping center and protect the interests of the property owners and tenants, as the case may be.

Quite often REAs are associated with large department store-anchored regional shopping malls that comprise acres upon acres of land; however, REAs are now also frequently used with smaller developments that may comprise a few acres and have multiple stand-alone parcels. In many areas of the country, these types of developments are “in fill” projects in urban areas where the availability of developable land is limited. An example of this smaller development could be a development with a drug store on a corner, a restaurant with sit-down service on an adjacent parcel, and a fast food restaurant with a drive-through facility on another parcel, where all the parcels would have common access to each other. The landlord may decide for investment purposes to sell each parcel separately. To add value to ' or at least maintain value of ' all the parcels, an REA would be necessary. Most likely, each tenant (or occupant) of such a development would want to be part of the process in drafting the REA to protect its interests (such as the permitted use and exclusive use restrictions).

The operation of a shopping center is hardly static. There are the initial considerations for the tenant mix and design of a shopping center. Further, there are the subsequent considerations concerning redeveloping and remarketing a shopping center over time to remain competitive in the trade area. The provisions in an REA could possibly hinder both the landlord's and tenant's efforts to meet such challenges of providing what their customers want at the time and in the manner their customers have come to expect.

The Initial Restrictions

These initial recorded restrictions will set the stage for the character of the development to follow and should be given thorough consideration by the “first generation” of occupants of the shopping center. These restrictions are often imposed by the landlord, but may also be imposed by leasehold anchor tenants, other significant tenants whose leases are necessary for financing initial development of the shopping center, adjacent property owners and lenders. Generally, these restrictions will address:

1) Construction Process ' The construction process, including architecture and design considerations; parking ratios; building location, building configuration (including height, size, color and other design criteria); setback requirements; signage (on and off-site) and landscaping to ensure the consistency of the presentation of the shopping center; and

2) Use Restrictions ' Use restrictions limiting or precluding certain protected retail uses for any existing or proposed occupants (eg, exclusive and radius clauses) and other use restrictions prohibiting obnoxious or undesirable uses (eg, manufacturing facilities and other non-retail uses) for the benefit of the landlord and all tenants of the shopping center. The anchor tenants and other big box tenants at almost any shopping center will undoubtedly try to impose certain restrictions to protect their use from competition from other tenants, as well as from other future development of the shopping center by the landlord.

Expansion and Redevelopment

The initial recorded restrictions that provided protection and other benefits to the landlord and the first generation of tenants can, in the second generation of the shopping center's life, work to hinder the shopping center's ability to adapt and change to keep pace with consumer demands and market conditions. Many shopping centers in the “second generation” of life are either in the process of expansion or in need of redevelopment.

In order to evaluate the feasibility of a shopping center's expansion or redevelopment properly, a thorough analysis of all the restrictive covenants encumbering the shopping center should be performed. The express and/or implied covenants, conditions and restrictions affecting the shopping center can inhibit expansion or redevelopment efforts in ways that are sometimes unpredictable.

1) Use Restrictions. Existing use restrictions may or may not inhibit expansion or redevelopment of a shopping center, depending upon the developer's redevelopment or expansion goals. In evaluating the applicable restrictive covenants, consideration should be given to the following:

• Are there any specific use restrictions that may prohibit the introduction of new occupants or new uses into the shopping center? For example, a recorded restriction may prohibit a landlord from replacing traditional department stores with discount department stores or category killers or may contain certain exclusive rights that may prohibit certain kinds of users and/or uses. Alternatively, a recorded restriction may have been negotiated in which a change in use by a tenant or occupant will terminate the exclusive use restriction or trigger a buy-back right for the landlord.
• Are there any implied use restrictions that may prohibit expansion and redevelopment? For example, a landlord may be prohibited from changing a retail shopping center to a mixed-use facility if the terms of the REA do not specifically permit the change in the nature of the shopping center. Implied use restrictions may also arise by virtue of the attachment of a site plan or other rendering of a shopping center to the REA. A site plan may negatively affect expansion efforts beyond what is depicted on it, if the site plan is determined to be a binding term of the REA.
• Is the intent of a use restriction susceptible to alternative meanings? Restrictions can have alternative and evolving meanings.

2) Construction Restrictions. Construction restrictions can clearly limit expansion and redevelopment efforts. Expressed restrictions may hinder expansion and redevelopment efforts. Examples of express construction restrictions in an REA would include:

• A provision that creates a “no build area” or “permissible building area”;
• A provision that no additional buildings may be built without the consent of one or more of the occupants;
• A provision that restricts uses of the common areas for any purposes other than the mutual nonexclusive uses for which those areas were designated;
• A provision for parking ratio requirements for different types of uses in the shopping center; and
• A provision prohibiting interference with existing access and visibility, and permitting short term or seasonal sales areas.

Implied restrictions may also negatively affect the expansion and redevelopment of a shopping center. One of the most obvious implied restrictions may result from the attachment of a site plan naming certain tenants and occupants by their trade name, showing the size and configuration of the stores in relation to each other and the portion of the shopping center allocated to common and parking areas. Many courts have held such a site plan to be a sufficient implied representation for access and visibility from which each occupant expects to benefit throughout the term of its occupancy. Other examples of implied construction restrictions may include:

• common areas creating easements for access, visibility, parking etc.;
• the definition of the “Premises” incorporating appurtenant rights creating implied covenants with respect to existing access and visibility; and
• the definition of the “shopping center,” which does not include future expansion areas, therefore precluding the developer from expanding the shopping center or permitting tenants on adjacent land to share the common areas.

3) Parking Ratios and Prohibitions. Anchor tenants and other occupants with leverage will have taken steps to protect the accessibility to and size of parking areas close to their portions of the shopping center. As part of the expansion or redevelopment process, the following questions should be asked:

• Are there any expressed covenants or conditions regarding the size and/or location of parking fields or access points?
• Can any tenant or other party claim implied covenants or conditions with respect to parking or traffic flow from the attachment of site plans as exhibits?
• Can any tenant or other party claim implied covenants or conditions with respect to parking or traffic flow from the developer's compliance with code parking requirements that have now been modified or superseded?
• Will restrictions imposed on the shopping center encumber out parcels?
• What about after-acquired property by the landlord?

In summary, to create value initially for each respective party and to maintain the long-term viability of a shopping center, it is essential to draft an REA with clear, precise language to avoid ambiguity and the need for interpretation by the courts.