In the Spotlight: Outparcel Leasing and Sales ' Concepts to Consider

In addition, and as discussed below, issues may arise regarding whether the outparcel tenant or the landlord is responsible for the maintenance, repair, restriping and repaving of the parking spaces during the term. Further, issues may arise concerning the landlord's rights if the parking spaces become in disrepair during the term, even if it is the outparcel tenant or purchaser who is responsible to maintain the parking spaces.

In any event, the manner in which the parking spaces will be utilized should be carefully examined prior to reaching an agreement with the outparcel tenant or purchaser.

Insurance/Casualty

When leasing space for in-line tenants, the insurance section and/or casualty section of the lease is fairly mundane and substantially similar for all in-line tenants. However, for outparcel properties, the insurance section may vary from tenant to tenant. For instance, certain tenants desire that the landlord maintain the insurance on the building or structure and that the tenant will maintain insurance on the interior fixtures and moveable personal property. The issue then becomes who will pay for the cost of the insurance and who is responsible for rebuilding the structure once a casualty occurs.

Conversely, a tenant may desire to maintain the insurance on the structure, attached fixtures and moveable personal property, so that in the event of a casualty, the tenant is solely responsible for repairing the structure, attached fixtures and personal property, and the tenant is able to control the insurance proceeds and the performance of the reconstruction work. If a tenant seeks to maintain the insurance on the outparcel property, very often the tenant will seek a termination right of the lease, in the event a casualty occurs during the last 2 or 3 years of the term (ie, so that the tenant can determine whether it is worth the cost to rebuild the outparcel property, only to have its lease expire shortly after the rebuilding process is completed).

In considering a tenant's request to maintain insurance for the structure, attached fixtures and moveable personal property, the landlord may want to consider whether it is best for the landlord to maintain insurance over the entire shopping center, including the outparcels. A landlord may seek to maintain such insurance coverage (instead of the tenant) because the cost to maintain additional insurance on the outparcel may be a fairly negligible cost for the landlord to absorb (or be reimbursed by the tenant) and in the event of a casualty that encompasses most, if not all of the shopping center, the landlord would be able to resolve the insurance issues more easily with one insurance company, instead of dealing with various insurance companies that are handling the rebuilding process on behalf of the tenant or purchaser of the outparcel.

Similar to the rights requested by a tenant, if the tenant maintains the insurance on the outparcel, a landlord who maintains insurance on the outparcel may seek the right to terminate the lease, in the event of a casualty during the last 2 or 3 years of the term.

Also, the party maintaining the insurance may seek to include a provision in the lease whereby the party is not obligated to expend amounts in excess of those insurance proceeds received from its insurance company. Further the landlord and the tenant should address the question regarding a casualty that is not covered by insurance (eg, arson, earthquake, where no earthquake insurance is maintained, etc.). The landlord and the tenant should determine who will bear the risk of an uninsured casualty, so that appropriate reserves can be maintained to address such an occurrence.

Maintenance and Repair

In the typical in-line leasing situation, the tenant will maintain the interior of the premises and those areas exclusively serving the premises, whereas the landlord will maintain the common areas of the shopping center and the structural portions of the shopping center. However, the landlord and the tenant may elect to handle maintenance and repair issues in a totally different manner for outparcel leasing. In particular, the landlord may determine that any maintenance and repair, including the parking field that services the outparcel, will be maintained and repaired by the tenant. However, even if this is the case, the landlord will want to maintain certain rights to repair and maintain the parking fields and other common or exterior areas, if the tenant fails to satisfy its maintenance obligations.

Similarly, the landlord and the tenant may seek to reach certain agreements as to the maintenance and the repair of the structural portions of the building constructed on the outparcel. For instance, if the outparcel structure is already present at the time the tenant seeks to lease the outparcel space, the landlord may be required to provide certain warranties and repair obligations, in the event the structure located on the outparcel needs repair or replacement during a specified period of time (eg, the first 5 years of the term).

Also, the landlord and the tenant may want to establish which party is responsible for removal of hazardous materials, if they are determined to exist on the outparcel property. As a result, the landlord and the tenant should consider requiring a survey of the environmental condition of the property before executing a lease agreement for the outparcel property. If the environmental condition of the property is not surveyed by the parties before executing a lease, it is even more important for the parties to determine the exact manner in which an environmental condition will be handled during the term.

Signage

A critical element of outparcel leasing involves the signage that will be permitted on the building or structure located on the outparcel, as well as any pylon signs or monument signs located within the shopping center property. The landlord and the tenant should not only determine how many signs will be permitted and the size of the lettering for each sign, but they should also determine the various locations of the signage that will be permitted at the shopping center. While, obviously, there will be constraints imposed by governmental authorities on the signage that will be permitted at the shopping center, there should be consensus between the landlord and the tenant as to what signage the landlord will permit.

The landlord and the tenant (or purchaser) of the outparcel would be wise to attach to the agreement between the parties an exhibit that would detail the signage that has been approved by the landlord. The signage drawing should be detailed enough to specifically address types of signage, height of signage lettering, lighting of the sign, location and number of signs permitted, as well as designating whether the tenant will have the right to appear on the pylon signage (and in what location) or any monument signs located at the shopping center.

By carefully considering the issues discussed above, the landlord and the tenant can carefully address certain critical outparcel leasing concepts, so as to avoid confusion and disputes once the lease agreement or purchase agreement is signed. If possible, these issues should be addressed in the letter of intent between the parties, prior to leasing, but at a minimum, the issues should be addressed in the lease document or purchase document between the parties. As always, careful planning and careful drafting may serve to avoid costly disputes between the parties once the outparcel property has been leased or sold.

When leasing or selling parcels of property that are located outside of an enclosed shopping center but within the perimeter of the shopping center property (eg, along the interior road of the shopping center, along the peripheral boundary of the shopping center, or along shared parking fields of a shopping center), a landlord should consider several concepts that may not be considered critical issues when leasing in-line space. However, for purposes of leasing or selling outparcel locations, these concepts are not only financially important to the landlord, but also will impact the day-to-day operations of a shopping center. These concepts include parking, insurance/casualty, maintenance and repair, and signage.

Parking

Often when leasing or selling an outparcel, the tenant or purchaser requires that a certain number of parking spaces also be designated or set aside for exclusive use by the outparcel. Further, the tenant or purchaser will want to designate by signage or otherwise the particular parking field that is set aside for customers of that particular outparcel. Several factors may impact the decision of the landlord to designate parking spaces for a particular outparcel. In particular, the proximity of the outparcel to adjacent tenants that have a heavy parking use (eg, restaurants, movie theaters, etc.), restrictions imposed by reciprocal easement agreements or covenants of record relating to the establishment at the shopping center of tenant-specific parking fields, and governmental restrictions mandating the necessity that a certain number of parking spaces be used by the entire shopping center, may need to be considered before specific parking spaces are allocated to a specific outparcel.

In addition, and as discussed below, issues may arise regarding whether the outparcel tenant or the landlord is responsible for the maintenance, repair, restriping and repaving of the parking spaces during the term. Further, issues may arise concerning the landlord's rights if the parking spaces become in disrepair during the term, even if it is the outparcel tenant or purchaser who is responsible to maintain the parking spaces.

In any event, the manner in which the parking spaces will be utilized should be carefully examined prior to reaching an agreement with the outparcel tenant or purchaser.

Insurance/Casualty

When leasing space for in-line tenants, the insurance section and/or casualty section of the lease is fairly mundane and substantially similar for all in-line tenants. However, for outparcel properties, the insurance section may vary from tenant to tenant. For instance, certain tenants desire that the landlord maintain the insurance on the building or structure and that the tenant will maintain insurance on the interior fixtures and moveable personal property. The issue then becomes who will pay for the cost of the insurance and who is responsible for rebuilding the structure once a casualty occurs.

Conversely, a tenant may desire to maintain the insurance on the structure, attached fixtures and moveable personal property, so that in the event of a casualty, the tenant is solely responsible for repairing the structure, attached fixtures and personal property, and the tenant is able to control the insurance proceeds and the performance of the reconstruction work. If a tenant seeks to maintain the insurance on the outparcel property, very often the tenant will seek a termination right of the lease, in the event a casualty occurs during the last 2 or 3 years of the term (ie, so that the tenant can determine whether it is worth the cost to rebuild the outparcel property, only to have its lease expire shortly after the rebuilding process is completed).

In considering a tenant's request to maintain insurance for the structure, attached fixtures and moveable personal property, the landlord may want to consider whether it is best for the landlord to maintain insurance over the entire shopping center, including the outparcels. A landlord may seek to maintain such insurance coverage (instead of the tenant) because the cost to maintain additional insurance on the outparcel may be a fairly negligible cost for the landlord to absorb (or be reimbursed by the tenant) and in the event of a casualty that encompasses most, if not all of the shopping center, the landlord would be able to resolve the insurance issues more easily with one insurance company, instead of dealing with various insurance companies that are handling the rebuilding process on behalf of the tenant or purchaser of the outparcel.

Similar to the rights requested by a tenant, if the tenant maintains the insurance on the outparcel, a landlord who maintains insurance on the outparcel may seek the right to terminate the lease, in the event of a casualty during the last 2 or 3 years of the term.

Also, the party maintaining the insurance may seek to include a provision in the lease whereby the party is not obligated to expend amounts in excess of those insurance proceeds received from its insurance company. Further the landlord and the tenant should address the question regarding a casualty that is not covered by insurance (eg, arson, earthquake, where no earthquake insurance is maintained, etc.). The landlord and the tenant should determine who will bear the risk of an uninsured casualty, so that appropriate reserves can be maintained to address such an occurrence.

Maintenance and Repair

In the typical in-line leasing situation, the tenant will maintain the interior of the premises and those areas exclusively serving the premises, whereas the landlord will maintain the common areas of the shopping center and the structural portions of the shopping center. However, the landlord and the tenant may elect to handle maintenance and repair issues in a totally different manner for outparcel leasing. In particular, the landlord may determine that any maintenance and repair, including the parking field that services the outparcel, will be maintained and repaired by the tenant. However, even if this is the case, the landlord will want to maintain certain rights to repair and maintain the parking fields and other common or exterior areas, if the tenant fails to satisfy its maintenance obligations.

Similarly, the landlord and the tenant may seek to reach certain agreements as to the maintenance and the repair of the structural portions of the building constructed on the outparcel. For instance, if the outparcel structure is already present at the time the tenant seeks to lease the outparcel space, the landlord may be required to provide certain warranties and repair obligations, in the event the structure located on the outparcel needs repair or replacement during a specified period of time (eg, the first 5 years of the term).

Also, the landlord and the tenant may want to establish which party is responsible for removal of hazardous materials, if they are determined to exist on the outparcel property. As a result, the landlord and the tenant should consider requiring a survey of the environmental condition of the property before executing a lease agreement for the outparcel property. If the environmental condition of the property is not surveyed by the parties before executing a lease, it is even more important for the parties to determine the exact manner in which an environmental condition will be handled during the term.

Signage

A critical element of outparcel leasing involves the signage that will be permitted on the building or structure located on the outparcel, as well as any pylon signs or monument signs located within the shopping center property. The landlord and the tenant should not only determine how many signs will be permitted and the size of the lettering for each sign, but they should also determine the various locations of the signage that will be permitted at the shopping center. While, obviously, there will be constraints imposed by governmental authorities on the signage that will be permitted at the shopping center, there should be consensus between the landlord and the tenant as to what signage the landlord will permit.

The landlord and the tenant (or purchaser) of the outparcel would be wise to attach to the agreement between the parties an exhibit that would detail the signage that has been approved by the landlord. The signage drawing should be detailed enough to specifically address types of signage, height of signage lettering, lighting of the sign, location and number of signs permitted, as well as designating whether the tenant will have the right to appear on the pylon signage (and in what location) or any monument signs located at the shopping center.

By carefully considering the issues discussed above, the landlord and the tenant can carefully address certain critical outparcel leasing concepts, so as to avoid confusion and disputes once the lease agreement or purchase agreement is signed. If possible, these issues should be addressed in the letter of intent between the parties, prior to leasing, but at a minimum, the issues should be addressed in the lease document or purchase document between the parties. As always, careful planning and careful drafting may serve to avoid costly disputes between the parties once the outparcel property has been leased or sold.