In the Spotlight: Preparing Form Leases for Mixed-Use Projects

Decisions as to how many form leases to employ for different tenants should be made on a project-by-project basis. For the most part, however, one form can be used in all but two situations, and the use of one form helps protect against conflicts amongst leases and tenants.

Tenants in mixed-use projects generally conform to the following uses: commercial, office tenants; commercial, retail tenants; residential tenants; and recreational tenants. While there are too many permutations of mixed-use projects to list, these tenants and a mix thereof represent the 'typical' mixed-use project. The first three tenants need no further explanation, but the last ' recreational tenants ' are becoming more prevalent and bring a new set of issues. Recreational tenants, i.e., town halls, music, and other entertainment venues, and other public gathering places, are becoming commonplace in mixed-use projects. Arguably, these uses are unique enough to require a separate form lease; however, this form lease can be a modified version of the form lease used for the entire project.

The one situation in which the use of at least two form leases is recommended involves a project in which both commercial ' whether retail or office ' and residential spaces will be leased. The reason is that different states require different disclosures and generally have statutory provisions applicable only to residential leases. This local focus on residential leases, without a parallel to commercial leases, creates a situation in which it makes sense to have two form leases. However, the forms must be consistent with each other and create a structure for the relationship between residential and commercial tenants (i.e., the residential form lease should be a modified version of the commercial lease with local law insertions for residential leases, and not a state-promulgated form).

The final document is not a lease at all, but a condominium declaration for projects that consist of condo units. The condominium declaration acts as a fourth lease in the sense that it creates a relationship among tenants ' there may be more than one declaration for each type of tenant and, therefore, the relationships may be interwoven or distinct. Any condominium declaration should, if possible, be drafted in conjunction with the form lease to ensure consistency.

The Second Step: Learn the Project

This seems an obvious suggestion, but it is one of great importance. Knowing the physical layout of the project is extremely important in preparing a form lease. Because many mixed-use projects are found in urban areas, each project will have a different set of characteristics that must be appropriately addressed in the form lease. Some of the most important characteristics to know are parking, signage, common areas, and common utilities. A form lease prepared by someone without a good understanding of the foregoing will likely not provide for the optimal use of the project and will cost the owner money on negotiating leases with tenants that should not have to be negotiated.

Part of learning the project also includes understanding the initial and build-out construction of the project. Most mixed-use projects are not 100% complete and ready for lease when they go on the market. Instead, most projects are leased out in phases (typically, with the first phase financing the construction of the later phases). This requires a thorough work letter that contemplates how the construction will affect the tenants ready to move in and the tenants moving in when the next phase is complete.

The Third Step: Consider the Interests of All Future Tenants

The form lease for a mixed-use project must be flexible enough to accommodate the current and future needs of tenants. Because, as discussed above, the form lease is likely to be prepared before all tenants are ready to move in, it is important to contemplate and include provisions in all leases that address the interests of future tenants. This may be an uphill battle with initial tenants that do not see the need to be restricted, but the lack of provisions regulating the use of the project by all tenants ' current and future ' could lead to a project in which the later tenants require certain provisions, and the owner will be forced to go back to existing tenants and renegotiate certain provisions in the existing leases ' an expensive proposition.

The Fourth Step: Focus on Key Lease Provisions

The following discussion addresses three provisions of a form lease that warrant specific attention; however, there will be several other provisions that will require specific attention as well, including those mentioned above ' parking, common utilities, work letter, and signage.

Use Provisions

The use provision in a form lease will be directed primarily at commercial-office tenants and commercial-retail tenants. This provision should be drafted to meet the planned uses of the project and should contemplate exclusives being granted to retail and, in some situations, office tenants (e.g., exclusives granted to brokerage office users). Therefore, the provision should be limited to specific uses, or, at a minimum, provide that a tenant's use will be subject to existing and future exclusives granted ' especially in the case where office space is being leased prior to retail space.

Common Areas ' Designation, Use, Maintenance, and Cost

The common areas provision will likely be the most complicated provision in a form multi-use project. The provision should be drafted to ensure the right tenants have access to the right common areas, and, where appropriate, exclude certain tenants from certain common areas. In addition, it will have to provide for the maintenance and pass-through of the cost of maintaining the common areas. These terms will likely be driven by the market in which the project is located; however, it is advisable that the common areas be divided into separate areas based on tenant use (i.e., 'retail common areas,' 'office common areas,' and 'residential common areas'). Creating these units of common areas will provide a foundation upon which to promulgate rules and regulations for the use of the common areas and a method by which to apply different maintenance and pass-through standards.

Services

Second only to the common areas of the form lease, the services provided by the landlord will vary widely among different users of the project. Unlike the common area approach suggested above, the services provision is best drafted in the alternative so that provisions that are solely applicable to specific tenants can be removed when not applicable (e.g., remove janitorial services for retail and residential tenants).

Conclusion

Both the owners and tenants of mixed-use projects will be well served by employing a form lease that has been prepared based on the foregoing suggestions. One that has not been prepared following the minimum suggestions above will be easy to spot. As the industry continues to progress and capitalize on the synergies of mixed-use projects, the uses will become more complex and the relationships more interwoven. Therefore, it behooves all parties involved to ensure that the underlying documents that govern the relationships are flexible to accommodate the future, but project-specific to ensure that they work on the ground. The lack of either of these elements may lead to infighting among tenants ' with the landlord caught in the middle or actively engaged ' which may in turn lose the synergy upon which the development is based and lead to a project that is not marketable.

Jane Snoddy Smith, a member of this newsletter's Board of Editors, is a partner in the Austin, TX office of Fulbright & Jaworski, LLP. Her experience extends to the construction of mixed-use and brownfield projects; the sale of industrial and office properties; the creation of joint ventures for multi-family, retail, and office projects; the operation of shopping centers; the development of medical office buildings; the formation of urban redevelopment and public private partnerships; and the negotiation of office, industrial, and retail space leases. Travis Seibeneicher, an associate in the same office, concentrates his practice on transactional law, with a focus on real estate and corporate matters.

As the construction of mixed-use projects continues to grow across the nation and globally, all parties involved ' developers, owners, property managers, attorneys, and tenants ' must understand the dynamics of the project in which they are involved and how best to structure the relationships among the several parties, which will generally have divergent interests. The building block for this relationship will likely be a form lease.

In addition to a form lease, many developers are adopting the strategy of creating condo units within a project, selling the residential units, and leasing the commercial units. These condo, mixed-use projects add an additional complexity because there will be an underlying condo declaration (or similar document ' depending on the state in which the project is located) that will govern all use of the project, with which the form lease will need to be consistent. Without a solid building block for mixed-use projects, the relationships between the different types of tenants, and between the landlord and the tenants, can quickly deteriorate, leading to infighting and an unattractive project that is hard to stabilize. It is, therefore, important to an owner or property manager to have a form lease that creates a lasting, harmonious relationship among all tenants of a mixed-use project. This article outlines the steps each owner should follow when drafting a form lease for each mixed-use project and points out some major provisions of the form lease that deserve specific attention.

The First Step: One, Two, Three (or Four) Form Leases

Decisions as to how many form leases to employ for different tenants should be made on a project-by-project basis. For the most part, however, one form can be used in all but two situations, and the use of one form helps protect against conflicts amongst leases and tenants.

Tenants in mixed-use projects generally conform to the following uses: commercial, office tenants; commercial, retail tenants; residential tenants; and recreational tenants. While there are too many permutations of mixed-use projects to list, these tenants and a mix thereof represent the 'typical' mixed-use project. The first three tenants need no further explanation, but the last ' recreational tenants ' are becoming more prevalent and bring a new set of issues. Recreational tenants, i.e., town halls, music, and other entertainment venues, and other public gathering places, are becoming commonplace in mixed-use projects. Arguably, these uses are unique enough to require a separate form lease; however, this form lease can be a modified version of the form lease used for the entire project.

The one situation in which the use of at least two form leases is recommended involves a project in which both commercial ' whether retail or office ' and residential spaces will be leased. The reason is that different states require different disclosures and generally have statutory provisions applicable only to residential leases. This local focus on residential leases, without a parallel to commercial leases, creates a situation in which it makes sense to have two form leases. However, the forms must be consistent with each other and create a structure for the relationship between residential and commercial tenants (i.e., the residential form lease should be a modified version of the commercial lease with local law insertions for residential leases, and not a state-promulgated form).

The final document is not a lease at all, but a condominium declaration for projects that consist of condo units. The condominium declaration acts as a fourth lease in the sense that it creates a relationship among tenants ' there may be more than one declaration for each type of tenant and, therefore, the relationships may be interwoven or distinct. Any condominium declaration should, if possible, be drafted in conjunction with the form lease to ensure consistency.

The Second Step: Learn the Project

This seems an obvious suggestion, but it is one of great importance. Knowing the physical layout of the project is extremely important in preparing a form lease. Because many mixed-use projects are found in urban areas, each project will have a different set of characteristics that must be appropriately addressed in the form lease. Some of the most important characteristics to know are parking, signage, common areas, and common utilities. A form lease prepared by someone without a good understanding of the foregoing will likely not provide for the optimal use of the project and will cost the owner money on negotiating leases with tenants that should not have to be negotiated.

Part of learning the project also includes understanding the initial and build-out construction of the project. Most mixed-use projects are not 100% complete and ready for lease when they go on the market. Instead, most projects are leased out in phases (typically, with the first phase financing the construction of the later phases). This requires a thorough work letter that contemplates how the construction will affect the tenants ready to move in and the tenants moving in when the next phase is complete.

The Third Step: Consider the Interests of All Future Tenants

The form lease for a mixed-use project must be flexible enough to accommodate the current and future needs of tenants. Because, as discussed above, the form lease is likely to be prepared before all tenants are ready to move in, it is important to contemplate and include provisions in all leases that address the interests of future tenants. This may be an uphill battle with initial tenants that do not see the need to be restricted, but the lack of provisions regulating the use of the project by all tenants ' current and future ' could lead to a project in which the later tenants require certain provisions, and the owner will be forced to go back to existing tenants and renegotiate certain provisions in the existing leases ' an expensive proposition.

The Fourth Step: Focus on Key Lease Provisions

The following discussion addresses three provisions of a form lease that warrant specific attention; however, there will be several other provisions that will require specific attention as well, including those mentioned above ' parking, common utilities, work letter, and signage.

Use Provisions

The use provision in a form lease will be directed primarily at commercial-office tenants and commercial-retail tenants. This provision should be drafted to meet the planned uses of the project and should contemplate exclusives being granted to retail and, in some situations, office tenants (e.g., exclusives granted to brokerage office users). Therefore, the provision should be limited to specific uses, or, at a minimum, provide that a tenant's use will be subject to existing and future exclusives granted ' especially in the case where office space is being leased prior to retail space.

Common Areas ' Designation, Use, Maintenance, and Cost

The common areas provision will likely be the most complicated provision in a form multi-use project. The provision should be drafted to ensure the right tenants have access to the right common areas, and, where appropriate, exclude certain tenants from certain common areas. In addition, it will have to provide for the maintenance and pass-through of the cost of maintaining the common areas. These terms will likely be driven by the market in which the project is located; however, it is advisable that the common areas be divided into separate areas based on tenant use (i.e., 'retail common areas,' 'office common areas,' and 'residential common areas'). Creating these units of common areas will provide a foundation upon which to promulgate rules and regulations for the use of the common areas and a method by which to apply different maintenance and pass-through standards.

Services

Second only to the common areas of the form lease, the services provided by the landlord will vary widely among different users of the project. Unlike the common area approach suggested above, the services provision is best drafted in the alternative so that provisions that are solely applicable to specific tenants can be removed when not applicable (e.g., remove janitorial services for retail and residential tenants).

Conclusion

Both the owners and tenants of mixed-use projects will be well served by employing a form lease that has been prepared based on the foregoing suggestions. One that has not been prepared following the minimum suggestions above will be easy to spot. As the industry continues to progress and capitalize on the synergies of mixed-use projects, the uses will become more complex and the relationships more interwoven. Therefore, it behooves all parties involved to ensure that the underlying documents that govern the relationships are flexible to accommodate the future, but project-specific to ensure that they work on the ground. The lack of either of these elements may lead to infighting among tenants ' with the landlord caught in the middle or actively engaged ' which may in turn lose the synergy upon which the development is based and lead to a project that is not marketable.

Jane Snoddy Smith, a member of this newsletter's Board of Editors, is a partner in the Austin, TX office of Fulbright & Jaworski, LLP. Her experience extends to the construction of mixed-use and brownfield projects; the sale of industrial and office properties; the creation of joint ventures for multi-family, retail, and office projects; the operation of shopping centers; the development of medical office buildings; the formation of urban redevelopment and public private partnerships; and the negotiation of office, industrial, and retail space leases. Travis Seibeneicher, an associate in the same office, concentrates his practice on transactional law, with a focus on real estate and corporate matters.