Recently, the Fourth Circuit affirmed a $31 million dollar jury award in favor of retailer Lord & Taylor for lost profits in connection with a breach of its reciprocal easement agreement (“REA”) with D.C.-area mall owner White Flint, LP. The court found White Flint’s efforts to redevelop the regional mall into a mixed-use project violated the terms of the REA under which the mall landlord agreed to maintain the site as a “first-class high fashion regional Shopping Center.”
The consolidation of large department stores and increase in competition from online retail has led to a proliferation of brick-and-mortar vacancies. To stay relevant, mall landlords are responding with efforts to reconfigure obsolete mall spaces into more contemporary open-air shopping centers or mixed-use projects. The recent Lord & Taylor verdict demonstrates a material obstacle to such redevelopment plans – the REA.
REAs are common in large commercial retail projects where several parties seek to develop a single property into a cohesive shopping center. These instruments generally set forth certain contractual rights and obligations that ensure that the site’s development and maintenance agrees with the parties’ predesigned, schematic plan.
In the case of large regional malls, the developer and a prospective anchor tenant – usually a chain department store – will enter into an REA at the project’s early stages. Given the timing, the retailer carries substantial bargaining power as its project engagement is viewed as critical for generating consumer traffic. This often results in long-term agreements with detailed use restrictions designed to protect the retail store’s investment. For instance, a high-end fashion retailer may bargain for a certain tenant mix to ensure that the retail concept caters to its particular type of consumer.
Although a developer may see a detailed and tenant-favored REA as useful for committing anchor tenants to new projects, the limitations these agreements will impose on future redevelopment should be carefully analyzed. Because the REA is typically a long-term relationship, its parties should be mindful of the changing marketplace. It may be in the best interest of the parties to draft flexible REAs that evolve with the retail industry by allowing for redevelopment, while also addressing the issues that ensure for a successful (and financeable) project.