Don’t Let Uncooperative Tenants Undermine Property Redevelopment

Redevelopment work is messy, noisy, and disruptive. And the results it produces may not be appealing to all tenants, especially to the extent it makes the shopping center substantially different and less favorable than the one the tenant thought it was committing to. For example, a tenant located near the shopping center entrance may object that a plan to relocate the main entrance violates the lease and prevents it from using the property as it intended when it signed the lease.

While unhappy tenants are never a good thing, negative reaction might go beyond mere grumbles. Tenants who object to redevelopment projects may also:

• Withhold rent;
• Demand rent reductions, lease extensions at below market rates, or other concessions;
• Refuse to alter or install new signs or displays conforming to your center’s revised signage criteria;
• Move out and claim that the redevelopment work constitutes constructive eviction or a breach of the warranty of habitability;
• Sue you for damaging their business; and/or
• Go to court seeking declarative relief or an injunction barring you from carrying out the redevelopment project.

Example: An Illinois shopping center tenant sued to stop a landlord from building an outparcel in the parking area, claiming that the plan violated its nonexclusive lease right to use all of the common area in the center, including the parking areas. The court agreed and issued an injunction barring the landlord from completing the project. There was no clear-cut provision in the lease giving the landlord the right to alter the common areas displayed in the original site plan attached to the lease, the court reasoned [Madigan Brothers Inc. v. Melrose Shopping Center Co., 463 N.E. 2d 824].  

Even if tenants’ redevelopment-related claims prove invalid, the time, energy, and money you spend fighting them may drive up the costs of the project, generate delays, or even force you to cancel the work entirely.

Get 8 Key Redevelopment Rights in Your Lease

To effectively minimize potential tenant interference, spell out your redevelopment rights and reserve the right to exercise any or all of them at any time, and from time to time, at your sole and absolute discretion. To avoid being bound by your original site plan, a la the landlord in the Madigan Brothers case above, have the tenant acknowledge that the site plan is “diagrammatic only” and intended as neither a representation showing the exact configuration, number, location, or size of the property nor a warranty that the latter will remain the same without varying during the lease term.

The heart of your lease clause should spell out the kinds of rights you’ll need to carry out redevelopment projects during the lease term without being deemed to be in breach of the lease or the tenant’s warranty of habitability.

For a detailed discussion of the eight key redevelopment rights, as well as a Model Lease Clause you can adapt for your own leases, see the September feature in Commercial Lease Law Insider, available to premium subscribers here.