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DO YOUR HOMEWORK BEFORE WRITING A LEASE, EXPERTS SAY

The granting of exclusives may be a necessary evil that always carries some degree of risk, but leasing attorneys say shopping center owners can reduce their exposure by relying on some basic principles and strategies.

Being aware of the actual provisions in the lease tops the list, says real estate lawyer Abraham Lieberman, a partner in the Sheffield Village, Ohio, office of Baumgartner & O’Toole. “Landlords sometimes forget what exclusives they have granted once the deal is done,” he said. “The landlord better be sure that when he grants that exclusive jurisdiction, he is not already violating some other tenant’s right.”

Clarity is important too. Landlords must resist retailers’ efforts to give themselves maximum flexibility to sell, say, “electronics and all outgrowths” or “shoes and all outgrowths,” says Mark A. Senn, a partner at Senn Visciano Kirschenbaum Merrick, a Denver law firm. “I don’t want someone to call me in three years and say, ‘What does outgrowths of shoes mean?’ I like to give clear, precise responses to a client,” he said. “Vagueness is the cause of a lot of arguments.”

Reducing overlap between the product lines offered by anchors and smaller tenants is an obvious formula for harmony, but some overlap inevitably occurs anyway. In those cases, landlords should make maximum use of provisions that allow for incidental sales, says retail real estate lawyer Sheldon A. Halpern, a partner in the Los Angeles office of Pircher, Nichols & Meeks. A video store, for example, could be persuaded to allow a grocery store to sell DVDs, provided the latter agrees to limit the amount of space allocated to the display.

Halpern urges clients to pay particular attention to the exclusives they grant to retailers with relatively homogenous merchandise lines like apparel or fast food, as well as retailers with many merchandise lines like home improvement centers and supermarkets.

He is also fond of telling tenants, “Use it or lose it.” In other words, landlords should resist granting exclusives that remain active even if a tenant stops selling that particular product or line.

Gwen MacKenzie, CLS, senior vice president of retail investments at Irvine, Calif.-based Sperry Van Ness, says such “ghost exclusives” can prevent developers from striking the right tenant mix. “Circuit City, in most of its old leases, had exclusives on electronics and appliances. Now, they stopped carrying appliances many years ago, but nowhere in these leases does it say that if Circuit City stops carrying appliances, they lose the exclusive on appliances. So, five years later, landlords would come to Circuit City and say, ‘Look, you have not had appliances for five years,’ but they would say, ‘Well, we might change our minds in three years and decide to sell them again.’ ”

In malls and other large centers, distance can be used to reduce tenant tension, says Senn. This sometimes works in smaller centers too. At Equity One’s Sheridan Plaza, in Hollywood, Fla., Publix, which typically refuses to be a tenant in open-air properties that contain fitness centers, is co-existing with an LA Fitness — albeit at opposite ends of the center.

Landlords should also pay particular attention to the way exclusives apply to outparcels and sublets, says real estate lawyer Alfred G. Adams Jr., a partner in the Atlanta office of Sutherland Asbill & Brennan. A tenant could sell an outparcel or sublet a space to a retailer who then violates a pre-existing exclusive.

“If I have granted an exclusive that I won’t permit any portion of the center to be used as X,” Adams said, “and the center is defined as including the outparcels, then the buyer of the outparcel could put me in default, depending on the wording of the lease.”

No matter how much care is taken in the lease-drafting process, however, exclusives are bound to cause surprises. Senn recalls a case in which a landlord granted two food store tenants inside the same center one Vietnamese, the other one Korean — exclusives for their particular ethnic inventories. Reasonable enough. But the tenants were soon pointing fingers at each other — both were selling some of the same items, albeit with different languages on the packaging. The tenants, the landlord and their attorneys eventually found themselves in a law office attempting to hash out a somewhat philosophical question: Does a Vietnamese or Korean name for noodle soup make that soup Vietnamese or Korean?

After a frustrating and time-consuming attempt to go item-by-item down the two inventory lists and definitely declare ethnic identities for each product, the tenants agreed to shake hands and forget their exclusives conflict altogether. “They realized that, regardless of what the food was called, Vietnamese would probably not go to the Korean store and vice versa,” Senn said.

The lawyers did not agree to forget about their legal fees.

— JG