Shopping Center Leases

Often, tenants negotiate exclusives that prevent landlords from leasing space, or approving assignments or sublets for a similar use or prohibited uses. Such exclusive provisions effectively prevent certain uses in the shopping center, which a tenant may find either offensive or detrimental to the value of the center. These provisions, reasonable at the time of negotiation, can sometimes become outdated quickly as new business ideas develop, unforeseen by landlords and their attorneys. Recently, this phenomenon has been particularly pronounced with the growth of certain unconventional shopping center tenants.

Urgent Care Clinics

An example of an increasingly common unconventional tenant is the urgent care center. In the past, many landlords would routinely grant restrictions to requesting tenants who wanted to prohibit medical uses in certain shopping centers. Tenants would ask for these restrictions to protect the “retail” nature of the center due to concerns that medical offices do not create the same synergy as a typical tenant.

Sometimes, the restriction is drafted in a much more general form. It is common for retail leases to contain provisions requiring the landlord to only lease to “retail” tenants. Depending on the definition of “retail,” this could be interpreted as preventing a landlord from leasing to any medical or office use.

One way to address the problem, while compromising and understanding a tenant's concerns, is by carving out one or two medical uses, or imposing square-footage limitations on such usage. This way, tenants will not have the risk of being surrounded by medical clinics, while the landlord will still be permitted to add a unique, stable tenant to the shopping center.

Therapeutic Massage Spas

Growing interest in health and wellness has also led to an increase in therapeutic day spas. Unfortunately, massage parlors have suffered from a historically bad reputation. Older leases tend to restrict massage parlors, as in years past, theywere known to attract seedy elements. More modern-day spas and therapeutic salons, however, do not present the same issues. Tenants such as Massage Envy or even a mom-and-pop day spa can provide all the benefits of a traditional retail tenant without any of the ill effects.

The conflicting perspectives can be managed through a lease provision that prohibits massage parlors except for therapeutic spas commonly found in retail shopping centers. If that language is too broad for a tenant, it can be further narrowed by explicitly naming permissible day spa/salon chains (or comparable enterprises) that would fit the definition.

Restaurants

Some of the biggest growth in shopping centers has been through the increased popularity of restaurants and dining out. This creates issues, due to the higher parking requirements for restaurants, and retail tenants' typical predisposition to be near other retailers, rather than a food emporium. Often, retail tenants require restrictions on restaurant uses because of these concerns.

Unfortunately, this can shut a landlord out of one of the more flourishing parts of the retail sector. This restriction can also keep a landlord from accessing certain tenants or uses that do not immediately come to mind when one thinks of a restaurant. This begs the question, “What is a restaurant?” Frozen yogurt and ice cream shops have become increasingly popular in shopping centers and are attractive tenants in most centers without the issues created by restaurants. Restrictions on restaurants should be drafted narrowly enough to still allow for these and other types of uses that may be desirable in a shopping center.

Lessons from the Past Are the Same Lessons of Today

The shift in the traditional shopping center mix and its effect on leases is not a new phenomenon. In years past, the same problems arose as certain tenants expanded their product lines. The product overlap between a grocery store and a pharmacy began a long time ago and continues to grow. Stores like Walmart sell everything imaginable. Product lines grow and evolve.

It is impossible to foresee all of these changes; however, a forward-thinking approach can minimize the risks in providing exclusives or prohibited uses. Creating exceptions for “uses commonly found in shopping centers of similar class and condition” can be a broad approach to avoiding problems with evolving retail strategies. A more narrow solution, and one that may be more acceptable to tenants, can be to try to anticipate and specifically identify appropriate carve-outs for uses that may have traditionally been uncommon in shopping centers.

In addition, tenants should be challenged to limit their demands to those products or services that are critical and for which competition would clearly be damaging; after all, shopping centers are intended to gather a number of complimentary enterprises together and some overlap is generally inevitable. Further, it should be recognized by tenants that landlords have an interest in, and an incentive to maintain a broad, varied and diversified tenant mix, for the health of their centers. Most importantly, attorneys drafting exclusive provisions should not lose sight of the inevitability of change.

Martin J. Doyle is a partner in Saul Ewing's real estate department. Reach him at [email protected]. Igor Pleskov is an associate in the same department. Pleskov can be contacted at [email protected]. This article also appeared in The Legal Intelligencer, an ALM sister publication of this newsletter.

Often, tenants negotiate exclusives that prevent landlords from leasing space, or approving assignments or sublets for a similar use or prohibited uses. Such exclusive provisions effectively prevent certain uses in the shopping center, which a tenant may find either offensive or detrimental to the value of the center. These provisions, reasonable at the time of negotiation, can sometimes become outdated quickly as new business ideas develop, unforeseen by landlords and their attorneys. Recently, this phenomenon has been particularly pronounced with the growth of certain unconventional shopping center tenants.

Urgent Care Clinics

An example of an increasingly common unconventional tenant is the urgent care center. In the past, many landlords would routinely grant restrictions to requesting tenants who wanted to prohibit medical uses in certain shopping centers. Tenants would ask for these restrictions to protect the “retail” nature of the center due to concerns that medical offices do not create the same synergy as a typical tenant.

Sometimes, the restriction is drafted in a much more general form. It is common for retail leases to contain provisions requiring the landlord to only lease to “retail” tenants. Depending on the definition of “retail,” this could be interpreted as preventing a landlord from leasing to any medical or office use.

One way to address the problem, while compromising and understanding a tenant's concerns, is by carving out one or two medical uses, or imposing square-footage limitations on such usage. This way, tenants will not have the risk of being surrounded by medical clinics, while the landlord will still be permitted to add a unique, stable tenant to the shopping center.

Therapeutic Massage Spas

Growing interest in health and wellness has also led to an increase in therapeutic day spas. Unfortunately, massage parlors have suffered from a historically bad reputation. Older leases tend to restrict massage parlors, as in years past, theywere known to attract seedy elements. More modern-day spas and therapeutic salons, however, do not present the same issues. Tenants such as Massage Envy or even a mom-and-pop day spa can provide all the benefits of a traditional retail tenant without any of the ill effects.

The conflicting perspectives can be managed through a lease provision that prohibits massage parlors except for therapeutic spas commonly found in retail shopping centers. If that language is too broad for a tenant, it can be further narrowed by explicitly naming permissible day spa/salon chains (or comparable enterprises) that would fit the definition.

Restaurants

Some of the biggest growth in shopping centers has been through the increased popularity of restaurants and dining out. This creates issues, due to the higher parking requirements for restaurants, and retail tenants' typical predisposition to be near other retailers, rather than a food emporium. Often, retail tenants require restrictions on restaurant uses because of these concerns.

Unfortunately, this can shut a landlord out of one of the more flourishing parts of the retail sector. This restriction can also keep a landlord from accessing certain tenants or uses that do not immediately come to mind when one thinks of a restaurant. This begs the question, “What is a restaurant?” Frozen yogurt and ice cream shops have become increasingly popular in shopping centers and are attractive tenants in most centers without the issues created by restaurants. Restrictions on restaurants should be drafted narrowly enough to still allow for these and other types of uses that may be desirable in a shopping center.

Lessons from the Past Are the Same Lessons of Today

The shift in the traditional shopping center mix and its effect on leases is not a new phenomenon. In years past, the same problems arose as certain tenants expanded their product lines. The product overlap between a grocery store and a pharmacy began a long time ago and continues to grow. Stores like Walmart sell everything imaginable. Product lines grow and evolve.

It is impossible to foresee all of these changes; however, a forward-thinking approach can minimize the risks in providing exclusives or prohibited uses. Creating exceptions for “uses commonly found in shopping centers of similar class and condition” can be a broad approach to avoiding problems with evolving retail strategies. A more narrow solution, and one that may be more acceptable to tenants, can be to try to anticipate and specifically identify appropriate carve-outs for uses that may have traditionally been uncommon in shopping centers.

In addition, tenants should be challenged to limit their demands to those products or services that are critical and for which competition would clearly be damaging; after all, shopping centers are intended to gather a number of complimentary enterprises together and some overlap is generally inevitable. Further, it should be recognized by tenants that landlords have an interest in, and an incentive to maintain a broad, varied and diversified tenant mix, for the health of their centers. Most importantly, attorneys drafting exclusive provisions should not lose sight of the inevitability of change.

Martin J. Doyle is a partner in Saul Ewing's real estate department. Reach him at [email protected]. Igor Pleskov is an associate in the same department. Pleskov can be contacted at [email protected]. This article also appeared in The Legal Intelligencer, an ALM sister publication of this newsletter.