Rules and Regulations – Another Kind of Lease Amendment

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So, after you’ve fully negotiated a Lease, do you think the words are chiseled into stone, the document is fixed, it is now a “read only” file? Maybe you need to think again. It is not uncommon (how about that for indirectness) for a lease to say: “Landlord reserves the right to, and Tenant agrees that Landlord, at any time and from time to time for the general welfare of the Shopping Center, may impose reasonable rules and regulations governing the Shopping Center and the use of the Common Areas and Tenant shall abide by those rules and regulations..” Yes, it ain’t over ‘til the fat lady sings.

Let’s talk about “Rules and Regulations.” There is nothing wrong, per se, about placing reasonable limitations on a tenant’s use of the property, including on the tenant’s own premises. After all, a lease is a grant of rights to a tenant, and no one believes those rights should be unlimited. And, most of the typical set of Rules and Regulations meet a tenant’s expectations – no smoking; rubber tired wheels on hard flooring surfaces; no shaking carpets out the window.

Ah, there’s the rub. If the rules and regulations were only those attached to the lease, and if those rules and regulations were as carefully vetted as is the lease’s rent clause, then there would be no grist for this Ruminator to work with, only chaff. But, a lot of those leases (yet, far from all) speak of rules and regulations that haven’t yet been written, let alone thought of, and they contain the “Landlord reserve the right …” text you saw above

Now, this seems like a pretty innocent lease provision if all you are thinking about is shaking out carpets or putting trash out on the sidewalks. But, what if the later-imposed “reasonable rule for the general welfare of the Shopping Center” is that employees need to park across the street? And, to add to the hypothetical, what if the lease doesn’t have an employee parking provision because you negotiated it out of the drafts?

Let’s not argue the facts. Start with the premise that the new employee parking rule is reasonable. The Shopping Center has become very popular, and customer parking is scarce. There is plenty of “less than good parking” well away from the entrances, and that’s where the landlord wants your employees and everyone else’s to park. But, that’s not where you want your employees to park. You have your own “idea” as to where you want your employees to park, and that might be right in front of your competitor’s customer entrance. That’s why you negotiated employee parking out of your own lease.

Or, the rule might really only affect you and some other tenants, but not all tenants. For example, employees of tenants occupying 5,000 or more square feet of space might be required to park in the “new” employee parking area. Here, you have no issue, per se, with making your employees park away from the prime customer spaces, and would like to see your neighbors abide by such a rule. In fact, even requiring employees of the large size premises to use the employee parking area would be a great relief for customers. But, even more important to you is your relationship with your own employees. How can you insist that your employees park far, far away from your employee entrances when your next door neighbor’s employees aren’t bound by the same rule? Or what if the landlord selectively enforces the employee parking rule against you and not others at the Shopping Center?

Now, to sum up where we are now. You’ve agreed to the concept that the Landlord (essentially) can amend the lease by unilaterally promulgating rules and regulations after the lease is signed. [Just take that as a fact, because this isn’t all that unusual.] You’ve been given the comfort that the rules and regulations will be reasonable. But, you now realize that even “reasonable” rules and regulations can adversely impact your business. How do you balance the reasonable needs of the landlord with the reasonable needs of the tenant?

Here is one approach. Here’s what the lease could say. I’ll stand behind the general principles in it, but have no problem with changing the words or expressing the concept differently.

Tenant shall comply, and shall require that its employees, agents, and contractors comply, with the Rules and Regulations with respect to the Shopping Center which are set forth in Exhibit “X.” Tenant shall use commercially reasonable efforts to have its customers comply with such Rules and Regulation while inside the Demised Premises. Landlord shall have the right to make reasonable amendments thereto from time to time for the safety, care, and cleanliness of the Shopping Center, the preservation of good order therein and the general convenience of all the tenants and beginning thirty (30) days after Tenant receives notice of such amendments or new Rules or Regulations from Landlord, Tenant shall comply with such amended Rules and Regulations. No newly promulgated Rule or Regulation and no amendments to the Rules or Regulation shall be enforceable against Tenant or Tenant’s Visitors if: (a) applying the new or amended Rule or Regulation will materially interfere with the use and enjoyment of the Shopping Center by Tenant or Tenant’s customers; (b) any such new or amended Rule and Regulations is not generally applicable to all tenants of the Shopping Center and their respective visitors; (c) any new or amended Rule or Regulation is not uniformly enforced against all tenants of the Shopping Center and their visitors; (d) application of the new or amended Rule or Regulation would increase Tenant’s cost to occupy the Demised Premises; or (e) application of the new or amended Rule or Regulation would diminish Tenant’s rights under this Lease or reduce Landlord’s obligations under this Lease. In the event there is a conflict between the provisions of this Lease (other than Exhibit “X”) and the Rules and Regulations, the provisions of this Lease shall govern. Landlord shall not be responsible for the non performance by any other tenant or occupant of the Shopping Center of any of the Rules and Regulations; however, Landlord shall use reasonable efforts to apply all Rules and Regulations uniformly to all tenants.

There are a lot of possible variations even where the general principle is agreed-upon. Such a lease provision could permit new rules or changed rules only if they have an “insignificant” effect on the tenant. It could limit the uniformity requirement to like sets of clients, such as rules for restaurants only affecting restaurants. Go ahead and try writing this kind of provision for yourself. Share your thoughts with other by posting a comment to the Ruminations Blog at www.retailrealestatelaw.com. Try it, you’ll like it.

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Comments

  1. Ira, good post. I have always viewed the Rules And Regulations provision is the means by which a landlord could unilaterally modify the lease. Two examples of the abuse of this clause. Years ago, when the President of the old Rouse Company noticed one of his tenants selling hash pipes and marijuana paraphernalia, a new rule and regulation appeared outlawing the same. At the time I responded to the landlord that my use was covered by my use clause (and such items were outside the scope of the use clause) and my client’s lease could not be amended by the rule and regulation power. That prohibition eventually appeared in later editions of Rouse’s lease form (to which no one objects). Another developer promulgated a rule and regulation prohibiting retailers from advertising their website in their brick and mortar stores (this was early in the Internet Age). After that developer was humiliated in a CCN financial report, it recanted. I try to restrict the application of the rules and regulation power to legitimate “police power” issues in the premises such as health, safety and sanitation and they can no way affect the tenant’s use or manner of operation (subject to health & safety issues). In the common areas, I provide that all rules and regulation be non-discriminatory (another topic) and shall in no manner increase the tenant’s obligations (except to an immaterial extent) or decrease its rights or the landlord’s obligations.

  2. Absolutely agree.
    I once encountered a landlord–I kid you not–who tried to insist that in the event of a conflict between the lease and the rules and regs, that the rules and regs would control!

  3. Good post Ira and I agree with Joel that the Rules and Regulations provisions are a way for the landlord to change the terms of the lease, although I have rarely seen any landlord’s use it in that fashion or even consider that it could be used in that fashion.

    Two thoughts as to your proposed subparagraph (e):

    1. The language providing that new rules cannot “diminish Tenant’s rights under this Lease or reduce Landlord’s obligations under this Lease” is so broad and all inclusive that one might argue that any change in the rules would be prohibited. Why not use the word “materially” as a preface?
    2. Your language regarding conflict between the rules and the lease does not resolve the issue that you first raised where the conflicting language may have been negotiated out of the lease. I look at that lease negotiation process as part of the lease and what I can prove or disapprove in a later dispute. That’s why I retain each and every draft of a lease evidencing the changes negotiated by the parties and evidencing who requested the change.

    In your initial factual example, you note that the lease does not contain an employee parking provision because that provision had been negotiated out of the lease. Since the employee parking provision is not contained in the lease and the rules limiting employee parking may be later added by the landlord, if I represented the tenant, I would look to the earlier drafts to see what was negotiated and why and argue that the change in the rules contradicts the intent of the parties at the time of execution of the lease. The lease drafts would be considered extrinsic evidence that I would attempt to introduce into evidence by arguing that the lease is unclear and ambiguous on the issue and that the court could consider extrinsic evidence to determine what the intent of the parties was at the time of execution of the lease. This is assuming that at the time of the lease the Rules and Regulations attached to the lease did not contain an employee parking provision.

    • Howard – all good points. They certainly move the discussion.

      Choosing, as an example, “diminish” vs. “materially adversely affect” or similar terminology only reflects a negotiating stance from a tenant’s perspective. You are entirely correct that a more balanced word could be used here, and would likely be used after negotiation.

      As to keeping drafts, I’ll reserve comment until after I’ve completed a “presently in conceptual development (that means: I’ve got the topic on a list)” Blog entry about merger / integration clauses and the role of parol evidence.

      • Ira, well I will mention in my blog post that you reminded me about keeping drafts and parole evidence rule and we might have a lively debate. Actually, Joel and I briefly discussed the practice of keeping earlier drafts, if for no other reason than reminding us at a later time what was negotiated and why, when an issue came up that the lease was not entirely clear on. Is there such a thing as “dueling blogs”?

  4. Since this is article is intended for the occupier’s information and not the landlord I will let the above (good) comments sit. I believe that gaining an appreciation of the perspective from the other side of the table ultimately speeds transactions.

    However, while somewhat off topic I need to comment on employee parking in shopping centers. Unlike office buildings – that primarily house employees and cater to the tenant employees (an over simplification) – and industrial buildings – that primarily house materials and employees (another over simplification); retail properties cater to the general public. One of the advantages of a shopping center v. a downtown street front store is the proximity of convenient and (mostly) free customer parking. Since the primary objective is to move product from the retailer to the consumer the parking should be reserved for the customer first and foremost. Because more than 25% of the total annual retail sales occur in less than 8 weeks it is reasonable to remove employee parking at that time. Rules governing where an employee may park at other times should also be reasonably accepted by a knowledgeable tenant.

    The rules and regulations should be viewed as addressing those ‘reasonable’ operating matters that fluctuate from time to time (ie: parking, waste removal, etc.) as compared to those items both parties want fixed in stone for the term.

    From the landlord’s perspective I would push back on the wording that any change to the rules can’t increase the tenant’s cost of occupancy, since that wording is nebulous and some changes to rules and regulations may be borne of external changes to the property (ie: the way the city demands waste is removed, etc.) and therefore both unanticipated by either party nor in their control.

  5. In a first for me, I am “transferring” a comment from another forum (LinkedIn) to Ruminations because I find it fascinating.

    This is what Morten Gahrn, an attorney at the Danish law firm of Kromann Reumert in Copenhagen had to say:

    “In Denmark the Act on Commercial Leases are basically very protective of the tenant – even though the tenant might be the bigger of the two. There are only 4 options for the landlord to terminate the contract and these 4 are scrutinized stringently by the Courts if it comes to a dispute.

    However, the Act contains a section 14 (which only applies if explicitly agreed upon) and this section states that the landlord after 8 years may demand all clauses (except area) renegotiated AND if no agreement is reached this can be used as grounds for a landlord termination. Even if the negotiations had no real substance on part of the landlord the Courts cannot disqualify the termination.

    I guess this is as close as you can get to a unilaterally change you can get, however, the section is usually NOT agreed upon and therefor not in effect in the leases that pass my desk or are being negotiated on behalf of the tenant by me.” [I corrected some misspellings, but there weren’t many at all – IM.]

  6. Howard and Ira – I try to avoid the modifier “materially’ when referring to the effect of a rule or regulation as it pertains to the premises. No rule should be effective with respect to the premises unless it is a life, safety or sanitation issue. With respect to the common areas, the landlord is entitled to a little more leeway here as to management thereof and I would agree to add “materially” as the limitation.

  7. Ira – Great post. I have heard it suggested (and may have suggested it myself on occasion) that the right of landlord to impose reasonable rules and regulations could be an entree to some “green lease” provisions. For example, a landlord may require the tenant to install submetering, or at least to report energy use, or adopt and implement a recylcing or green cleaning program. With the growing importance of LEED EBOM (Existing Buildings Operations and Maintenance), I was wondering if you have seen the clause used in this context, and if so, with what outcome. Keep up the good work.

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