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Negotiating Exclusive Use and Restrictive Covenant Provisions in - - PowerPoint PPT Presentation

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Presenting a live 90-minute webinar with interactive Q&A Negotiating Exclusive Use and Restrictive Covenant Provisions in Office and Retail Leases Balancing Competing Interests and Protecting Rights of Both Landlords and Tenants THURSDAY,

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Negotiating Exclusive Use and Restrictive Covenant Provisions in Office and Retail Leases

Balancing Competing Interests and Protecting Rights of Both Landlords and Tenants Today’s faculty features:

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THURSDAY, APRIL 2, 2015

Presenting a live 90-minute webinar with interactive Q&A Scott L. Weber , Partner, McGuireWoods, Richmond, Va. Edmund S. Pittman, Partner, McGuireWoods, Richmond, Va. Lindsey D. Chase, Counsel, McGuireWoods, Richmond, Va.

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www.mcguirewoods.com

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www.mcguirewoods.com

Negotiating Exclusive Use and Restrictive Covenant Provisions in Office and Retail Leases

April 2, 2015 Scott L. Weber Partner McGuireWoods LLP sweber@mcguirewoods.com Edmund S. Pittman Partner McGuireWoods LLP epittman@mcguirewoods.com Lindsey D. Chase Counsel McGuireWoods LLP lchase@mcguirewoods.com

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McGuireWoods | 6

CONFIDENTIAL

I. RESTRICTIVE COVENANTS

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McGuireWoods | 7

CONFIDENTIAL

I. RESTRICTIVE COVENANTS

  • Introduction

– What is a “restrictive covenant”? – Why would a Landlord be in favor of a restrictive covenant? – Why might a Tenant also seek a restrictive covenant? – Considerations in an Office vs. Retail Context

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McGuireWoods | 8

CONFIDENTIAL

I. RESTRICTIVE COVENANTS

  • Sources of Restrictive Covenants

– Lease / Sublease Documentation

  • Body
  • Exhibits
  • Rules and Regulations (often subject to change)

– Recorded Instruments

  • REAs / OEAs / CC&Rs / Declarations / Deeds

– Master Lease / Ground Lease – Condominium Documents – Consider Also: Zoning

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CONFIDENTIAL

I. RESTRICTIVE COVENANTS

  • Permitted Use

– Scope

  • Landlord Considerations vs. Tenant Considerations

– Relative bargaining power of Landlord and Tenant important

  • Tenant’s ideal is “any lawful use.”
  • Subject to recorded restrictive covenants and zoning, whether stated or

not.

  • Change in use often subject to LL approval.

– Office Context

  • “General office use” vs. a specific type of office use.
  • Ancillary uses, such as storage.
  • Call centers.
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CONFIDENTIAL

I. RESTRICTIVE COVENANTS

  • Permitted Use, Cont.

– Drafting Considerations and Practice Pointers

  • If narrow, should be broad enough to capture Tenant’s use.
  • Flexibility probably more important in retail than office.
  • Assignment and Subletting Restraints
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CONFIDENTIAL

  • Prohibited Uses

– Specific List in Lease / Sublease Documentation

  • More Common in Retail Leases
  • Common Categories in Retail Leasing

– Parking Considerations – Noxious Uses – Outside Sales / Marketing Activities – May Be Found in Recorded Documents

– Exclusives Granted to Other Tenants

  • Complete list (may be scheduled) vs. simple reference to existence.
  • Duration Considerations

– “Subject to the terms of existing leases”

  • Change in use and/or assignment and subletting by existing tenants

I. RESTRICTIVE COVENANTS

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CONFIDENTIAL

I. RESTRICTIVE COVENANTS

  • Prohibited Uses, cont.

– Restrictions on Landlords

  • Radius Restrictions
  • Protected Areas
  • Exclusive Use Rights
  • Future Development Constraints
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CONFIDENTIAL

I. RESTRICTIVE COVENANTS

  • General Restrictive Covenants – Categories

– Construction Limitations / Architectural review boards – May be Multiple REAs / OEAs (large centers) – Parking Restrictions – Signage Restrictions – Easements and Access

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CONFIDENTIAL

I. RESTRICTIVE COVENANTS

  • Drafting Considerations and Practice Pointers Regarding General

Restrictive Covenants

– Diligence (T wants disclosure of all relevant restrictions) – If approval is required, should be condition to effectiveness of Lease. – T wants a representation from the Landlord that its use does not conflict with restrictive covenants found outside of the Lease, and that no approval is required thereunder for its use and/or its improvements and signage. – Limiting rights / reserving rights to modify or impose new encumbrances. – T may want to request an estoppel from an association or other third party.

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CONFIDENTIAL

II. EXCLUSIVE USE PROVISIONS

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CONFIDENTIAL

II. EXCLUSIVE USE PROVISIONS

  • Introduction

– What is an “exclusive use provision”? – Considerations in Office vs. Retail Contexts – Rationale

  • Tenant Mix
  • Reputation of Property / Center
  • Restricting Competition
  • Parking
  • Access Points
  • Relationship to Percentage Rent
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CONFIDENTIAL

II. EXCLUSIVE USE PROVISIONS

  • Drafting Considerations

– What is the exclusive for?

  • Scope
  • Relationship to Permitted Use
  • Implications for Center Leasing
  • Possible Parameters

– Context important. – Know your client’s business and what’s important to them.

  • Office Leasing – Restrictions on “Competitors”

– Relative bargaining power of parties important. – Broad restriction vs. specific list – Future modifications

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CONFIDENTIAL

II. EXCLUSIVE USE PROVISIONS

  • Drafting Considerations, cont.

– Are there any exceptions to the exclusive?

  • Rights of Existing Tenants
  • Big Box / Anchor Tenants
  • Incidental Uses

– How far does the exclusive reach?

  • Identity of Landlord
  • What if the Landlord sells property, or acquires property?
  • MOL’s
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CONFIDENTIAL

II. EXCLUSIVE USE PROVISIONS

  • Drafting Considerations, cont.

– Does the exclusive flow to potential subtenants and assignees?

  • Assignments to affiliates and permitted transferees
  • Nevertheless bound by the permitted use, and any prohibited uses.

– How long does the exclusive last?

  • Discontinuance / Abandonment
  • Events of Default
  • Change in Use
  • Relationship to Operations Covenant
  • Could Give Rise to Default or Right of Recapture
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CONFIDENTIAL

III. SIGNAGE RIGHTS

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CONFIDENTIAL

III. SIGNAGE RIGHTS

  • Introduction

– What are “signage rights”? – Why is signage important to LL vs. T? – May be more relevant for certain types of retail tenants.

  • Common Types of Signage

– Monument / Pylons – Building Façade

  • Considerations in Office vs. Retail Contexts
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CONFIDENTIAL

III. SIGNAGE RIGHTS

  • Signage Restrictions as De Facto Leasing Restrictions

– Tenant’s concerns – Landlord’s concerns

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CONFIDENTIAL

IV. REMEDIES AND DAMAGES

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CONFIDENTIAL

IV. REMEDIES AND DAMAGES

  • Tenant Violation

– Typically, a simple default for all types of restrictive covenants. – Usually entitles LL to all rights and remedies upon a T default, subject to applicable notice and cure (if any). – LL may wish to shorten cure rights for certain defaults (e.g., violation of noxious use restriction, signage violations, violation of another tenant’s exclusive). – Self-help in favor of LL (e.g., sign removal, etc.). – Injunctive relief. – Consequential damages limitations.

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CONFIDENTIAL

IV. REMEDIES AND DAMAGES

  • Landlord Violation

– Prohibited Use Violation

  • Typically a simple default.
  • Usually entitles T to all rights and remedies at law and equity.
  • T’s rights may not be stated in Lease. Often, no termination right.
  • Subject to applicable notice and cure rights (if any).

– Exclusive Use Violation

  • Typically, rent reduction followed by a termination right.
  • Injunctive relief.
  • Rogue Tenant Differentiated

– MOL – Issues of Privity – Cost a Consideration

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CONFIDENTIAL

IV. REMEDIES AND DAMAGES

  • Violations of Recorded Documents and Underlying Lease

Documents

– Violation of recorded documents may give rise to fines, which could be a lien. – T’s default may result in LL default under recorded documents and underlying lease documents. – LL may also violate recorded documents directly. – Could give rise to remedies and damages in favor of third parties, including injunctive relief.

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CONFIDENTIAL

V. RECENT CASE LAW

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V. RECENT CASE LAW

  • Waynesboro Vill., L.L.C. v. Chick-Fil-A, Inc.

– Supreme Court of Virginia – Decided May 27, 2014 (Reporter 2014 Va. LEXIS 91)

– “The trial court erroneously entered summary judgment because the facts in the record do not support the conclusion that Waynesboro Village ‘discontinued’) (i.e., ‘abandoned’) its use of the Property for ‘discount retail stores;’ rather, the record viewed in the light most favorable to Waynesboro Village supports the conclusion that the Property has consistently and continuously been used as a location for discount retail stores, and a temporary suspension to redevelop the Property into a modern discount retail shopping center did not operate as a discontinuance or abandonment of the use contemplated by the restrictive covenant.” – “The trial court erroneously interpreted the term ‘discontinuance’ by failing to consider the term’s meaning within the scope, purpose and intent of the restrictive covenant and the general plan of development, thus making the trial court’s ruling inconsistent with this Court’s decision in Waynesboro Village, L.L.C. v. BMC Props., 255 Va. 75, 496 S.E.2d 64 (1998).”

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CONFIDENTIAL

V. RECENT CASE LAW

  • Lord & Taylor, LLC v. White Flint, L.P.

– United States Court of Appeals, Fourth Circuit – Decided March 4, 2015 – “… Maryland law makes perfectly clear that trial courts may take account of feasibility concerns … in considering injunctive relief for a breach of a restrictive covenant.” – “Continuous judicial supervision of commercial relationships on this scale may place a particular strain on a district court, and the decision to refuse such intervention goes to the heartland of that court’s discretion to manage its own affairs. Where, as here, the district court follows applicable state law and reasonably exercises its discretion in denying injunctive relief as infeasible, we have no grounds to second guess its decision.”

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CONFIDENTIAL

V. RECENT CASE LAW

  • Redner’s Markets, Inc. v. Joppatowne G.P. Ltd. Partnership

– United States Court of Appeals, Fourth Circuit – Decided Dec. 17, 2014 – “food supermarket” defined as “any retailer whose Gross Floor Area is 15,000 square feet or less and whose in-store sales areas

  • ffering canned foods, fresh-baked bakery items; baking

ingredients; fresh or frozen meats and deli items; fresh uncooked fruits and vegetables; ice cream, frozen vegetables and frozen prepared foods; milk and milk products, butter, eggs and cheese; and pet foods that exceed, in the aggregate, twenty-five percent (25%) of such retail operator’s Gross Floor Area ….” – Amish Farmer’s Market with various stalls alleged by grocery store to violate exclusive use

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CONFIDENTIAL

  • RRC Northeast, LLC v. BAA Maryland, Inc.

– Court of Appeals of Maryland – 413 Md. 638 (2010) – “Taken together, Automatic Laundry, Eastern Shore Markets, and Food Fair, establish that an implied covenant to refrain from destructive competition may be inferred from a percentage lease, based on the duty of good faith and fair dealing, where the intentions of the parties, as indicated by the terms of the lease and the circumstances surrounding the formation of the lease, suggest that such an inference is appropriate, namely, by limited competition to a particular level with, or granting exclusivity to, the plaintiff, either in the contract or an incorporated pre-lease document.”

V. RECENT CASE LAW