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Firm managing shareholder Oscar R. Rivera authored an article that is featured in the online edition of today’s Daily Business Review, South Florida’s exclusive business daily and official court newspaper, and will soon be appearing in the “Board of Contributors” page of the print edition. The article, which is titled “Potential Pitfalls to Avoid with Restrictive Clauses in Outparcel Sales, Developments for CRE Owners,” focuses on the growing trend of the carving out of parts of shopping centers and mall parking lots to create “outparcels” for stores, restaurants, and even multi-family apartments. He notes that the growth of online shopping and curbside pickup at major big-box retailers and grocery chains has diminished the need for vast parking fields for in-store shoppers, and property owners are trying to tap into the growing appeal of mixed-use sites that provide a live, work and play experience. Oscar’s article reads:
. . . However, for commercial real estate owners hoping to create and sell an outparcel for further redevelopment, or even acquire an existing outparcel owned by others for their own redevelopment, there is a significant potential hitch that must be addressed prior to closing. This issue requires the utmost care and attention, and is oftentimes overlooked, only to cause potential snags down the line.
The application of a property’s current restrictive covenants with existing tenants in outparcel deals can become a challenge depending on the nature of the plans for the new or redeveloped site. CRE owners can never lose sight of the fact that the new store/restaurant category or other planned use for a newly created outparcel being marketed and sold to a third party should not run afoul of the restrictive use clauses contained in the lease agreements with their property’s existing tenants. Otherwise, they can expose themselves to serious legal liability if the new enterprise planned for the outparcel is in a category that is a protected exclusive for any of the current tenant(s) at the property or a prohibited use that is forbidden by existing leases.
Therefore, always in close consultation with experienced CRE attorneys, owners need to address any such restricted uses that may be in play with all the parties prior to finalizing any transaction.
The most efficient and effective way to do so would be to make the outparcel buyer aware of all the existing exclusives and restricted uses, and then negotiate their inclusion in the sales contract as an exhibit and as a covenant running with the parcel being purchased. The latter causes these exclusives and restricted uses to be a title burden that runs with the land and binds not only the current owner, but also all future owners and tenants on the outparcel.
These covenants can be tricky to draft, as specific exclusives and restrictions are often tied to short-term leases. For example, a five-year coffeeshop lease may have a coffee exclusive, so adding its exclusive to a new outparcel forever makes no sense. The documents need to be crafted so that the restrictions are fluid and able to vary with the exclusives on the adjoining parcel, and also so they apply only so long as the corresponding exclusive leaseholders remain at the property and automatically expire if they leave. Future exclusives or restricted uses will not flow down to the outparcel, as they would have been created after the outparcel owner acquired title and would not be subject to the covenant.
Other restrictions, such as obnoxious uses which are generally prohibited in many leases, can be drafted in such a way that they do not expire but instead run with the land forever.
However, if there is an issue with existing restrictions against the planned use that raises concerns from a potential buyer, the next step is to approach the existing tenants and seek a waiver of the protections in their leases. Discussions with these tenants, again advisably led by qualified CRE legal counsel, should ensue over the exact plans for the outparcel site and whether it should trigger an objection.
Generally, seeking such waivers from existing tenants will come at a cost to the master parcel property owner, as many tenants will seek some sort of concession before agreeing to change a previously negotiated benefit. Sometimes these costs can be passed on to the prospective outparcel buyer, but oftentimes the master parcel owner/seller has to absorb them.
The goal in these transactions is for there to be little if any competitive overlap with existing tenants, and for the planned operator of the outparcel site being created to be a proven winner that generates a great deal of traffic among not only their target customers but customers that will also spill over to and benefit the entire center. . .
Oscar concludes his article by advising CRE owners to have all of these and several other important discussions with their prospective buyer and existing tenants as part of their pre-sale negotiations, and codify everything in writing with the buyer and tenant(s) as necessary with the help of highly qualified counsel.
Our firm salutes Oscar for sharing his insights into this very important potential sticking point in outparcel deals for CRE owners with the readers of the Daily Business Review. Click here to read the complete article in the newspaper’s website (registration required).