Exhibits: Details and Timing

The first part of this article discussed the purpose of, need for and some of the items included in, the exhibits to a lease. The conclusion herein addresses finalizing the lease and the exhibits.

Mesh the Lease with the Exhibits

Once you have the construction exhibit input (including permitting and governmental approval processes), you need to review the lease and make sure the exhibit and the lease document mesh for purposes of concepts, timing, and definitions. Depending on the input received and the timing of that input, you may not be able to coordinate the lease with the exhibit when the first draft goes out, but try to “mesh” the two documents as soon as possible, taking into consideration the timing of comments from the other side and responsibilities for redrafting the lease document. Efficiency in the hours spent is always a consideration but sometimes it pays to undertake constant review and updating to “mesh” the lease with the exhibits. Last, always attempt to get a “sign-off” on the construction exhibit from your client's construction group prior to execution of the lease.

If a construction allowance is involved, make sure that any allowance exhibit is aligned with the terms of the main body of the lease. If the allowance is based on a square-footage amount and there is a re-measurement clause in the lease, make sure you have provided for such an adjustment in the allowance exhibit. Also, it is typical for the allowance language to provide one or more conditions to the actual payment of the allowance. If timeframes are involved, ensure that the exhibit is consistent with any applicable lease language. Do any of the “date certain” provisions in the lease conflict with the time periods stated in number of days from an event? The language may differ, but the time periods need to be consistent. Check all other conditions and make sure they are consistent with the terms and conditions in the lease.

COREAs

Any good-sized shopping center will have restrictions affecting it. The landlord and tenant may negotiate and agree on many items, terms and conditions in the lease. However, there may not be a meeting of the minds if all the contemplated lease exhibits have not been provided to the tenant for review. If a landlord waits until late in the lease process to prepare the restriction exhibit, and the exhibit contains restrictions that alter the terms of the main body of the lease that have already been negotiated, additional time and energy will be spent renegotiating terms of the lease. For example, there may be a construction, operation and reciprocal easement agreement (COREA) recorded against the shopping center that may control aspects of the tenant's entry into the center and its operation. It may affect the tenant's use and the use of certain areas of the center, such as a restriction on sidewalks and sidewalk sales and restrictions on outdoor sales areas. Depending on the type of tenant with whom you are negotiating, these restrictions may be detrimental to the tenant's operation to such an extent that the deal will collapse if the restrictions are not changed.

In many mixed-use projects, there may be a condominium regime recorded against various parcels of the project that contain restrictions similar to the COREA mentioned above or that address dues and assessments for common areas that may differ from, or be in addition to, the provisions contained in the main body of the lease.

You may find yourself renegotiating several lease provisions or modifying the COREA or condominium documents to accommodate the tenant's use and operation.

Many tenants have sufficient leverage in negotiating lease terms to garner a clause allowing them an exclusive use for a sale of a particular item or items or even to operate a certain type of business. In a large shopping center, there may be numerous tenants that have exclusive uses benefitting them. It is typical to attach a list of the exclusives affecting the center as an exhibit to the lease and to require a new tenant to the center to take subject to the exclusives. Some tenants require that the exclusive(s) be included verbatim in order to review the exact wording to see if that exclusive will have even a minor impact on their operation. Often the tenant entering the center may not have a primary use that conflicts with the exclusives listed on the exhibit but an ancillary use may conflict with the exclusive list and if the ancillary use is of significant importance to your incoming tenant, the deal may be lost unless a waiver from the holder of the exclusive is obtained.

For example, if an exclusive is given to a coffee shop for the sale of fresh-brewed coffee and a fast-food burger restaurant is negotiating to enter into the center, a requirement to take subject to an existing exclusive for fresh-brewed coffee will in all likelihood be problematic to the transaction. Disclosing exclusives early in the lease negotiation process will reveal potential issues and will allow time for a resolution of the issue (if a resolution is possible).

Similarly, an updated title policy provided as an exhibit with the initial draft of the lease (or soon thereafter) will confirm the landlord entity, current lender (if any), any easements and restrictions filed against the center. It will also serve as confirmation of the shopping center's legal description. Exhibits including COREAs, condominium documents, and restrictions need to be disclosed as early as possible so the tenant realizes that even though they may negotiate a favorable provision in the lease, they may need to take subject to these preexisting documents.

SNDAs

A tenant entering into a new lease will generally require that any lender execute a subordination, non-disturbance and attornment agreement (SNDA) with the tenant. Often, the main body of the lease will provide the minimal terms of an SNDA to be entered into between the tenant and the lender (existing lender or future lender). However, a tenant with leverage may insist upon attaching its form SNDA, or if the parties are lucky enough to have a prior negotiated SNDA with the current lender, the form of the prior negotiated SNDA may be attached. Review the main body of the lease to see if minimal requirements of an SNDA are included in the main body of the lease or merely references to the attached Exhibit with the SNDA. If you only have an attached exhibit you will need to build in flexibility for modification of the form for future lenders.

It is important to get the form exhibit established as soon as possible so the form can be sent to the existing lender early in the process to confirm that the form will be acceptable for the current transaction. The deal terms may differ from the past transaction where the form SNDA was used (example, this deal may include an allowance) necessitating comments or differing provisions to be included in the SNDA for the current transaction.

Conclusion

The sampling of exhibits mentioned in this article are but a few of those that may be required to conclude a lease. Hours and hours of time may be necessary to prepare and negotiate the exhibits. If your client does not have dedicated in-house staff to work with you, outside consultants may be needed to prepare and finalize the exhibits. For a large project with many retail tenants, the landlord may have spent a great deal of time setting up lease exhibits to be used for the project, which may only need to be modified to accommodate the specifics of your transaction. If you are representing a party involved in a lease for a smaller project that may only have a few retail tenants, the exhibits may not be prepared for the project or if prepared, they may not contain the detail needed. This is especially true if you have a small center with one large anchor; that anchor will expect detailed exhibits in most instances.

Anchor tenants and restaurant tenants may want to prepare several of the lease exhibits. They may be drafted by parties that did not work on the initial form lease to be used for the transaction; therefore, a thorough review of the lease terms and the exhibit terms is needed to make sure there is consistency in timing, definitions and overall concepts. Most clients are anxious to get transactions completed, but often do not realize the importance of providing full information early in the lease preparation and negotiation process. Once the information is provided, sufficient time is needed to prepare and negotiate exhibits and to make sure the lease terms are consistent with each one of the exhibits.

Do not leave the preparation of the exhibits to the end of the negotiation. The exhibits are an important part of the lease. Avoid last-minute surprises by drafting and negotiating the exhibits simultaneously with the main body of the lease.

Steven J. Roberts is Of Counsel to Hirschel, Savitz, Parker & Hollman, P.A., in Gaithersburg, MD.

The first part of this article discussed the purpose of, need for and some of the items included in, the exhibits to a lease. The conclusion herein addresses finalizing the lease and the exhibits.

Mesh the Lease with the Exhibits

Once you have the construction exhibit input (including permitting and governmental approval processes), you need to review the lease and make sure the exhibit and the lease document mesh for purposes of concepts, timing, and definitions. Depending on the input received and the timing of that input, you may not be able to coordinate the lease with the exhibit when the first draft goes out, but try to “mesh” the two documents as soon as possible, taking into consideration the timing of comments from the other side and responsibilities for redrafting the lease document. Efficiency in the hours spent is always a consideration but sometimes it pays to undertake constant review and updating to “mesh” the lease with the exhibits. Last, always attempt to get a “sign-off” on the construction exhibit from your client's construction group prior to execution of the lease.

If a construction allowance is involved, make sure that any allowance exhibit is aligned with the terms of the main body of the lease. If the allowance is based on a square-footage amount and there is a re-measurement clause in the lease, make sure you have provided for such an adjustment in the allowance exhibit. Also, it is typical for the allowance language to provide one or more conditions to the actual payment of the allowance. If timeframes are involved, ensure that the exhibit is consistent with any applicable lease language. Do any of the “date certain” provisions in the lease conflict with the time periods stated in number of days from an event? The language may differ, but the time periods need to be consistent. Check all other conditions and make sure they are consistent with the terms and conditions in the lease.

COREAs

Any good-sized shopping center will have restrictions affecting it. The landlord and tenant may negotiate and agree on many items, terms and conditions in the lease. However, there may not be a meeting of the minds if all the contemplated lease exhibits have not been provided to the tenant for review. If a landlord waits until late in the lease process to prepare the restriction exhibit, and the exhibit contains restrictions that alter the terms of the main body of the lease that have already been negotiated, additional time and energy will be spent renegotiating terms of the lease. For example, there may be a construction, operation and reciprocal easement agreement (COREA) recorded against the shopping center that may control aspects of the tenant's entry into the center and its operation. It may affect the tenant's use and the use of certain areas of the center, such as a restriction on sidewalks and sidewalk sales and restrictions on outdoor sales areas. Depending on the type of tenant with whom you are negotiating, these restrictions may be detrimental to the tenant's operation to such an extent that the deal will collapse if the restrictions are not changed.

In many mixed-use projects, there may be a condominium regime recorded against various parcels of the project that contain restrictions similar to the COREA mentioned above or that address dues and assessments for common areas that may differ from, or be in addition to, the provisions contained in the main body of the lease.

You may find yourself renegotiating several lease provisions or modifying the COREA or condominium documents to accommodate the tenant's use and operation.

Many tenants have sufficient leverage in negotiating lease terms to garner a clause allowing them an exclusive use for a sale of a particular item or items or even to operate a certain type of business. In a large shopping center, there may be numerous tenants that have exclusive uses benefitting them. It is typical to attach a list of the exclusives affecting the center as an exhibit to the lease and to require a new tenant to the center to take subject to the exclusives. Some tenants require that the exclusive(s) be included verbatim in order to review the exact wording to see if that exclusive will have even a minor impact on their operation. Often the tenant entering the center may not have a primary use that conflicts with the exclusives listed on the exhibit but an ancillary use may conflict with the exclusive list and if the ancillary use is of significant importance to your incoming tenant, the deal may be lost unless a waiver from the holder of the exclusive is obtained.

For example, if an exclusive is given to a coffee shop for the sale of fresh-brewed coffee and a fast-food burger restaurant is negotiating to enter into the center, a requirement to take subject to an existing exclusive for fresh-brewed coffee will in all likelihood be problematic to the transaction. Disclosing exclusives early in the lease negotiation process will reveal potential issues and will allow time for a resolution of the issue (if a resolution is possible).

Similarly, an updated title policy provided as an exhibit with the initial draft of the lease (or soon thereafter) will confirm the landlord entity, current lender (if any), any easements and restrictions filed against the center. It will also serve as confirmation of the shopping center's legal description. Exhibits including COREAs, condominium documents, and restrictions need to be disclosed as early as possible so the tenant realizes that even though they may negotiate a favorable provision in the lease, they may need to take subject to these preexisting documents.

SNDAs

A tenant entering into a new lease will generally require that any lender execute a subordination, non-disturbance and attornment agreement (SNDA) with the tenant. Often, the main body of the lease will provide the minimal terms of an SNDA to be entered into between the tenant and the lender (existing lender or future lender). However, a tenant with leverage may insist upon attaching its form SNDA, or if the parties are lucky enough to have a prior negotiated SNDA with the current lender, the form of the prior negotiated SNDA may be attached. Review the main body of the lease to see if minimal requirements of an SNDA are included in the main body of the lease or merely references to the attached Exhibit with the SNDA. If you only have an attached exhibit you will need to build in flexibility for modification of the form for future lenders.

It is important to get the form exhibit established as soon as possible so the form can be sent to the existing lender early in the process to confirm that the form will be acceptable for the current transaction. The deal terms may differ from the past transaction where the form SNDA was used (example, this deal may include an allowance) necessitating comments or differing provisions to be included in the SNDA for the current transaction.

Conclusion

The sampling of exhibits mentioned in this article are but a few of those that may be required to conclude a lease. Hours and hours of time may be necessary to prepare and negotiate the exhibits. If your client does not have dedicated in-house staff to work with you, outside consultants may be needed to prepare and finalize the exhibits. For a large project with many retail tenants, the landlord may have spent a great deal of time setting up lease exhibits to be used for the project, which may only need to be modified to accommodate the specifics of your transaction. If you are representing a party involved in a lease for a smaller project that may only have a few retail tenants, the exhibits may not be prepared for the project or if prepared, they may not contain the detail needed. This is especially true if you have a small center with one large anchor; that anchor will expect detailed exhibits in most instances.

Anchor tenants and restaurant tenants may want to prepare several of the lease exhibits. They may be drafted by parties that did not work on the initial form lease to be used for the transaction; therefore, a thorough review of the lease terms and the exhibit terms is needed to make sure there is consistency in timing, definitions and overall concepts. Most clients are anxious to get transactions completed, but often do not realize the importance of providing full information early in the lease preparation and negotiation process. Once the information is provided, sufficient time is needed to prepare and negotiate exhibits and to make sure the lease terms are consistent with each one of the exhibits.

Do not leave the preparation of the exhibits to the end of the negotiation. The exhibits are an important part of the lease. Avoid last-minute surprises by drafting and negotiating the exhibits simultaneously with the main body of the lease.

Steven J. Roberts is Of Counsel to Hirschel, Savitz, Parker & Hollman, P.A., in Gaithersburg, MD.