Page 20 —
COLORADO REAL ESTATE JOURNAL
— October 21-November 3, 2015
Law & Accounting
T
he retail mix in the
development
and
ongoing management
of strip malls, shopping cen-
ters, pad sites and other types
of retail centers is critical for
the continuing success of a
retail project. Owners typically
want use provisions that pro-
tect their vision of the project
while tenants want exclusive-
use provisions to protect their
use from similar competitive
uses. The use provisions typi-
cally consist of permitted uses,
required uses and restricted
uses while the exclusive-use
provisions grant the retailer an
exclusive right to offer a cer-
tain product or service in the
project.
Both exclusive- and permit-
ted-use provisions if not prop-
erly addressed on a project-
wide basis in the covenants
and lease documents may
create long-term unintended
consequences for developers,
owners, landlords and tenants
in the project. Carefully draft-
ed covenants, letters of intent,
leases or purchase agreements
will prevent future conflict
among retailers, lessen defaults
and keep occupancy higher.
The importance of consistency
of the use provisions with the
exclusive-use provisions apply
to retail projects whether the
proposed transaction is a lease
or the owner-occupant is pur-
chasing a pad site or a portion
of the project. In a lease trans-
action, the controlling docu-
ments are usually any recorded
covenants and the lease; with
an acquisition, the documents
are recorded covenants and a
recorded use restriction wheth-
er in a deed or in a restrictive
use document. Use restrictions
also may be found in ease-
ments, deeds, a memorandum
of lease or other recorded
documents, so a complete title
review should be performed
before granting any exclusive
uses by a landlord and a tenant
should confirm that its per-
mitted use and any exclusive
use granted may be granted by
landlord/developer.
Recorded covenants typical-
ly contain use restrictions that
prohibit certain types of uses,
for example, “no portion of
the property will be used for
an athletic or
health club,
studio
or
gym, game
arcade
or
amusement
center.” The
c o v e n a n t s
run
with
the land, so
when
pad
sites or por-
tions of the
project are
sold to par-
ties other than the developer,
the use restriction covenants
continue to bind the entire
project. In theory, this is to pro-
tect the original vision of the
project and allow the develop-
er to sell portions of the project
and still have a cohesive retail
center, without worry of the
prohibited uses becoming uses.
On the flip side, however, the
developer/owner usually has
to obtain the written consent in
a recorded document of some
or all owners and their lenders
who have purchased portions
of the project to amend the
recorded covenants.
An example of a problem-
atic scenario stemming from
the above prohibited use in the
retail project: A developer has
a difficult time leasing some of
the larger retail spaces and is
approached by a potential ten-
ant who wants to create a space
to rent for fancy kids’ birthday
parties with an “amusement”
component the developer has
sold off several pad sites to
owners who have issues with
certain aspects of the devel-
opment of the retail project,
such as the number of available
parking spaces, and as a result
will not sign an amendment
to the covenants to allow the
amusement center as a use in
the birthday party space lease
without concessions from the
developer in return and, in the
meantime, the potential tenant
finds another location and the
developer loses the lease.
Lease provisions often
grant overly broad exclusive
uses to tenants and simulta-
neously limit the tenant’s use
to a required specific use. For
example, “Tenant will use the
premises only as a prototypi-
cal noodle restaurant. Tenant
shall have the exclusive right to
sell noodles and pasta for on-
or off-premises consumption.”
This exclusive is too broad for
the landlord and the required
use too limiting for the ten-
ant. The exclusive prohibits
the landlord from leasing other
portions of the project to many
types of restaurants (any res-
taurant that serves any type
of pasta) and also limits what
other restaurant tenants may
serve without creating a land-
lord default under the noodle
restaurant lease. For example,
a sandwich shop would not
be able to sell any soup with
pasta in it (Italian wedding or
chicken noodle). This exclusive
also would eliminate the abil-
ity of a landlord to lease to con-
venience stores, specialty food
stores, novelty stores, discount
stores and sundries stores
without creating a potential
default if any product contain-
ing pasta were sold. This pro-
vision also is problematic for
the tenant because it limits a
tenant’s ability to sublease or
assign its lease in the future
to any other type of restaurant
but it also makes assigning it
to any type of tenant almost
impossible because it could not
comply with the “prototypical”
requirement. The same issues
arise in use restrictions/exclu-
sive grants in deeds or other
covenants.
Conflict in the documents
both internally and among
documents may result if not
carefully drafted. For example,
a tenant may require a landlord
to add the following language
“and any other lawful use” to
its permitted/required use to
avoid the subleasing difficul-
ty outlined above. Covenants
also may contain the phrase
“and any other lawful use”
along with the list of permitted
uses in a retail project. “And
any other lawful use” creates
a tension with the prohibited
uses that are generally “lawful
uses” and also with the exclu-
sive uses granted in leases or
covenants unless the document
also includes a provision “and
any other lawful use not other-
wise prohibited (in the various
documents).”
Amy Brimah
Managing partner,
Brimah LLP, Denver
