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As Retail Real Estate Comes Back to Life, It’s Time to Revisit Lease Documents

As Retail Real Estate Comes Back to Life, It’s Time to Revisit Lease Documents

The retail world is coming back with a bang and many retailers and developers are focusing on deals that were signed prior to or during the recent economic downturn. As a result, it’s time to dust off lease documents from 2008, 2009 and 2010 as new sales, financing and equity investments pick up.

A review of these lease documents is necessary for landlords and retailers to put themselves in the best possible position when bringing projects out of hibernation.

Passage of time

When many leases were executed, estimates for closing on construction loans and commencement of construction were based on the facts known at the time. Since then, difficulties obtaining construction financing created major delays on many developments. The uncertainty in the retail business sector also made it challenging to hit the leasing thresholds necessary to start construction.

These delays pushed project schedules well beyond what would reasonably have been anticipated. Here are some provisions that warrant a review:

• Delivery dates, outside delivery dates and tender of possession deadlines may no longer be consistent with the new project schedule. Landlords should review the key dates for all signed leases against the construction schedule for the project to best meet the dates and timeframes in the leases. Tenants should track their projected delivery dates to keep their projected opening dates realistic.

• Many leases contain a rule against perpetuities clause that results in an outside automatic termination date. When executed, this is usually far in the future. But as deals have stalled, this may be uncomfortably close. These provisions are often in the boiler plate at the end of the lease and may not be noticed unless the lease is reviewed carefully.

• Parties should confirm that the current zoning, sign regulations or criteria and other municipal codes and regulations are still consistent. Parties should also confirm that permits are still active and not stale.

• Landlords and tenants may also want to confirm that any unusual common area maintenance provisions involving payment of increases over a base year or other formulas did not specify a particular outdated calendar year as a base year.

• Retailers should confirm that conditions to delivery or the retailer’s acceptance of its premises are still satisfied.

Changes in the project

Many projects may have been planned based on key tenants who are no longer in existence or not opening new stores at the moment. In addition, available financing may force landlords to develop in phases that were not originally planned. Below are some of the lease provision trouble spots:

• Review site plan and control area exhibits to confirm that the improvements depicted reflect the project as currently planned or will be within permissible variances based on frozen site plan or control area provisions of the leases. Landlords should also confirm that all of the land contemplated to be part of the project is still under their control.

• Review co-tenancy provisions to make sure that the phasing and improvements required still meet the requirements for the project. Key tenant and anchor descriptions must be reviewed to confirm that the current tenant mix will satisfy these requirements or that substitute tenant clauses are flexible enough for any changes.

• Check CAM provisions to make sure that minimum denominator provisions or floors on the calculation of a retailer’s pro rata share still reflect the project to be built.

Certain assumptions are necessary to finalize a lease in a development. As projects evolved to survive in the new retail climate, some of those assumptions need to be revisited so that landlord and tenant can adapt to these changing assumptions.

Tara A. Scanlon is a Partner with Holland & Knight LLP in Washington, D.C. specializing in commercial real estate transactions. She is co-chair of the law firm’s retail development leasing team and an adjunct professor at the Allan L. Berman Real Estate Institute at Johns Hopkins University.

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