REAs are agreements that set the terms, conditions, and obligations for the easements, restrictions, and covenants between owners of real property and stakeholders with a leasehold interest in the real property to ensure harmony in the development, operations, and maintenance of such real property. REAs can be used in both commercial or residential contexts but typically apply to integrated shopping centers, retail, office, and other mixed-use properties. REAs set forth a uniform standard for the subject real property with respect to construction; maintenance obligations; architectural theme; prohibited, restricted, and exclusive use protections; site plan controls; signage rights; and other operational requirements.
Pertinent Provisions
Here are the most common and pertinent provisions contained in REAs.
Access: The parties to the REA will want to grant and receive reciprocal easements for ingress and egress across parcels to ensure that driveways, walkways, parking lots, lanes, aisles, roadways, and ring roads located on the various tracts allow the parcel owners and their respective employees, customers, and suppliers the ability to travel between the public roads and the subject real property.
Parking: Parking is a key point of consideration for REAs. The parties to the REA grant each other the right for their tenants, customers, employees, and suppliers to park in designated parking areas on the real property subject to the REA. Similar to the access easement, consideration should be given to the rights and limitations on the right to relocate parking areas. An important item to consider is whether each parcel has to be self-sufficient for parking or if one owner will be allowed to count parking on another owner’s parcel to meet required parking ratios on the subject real property.
Operation of Common Areas: The definition of “common areas” typically includes, but is not limited to, the following: access roads, driveways, walkways, ring roads, outdoor green spaces and seating areas, lobbies, elevators, escalators, hallways, and other shared or common areas of the property that are available for all tenants, customers, employees, visitors, and others to use throughout the property. The REA should provide the party that controls the common areas of the subject real property, such as the developer or manager, to operate, insure, and maintain the common areas. In addition, the REA should outline each REA party’s responsibility for, and costs related to, maintaining common areas. These collected fees pay for expenses such as upkeep, insurance premiums for common areas, trash removal, cleaning, and lighting. Property owners are typically required to pay taxes relating to their own property and a portion of the taxes pertaining to common areas. In addition, each party is also required to maintain the appearance of the buildings on its property and maintain insurance on the buildings and improvements located on its property.
Term: REAs can be perpetual or for a limited timeframe as may be determined by the types of easements granted and the particular use of such easements. Perpetual easements such as access, stormwater, party wall, and utilities generally last as long as improvements exist on the benefitted tract. For limited timeframe easements, the parties should consider the appropriate time for expiration of easements, such as parking, accent lighting, construction, and the right to use an enclosed mall. For example, the burdened owner might want to consider including language in the REA that gives the burdened owner the right to force an abandonment of certain easements such as an accent lighting easement if the benefitted owner has not used the easement for extended periods of time. Furthermore, language in the REA may want to address what occurs to certain easements if the intended use of the real property as set forth in the REA ceases to exist.
Signage: REAs can contain provisions pertaining to signage. These provisions address the size, location, lighting, and materials for signage and also provide access details for maintenance and repair. Typically, a common sign such as a monument sign will be located on one party’s property. As a result, the other REA parties will want the owner upon whose tract the sign is located to grant to other owners (and their tenants or designated parties) an easement to cross the burdened tract to access the sign and to maintain its panel on the sign. If a sign does not exist on the effective date of the REA, then there should be language included to address an owner wanting to erect its own monument or pylon sign on the tract of another owner, and the benefitted owner should obtain a construction and maintenance easement to construct and maintain the sign.
Utilities: REAs typically include provisions dealing with the installation, maintenance, relocation, and replacement of utilities on the subject real property, such as electric, gas, cable, water, and sewer. The REA parties grant each other and the applicable utility service providers the right to install, operate, maintain, and repair utility lines on each owner’s tract. The REA should address the burdened owner’s right to consent to the location of the utility facilities or placement of the utilities and should have the right to prohibit utility lines from being installed under its building. As with an access easement, the burdened owner will want to reserve the right to relocate a utility easement, which is a common occurrence, especially with outparcels and redeveloped parcels. The relocation of a utility easement will have the same concerns as the relocation of an access easement. The burdened owner should give the benefitted owner notice, not vacate the existing utility line until the new one is ready to use, and not make it more difficult for the benefitted owner to use the utility line. If an interruption of service is necessary to relocate the utility line, the interruption should be scheduled with the benefitted parties so their business is not interrupted. If the benefitted owner is working on utility lines on the burdened owner’s tract, the benefitted owner should be required to provide liability insurance and indemnify the burdened owner against any liability claims. The benefitted owner should be required to pay all of the costs of the work and keep the burdened owner’s tract free of liens. The burdened owner will want to require the benefitted owner to perform the work as quickly as possible; to schedule the work with the burdened owner; and, unless it is an emergency, not to perform any utility work during the holiday, back-to-school, or other important shopping periods.
Mortgagee Protection: An REA should contain provisions for the benefit of the lender of any party to the REA. In the event of a default by one party to the REA, the nondefaulting party should be obligated to notify the defaulting party’s lender, if known, and allow such lender to cure the default. In addition, the REA should provide that a breach of any of the covenants or restrictions contained in the REA will not defeat or render invalid the lien of any lender made in good faith and for value as to the shopping center or any part thereof.
Use, Recapture Rights, and Rights of First Offer: Some REAs may require the subject real property to be used for a particular use or, in turn, may restrict certain uses on one parcel to benefit another parcel. If a major retailer that is a party to the REA fails to use its property for a particular use for a specified period of time, then the other parties to the REA may be given the right to purchase the major retailer’s property for its fair market value. The REA may also provide that, in the event either party desires to sell its property to a bona fide third party, the other party will have a “right of first offer” to purchase the selling party’s property. The specific terms and conditions of said right of first offer should be set forth in detail in the REA, which should include a mechanism to determine purchase price and timing of the exercise of such right of first offer.
Construction: Some REAs are executed at the onset of a project or construction phase of a development. In these cases, the parties will want to grant to one another a temporary easement for an adjacent owner to access the tract of an adjacent owner to construct foundations and walls on the tract of the benefitted owner. Such temporary easements may require the workers to be on the burdened tract and provide appurtenant easements pertaining to the construction standards, maintenance obligations, and operations of such project or development. If each owner is not only constructing a building on its tract, but also performing site work, the easement will include the right to install utility lines and grade the benefitted tract. If the developer is doing the site work and the parties are building their own buildings, the parties will want to grant an easement for the site work to the developer and a construction easement to the adjacent owners.
Amendments and Other Considerations: REAs include the mechanism to modify the REA, if necessary. Typically, the REA cannot be amended without the approval of all, or a majority of, the other REA parties. The REA must be clear, however, as to who has this approval right if one party’s property is subsequently subdivided into multiple properties or owned by multiple parties. The ability to grant easements is as important as the ability to not grant easements. The parties will want to establish that the other parties will not have the right to grant similar easements to anyone that is not an owner under the REA. As mentioned above, the parties will also want the right to close off access and parking occasionally to keep the public from gaining prescriptive rights in the burdened owner’s tract. The benefitted owner will want to obtain an agreement from the burdened owner not to install any landscaping, signs, or structures that will interfere with visibility of the benefitted owner’s sign. As with other easements where work is being performed by one owner on the tract of another owner, the burdened owner should require the benefitted owner to indemnify the burdened owner and maintain liability insurance.
REAs and Priority
REAs are vital real property interests, and the intent of REA parties is that the rights and restrictions contained therein must not be subject to being extinguished by third parties (e.g., lenders). Accordingly, if a security instrument, such as a mortgage, happens to encumber any portion of the property that is intended to be governed by, or subject to, an REA at the time the REA is established, then such security instrument will need to be subordinated to the REA. Likewise, future security instruments encumbering the property must remain subject and subordinate to the REA. This may sound controversial because lenders abhor title encumbrances that are superior to their mortgage interests; however, lenders understand that that the rights in the REA in favor of the encumbered property are often critical to the property in which they have interests, so lenders are comfortable with not having priority over an REA. It helps to think about the concept in reverse. A mortgage lender (or property owner) would not want another lender with a mortgage on another portion of the shopping center to have the right to extinguish the REA if the other lender forecloses (or otherwise exercises its rights) due to a default by the other property owner. As a practice point, when representing a party obtaining an interest in an existing shopping center that is encumbered by an REA (whether as a buyer or lender), it is important to have the rights under the REA be part of the property insured under the title policy.
How REAs Affect Leases
REAs exist in real estate projects and developments for every type of use—retail, industrial, or office. In the retail context, you find them in a shopping center development. In an office context, you find them in office parks, and in the industrial context, you find them industrial parks. Because REAs are typically seen in a shopping center development, these written materials will focus on the effect of these documents on retail leases.
How REAs Can Restrict a Tenant’s Use
Similar to a COREA, DOE, OEA, declaration, master deed, or covenants, conditions, and restrictions, REAs are documents meant to run with the land and specify in detail (i) the promises that each owner of a parcel of land makes to an owner of an adjacent parcel, (ii) the obligations and duties of each owner of a parcel of land, and (iii) ways in which the development of such parcels will be restricted to accomplish the vision for the development.
REAs are meant to affect the land in perpetuity. Ideally, REAs will accomplish the long-term development goals of the developer/co-owner but also ensure compatibility of future tenants with the use of the major retailer/co-owner that also has a vested interest in seeing the retail development succeed. Ultimately, a thriving retail center will drive traffic to the major retailer, and the foot traffic that the major retailer experiences will inevitably spill over into the physical locations of nearby tenants in the retail center.
The provisions of REAs address the mechanics of how the retail center will develop, how it will operate, and how the co-owners will divvy up the duties and obligations that come with owning the development.
Invariably, REAs will establish a general use for the development. For example, an REA for a shopping center might contain the following general use language: “No part of the Shopping Center shall be used for other than retail sales or services, offices, restaurants, information centers, or other commercial purposes.” In addition, REAs will set out a list of prohibited uses for the retail center. Although the list of prohibited uses can vary from one retail center to the next, these are the most common uses that are banned in a retail center:
- Any use that amounts to a public or private nuisance;
- Any use that allows noise or sound that is objectionable due to intermittence, beat, frequency, shrillness, or loudness;
- Any use that allows any obnoxious odor;
- Any use that produces an excessive quantity of dust, dirt, or fly ash (the parties may want to exclude the sale of soils, fertilizers, or other garden materials or building materials in containers if incident to the operating of a home improvement or general merchandise store; typically, a major retailer will want to carve this out from the list of prohibited uses);
- Any use that results in fire, explosion, or other damaging or dangerous hazard, including the storage, display or sale of explosives or fireworks (depending on the major retailer, the parties may want to carve out that the sale of gasoline is an acceptable use);
- Any use allowing a trailer or mobile home, labor camp, junk yard, stock yard, or animal raising [the parties may want to carve out pet shops, dog grooming stores, or doggie “day cares” (or not) from this use];
- Any use allowing the drilling for or removal of subsurface substances;
- Any use allowing the dumping of garbage or refuse, other than in enclosed receptacles intended for such purpose;
- A cemetery, veterinary hospital, mortuary, or similar service establishment;
- A car washing establishment;
- A shop providing automobile body and fender repair work;
- Any use allowing automobile, truck, trailer, or recreational vehicle sales, leasing, or display that is not entirely conducted inside of a building;
- Any church, synagogue, temple, mosque, or other place of worship;
- Any fire sale, flea market, bankruptcy sale (unless pursuant to a court order), or auction operation;
- Any apartment, home, or other residential use or any hotel, motel, or other lodging facilities;
- Any theater, playhouse, cinema, or movie theater;
- Any bar or discotheque;
- Any school, training, educational, or day care facility, including, but not limited to, beauty schools, barber colleges, nursery schools, diet centers, reading rooms, places of instruction, or other operations catering primarily to students or trainees rather than to customers;
- Any sexually oriented business or cannabis establishment;
- A hospital or clinic; or
- A convenience store.
Potential tenants looking to lease in the retail center will want to review the REA to make sure there is no outright ban for the expected use of their space. Prohibited uses are usually listed altogether in one paragraph and easy to locate. What can be more difficult to locate are uses that the major retailer might want to reserve for itself that may overlap with an exclusive for which the potential tenant wants an exclusive—say the sale of coffee or the sale of pizza. Typically, the way this gets handled is that the REA will be drafted so the major retailer promises to never have more than a certain percentage of its sales (for example, three percent) be attributed to the sale of pizza or coffee.
What can be a trickier situation is whether the major retailer—say a Walmart—will be allowed to have a small store within its location—such as Starbucks, Subway, an optometrist, or a nail salon, for example—that may compete with a future tenant. This is a major negotiating point that will have to be decided between the developer/co-owner and the major retailer/co-owner when drafting the REA. This is also an issue when a potential tenant is performing its due diligence on the retail center and reviewing the REA for such provisions that allow the major retailer to contain a possible competitor within its walls.
If you represent a developer/co-owner of a retail center, one way to protect your client from unwanted litigation that asserts the violation of a tenant’s exclusive use is to do the following in your form lease:
Ensure your lease sets limits. The landlord’s form lease should impose the following limitations with respect to granting exclusives to any tenant:
- Limit the remedy for an exclusive violation to a lower amount of rent.
- Limit the term of the exclusive (i.e., set an “expiration date” for the exclusive).
- Limit the applicability of the exclusive to a certain area of the retail center.
- Limit the exclusive to the tenant’s “primary” use.
Give the landlord the ability to eliminate the exclusive. The landlord should be able to eliminate an existing tenant’s exclusive in the event any of the following occurs during the term of the tenant’s lease:
- Tenant’s gross sales fall below a certain amount.
- Tenant assigns or sublets a portion of or the entire premises.
- Tenant triggers an event of default under the lease.
- Tenant stops using the exclusive use.
- Tenant establishes a competing business nearby.
- Tenant fails to continuously operate its business.
- Tenant does not notify the landlord of a violation of the exclusive in a timely manner.
Except certain tenants that would otherwise be a competing business. For example:
- Rogue tenants.
- Anchor tenants.
- Existing tenants.
- An assignee or subtenant of an existing tenant.
- Small tenants.
- Tenants that replace an existing tenant but are smaller in size.
- Tenants who violate the exclusive use on an incidental basis.
A sample lease provision granting an exclusive use that protects landlord is provided on page 10.
How REAs Can Affect Where a Tenant Can Build
REAs provide the rules and mechanics for a developer/co-owner and a major retailer/co-owner to develop the property. Ideally, the REAs will provide the owners of the development with flexibility to develop the retail center as they please. However, potential tenants of the retail center often want the landlord to make assurances in the site plan that can restrict the landlord’s development.
If not addressed ahead of time by the parties, unresolved issues with the landlord’s site plan can be flashpoints for lease disputes.
With the site plan, a tenant typically wants a representation from the landlord that the final development will be the same as the proposed development, and the site plan is a complete and accurate depiction of all matters. In contrast, a landlord will want minimal detail and maximum leeway to change the site plan, if necessary.
Common areas of dispute are the following:
- Landlord makes material changes to the site plan without tenant’s consent;
- Landlord’s site plan ends up significantly reducing the amount of parking to tenant;
- Landlord’s development under the REA impedes the visibility that the tenant expected to have; and
- Changes to the common areas or other development move the tenant to an undesirable location or cause its existing location to be undesirable.
Therefore, the parties will usually agree that the landlord’s changes to the site plan will NOT:
- Be substantial;
- Reduce parking below a specified ratio;
- Affect the visibility of the premises or access to them;
- Put any other tenant’s store line in front of the premises; or
- Remove the tenant from a specified proximity to proposed anchor tenants, retail center entrances, or parking areas.
When negotiating a retail lease in a retail center that is the subject of an REA, the tenant will want the following designated on a site plan (that is dated and scaled):
The perimeter of the shopping center;
The common areas;
The number of spaces for tenants;
The parking ratio and angle of striping;
The location of pylons, monuments, planters, and other barriers;
The outparcels;
The parking areas reserved for the tenant or other tenants, or designated for employees;
The location of handicapped or loading-zone spaces;
The size of the spaces; and
Entrances and exits, curb cuts, loading areas, means of access to the premises, and the size and location of buildings.
Cases have been litigated over reneged promises pertaining to parking ratios and visibility of a tenant’s premises. The parties can typically avoid disagreements ahead of time by giving the tenant an unobstructed vista on the site plan or a sight line easement on the site plan. Tenants will want the vista or sight line easement to be as large as possible, all the way to the nearest major thoroughfare. Landlords will want to limit the vista or sight line easement to areas directly in front of the premises, if possible.
Tenants will want to make sure their site plans show where all the signs will be located in the development and refer to their sign criteria set forth as an exhibit to the lease. This is important because a misplaced sign can impair visibility of the tenant’s premises.
The site plan should show outparcels, too. A building built on an outparcel may obstruct visibility of the tenant’s premises. In addition, the demand for parking by the owner of an outparcel may exceed the supply of the outparcel (i.e., restrictions imposed by building or zoning code). In situations like this, the developer/co-owner will typically negotiate with the buyer of the outparcel for a cross-parking arrangement. The problem with such an arrangement is that overflow parking from the outparcel may impair the parking reserved or intended for the tenant.
As a general rule, landlords should disclaim any promise that the site plan will not change during the term of the lease. And landlords should ensure that any promises they make to tenants regarding their physical requirements for the premises should not conflict with what is stated in the REA.
Consent to Changes in the REA
An important point of contention between a landlord and tenant is whether a tenant should be allowed to prevent a landlord from making alterations or improvements in the retail center pursuant to the REA that could hurt the tenant’s business. Whether a landlord can refuse to provide such a right to the tenant largely turns on the tenant’s size.
Anchor Tenants. Anchor tenants will have the most leverage in any lease negotiation with a landlord. Generally, such tenants have the clout to negotiate a provision that allows them to prevent the landlord from amending the REA without its consent. As an example, an anchor tenant would certainly want the right to preclude the landlord from making revisions to the REA that would allow it to change the retail center from a “lifestyle” center to that of an “outlet” center.
Midsize Tenants. For midsize tenants, a landlord can offer that it must obtain the tenant’s consent for any changes to the REA that would “unreasonably adversely” affect the tenant’s rights or obligations under the lease. This consent would apply to any changes that unreasonably interfere with the tenant’s use or enjoyment of the retail center.
Small Tenants. For small tenants, a landlord can offer that it must obtain the tenant’s consent for any changes to the REA that would “materially adversely” impact the tenant’s rights or obligations under the lease, which is a tougher standard than “unreasonably adversely.” The landlord will want to ensure that it has the final determination regarding what is “materially adverse.” If possible, the landlord can state in the lease specific instances where the “materially adversely” standard is met. For example, such changes to the REA would have to be changes that affect visibility, access, or economic provisions of the lease. Furthermore, the landlord wants to ensure that the tenant’s consent cannot be unreasonably withheld, conditioned, or delayed.
A sample lease provision using the “materially adversely” standard is as follows:
Landlord shall not amend, modify, or terminate the [insert name of REA] without the prior written consent of Tenant if such amendment, modification, or termination would materially adversely affect in Landlord’s sole opinion any rights or obligations of Tenant under the Lease. Tenant’s consent shall not be unreasonably withheld, conditioned, or delayed.
The lease should also consider the kind of changes that require the consent of the tenant before the landlord can amend the REA. Tenants will want landlords to require their consent for as broad a category of changes as the landlord will allow, but the landlord will want to narrow down the types of changes for which it will need to obtain the tenant’s consent. In fact, it would behoove the landlord to specifically list the specific changes that will require the tenant’s consent, such as changes that will affect the amount of parking directly in front of the tenant’s premises. Landlords would also be wise to provide the tenant a specific period of time to respond to any proposed changes to the REA. If the tenant does not respond prior to the expiration of the deadline to do so, then its rights to consent to such changes should be waived.
If the landlord deems it necessary to revise the terms of an REA, it is not limited to giving the tenant a consent right to such changes. In lieu of giving the tenant a consent right, it can offer other remedies, such as the right to receive rent abatement or the right to terminate the lease. The former remedy is less severe than the latter. If rent abatement is offered, the landlord should require the tenant to provide proof that such changes to the REA have decreased its sales prior to providing a rent abatement.
Ways to Ensure Leases Do Not Trigger Violations of REAs
When parties negotiate a commercial lease, it behooves both landlord and tenant to ensure that the terms of the lease not conflict with the terms of the REA. Ensuring agreement between the two documents gives the tenant clarity and prevents a costly lawsuit to the landlord. Landlords do not want to add provisions to the lease that inadvertently violate the REA.
For example, assume the REA dictates where the retail center’s entrances and exits will be located. As part of lease negotiations, however, the landlord makes a concession to an important, midsize tenant that it will move the entrance close to the midsize tenant’s space—a location that would violate the terms of the REA.
Once the parties sign the lease and the issue is brought to the landlord later, the landlord is in an impossible situation. If the landlord moves the entrance close to the tenant’s space, a third party will sue the landlord for violating the REA. If the landlord moves the entrance to the location designated in the REA, then the tenant will sue the landlord for violating the lease.
The parties can protect themselves by doing three things.
First, the parties should ensure the terms of the lease and REAs are consistent with one another. If there is an inconsistency, the landlord should modify or delete the offending lease clause and notify the tenant of the reasons for doing so.
Second, the lease should contain language that alerts the tenant during its review of the lease that an REA encumbers the real property on which the premises will be located. The lease should state that it is “subject to” the terms and provisions of the REA, as it may be modified or amended. By including the “subject to” language, the parties ensure that the REA must be followed if the REA ever conflicts with the lease.
A sample provision could read as follows:
Landlord and [insert name of major retailer] (the “Anchor”) have entered into a [insert name of REA], dated [insert date] (the “REA”). This Lease is in all respects subject to the terms and provisions of the REA and to all modifications, amendments, and revisions thereto.
A sophisticated tenant will demand that the landlord modify the lease language to limit the landlord’s ability to enter into modifications, amendments, and revisions to the REA on its own. The landlord will likely have to agree to the following additional language: “Notwithstanding the foregoing, Landlord shall not enter into any modifications, amendments, or revisions of the REA if they would materially adversely increase Tenant’s obligations under this Lease.”
Third, the tenant can require that the tenant’s business comply with the REA. The tenant should be obligated to conduct its business in a way that will not cause it or the landlord to violate the REA. The lease should state that the tenant must maintain and conduct its business in strict compliance with the REA, as well as any laws, rules, regulations, and orders of insurance underwriters.
A sample provision could read as follows:
Tenant shall at all times maintain and conduct its business, so far as the same relates to Tenant’s use and occupancy of the Premises, in a lawful manner, and in strict compliance with any maintenance or easement agreement, including but not limited to the REA, all governmental laws, rules, regulations, and orders and provisions of insurance underwriters applicable to the business of Tenant conducted in and upon the Premises, including those with respect to storage, handling, discharge, and transport of any pollutant, contaminant, or hazardous, toxic, or dangerous substance.
A sample form of REA appears following this article.
Conclusion
Practitioners are well advised to understand the basic considerations of landlords and tenants in REAs and the provisions that should be included in such documents.
