The Real Deal - May 2011
Expansive "Exclusive Use" Clauses in Retail Leases Can Lead to Costly Litigation
by Christopher B. Lord
Most landlords are thrilled to get national, name-brand tenants in their shopping centers. In most instances, however, such tenants have substantial leverage in negotiating lease terms and will insist on using their own standard lease form. For most developers, the choice is simple - if they want the tenant, they will agree to the tenant's lease terms. National tenant lease forms often contain broad restrictive or exclusive use clauses, which, if not carefully reviewed and revised ahead of time, can prove extremely difficult to administer over many years and could well result in expensive litigation that can be ruinous for both parties.
In a recent case, a national name-brand seafood restaurant had in its standard lease form an exclusive use clause that allowed it to be the only "seafood restaurant" in the shopping center. The term "seafood restaurant" was defined broadly to prohibit any other tenant from (i) having the words "seafood" or "fish" in its name, (ii) using seafood or fish in its marketing, or (iii) having seafood or fish products constitute more than 20% of the entrée items on its menu or its entrée items by sales, on a dollar basis. Further, although pre-existing tenants were exempted from the seafood restriction, if a pre-existing tenant proposed a use change and the landlord had the right to approve such change of use, then the landlord could not approve a new use that would violate the seafood restaurant's exclusive.
Although the seafood restaurant's exclusive was drafted broadly and could potentially be difficult to administer (for example, how does the landlord determine and enforce another restaurant's seafood entrée menu items and seafood entrée sales to ensure they do not exceed the 20% threshold?), the seafood restaurant was primarily concerned about the competition presented by other seafood-themed restaurants. Since most chain restaurants fall into specific use categories, so long as the landlord did not enter into a new lease with another seafood-themed restaurant, the seafood restaurant exclusive should not have presented problems.
But life is rarely so simple. A few years after the seafood restaurant opened, a pre-existing restaurant tenant (which was not subject to the seafood restaurant exclusive because it predated the seafood restaurant) closed and defaulted on its rent. This restaurant had been a casual grill and sports bar, but at times more than 20% of its entrée items constituted seafood offerings. The pre-existing restaurant assigned its lease, with landlord's approval, to a local restaurant operator specializing in regional seafood fare. The assignment did not impose on the local operator any of the restrictions contained in the seafood restaurant exclusive. When the local operator opened for business, the seafood restaurant filed suit against the landlord and the local operator seeking damages and injunctive relief to force the local operator to abide by the seafood restaurant exclusive. The three parties were eventually able to amicably resolve their dispute. By that time, however, the litigation had lasted over one year and cost the parties tens of thousands of dollars in legal fees each.
The parties could have avoided the protracted and expensive litigation if they had drafted the exclusive use clause more carefully in the first place.
First, the seafood restaurant exclusive was simply too broad in scope. In the past several years, numerous types of restaurants, which are not normally considered "seafood restaurants," have added seafood offerings to their menus. These include everything from casual bars and grills to high-end steakhouses. Under a strict reading of the terms of the seafood restaurant's exclusive, these restaurants could all be considered "seafood restaurants," but that is probably not what the parties intended. The parties should make every effort to draft the exclusive as narrowly as possible to avoid unintended violations by restaurants that do not compete with a seafood-themed restaurant.
Second, the seafood restaurant exclusive in this case did not address whether assignments of a pre-existing lease (as opposed to entering into a new lease) continued to benefit from the exemption the assigning restaurant had enjoyed. In this case, the pre-existing restaurant sold enough seafood to be considered a "seafood restaurant" under the terms of the seafood restaurant exclusive, but was not a typical seafood-themed restaurant, while the local restaurant operator was closer to a traditional seafood restaurant. If the parties had included language addressing whether assignments of pre-existing leases continued to be exempt from the seafood restaurant exclusive, this would have gone a long way to avoiding the dispute.
PlanMaryland - An Effort at "Smarter" Growth
by Jennifer R. Busse
After three years of work, including 13 public meetings in 2010, the Maryland Department of Planning has issued its draft of PlanMaryland. It is touted as the state's first ever sustainable growth and development plan, and calls for close interaction between state and local government and the private sector. The plan's purpose is to "promote the general welfare and prosperity of the people of the State through the coordinated development of the State."
Clearly, the focus of PlanMaryland is on the preservation of land and natural resources. Citing anticipated growth of one million residents over the next 20 years, and a projected "loss" of 560,000 acres to development by 2030, PlanMaryland calls for the reduction of land consumption. The drafted plan claims that three-quarters of the state's growth in terms of land area is occurring outside of the Priority Funding Areas identified as a result of Maryland's 1997 Smart Growth legislation.
PlanMaryland is intended, it appears, to be cited in the future in support of various spending initiatives, or more likely as a reason to prohibit spending in certain areas. Even a quick read makes it clear that the 1997 Smart Growth legislation is now seen as having been only somewhat successful - -- if the Priority Funding Areas were carrots for the type of land development the Governor desires, then PlanMaryland will be the stick. The comments on both the website and the drafted plan indicate that PlanMaryland is intended to prevent development actions that contradict planning goals, obviously an effort to avoid the type of controversy in the Terrapin Run case.
The foundation for PlanMaryland is the set of "12 Visions" Governor O'Malley previously signed into law. PlanMaryland is meant to provide a framework for the implementation of these twelve planning visions. By law, local jurisdictions are required to both include the visions in their local comprehensive plans and implement them through zoning ordinances and regulations.
However, what is arguably lacking from PlanMaryland is recognition of the importance of development for economic stimulus and the role that development plays in the economy generally. While certainly these issues are addressed elsewhere, for this new effort to be successful, perhaps they should be addressed head-on in the plan. Obviously the elephant in the room is the struggling economy and the balance that is needed between real estate development and land preservation.
How can you get involved? The Department of Planning is seeking feedback on the draft plan until September 1, 2011. Eight "Open Houses" will be held this month and next. All of the information is provided on their website. After the 120 day public comment period, a final version of PlanMaryland will be presented to Governor O'Malley.
Comments on the draft plan in general, as well as on the "Designated Places" identified on the Interactive PlanMaryland Map, are encouraged. Keep in mind that it is very possible that the areas that are specifically identified will be subject to special treatment in the future - either in the form of additional regulations restricting development; or, if identified as being appropriate for future development, hopefully in the form of new incentives.
PlanMaryland calls for future growth occurring, for the most part, in a very narrow and restricted area of the state - namely along the I-95 corridor. This means existing communities will be required to accept larger concentrations of population than they have likely envisioned, and that development will be strongly curtailed in both western Maryland and the eastern shore areas.
Maryland's New International Green Construction Code Law
by Tami P. Daniel
Developers and retailers who have projects in the pipeline in Maryland are well advised to find out early next year whether the county or city where the project is supposed to go has adopted the International Green Construction Code ("IGCC").
Recently Maryland became the first state in the country to enact legislation authorizing voluntary compliance with the IGCC. The new law, which goes into effect on March 1, 2012, means that a local government may, but is not required to, implement the most recent version of the IGCC for construction projects in its jurisdiction. All parties involved in the construction of new buildings, as well as alterations and additions to existing buildings (other than low-rise residential buildings which fall under the scope of the International Residential Code), will need ample time to adjust to the IGCC requirements if they are adopted by the local jurisdiction.
The IGCC is not a rating system like LEED; rather it establishes specific codes for construction to be adopted by local governments and administered by the local government's code officials. The purpose of the codes is to reduce the harmful impact of buildings on the environment. The IGCC works in coordination with other codes established by the International Code Council (ICC).
A sampling of provisions from the ICGG Synopsis (based on Public Version 2.0) addressing fundamental aspects of green and sustainable building, are set forth below:
- Requiring that at least 50 percent of construction-phase waste materials be diverted from landfills.
- Prohibiting the construction of additions to buildings that are located in flood hazard areas, except where all habitable space is located at least one foot above flood elevation.
- Requiring that owners of existing buildings and tenant spaces greater than 5,000 square feet develop a greenhouse gas inventory to calculate the carbon footprint of the building or tenant space.
- Requiring all buildings that consume energy, regardless of compliance path, to have capabilities for energy measuring, monitoring and reporting, or to incorporate features that readily facilitate those capabilities in the future.
- Estimating total daily water use in gallons per day, based on the occupant load of the building and using fixture flow rates that are identical to those in the International Plumbing Code.
Baltimore County's 2012 Comprehensive Zoning Map Process Commences this Year
by Adam D. Baker
In September of this year, Baltimore County will commence its quadrennial Comprehensive Zoning Map Process ("CZMP"). The Baltimore County Charter requires that at least once every six years the Baltimore County Council be presented with recommendations for a zoning map. The Baltimore County Code requires that every four years, the County Council review and revise, as necessary, the county zoning maps. This process is known as the Comprehensive Zoning Map Process or CZMP.
The first CZMP plan was adopted in 1971, and the next process followed shortly thereafter in 1976. Following the 1976 cycle, the processes have occurred every four years. The process has evolved over the years, becoming increasingly regulated. Each cycle also brings a greater amount of community involvement, as community associations have become increasingly sophisticated in land use and zoning matters.
The process allows virtually anyone to seek the zoning reclassification of any property located in Baltimore County. Each reclassification request in the CZMP is characterized as an "issue".
Legal Authority for the CZMP
Section 522.1 of the Baltimore County Charter requires the Office of Planning to submit and recommend a zoning map at least every six years. Section 523 of the Charter states that the map shall show "the boundaries of the proposed districts, divisions and zones into which the county is to be divided consistent with the master plan." The County Council may then accept or modify the plan and adopt it by legislative act.
Baltimore County Code §§ 32-3-211 through 32-3-236 govern operation of the CZMP.
Who May Apply
Issues may be raised by any person, organization, corporation, county agency or other entity. Once and issue is filed, it cannot be withdrawn or modified for any reason. Notably, the petitioner of an issue need not be the property owner. In fact, an issue may be filed on another's property without the property owner's knowledge or consent. Pursuant to the Baltimore County Code, though, the Office of Planning will provide notice to the property owner within 15 days after an issue is filed.
The CZMP takes place every four years on an exact schedule set forth in the Baltimore County Code. The process covers a period of 12 months. It begins with issue filings on September 1, 2011. An issue can contain one parcel of land or several contiguous parcels of land. An issue can also encompass hundreds of acres - often the case when a community association seeks to downzone a large area or when the Office of Planning raises an issue. The period during which members of the public may file an issue runs from September 1, 2011 to October 14, 2011. From October 1, 2011 through October 31, 2011, the Planning Board and the Planning Director may file issues. Between November 1, 2011 and November 30, 2011, issues can only be raised by members of the County Council.
Following the filing period, the Office of Planning reviews each issue and prepares preliminary recommendations that form the Log of Issues. This process runs from December 1, 2011 through February 28, 2012. Planning's recommendations are then finalized and the Log of Issues is submitted to the Planning Board for public hearings. The Planning Board hearings take place during March 2012 and are divided among the seven Councilmanic districts. Each district hosts a public hearing at which testimony is taken on issues located within the district.
From April 3, 2012 to May 3, 2012, at a series of work sessions open to the public, the Planning Board reviews and discusses the various issues. The Planning Board must formally adopt a recommendation on each issue before May 4, 2012. The Planning Board's resulting recommendations form the next version of the Log of Issues which is then presented to the County Council. The Planning Board's recommendations must be presented to the County Council within twenty (20) days after the Board's vote.
Similar to the Planning Board, the County Council holds public hearings for each Councilmanic district and receives testimony on the issues within each district. This process occurs during June 2012. From July 2012 through September 14, 2012, the County Council reviews the Log of Issues and makes final recommendations. The County Council has the sole authority to determine the final zoning on each property. The Council may accept, reject, or modify the recommendations of the Planning Board. These options include retaining the existing zoning or applying to a property any zoning or combination of zones. The County Council's vote will create the zoning map for the County for the next four years.
The County Council vote (which must occur by September 16, 2012), concludes the 12 month process. Thereafter, the official amended Zoning Maps are prepared and the final edition of the Log of Issues, showing how the Council voted on all of the issues, is published. This typically occurs in November following the Council's vote.
The Office of Planning will provide notification to each property owner whose land is within an issue or whose land is contiguous to an issue. The notification provided is in the form of a letter to the impacted owners and a post card to the contiguous owners. The letters to impacted property owners must be sent within 15 days of the filing of the respective issue. Additional notification will be provided through property sign posting, newspapers, the County's website and the public libraries.
The Use of Covenants
Although applicants may submit plans or make other statements regarding the proposed future use of a property which is the subject of an issue, these plans and statements cannot be made part of a rezoning decision by the County Council. Covenants, however, may be recorded to bind the use of the property, provided the Baltimore County is not a party to those documents and provided such covenants do not usurp the county of its zoning powers. Increasingly, covenants are being used in the CZMP as a negotiation tool between property owners and community groups.
In the year following each decennial census of the United States of America, the Baltimore County Council, in conjunction with a Council-appointed redistricting commission, must consider the issue of redistricting the seven Councilmanic districts. Pursuant to § 207 of the Baltimore County Charter, on or before October 15, 2011, the Commission must hold at least three public hearings and recommend to the County Council legislation to revise, amend, reconstitute, but not to increase or decrease the number of Councilmanic districts at any one time. The County Council then has until January 31, 2012 to hold at least one public hearing and to adopt a final redistricting plan.
This year, the county's redistricting efforts will overlap with the CZMP process. Such a juxtaposition may create scenarios where issues filed in one district at the beginning of the CZMP process fall within another district entirely by the time the Council votes on the Log of Issues in the fall of 2012.
Keep an eye on the two processes as they move forward next year.
Bill to Toll Permits Fails in Maryland
by Tami P. Daniel
House Bill 1050, supported by the ICSC Maryland Governmental Relations Committee, was not enacted by the 2011 Maryland General Assembly. The bill would have tolled the running period of certain Maryland state and local construction and development permits and approvals issued since January 1, 2008, through December 31, 2012. Their normal expiration period would have begun to run on January 1, 2013. [For example, a permit issued in January of 2008, with a one year lifespan would have been increased to six years, expiring on December 31, 2013.]
While the building and development community strongly supported the bill, others group in opposition, especially the Maryland Association of Counties ("MACO"), raised concerns that the tolling could potentially weaken the process of issuing permits for the right type of development and intrude on the authority of local governments to manage their permit approval process.
Tom Barbuti, chair of the ICSC Maryland Governmental Relations Committee (and also a partner at WTP), says many stakeholders like ICSC are sorry that the legislation did not pass, but MACO officials have said that most counties are willing to grant extensions without being required to by the state legislature, so Tom encourages anyone with a permit in jeopardy to promptly file for an extension with the applicable local officials.