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A Developer’s Survival Guide: Due Diligence Items in Connection with Negotiating A New Retail Lease


The past few years have presented developers and landlords with enormous challenges in marketing and leasing retail space. Deals were difficult to consummate and landlords were often presented with problematic lease provisions which the tenants insisted upon. Given the difficult economy and the lack of alternatives, landlords may at times have relaxed internal standards in dealing with lease provisions that could impact subsequent leases. Given the positive signs of an improving economy, this article is intended to highlight a few of the more significant lease provisions that should be examined in existing leases, in order that a landlord can be prepared to negotiate a new lease transaction.

One of the most significant and often problematic provisions is in the area of tenant use restrictions. In order to make a deal to help pay debt service, a landlord may have agreed to use restriction language that may present challenges in future lease transactions. It is imperative that a landlord carefully analyze all existing use restrictions in order to make sure that a new tenant will not trigger a violation of the use restrictions and to also determine to what extent the use restrictions that the new tenant may seek to impose upon the landlord may apply to existing tenants. Relevant to this analysis is the issue as to whether an existing tenant has an open-ended use clause that would permit that tenant to utilize its space for any retail purpose (or any lawful purpose, which is, in itself, a potentially problematic clause) or, in the alternative, whether the use clause is clearly drafted to only permit a specific use. It is also important to review the assignment and sublease clause to determine if that provision contemplates a change in use. Although a landlord may have a right of recapture to protect itself in the context of a change in use, that may not be a desirable alternative.

The landlord should also have a clear understanding of any existing lease restrictions which would restrict or even prohibit the alteration of common areas to accommodate a new tenant. In addition to the usual provisions which may set forth either a no-build area, so-called, within which no new construction is permitted, there may be a provision that likewise sets forth a permitted building area which would exclude construction activity in any portion of the center located outside the permitted building area. Other provisions may indirectly prevent or restrict any new construction. These would include provisions with respect to maintaining a required parking ratio or limiting or prohibiting the modification of parking areas, internal access roadways, landscaped areas and other portions of the common areas.

The bottom line is that a landlord needs to have a comprehensive understanding of all existing leases in a shopping center when the opportunity presents itself to develop a portion of the center for a new or replacement tenant.