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It's Just a Phase: Issues and Answers for Landlords When Phasing a Project
In today's larger community centers, the developer is often faced with the need to construct the shopping center in phases, either to ensure adequate tenancies before undertaking the next portion of the center or to negotiate a sale of a portion of the shopping center to a large department store user who has its own agenda on when to construct its store. In either case, it is necessary for the developer to address the construction timing of the various phases and to deal with the issue of whether certain phases will be built at all. This article focuses on certain provisions the landlord needs to incorporate into its leases to protect itself in these situations.
The threshold concern relates to the possibility that a particular phase, or portion of the shopping center, may not be built at all. Perhaps the landlord hits a snag in its leasing program, and the lease it is negotiating ends up being one of the relatively few leases in the current phase. Perhaps the landlord has difficulty obtaining a construction loan and decides to forego the phase that contains the lease in question and concentrate on filling up another phase in order to reach leasing requirements imposed by the construction lender or permanent lender of the first phase.
In either case, the landlord needs to protect itself from executing a lease and then not being able to fulfill its obligations to the tenant. The landlord must make sure it does not have any liability for damages, and that the tenant has no rights to force the landlord to specifically perform its obligations under the lease. The landlord should, in certain situations, be allowed to terminate the lease and have no further obligations to the tenant. A suggested provision may read as follows:
Notwithstanding anything contained in this Lease to the contrary, Tenant acknowledges that if Landlord shall, at any time, in its sole and absolute discretion, abandon the construction of the entire Shopping Center or that portion of the Shopping Center in which the Premises are expected to be located, Landlord may terminate this Lease by giving 30 days notice of such election to Tenant. If such notice is given, this Lease and the rights and obligations of the parties pursuant to this Lease shall cease and terminate without need for the execution of any further or other instrument, but if Landlord shall so request, Tenant shall execute an instrument in recordable form whereby Tenant releases and surrenders all right, title and interest which it may have in and to the Premises under this Lease or otherwise and in and to the Shopping Center.
This provision may not sit well with a more sophisticated tenant. First of all, the tenant may be incurring expenses in preparing plans and specifications for its store and may be foregoing other opportunities by waiting to see what the landlord is going to do. Therefore, it is reasonable to require the landlord to elect whether or not it will exercise its opportunity to abandon the construction of the phase in question within a specified period from the date of signing the lease.
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