In the Spotlight: Shopping Center Declarations

Some sophisticated developers have a vision of, or plan for, the type of retailers and restaurants desired in the shopping center, and will address issues common to such tenants in the declaration prior to finalizing and recording the declaration. However, it is also the case that some developers do not exercise that degree of control or foresight. For this reason, a tenant should carefully examine the declaration as early as possible during its lease negotiations with the landlord. While it is recommended that the tenant still review the official declaration complete with all amendments, once it is received from the issuing title agent, landlords are generally willing to help expedite a tenant's review by providing a copy of the recorded declaration that they have on hand. This article highlights three often overlooked, yet significant declaration issues tenants should address when leasing space in a shopping center or adjacent outparcel: omitted easements, future amendments to the declaration and common area maintenance (CAM) obligations and charges.

Omitted Easements

One of the main purposes of a shopping center declaration is to provide cross easements over the various parcels comprising the shopping center for its harmonious operation. The easements granted will generally include pedestrian and vehicular ingress and egress, parking, utilities, storm water drainage and possibly signage. These easements will typically be granted from each parcel owner for the mutual benefit of all other parcel owners and their permittees, except with respect to exclusive easement areas specifically defined in the declaration. A tenant in the shopping center or outparcel must identify the easements needed for its proposed use of the premises, and determine if all required easements have been granted in the declaration for the benefit of the tenant. A comprehensive examination of the shopping center site plan, survey and declaration will alert the tenant if any required easements have not been granted in the declaration.

Consider the example in which a landlord mistakenly misrepresents to the tenant that the declaration of record included an easement grant for the placement of the tenant's sign panels on the pylon sign located at the shopping center's main entrance. Consider further that obtaining a sign easement in connection with the lease is critical for the tenant because it relies heavily on its signage to stand out from competitors. Reviewing the recorded declaration in the beginning of lease negotiations would disclose that no such easement was granted for the shopping center. This discovery would provide the tenant with an opportunity to negotiate suitable language in the lease whereby the landlord directly grants, or causes to be granted, the signage easement to the tenant.

Future Amendments to the Declaration

A shopping center declaration is generally entered into by the developer and any major and/or big box tenants then owning, and in some cases, leasing a parcel(s) in the shopping center. As parties to the declaration, they will possess approval rights with control over all aspects of the shopping center, such as the operation and maintenance of the common areas, timing of construction, architectural review of proposed buildings and overall layout of the shopping center. It is important to note that while the landlord owns the premises the tenant proposes to lease, the landlord will not necessarily possess any approval rights under the declaration, unless it is the developer or other party to the declaration and deemed an approving party as set forth above.

Some declarations provide that any amendments must be signed by all parcel owners or a certain percentage of such owners, but some other declarations provide that the amendment must be signed only by the approving parties. The latter situation poses significant exposure for the tenant because as long as the landlord has a right to approve future declaration amendments, the tenant will have some influence or control over amendments that will detrimentally affect the tenant.

If the landlord does not have the right to approve future declaration amendments, neither then does the tenant as it is not in any greater position than the landlord. The benefits under the declaration extend to the tenant in its capacity as an occupant of the premises. The tenant's exposure lies in the fact that the declaration can be amended by the approving parties in a manner that materially affects the tenant, without the tenant's or landlord's prior approval. For example, the approving parties can amend the declaration to increase the parking ratio required for the premises above that which the tenant can accommodate. Such an amendment would materially affect the tenant's proposed development.

To protect itself in this case, the tenant should request an amendment to the declaration, as well as negotiate language in the lease. The declaration amendment should provide at a minimum that no amendments shall diminish the rights or increase the obligations of any parcel owner unless such owner has joined in the execution of such amendment. The lease should provide for a covenant, representation and warranty by the landlord that it will not enter into an amendment of the declaration without obtaining the tenant's prior approval (albeit that it is often appropriate also to provide that this approval will not be unreasonably withheld). Collectively, this language ensures that the tenant will be notified of any proposed declaration amendments that will impair the tenant's use and occupancy of the premises and given an opportunity to object as it deems reasonably necessary.

Having addressed future declaration amendments initiated by the approving parties, after the tenant has reviewed the declaration, it may find that it requires an amendment as well. For instance, a drive-thru restaurant tenant might object to its exclusive drive-thru lanes being categorized as common area drive aisles and wish to carve out such areas from the definition of common areas. To provide for this right in the lease, it is recommended that the tenant negotiate a lease provision whereby the landlord acknowledges that the tenant may require certain approvals under the declaration for its proposed development and use of the premises, and the landlord agrees to assist the tenant in that regard.

CAM Obligations and Charges

The final area of concern arises when the proposed lease requires the tenant to pay shopping center CAM charges allocated to the premises in the declaration, for the maintenance and repair of the common areas, but contains no affirmative obligation on the part of the landlord to perform such maintenance and repairs. The declaration will generally designate one party to maintain and repair the common areas, usually the developer or its appointee. That party performs such maintenance and repairs, then bills the other parcel owners for their pro rata share of the costs incurred in accordance with a schedule provided in the declaration.

What recourse does the tenant have if the billing statement covers charges for repairs that were not made, such as repairs to a shopping center drive aisle that is in terrible disrepair? The tenant would be obligated to pay such CAM charges or be exposed to liability for breach of the lease, without any right to require the landlord, developer or its appointee to make the necessary repairs. The lease did not charge the landlord with the affirmative obligation to repair and maintain the common areas, or cause the same to be repaired and maintained, nor does the tenant have the right to enforce the terms of the declaration as it is not a party. However, the landlord, as a parcel owner in the shopping center, most likely will have the right to enforce the terms of the declaration. Accordingly, the tenant should negotiate a provision in the lease that requires the landlord to maintain and repair the common areas in the shopping center, or cause such maintenance and repair work to be completed.

Conclusion

Commercial tenants negotiating a shopping center lease will find it beneficial to complete a full review of the landlord's title report and all
matters of record as early as possible in the due diligence process. Promptly reviewing the title matters, including any declarations recorded against the shopping center, will arm the tenant with vital information that may need to be addressed in the lease. Issues to watch out for are omitted easements, future declaration amendments and CAM obligations and charges.

Consuelo Boyd, a member of this newsletter's Board of Editors, is an Adjunct Professor, Real Estate Finance at Roosevelt University, Chicago.

A commercial tenant contemplating a lease in a shopping center or adjacent outparcel has its work cut out for it in terms of due diligence required. In addition to inspecting the physical characteristics of the premises, which typically includes completion of a survey, environmental and soil testing, a thorough review of the landlord's title report and all corresponding matters of record also should be done as soon as possible after commencing lease negotiations. Some tenants prefer not to incur the expense of ordering and reviewing the title up front due to uncertainty as to whether the lease will come to fruition. However, the knowledge gained from an early title search will prove invaluable if completed sooner rather than later.

Shopping Center Declaration

Reviewing the status of the landlord's title will raise any red flags for potential problems that need to be addressed by the tenant early during lease negotiations. For example, the title report may reveal that ownership of the premises is reflected in an entity other than the landlord, or the existence of liens, conditions, restrictions, encumbrances or easements that may interfere with the tenant's proposed development and use of the premises. Of particular concern for purposes of this article is the existence of a shopping center declaration previously recorded against the entire shopping center that includes the premises. A shopping center declaration imposes certain covenants, conditions and restrictions on, and grants easements over, the shopping center for its successful development and operation as one integrated retail or mixed-use project.

Some sophisticated developers have a vision of, or plan for, the type of retailers and restaurants desired in the shopping center, and will address issues common to such tenants in the declaration prior to finalizing and recording the declaration. However, it is also the case that some developers do not exercise that degree of control or foresight. For this reason, a tenant should carefully examine the declaration as early as possible during its lease negotiations with the landlord. While it is recommended that the tenant still review the official declaration complete with all amendments, once it is received from the issuing title agent, landlords are generally willing to help expedite a tenant's review by providing a copy of the recorded declaration that they have on hand. This article highlights three often overlooked, yet significant declaration issues tenants should address when leasing space in a shopping center or adjacent outparcel: omitted easements, future amendments to the declaration and common area maintenance (CAM) obligations and charges.

Omitted Easements

One of the main purposes of a shopping center declaration is to provide cross easements over the various parcels comprising the shopping center for its harmonious operation. The easements granted will generally include pedestrian and vehicular ingress and egress, parking, utilities, storm water drainage and possibly signage. These easements will typically be granted from each parcel owner for the mutual benefit of all other parcel owners and their permittees, except with respect to exclusive easement areas specifically defined in the declaration. A tenant in the shopping center or outparcel must identify the easements needed for its proposed use of the premises, and determine if all required easements have been granted in the declaration for the benefit of the tenant. A comprehensive examination of the shopping center site plan, survey and declaration will alert the tenant if any required easements have not been granted in the declaration.

Consider the example in which a landlord mistakenly misrepresents to the tenant that the declaration of record included an easement grant for the placement of the tenant's sign panels on the pylon sign located at the shopping center's main entrance. Consider further that obtaining a sign easement in connection with the lease is critical for the tenant because it relies heavily on its signage to stand out from competitors. Reviewing the recorded declaration in the beginning of lease negotiations would disclose that no such easement was granted for the shopping center. This discovery would provide the tenant with an opportunity to negotiate suitable language in the lease whereby the landlord directly grants, or causes to be granted, the signage easement to the tenant.

Future Amendments to the Declaration

A shopping center declaration is generally entered into by the developer and any major and/or big box tenants then owning, and in some cases, leasing a parcel(s) in the shopping center. As parties to the declaration, they will possess approval rights with control over all aspects of the shopping center, such as the operation and maintenance of the common areas, timing of construction, architectural review of proposed buildings and overall layout of the shopping center. It is important to note that while the landlord owns the premises the tenant proposes to lease, the landlord will not necessarily possess any approval rights under the declaration, unless it is the developer or other party to the declaration and deemed an approving party as set forth above.

Some declarations provide that any amendments must be signed by all parcel owners or a certain percentage of such owners, but some other declarations provide that the amendment must be signed only by the approving parties. The latter situation poses significant exposure for the tenant because as long as the landlord has a right to approve future declaration amendments, the tenant will have some influence or control over amendments that will detrimentally affect the tenant.

If the landlord does not have the right to approve future declaration amendments, neither then does the tenant as it is not in any greater position than the landlord. The benefits under the declaration extend to the tenant in its capacity as an occupant of the premises. The tenant's exposure lies in the fact that the declaration can be amended by the approving parties in a manner that materially affects the tenant, without the tenant's or landlord's prior approval. For example, the approving parties can amend the declaration to increase the parking ratio required for the premises above that which the tenant can accommodate. Such an amendment would materially affect the tenant's proposed development.

To protect itself in this case, the tenant should request an amendment to the declaration, as well as negotiate language in the lease. The declaration amendment should provide at a minimum that no amendments shall diminish the rights or increase the obligations of any parcel owner unless such owner has joined in the execution of such amendment. The lease should provide for a covenant, representation and warranty by the landlord that it will not enter into an amendment of the declaration without obtaining the tenant's prior approval (albeit that it is often appropriate also to provide that this approval will not be unreasonably withheld). Collectively, this language ensures that the tenant will be notified of any proposed declaration amendments that will impair the tenant's use and occupancy of the premises and given an opportunity to object as it deems reasonably necessary.

Having addressed future declaration amendments initiated by the approving parties, after the tenant has reviewed the declaration, it may find that it requires an amendment as well. For instance, a drive-thru restaurant tenant might object to its exclusive drive-thru lanes being categorized as common area drive aisles and wish to carve out such areas from the definition of common areas. To provide for this right in the lease, it is recommended that the tenant negotiate a lease provision whereby the landlord acknowledges that the tenant may require certain approvals under the declaration for its proposed development and use of the premises, and the landlord agrees to assist the tenant in that regard.

CAM Obligations and Charges

The final area of concern arises when the proposed lease requires the tenant to pay shopping center CAM charges allocated to the premises in the declaration, for the maintenance and repair of the common areas, but contains no affirmative obligation on the part of the landlord to perform such maintenance and repairs. The declaration will generally designate one party to maintain and repair the common areas, usually the developer or its appointee. That party performs such maintenance and repairs, then bills the other parcel owners for their pro rata share of the costs incurred in accordance with a schedule provided in the declaration.

What recourse does the tenant have if the billing statement covers charges for repairs that were not made, such as repairs to a shopping center drive aisle that is in terrible disrepair? The tenant would be obligated to pay such CAM charges or be exposed to liability for breach of the lease, without any right to require the landlord, developer or its appointee to make the necessary repairs. The lease did not charge the landlord with the affirmative obligation to repair and maintain the common areas, or cause the same to be repaired and maintained, nor does the tenant have the right to enforce the terms of the declaration as it is not a party. However, the landlord, as a parcel owner in the shopping center, most likely will have the right to enforce the terms of the declaration. Accordingly, the tenant should negotiate a provision in the lease that requires the landlord to maintain and repair the common areas in the shopping center, or cause such maintenance and repair work to be completed.

Conclusion

Commercial tenants negotiating a shopping center lease will find it beneficial to complete a full review of the landlord's title report and all
matters of record as early as possible in the due diligence process. Promptly reviewing the title matters, including any declarations recorded against the shopping center, will arm the tenant with vital information that may need to be addressed in the lease. Issues to watch out for are omitted easements, future declaration amendments and CAM obligations and charges.

Consuelo Boyd, a member of this newsletter's Board of Editors, is an Adjunct Professor, Real Estate Finance at Roosevelt University, Chicago.