Limit Tenant’s Right to Consent to Changes in Center’s Governing Document

If you've signed a “governing document” with the owner of an adjoining shopping center or the tenant of a freestanding building at your center, you've agreed to be subject to certain restrictions. A governing document—which can be an operation and easement agreement (OEA), a reciprocal easement agreement (REA), or a declaration of covenants, conditions, and restrictions (CC&Rs)—dictates how issues like parking, signage, construction, or use will be handled. But tenants may argue that they should have the right to consent to any changes in the governing document that would allow alterations to the center, because those alterations could hurt their businesses.

Your decision to give a tenant the right to consent to changes in the governing document will depend largely on which type of tenant is requesting it. But be careful when negotiating this right in your leases. A tenant that's out for only its interests could limit your ability to make the best decisions for your center.

Negotiate Right According to Tenant

You may think that you should have total control over any changes to the governing document—without interference by a tenant—because you, not the tenant, run the center. But a tenant could argue that having in its lease the right to consent to any changes to the governing document is necessary to its business. For example, if the change requires that you undertake a major construction project at the center, some of the construction costs might get passed through. But should you give that tenant the right to consent to any changes to the governing document?

“It depends on the type of tenant,” says California attorney Winifred C. Ward. An anchor tenant with strong bargaining power is unlikely to enter into a lease at all if the terms don't give it the right to consent to such changes to common areas—or any other changes that would impact the nature of the use of the center, such as changing the governing document so that a “lifestyle” center can become an “outlet” center.

“An anchor tenant will insist on a clause providing that the owner cannot amend the governing document without its consent,” says Ward. And there isn't much that the owner can do about it, if the anchor is a must-have tenant.

However, you can treat small and mid-size tenants differently. “Give a small tenant the right to consent to changes in the governing document only if the change will ‘materially adversely’ impact its rights or obligations under its lease,” says Ward, an Insider Advisory Board member. For bigger stores, try to change “materially adversely” to “unreasonably adversely” impact, she notes. For example, the tenant must consent to changes to the governing document that unreasonably interfere with its use and enjoyment of the center.

Make sure you're in charge of the final determination of what's materially adverse. So if the proposed change has a beneficial or only minor bad effect on the tenant, you don't need its consent. Also, make sure that the tenant's consent can't be unreasonably withheld, conditioned, or delayed. Ask your attorney about using this Model Language to limit a tenant's consent right.

Model Lease Language

Landlord shall not amend, modify, or terminate the [insert name of governing document, e.g., Operation and Easement Agreement] without the prior written consent of Tenant if such amendment, modification, or termination would materially adversely affect in Landlord's sole opinion any rights or obligations of Tenant under the Lease. Tenant's consent shall not be unreasonably withheld, conditioned, or delayed.

Remember that if a tenant balks at using the term “materially adversely” as a threshold for changes, you could define the term as changes “affecting visibility, access, or economic provisions.” Also, don't let a savvy tenant try to delete the phrase “in Landlord's sole opinion” from the language. If it becomes a point of contention, negotiate to change the phrase to “in Landlord's reasonable opinion.”

PRACTICAL POINTER: Withholding from small tenants the right to consent makes the already difficult administrative process of changing a governing document easier. “Don't add more work by having to get the consent of every small tenant at the center,” stresses Ward.

Narrow List of Changes

Once you've agreed to give a consent right to a tenant, be prepared for it to push for the right to consent to anything that would materially impact its use of certain important things in the center. A major issue that tenants and owners struggle over is changes to the parking field. For example, a tenant may try to negotiate that it be allowed to consent to a change that would leave fewer parking spaces directly in front of the tenant's store than it previously had.

Mid-size tenants will want to negotiate consent for changes that will affect broader areas, such as common areas, of the property, not just the area in front of its own space. And they'll want to make the list of types of changes to the governing document that require their consent as broad as possible. For example, they may want a say regarding a change to the governing document that would allow you to rent to specialty or alternate tenants like secondhand stores.

“Negotiate to specify as narrowly as possible the issues for which the tenant has to be consulted for its consent,” says Ward. List in the clause the specific issues that you can change in the governing document with and without the tenant's consent. “Make sure that your consent clause is as limited as possible,” advises Ward. And give the tenant a small period of time to respond, once you have told it you are going to change the governing document; if the tenant doesn't respond in that period of time, it waives its rights, says Ward.

Offer Remedies Instead of Consent Right

If you won't agree to give them consent rights in their leases, you may want to offer tenants three remedies in case a change to the governing document materially adversely impacts their businesses. You can say that, under certain circumstances, if their businesses are affected by changes, they have the right to terminate the lease. But keep in mind that termination rights are extreme and should be given only for major changes, such as a lifestyle center becoming another type of center, or a substantial change to common area use.

Rent abatement is another remedy you can offer instead of a consent right to a tenant that's worried it will be materially adversely affected by a change to the governing document. But specify that the tenant must have proof that the changes have hurt it, such as records of decreased sales after the parking field was changed.

“Rent abatement is the best option from the owner's standpoint. But in the lease provisions, require your tenant to show certain benchmarks, like a reduction in gross sales, since the changes were made,” Ward emphasizes. Allowing the tenant to terminate its lease over a change to the governing document is the least desirable remedy to offer in lieu of a consent right, she points out.

Insider Source

Winifred C. Ward, Esq.: Downey Brand, 621 Capitol Mall, 18th Fl., Sacramento, CA 95814; (916) 444-1000; www.downeybrand.com.

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