The Expanding Definition of Retail: Incorporating Alternative Uses in Retail Shopping CentersJuly 16, 2019
As retail real estate continues to evolve, landlords are increasingly looking for tenants with alternative uses to fill vacant spaces in shopping centers. What once may have been a toy store, might now be outfitted as a fitness center. A storefront that once contained a clothing boutique, might today be converted into a medical clinic. However, as the definition of retail diversifies, landlords should remain cautious of the following traps that could get them into trouble:
Local Zoning Laws
A landlord should be mindful of the restrictions that may exist in the zoning district where the shopping center is located. Certain commercial districts may restrict the types of uses that are not typically classified as retail. The local regulations may also have parking quotas that must be satisfied for a particular type of use. In the event the shopping center is subject to a special development plan, or the zone restricts against the proposed alternative use, a landlord should contemplate under the Letter of Intent and Lease which party is responsible for the application to the local zoning commission to approve the alternative use in the relevant zoning district, and the costs associated therewith.
The existing tenants in a shopping center, particularly anchor and big-box tenants, will likely have negotiated restricted use provisions in the leases, which the landlord must comply with as it attempts to recruit new alternative use tenants (AUT). Most frequently, large tenants with strong bargaining leverage will negotiate into the restricted use provisions a prohibition in the shopping center of fitness centers, medical centers, and massage parlors, to name a few. These uses often attract customers and clients that utilize a significant portion of parking in the shopping center for prolonged periods of time, which a large tenant would want to prevent, and which could impair a landlord’s ability to lease to such an AUT without first obtaining the existing tenants’ consent.
Sometimes restrictive use provisions will broadly restrict against any use that is “not consistent with a first-class retail shopping center.” Similarly, a landlord should obtain from an existing tenant with this sort of restriction, their consent to the new AUT, or acknowledgement that the alternative use conforms to that of a first-class retail shopping center. Otherwise, a landlord will risk having the existing tenant claim a violation of this restricted use and be responsible for any remedy resulting therefrom.
A landlord should also consider the other terms within existing leases at the shopping center that may restrict a new AUT, such as parking quotas and shared use of common areas. Depending on the construction of these existing terms, a landlord will need to consider them when preparing the Letter of Intent and Lease for the new AUT, and possibly even renegotiate the terms of existing leases to accommodate the needs of the new AUT.
Reciprocal Easement Agreements
In the event a shopping center shares common area with an adjacent, though distinct, owner, there will often exist on the land records a Reciprocal Easement Agreement. These agreements set forth the relationship between these parties, the responsibility to maintain these areas, and how costs are divided. They can sometimes impose restrictions on how the properties may be used, which could also require attention as a new AUT in a shopping center is considered subject to this type of agreement. As mentioned above regarding existing leases in the shopping center, Reciprocal Easement Agreements can also impact any changes to parking, signage, and most significantly, use of the common areas, all of which could be affected by a new AUT.
When considering a new AUT, a landlord will also need to pay close attention to the terms of its standard form. For instance, for an AUT such as a fitness center or medical clinic, a landlord should contemplate whether to impose more responsibility on the tenant for structural repairs to the premises (which is usually the landlord’s obligation), as these alternative uses often come along with heavy machinery and equipment that could place more stress on and potentially damage the structural portions of the premises, than a more traditional retail tenant’s use would. Similarly, a landlord may want to negotiate for higher insurance limits and stronger indemnification provisions, as medical and fitness uses have the potential to result in more significant claims from customers and clients than traditional retail use.
These are just a few of the considerations that a landlord should contemplate when deciding whether to incorporate alternative uses into an established shopping center. Before signing a Letter of Intent and Lease, a landlord should consult with an experienced attorney who is familiar with handling the matters laid out above.
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