10A — December 14 - 27, 2018 — Commercial Real Estate Law — M id A tlantic
Real Estate Journal
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C ommercial R eal E state L aw By Scott C. Butler, Esquire, Kaplin Stewart Dealing with retail vacancies
2019, co-ten- ancy clauses and use and building re- strictions in retail leases continue as major issues t ha t c o u l d have damag- W
ith numerous retail stores closing loca- tions in 2018 and
properties, and have a domino effect resulting from the co- tenancy provisions in the other leases of the properties. These co-tenancy provisions permit the other tenants to pay less rent and sometimes terminate their leases because of specific anchor tenant vacancies and vacancies in the overall oc- cupancy level of the property. Although there is normally a grace period to fill these va- cancies, the ability to replace anchor tenants and the use and building restrictions in the oth- er leases can severely hinder a landlord’s ability to prevent the loss of value to these properties.
The number of retailers that have a sufficiently large foot- print to fill the entire vacancy caused by some of the clo- sures is very limited, so many landlords have been forced to divide vacant premises into several smaller stores. To cure the breach of a co-tenancy provision, however, there is sometimes a limit on the num- ber of tenants that can fill an anchor tenant vacancy and a limit on the type of store that can qualify as a replacement tenant. Also, due to the limited num- ber of retailers that are expand- ing and opening stores, many
landlords are attempting to redevelop retail shopping cen- ters into mixed use projects that include office, residential and sometimes industrial uses. Other leases and easement agreements that are binding on the shopping centers commonly have use and building restric- tions that limit redevelopment opportunities and protect the desires of the other tenants to be part of a retail shopping center. When negotiating letters of intent and retail leases in this retail market, it is critical to focus on co-tenancy provisions and use and building restric-
tions. Understanding that ten- ants have a need to ensure that they are operating in a vibrant and active shopping center and require the benefit of foot traf- fic caused by the other stores of the property, landlords need to have as much flexibility as possible in dealing with large vacancies, including the abil- ity to redevelop buildings with numerous tenant spaces and various uses. It is also important to evalu- ate renewals of existing leases and, when negotiating the length of the renewal term and the rent, landlords should at- tempt to try to modify existing co-tenancy provisions and use and building restrictions. A landlord might find it beneficial for a tenant to pay less rent in order to provide for more flex- ibility in filling an existing or future vacancy. In addition, a tenant might agree to continu- ously operate at the property in exchange for less rent, which could be important to keep the other tenants paying full rent under their co-tenancy provi- sions. The loss of a major tenant can present challenges to shopping center and mall owners, but flexibility in the other leases can allow for opportunities to reposition a property and in- crease its value. Scott C. Butler is a princi- pal of Kaplin Stewart and a member of the Real Estate Transactions andCorporate & Business Law Depart- ments. He concentrates his areas of expertise in real estate and corporate trans- actions. MGKF’ s Spergel presents at brown- fields conference PHILADELPHIA, PA — Manko, Gold, Katcher & Fox managing partner Jonathan
Scott C. Butler
ing effects on shopping centers and malls. The closures of such stores as Sears, J.C. Penney, Kmart, Macy’s, Toys R Us and Lord & Taylor have caused significant vacancies in retail
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Spergel was a p a n e l i s t f o r “ E n v i - r o n m e n t a l Sustainabil- ity: Planning f o r S m a r t Growth,” at the 2018 PA Brownfields
Attorneys at Law
Conference in the Lehigh Valley. The presentation covered the benefits and hidden challenges of transforming one of Phila- delphia’s largest suburban brownfields. Attendees learned about how Pennsylvania’s Land Recycling Program. Jonathan Spergel
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