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Leasing A New Center

The developer of a new shopping center faces special challenges in leasing the center before it is even constructed. Tenants raise issues not usually a matter of negotiation in a lease for an existing center. The following are some significant matters that the leasing attorney will have to address in the leases for a new shopping center.

* Opening date. In new construction, the developer often wants all tenants to open on a specified "grand opening" date. Thus, each lease must require the tenant to open on such a date; not before and not after.

Many tenants will agree to this only if the developer agrees to notify tenant of the scheduled grand opening date months in advance. Tenants also will require a commitment from the developer that it will deliver the premises to the tenant within a certain period of time prior to the scheduled grand opening date.

The uncertainties of construction make it risky for the developer to give absolute time commitments. Therefore, the developer could permit the tenant to delay opening if notice or delivery is not tendered in sufficient time for the tenant to submit plans, perform its buildout work and open for business. Such time periods must be realistic for both the developer's construction schedule and the tenant's operational needs.

Some tenants insist on being allowed to open prior to grand opening if the grand opening date is delayed. Because of the risk of injury to customers on what is still a construction site, the developer should resist permitting any premature store openings.

If a necessary tenant makes this a deal point, the parties might agree that such a tenant may open in advance if the developer permits certain other tenants (or a certain number of other tenants) to do the same.

Tenants often want assurance that the shopping center will indeed be constructed and open by a specified date. Again, rather than give an absolute commitment, the developer could permit the tenant to terminate the lease if the premises are not delivered by a certain date. The developer also should retain the right to terminate the lease if financing, zoning changes or required approvals are never obtained, or if the shopping center is never constructed or completed.

* Co-tenancies. Many tenants will want to be able to delay their opening until a certain amount of the gross leasable area (GLA) of the center, or a certain number of named tenants, also are ready to open. Permitting tenants not to open on the grand opening date could create a domino effect, in which no tenant is required to open because no other tenants are required to open. Instead, where this becomes a deal point, the developer could agree to a reduction in rent until a certain percentage of the center, or until certain named tenants, are leased (or open).

* GLA floor. Many standard lease forms base a tenant's share of additional charges upon the amount of the GLA of the center that is leased and open for business. Savvy tenants require a floor on the amount of unleased and unoccupied space the landlord may deduct from the GLA when calculating these tenants' share of such costs.

A "stepped" floor is usually more appropriate for a new center. A lower floor is suitable for the first several years after the tenant opens for business, to give the developer the chance to reach maximum occupancy; a higher floor is applicable after the developer has first reached, or should have reached, such occupancy.

* Patent and latent defects. Shopping center lease forms generally provide that the tenant takes the premises in an "as is" condition. However, most leases for a new center are entered into before the premises are even constructed. Tenants thus often insist the developer assume responsibility for correcting defects in construction after delivery. The developer should require the tenant to give developer a punch list of obvious defects within a short time after the tenant accepts delivery of the premises. The developer should agree to repair only those latent defects (i.e., defects not apparent on visible inspection) discovered and reported by the tenant within a certain time period after opening, usually no longer than one year. Instead of an obligation to repair, the developer could agree to assign to the tenant any warranties the developer received from its contractors.

This is only a short list of the special issues to be addressed when leasing a newly constructed center. Standard lease provisions should be reviewed and recrafted for the peculiar concerns the new center creates.

M. Rosie Rees is a lawyer in the Chicago office of Los Angeles-based Pircher, Nichols & Meeks.

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