Exhibits: Details and Timing

Years ago, it was common to have exhibits for a lease consisting of a simple site plan, a construction exhibit, a description of the shopping center, title exceptions, and rules and regulations for the shopping center. Other than the basic components of the site plan and the basic construction obligations, exhibits were a minor part of the lease document and definitely an afterthought to the main body of the lease. In many instances, the exhibits were prepared and negotiated toward the end of the lease negotiations and usually were a last-minute rush to complete so the lease document could be executed.

Today, the lease exhibits are more numerous, have greater detail and often make up major terms and provisions of the lease. They need to be prepared and negotiated early in the lease preparation and negotiation process. Frequently, major terms of the lease are now relegated to the exhibits rather than the main body of the lease. This arrangement has evolved, not because the exhibits lack importance, but often due to the preparation of the exhibits by other professional groups and the need to attach the information to the lease easily. In addition, business terms unique to a particular tenant may be found in the exhibits. Mention the words “mixed-use project” and immediately the potential need for additional provisions to a standard shopping center lease form come to mind. Rather than make substantial additional provisions to the main body of the lease, some drafters prefer to add major changes to the lease form as an exhibit.

A Recent Illustration

A recent lease had 17 exhibits (including sub-parts of exhibits). There was a rent schedule, site plan, tax parcel site plan, legal description of the shopping center, legal description of the demised premises, construction/approvals/permitting obligations, construction allowance, elevation drawings, sign criteria, pylon plan/location of tenant's panel, restrictions impacting the shopping center, exclusive uses of other tenants in the shopping center, conceptual floor plans for the demised premises, title policy/exceptions, rules and regulations for the shopping center, SNDA form and an arbitration exhibit.

The above list of exhibits is a microcosm of some of the exhibits commonly included in leases today. Exhibits are added or subtracted as needed. However, there are still some centers that only need a handful of exhibits. Whatever the case for your transaction, the exhibits need to be addressed early in the lease preparation and negotiation process and the detail of each exhibit must be scrutinized. Do not wait midway through the lease review/negotiation to start the preparation of the exhibits.

Some of the exhibits are necessary at the beginning of a lease negotiation process to provide each party with a clear understanding of the components of a transaction, as well as to facilitate the division of responsibility for the various requirements to be completed to get the demised premises permitted, constructed and opened for business. At a minimum, the drafter and the reviewer of the lease will need the basic business terms and of course, a site plan, in order to prepare and review the draft lease. Often, the client will only provide partial information on the status of the governmental approvals, the needed approvals and permits for the construction and operation of the demised premises and the title encumbrances that affect the shopping center, but still want to get the draft lease distributed in order to keep the deal moving.

Without having complete information “up front,” hours of preparation, review and negotiation can be wasted. We have all been down the road on transactions thinking we had been provided complete information for the transaction only to find out that a major revision to the deal terms, the division of responsibilities, or accommodation of title encumbrances is needed to reflect the state of the approvals, title and even construction needs adequately. By commencing work on the exhibits at an early stage, we can avoid some of these pitfalls.

The Devil's in the Details

Today's exhibits addressing the site plan, construction obligations and the governmental approval process regularly need to be very detailed. The leasing person with whom you are coordinating may not be involved with the approvals, permitting and construction; nevertheless, that information must be included in the lease. You will need to get input from your client's technical staff that handle approvals, construction and permits to fully vet all the specific information applicable to the transaction. Due to the shortage of staff as a result of cutbacks during the recent recessionary period, often this review is not timely and there is nothing the attorney can do but go back and modify the exhibits when the information comes to light. Gently push your client to get as much information as possible up front! The attorney on the other side and his client will appreciate only having to review the base document once rather than having to view a revised document because information was not provided in the initial draft document and exhibits.

What Exhibits to Include

Site Plan. It is very difficult to prepare or review a draft lease if you do not have a site plan view. The site plan needs to show many details, including physical details of the shopping center site, as well as parcel delineations for tax parcels, separately owned parcels and designations of areas where parties maintain their own parcels (or portions thereof) and protected areas where the landlord is prohibited from making changes, or making building improvements.

Separate Parcels. The main body of the lease will normally address the tenant's tax contribution. When making their business arrangement to enter the center, most tenants assume they will pay a pro-rata share of the taxes on the shopping center, based on the floor area of the demised premises in relation to the floor area in the shopping center. However, many tenants have a separate subdivided tax parcel with their own bill (with or without a fee ownership interest). For purposes of determining a tenant's pro-rata share of taxes, these separately subdivided parcels will generally be excluded from the formula for determining the tenant's pro-rata share of taxes if the tenant with the separate tax parcel pays the taxes on its parcel directly to the taxing authority. The site plan should delineate these separately subdivided parcels where taxes are paid pursuant to a separate tax bill.

When looking at the delineation, careful consideration should be given to each subdivided parcel, to determine whether the parcel contains a parking field sufficient to serve that particular parcel. If the parcel does not contain parking (or insufficient parking to meet the statutory parking ratio for the subdivided parcel), some modification to the tenant's formulas will have to be made to insure that tenant is paying a fair share of the taxes on the separately assessed tax parcel where the tenant's parking is located.

A similar delineation and analysis of the pro-rata share formula is needed for parcels whose owners opt to perform their own maintenance and snow plowing rather than pay the shopping center owner to do it. This arrangement may cover the entire maintenance obligation or be limited to certain components of the exterior maintenance. Whatever the case, the site plan should delineate the parcels involved so that the clause in the main body of the lease may adequately address the variation by a reference to the site plan parcel(s) and any floor area on the affected parcel(s). Major tenants will often have this right and may opt in or out of the maintenance obligation or certain portions of the obligations during the tenant's term. It is often common for the outparcels on a shopping center to maintain their own parcel but still contribute to the maintenance and snow plowing for ingress and egress driveways, etc.. Make sure the references in the main body of the lease to the parcels delineated on the site plan correctly reference the labeling language on the site plan.

Signage; Separate Areas

The site plan may show the pylon/monument signs on the shopping center. Coordination of the labeling of these signs needs to match with the reference in the main body of the lease for the pylon/monument signs on which the tenant is entitled to be listed. Again make sure the reference in the main body of the lease matches the labeling on the site plan.

Tenants may also request a “Protected Area” or “Critical Area” in the shopping center where changes are restricted. These areas are generally close to the tenant's demised premises, but may also include entrances/exits and passageways for vehicles and pedestrians to and from the demised premises and the loading docks. The tenant will want to make sure that there is a clear delineation of the area(s) so each party understands the rights and obligations of the other. The landlord will want to make sure that the existing (or proposed, as the case may be) site improvements are correctly shown so that existing conditions or proposed improvements are not in conflict with the wording in the main body of the lease.

If the project is mixed-use, as many projects are today, there may be one or more parking garages, some of which may be designated for residential use only, retail use only, or shared use. Not only is it important to understand where the tenant's customers and employees may park, but it may also be important to designate such parking areas for purposes of determining maintenance and repair obligations and tax contributions. A detailed review of the main body of the lease is necessary to ensure that all items referenced in the lease are shown on the site plan with the labeling consistent with the lease.

Legal Description

Be careful attaching and/or reviewing the legal descriptions used for the shopping center. It is important to ascertain if the parcel delineations mentioned above are included or excluded from the description. If there are separately owned parcels or outparcels, have a clear understanding of whether the legal description (as used in the main body of the lease) is intended to include or exclude such parcels. Often, the tenant will expect the landlord to represent and warrant that the legal description in the exhibit matches the shopping center shown on the site plan. Does it? Does the site plan clearly label the shopping center and exclude certain parcels not a part of the shopping center definition in the main body of the lease? Again, compare the language in the main body of the lease that addresses the tenant's pro rata share formulas with the legal description to make sure it accurately reflects what is required/intended by the lease language.

Construction/Permitting/Approvals

Technical help is needed in the preparation of the construction/permitting/approvals exhibit. Often, the exhibit is prepared by either the landlord's or tenant's construction/architect/design team. These professionals may or may not have seen the lease prior to creating the construction exhibit. Terms and definitions used in the construction exhibit may or may not align with those used in the main body of the lease. Often, the construction approval process for the tenant to follow requires the tenant to obtain approval from the landlord and/or the governmental authorities for plans, specifications, design and building permits that are not detailed in the lease but rather merely referenced to the exhibit(s).

Make sure the exhibit provided by your client addresses the process to obtain the landlord's approval and the governmental approvals and addresses the party obligated to obtain the same. Are the plans and specifications mentioned in the main body of the lease? Does the exhibit conform to what is in the main body of the lease? Do the terms of the construction exhibit reflect what is in the letter of intent for the transaction or is the draft of the exhibit merely a generic document prepared for the overall project and not particular to the tenant's lease terms? Do the exhibits detailing construction received from the construction group cover all the work necessary to complete the demised premises to the extent needed for the tenant's operation? Is there a delineation of landlord's and tenant's work? Is there a “catch-all” phrase requiring one of the parties to complete all other items of work not specifically mentioned in the exhibit?

As the attorney involved in the project, you may be taking direction from the leasing/business contact of your client, but there may be many others in your client's organization who will want or need input on the exhibits. It may be beneficial for a construction representative to take the lead (or at least partner with you) to prepare and finalize the construction/approvals exhibit. Clients, both tenants and landlords, vary in how their in-house personnel handle construction exhibits and lease input. Most of the exhibit, construction details, plans and specifications, elevation drawing and the like will not be prepared by the attorneys involved in the transaction. Coordination with construction personnel is crucial whether it be by the attorneys or the leasing/business person. The client's processes will generally dictate how the coordination will work and the person responsible for the coordination.

The conclusion of this article will discuss finalizing the lease and the exhibits.

Steven J. Roberts is Of Counsel to Hirschel, Savitz, Parker & Hollman, P.A., and a member of this newsletter's Board of Editors.

Years ago, it was common to have exhibits for a lease consisting of a simple site plan, a construction exhibit, a description of the shopping center, title exceptions, and rules and regulations for the shopping center. Other than the basic components of the site plan and the basic construction obligations, exhibits were a minor part of the lease document and definitely an afterthought to the main body of the lease. In many instances, the exhibits were prepared and negotiated toward the end of the lease negotiations and usually were a last-minute rush to complete so the lease document could be executed.

Today, the lease exhibits are more numerous, have greater detail and often make up major terms and provisions of the lease. They need to be prepared and negotiated early in the lease preparation and negotiation process. Frequently, major terms of the lease are now relegated to the exhibits rather than the main body of the lease. This arrangement has evolved, not because the exhibits lack importance, but often due to the preparation of the exhibits by other professional groups and the need to attach the information to the lease easily. In addition, business terms unique to a particular tenant may be found in the exhibits. Mention the words “mixed-use project” and immediately the potential need for additional provisions to a standard shopping center lease form come to mind. Rather than make substantial additional provisions to the main body of the lease, some drafters prefer to add major changes to the lease form as an exhibit.

A Recent Illustration

A recent lease had 17 exhibits (including sub-parts of exhibits). There was a rent schedule, site plan, tax parcel site plan, legal description of the shopping center, legal description of the demised premises, construction/approvals/permitting obligations, construction allowance, elevation drawings, sign criteria, pylon plan/location of tenant's panel, restrictions impacting the shopping center, exclusive uses of other tenants in the shopping center, conceptual floor plans for the demised premises, title policy/exceptions, rules and regulations for the shopping center, SNDA form and an arbitration exhibit.

The above list of exhibits is a microcosm of some of the exhibits commonly included in leases today. Exhibits are added or subtracted as needed. However, there are still some centers that only need a handful of exhibits. Whatever the case for your transaction, the exhibits need to be addressed early in the lease preparation and negotiation process and the detail of each exhibit must be scrutinized. Do not wait midway through the lease review/negotiation to start the preparation of the exhibits.

Some of the exhibits are necessary at the beginning of a lease negotiation process to provide each party with a clear understanding of the components of a transaction, as well as to facilitate the division of responsibility for the various requirements to be completed to get the demised premises permitted, constructed and opened for business. At a minimum, the drafter and the reviewer of the lease will need the basic business terms and of course, a site plan, in order to prepare and review the draft lease. Often, the client will only provide partial information on the status of the governmental approvals, the needed approvals and permits for the construction and operation of the demised premises and the title encumbrances that affect the shopping center, but still want to get the draft lease distributed in order to keep the deal moving.

Without having complete information “up front,” hours of preparation, review and negotiation can be wasted. We have all been down the road on transactions thinking we had been provided complete information for the transaction only to find out that a major revision to the deal terms, the division of responsibilities, or accommodation of title encumbrances is needed to reflect the state of the approvals, title and even construction needs adequately. By commencing work on the exhibits at an early stage, we can avoid some of these pitfalls.

The Devil's in the Details

Today's exhibits addressing the site plan, construction obligations and the governmental approval process regularly need to be very detailed. The leasing person with whom you are coordinating may not be involved with the approvals, permitting and construction; nevertheless, that information must be included in the lease. You will need to get input from your client's technical staff that handle approvals, construction and permits to fully vet all the specific information applicable to the transaction. Due to the shortage of staff as a result of cutbacks during the recent recessionary period, often this review is not timely and there is nothing the attorney can do but go back and modify the exhibits when the information comes to light. Gently push your client to get as much information as possible up front! The attorney on the other side and his client will appreciate only having to review the base document once rather than having to view a revised document because information was not provided in the initial draft document and exhibits.

What Exhibits to Include

Site Plan. It is very difficult to prepare or review a draft lease if you do not have a site plan view. The site plan needs to show many details, including physical details of the shopping center site, as well as parcel delineations for tax parcels, separately owned parcels and designations of areas where parties maintain their own parcels (or portions thereof) and protected areas where the landlord is prohibited from making changes, or making building improvements.

Separate Parcels. The main body of the lease will normally address the tenant's tax contribution. When making their business arrangement to enter the center, most tenants assume they will pay a pro-rata share of the taxes on the shopping center, based on the floor area of the demised premises in relation to the floor area in the shopping center. However, many tenants have a separate subdivided tax parcel with their own bill (with or without a fee ownership interest). For purposes of determining a tenant's pro-rata share of taxes, these separately subdivided parcels will generally be excluded from the formula for determining the tenant's pro-rata share of taxes if the tenant with the separate tax parcel pays the taxes on its parcel directly to the taxing authority. The site plan should delineate these separately subdivided parcels where taxes are paid pursuant to a separate tax bill.

When looking at the delineation, careful consideration should be given to each subdivided parcel, to determine whether the parcel contains a parking field sufficient to serve that particular parcel. If the parcel does not contain parking (or insufficient parking to meet the statutory parking ratio for the subdivided parcel), some modification to the tenant's formulas will have to be made to insure that tenant is paying a fair share of the taxes on the separately assessed tax parcel where the tenant's parking is located.

A similar delineation and analysis of the pro-rata share formula is needed for parcels whose owners opt to perform their own maintenance and snow plowing rather than pay the shopping center owner to do it. This arrangement may cover the entire maintenance obligation or be limited to certain components of the exterior maintenance. Whatever the case, the site plan should delineate the parcels involved so that the clause in the main body of the lease may adequately address the variation by a reference to the site plan parcel(s) and any floor area on the affected parcel(s). Major tenants will often have this right and may opt in or out of the maintenance obligation or certain portions of the obligations during the tenant's term. It is often common for the outparcels on a shopping center to maintain their own parcel but still contribute to the maintenance and snow plowing for ingress and egress driveways, etc.. Make sure the references in the main body of the lease to the parcels delineated on the site plan correctly reference the labeling language on the site plan.

Signage; Separate Areas

The site plan may show the pylon/monument signs on the shopping center. Coordination of the labeling of these signs needs to match with the reference in the main body of the lease for the pylon/monument signs on which the tenant is entitled to be listed. Again make sure the reference in the main body of the lease matches the labeling on the site plan.

Tenants may also request a “Protected Area” or “Critical Area” in the shopping center where changes are restricted. These areas are generally close to the tenant's demised premises, but may also include entrances/exits and passageways for vehicles and pedestrians to and from the demised premises and the loading docks. The tenant will want to make sure that there is a clear delineation of the area(s) so each party understands the rights and obligations of the other. The landlord will want to make sure that the existing (or proposed, as the case may be) site improvements are correctly shown so that existing conditions or proposed improvements are not in conflict with the wording in the main body of the lease.

If the project is mixed-use, as many projects are today, there may be one or more parking garages, some of which may be designated for residential use only, retail use only, or shared use. Not only is it important to understand where the tenant's customers and employees may park, but it may also be important to designate such parking areas for purposes of determining maintenance and repair obligations and tax contributions. A detailed review of the main body of the lease is necessary to ensure that all items referenced in the lease are shown on the site plan with the labeling consistent with the lease.

Legal Description

Be careful attaching and/or reviewing the legal descriptions used for the shopping center. It is important to ascertain if the parcel delineations mentioned above are included or excluded from the description. If there are separately owned parcels or outparcels, have a clear understanding of whether the legal description (as used in the main body of the lease) is intended to include or exclude such parcels. Often, the tenant will expect the landlord to represent and warrant that the legal description in the exhibit matches the shopping center shown on the site plan. Does it? Does the site plan clearly label the shopping center and exclude certain parcels not a part of the shopping center definition in the main body of the lease? Again, compare the language in the main body of the lease that addresses the tenant's pro rata share formulas with the legal description to make sure it accurately reflects what is required/intended by the lease language.

Construction/Permitting/Approvals

Technical help is needed in the preparation of the construction/permitting/approvals exhibit. Often, the exhibit is prepared by either the landlord's or tenant's construction/architect/design team. These professionals may or may not have seen the lease prior to creating the construction exhibit. Terms and definitions used in the construction exhibit may or may not align with those used in the main body of the lease. Often, the construction approval process for the tenant to follow requires the tenant to obtain approval from the landlord and/or the governmental authorities for plans, specifications, design and building permits that are not detailed in the lease but rather merely referenced to the exhibit(s).

Make sure the exhibit provided by your client addresses the process to obtain the landlord's approval and the governmental approvals and addresses the party obligated to obtain the same. Are the plans and specifications mentioned in the main body of the lease? Does the exhibit conform to what is in the main body of the lease? Do the terms of the construction exhibit reflect what is in the letter of intent for the transaction or is the draft of the exhibit merely a generic document prepared for the overall project and not particular to the tenant's lease terms? Do the exhibits detailing construction received from the construction group cover all the work necessary to complete the demised premises to the extent needed for the tenant's operation? Is there a delineation of landlord's and tenant's work? Is there a “catch-all” phrase requiring one of the parties to complete all other items of work not specifically mentioned in the exhibit?

As the attorney involved in the project, you may be taking direction from the leasing/business contact of your client, but there may be many others in your client's organization who will want or need input on the exhibits. It may be beneficial for a construction representative to take the lead (or at least partner with you) to prepare and finalize the construction/approvals exhibit. Clients, both tenants and landlords, vary in how their in-house personnel handle construction exhibits and lease input. Most of the exhibit, construction details, plans and specifications, elevation drawing and the like will not be prepared by the attorneys involved in the transaction. Coordination with construction personnel is crucial whether it be by the attorneys or the leasing/business person. The client's processes will generally dictate how the coordination will work and the person responsible for the coordination.

The conclusion of this article will discuss finalizing the lease and the exhibits.

Steven J. Roberts is Of Counsel to Hirschel, Savitz, Parker & Hollman, P.A., and a member of this newsletter's Board of Editors.