Larger retail projects are developed with anchor tenants or big boxes in mind.  Assume for the moment that you have plans for a grocery store surrounded by small shop tenants, and you have yet to decide if you are going to sell or lease the parcel to the grocery store.  Your site plan and your marketing focus on the vehicle and pedestrian traffic that will be attracted to the center because of the grocery store.  The shop tenants want to be next to the grocery store to take advantage of potential customers who will walk by each day.

Because your attorney is a trained pessimist, he or she assumes that the grocery store may never open or that it may close sometime in the future.  You, the optimistic developer, do not want to hear such nonsense.  However, you at least feel obligated to patronize your attorney and review the documents, only to realize that the grocery store has refused to give you a promise to open or to operate in the draft documents.  What do you do?

Because the grocery store will not give a covenant to open or operate, you need to have the right to recapture the space if the store does not open within a reasonable time or if it closes and does not reopen within a specified time.  This recapture right can take the form of a termination provision in a lease or a repurchase option that exists after the sale to the retailer.  Naturally, the retailer will require compensation, although this might not be necessary if the location was losing money and the retailer just wants to get out from under the lease.

If you do not provide for a recapture, you may face a future disaster.  Many people in the industry remember that Fresh & Easy completed a number of stores that never opened, and, earlier in my career, I spent time evaluating new locations for retailers that wanted to close and open down the street, but the retailers feared that they might be subject to implied covenants of continuous operations if the percentage rent played a major factor in the deal.   If I felt that there was no risk of an implied covenant, then the retailer might choose to move, although it would not terminate the old lease since it wanted to keep out the competition.  As a result, the shopping center became a ghost town, the shop tenants closed, and the developer was on the telephone begging the lender not to foreclose.  This is why recapture rights are so important.

By |2018-09-27T21:47:26+00:00August 24, 2018|Commercial Real Estate|

About the Author:

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Dave’s expertise is in the areas of commercial real estate leasing, finance and development. He knows the real estate market of greater Sacramento like the back of his hand. He has served as general counsel for a regional mall developer and has represented several state agencies in conjunction with large real estate projects, while also providing detailed attention to individual commercial property owners. He has supervised shopping center projects in California, Oregon, Washington, Idaho and Wyoming. Read more about Dave here. Contact Dave at [email protected]