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RECIPROCAL UNEASE

Shopping center landlords battle anchors over how to fill vacant space

BY STEVE McLINDEN

As department stores consolidate and the definition of anchor tenant broadens, landlords and retailers are dusting off decades-old leases and site-purchase agreements to see how much clout they wield in determining who, or what, can fill empty shopping center spaces.

Increasingly, they are poring over reciprocal easement agreements, or REAs, which often define redevelopment restrictions on replacement anchors.

One such REA stands at the center of the ongoing battle between The May Department Stores Co. and Taubman Centers over a space in the Cherry Creek Shopping Center, in Denver. Last fall May sued Taubman for the right to replace its soon-to-close Lord & Taylor store there with a Foley’s Men’s and Home store. Taubman said it wanted a Nordstrom or other higher-end concept for the space, pointing out that May already has a conventional Foley’s store operating at the mall.

Each company appeals to the same REA to back its position. At press time, the suit continued unresolved.

Such disputes are likely to multiply around the country as owners and stores take diverging paths to protect their investments amid a changing retail landscape, say retail law experts and consultants.

In fact, “dozens and dozens” of such reciprocal easement disagreements have surfaced in recent years, although most have been negotiated or quietly litigated, says mall consultant Stanley L. Eichelbaum, SCMD, president of Cincinnati-based Marketing Developments. “The reality is, when malls expanded to six, seven and eight anchors, the number of department stores went the other way,” said Eichelbaum. “There aren’t as many candidates to choose from.”

Also at issue is how an REA defines a department store and/or a specialty store. According to the May Department Store suit, the REA says the replacement space must “contain a number of departments for the sale of varied merchandise and services [that are] operated as a single, integrated unit.” May insists that this definition clears the way for the Men’s and Home store.

But in a motion for dismissal, Taubman countered that this second Foley’s concept will not operate at the level committed to by a Lord & Taylor and could thus compromise the mall’s status as a dominant regional fashion center. Taubman subsequently asked that the suit be broadened and that “stakeholder” input from Cherry Creek’s other anchors, Saks Fifth Avenue and Neiman Marcus be included. May originally planned to close Lord & Taylor this summer as part of a brand restructuring, but the store will probably remain open until the dispute is settled.

Heartburn hotel
Jeffrey H. Newman, a lawyer and chairman of the real estate department of Sills Cummis Epstein & Gross, in Newark, N.J., says he has drafted hundreds of REAs, and he calls them “the most contentious nonmonetary issue to arise in the last five to 10 years” for anchor site owners and leaseholders. Such clauses often result in a deal’s being delayed or not done at all, he says. “Tenants often believe a lease is tantamount to a purchase, and they shouldn’t have to subject themselves to the vagaries of it,” he said.

REA provisions that sounded reasonable 20 years ago “are causing a lot of heartburn today,” according to Linda K. Schear, general counsel at Gregory Greenfield & Associates, an Atlanta-based investment firm that specializes in retail real estate. A clause giving an anchor the right to expand by 40,000 square feet, for example, may also require the landlord to provide additional parking, she says. Often, these are provisions that cannot be met today, because most mall properties are built out and many cities no longer allow the construction of parking decks, she adds.

In some cases, departing anchor tenants that own their spaces or have long-term leaseholds choose to divvy up their store sites into smaller stores. “Developers are naturally concerned when a department store wants to take 80,000 to 160,000 square feet of space and subdivide all or a portion of it into competing mall stores,” said Dana I. Schiffman, a partner and retail law specialist at Allen Matkins Leck Gamble & Mallory in San Diego. “So a lot of people are taking a much closer look at their REAs.”

Specific operations covenants within an REA or by themselves often spell out in more detail what can and cannot be done commercially with an anchor space, lawyers say.

Some reuses, such as fitness centers, may not be incompatible with other tenants in many centers, but they may create parking problems, says Sheldon A. Halpern, a retail lawyer at Pircher Nichols & Meeks, in Los Angeles. “But the ultimate parking problem in mixed-use centers can be heavy office use, because their users will remain all day.”

The definition of an anchor store has become significantly muddied over the past decade or so, as discounters, grocers, theaters and other entertainment venues filled prominent vacancies. “It used to be [that malls] would excise groceries and theaters, but now we are begging for them to be participatory,” said Eichelbaum.

In many traditional malls, such tenants as Costco or Target “are being creatively added to or used as replacement anchors,” Schiffman said. “And we see transactions where developers have regained control of sites and are converting them to entertainment.”

Older REAs tend to give department stores more control over changes in the center, said Schiffman, “but that’s changed over the last decade as a lot of these old agreements expire.” Today new REAs “are extremely long and detailed and are intensely negotiated.”

Some high-profile centers welcome unconventional retail uses for vacant anchor slots, says T. Andrew Dow, an adjunct professor of business law and real estate at Dallas Baptist University and an attorney representing several national retailers for Dallas-based Winstead Sechrest & Minick. He points to the Dallas Galleria’s decision to fill a former Saks Fifth Avenue space with a unique cluster of the three Gap concepts after Saks moved across the mall. “That was unheard of at the time, but it appears to be working well.”

REA lawsuits are still not very common, says Dow. “As department store retailers have consolidated, so have the number of landlords who own regional malls … and these people have had to forge pretty good relationships,” he said. “They need each other.”

Department stores still have leverage in tenant decisions, but “they’re not as dominant as they were when these centers were being developed,” Schiffman said. “It all seems to be linked to the health of the industry.”

Indeed, recent disputes “accurately reflect today’s retail climate,” said Schear. “The [anchor] field is not what it once was or what we’d like it to be. There’s a lot more pressure on both parties. Public companies are dealing with stock prices, and everyone has their own people to answer to.”

Taubman’s local attorney, Stan Garnett of Brownstein, Hyatt & Farber, in Denver, says a ruling in the May case “will have widespread implications” for the mall, and possibly for other centers.

“May would say the marker has changed and the demographics have changed and that they would like to be held to a different standard,” Garnett said. “But Taubman operates top-flight malls and has a real clear demographic and a clear picture of who they want shopping at their malls.”

The mall’s other anchor tenants, Saks and Neiman Marcus, “each have the right through us to make the other tenants operate to a particular level” and should be allowed to weigh in on the argument, says Garnett.

May officials say neither the company nor its attorneys can comment about the case.

May owns the Lord & Taylor anchor space at Cherry Creek, but though site ownership usually gives retailers added leverage on redevelopment rights, REAs still govern those decisions because they often afford rights of refusal to both the mall’s owners and its other anchors, lawyers say.

Newman says Taubman is probably concerned that a Foley’s Men’s and Home won’t attract as many of its core female shoppers, “although women will come out to shop for the men, as we all know.” On the flip side, “Taubman has a reputation to maintain, and they have every reason to extract what they can from that space,” he added.

“To protect itself,” Newman continued, “a landlord either has to take a position in an REA that [the replacement tenant] shouldn’t be incompatible, or, in stronger terms, that it should be affirmatively compatible and subject to a test.”

Given the current waves of bankruptcies and consolidations, Schear says she expects to see more REA issues coming to the forefront, though probably not in the form of protracted lawsuits. “Litigation is not conducive to a quick solution,” she said. “The landlord can’t sit around while the space goes dark, and the retailer can’t afford the expense and the wait. Time is money.”

Pircher Nichols & Meeks’ Halpern says shopping center anchors have “always tried to exercise unfettered rights to their property, and with some success, depending on their leverage … but the ultimate resolution today rests with the language of the REA.”