If you are new to the world of shopping centers, frequently used acronyms like REA, COREA, CC&Rs, or OEM would lead one to the reasonable conclusion that these must be different types of contracts. What are these? Are they different at all?
To start, what we have listed above are different names for the same contract! These are documents that govern the operation of a shopping center when there are multiple owners. If a landlord owns 60,000 square feet of retail, and a restaurant owns a 2-acre site improved with a 20,000 square foot restaurant just outside the landlord’s parking field, the parties have an interest in an orderly and compatible operation. The REA (a/k/a CC&R’s, COREA, OEM) steps in to fill that gap. For the remainder of this post, we will use the term REA, which stands for Reciprocal Easement Agreement.
REA: Reciprocal Easement Agreement
COREA: Construction, Operation and Reciprocal Easement Agreement
CC&Rs: Declaration of Covenants, Conditions and Restrictions
OEM: Operation, Easement, and Maintenance Agreement
Many provisions of an REA are similar to those you might find in a shopping center lease. The key difference is that the different owners are generally on relatively equal footing versus the hierarchal landlord-tenant relationship. Often, the REA may be the only contract between the different owners in what appears to be a single, integrated development. For that reason, the REA provides protections that everyone will “play nicely in the pool.”
What is typical in an REA? While each REA will ultimately be different, an REA is likely to discuss the following:
- The REA will likely establish mutual easements.
- Generally, this will allow one party access across another party’s parcels, and usually the right to park is extended across all of the shopping center. These will also often designate employee parking areas and loading areas. However, uses that are sensitive to parking—such as supermarkets or other anchors—may restrict certain parking areas.
- This may also govern easements for drainage and utilities across the shopping center.
- Next, the REA may govern initial construction and the issues that arise from that: construction access rights; liens by contractors; takeover by another party in the event common area work isn’t timely completed; change orders and changes to the budget; cost allocation for the new construction; and dedication of improvements like roads or utilities to the government.
- Next, the REA will discuss maintenance of the parcels. Sometimes each party is required to maintain the common area around its parcel. Other times, one party is the “maintaining party” and controls the maintenance. Then the maintaining party can bill others in the shopping center for the pro rata share of costs – known as Common Area Maintenance Costs or CAM. Pro rata share can be determined a number of different ways; it is usually based on the relative amount of gross leasable area of completed buildings. Depending on the shopping center, the maintaining party may be required to generate a budget before the beginning of the CAM year (which may differ from the calendar year). Other parties may have the ability to audit CAM.
- REAs may also describe signage rights, including who goes where on a large pylon sign for the tenants of the shopping center.
- Lastly, REAs should touch on default by one party. Typically the default provisions will have more of a grace period than one might see in a Lease.
REAs may also touch on other important topics:
- The REA may specify what happens in extraordinary situations such as condemnation by a governmental authority or a casualty event (fire, earthquake, etc.).
- The REA can require the parties to maintain a certain level of insurance.
- The REA may prohibit certain uses like adult-oriented entertainment, heavy industrial uses, or drug-related uses. As retail and entertainment concepts evolve, the typical prohibited use provisions may require continued review.
- The REA may designate certain exclusive uses for certain users that see it as essential (e.g., discount clothes, pet stores, pharmacies, sporting goods). These often are established at the outset when a potential landlord has certain lease commitments in place.
- The parties may negotiate “no build” areas and visibility corridors (especially for the larger anchors).
REAs have evolved over time, just like shopping centers. REAs first gained popularity in the 1960s and 1970s, and REAs have tended to become longer over the ensuing decades. In moving to an old shopping center, the REA may be extremely outdated, especially as to the prohibited uses and the evolution of the consumer shopping experience. Careful review of an REA is recommended to make sure that a new use does not require a third party consent and that a new end user is getting what it bargained for.