Avoid Permit Pitfalls When Re-Leasing Second Generation Space

by Howard D. Geneslaw, Esq.

Leasing second-generation space generally does not require site plan approval. Prospective tenants, nevertheless, are well advised to thoroughly investigate local requirements and insist upon permitting contingencies in their leases to protect against those occasional situations where the need to obtain site plan approval can be costly in both time and money. To illustrate the importance of doing so, consider the following situation.

A retailer utilizing a wholesale/closeout strategy enters into subtenancies with Woolworths in a package deal for three stores in the New York/New Jersey metropolitan area. One of the stores is located in an affluent suburban community at a shopping center that was built in the early 1960s. The anchor tenants are Kmart and a supermarket, and the owner has made few capital improvements since the center first opened.

The Retailer Meets Immediate Resistance

The retailer sought construction permits immediately upon commencement of its sublease term. The only work proposed was interior, non-structural fit-up and the installation of a facade sign that required a variance even though it was smaller than Woolworths’ sign, which had been removed.

The staff in the municipal construction office claimed that site plan approval from the local planning board was required because the space exceeded 2,000 sq.ft., despite (a) the local ordinance requiring site plan approval for space surpassing this threshold only where there was a "change of use to a permitted use" and (b) an exemption from the site plan approval requirement for renovations or alterations not involving enlargement of any building or major structural change. The construction staff at first refused to even provide a permit application package and then, after some persuasion, provided a form but said it would not be accepted for filing once completed.

Planning Board Approval Process Becomes A Legal Nightmare

Although the retailer could have immediately proceeded to court to challenge the need for site plan approval, it instead chose to proceed to the planning board, an avenue that was expected to be faster and less expensive than seeking judicial intervention.

The planning board held three workshops. At the first workshop, it refused to accept the lease and sublease, which gave the retailer authority to make the proposed improvements, as owner consent required, the board that the retailer obtain a signed consent from the property owner.

At the second workshop, the planning board insisted that the retailer submit a site plan for the entire shopping center, an item required by its application checklist, despite the fact that no changes to the shopping center were proposed. In order to reduce the cost of preparing such a plan, the retailer asked the planning board for copies of prior approved site plans. The planning board professed an inability to find them, yet the retailer later found prior plans in the planning board’s files simply by looking under the name of each of the anchor tenants.

At the third workshop, the planning board required that the retailer submit a parking count for the entire shopping center, on a use-by-use basis, even though the local ordinance computed parking in shopping centers based on the total square footage of the shopping center and irrespective of the mix of individual uses.

Finally, more than four months after the initial application, the planning board held a public hearing that proved to be extremely contentious. The planning board inquired into the nature of the merchandise to be sold, how merchandise would be displayed, where the retailer would advertise, whether patrons would come from other towns, and whether cheap or more expensive fixtures would be utilized. The planning board also focused on a substantial parking deficiency based on what would be required under local ordinances if the shopping center were built today (the parking standards had increased in the mid 1970s, after the shopping center was built). The retailer, having control over only its demised premises, had neither the legal nor financial ability to reconfigure the parking lot as the planning board suggested. Moreover, since the existing parking constituted a legally protected nonconforming condition, the planning board could not require any changes.

Ultimately, the planning board reached the incredible conclusion that the proposed use was prohibited, despite the fact that the zoning ordinance permitted "retail merchandising" without exception. Next, the planning board determined that, even if the use was permitted, site plan approval would still be denied because the retailer would substantially tax an already over-stressed parking lot. The sign variance was also denied.

Judicial Intervention Becomes Necessary

The retailer appealed the planning board’s decision, arguing that a site plan was not required because there was no change of use or, if it was required, that is should have been granted. Following a trial on the record before the planning board, the court held that the planning board was in error, as a matter of law, in concluding that the use was not permitted. Although the planning board had no statutory authority to interpret the zoning ordinance, it did have the power to inquire into its own jurisdiction but erred, on the evidence in the record, in concluding that the retailer’s proposed use was not encompassed within "retail merchandising." The court rejected the planning board’s argument that utilization of a "wholesale-closeout" strategy rendered the retailer a non-permitted wholesaler.

On the issue of site plan approval, the court relied upon a provision in the ordinance that required site plan approval upon changes to any of the site conditions enumerated in the ordinance, including signs. Thus, because the sign was being changed, the planning board’s authority over site plan approval was triggered. In an unnecessary broad ruling, however, the court ruled that this gave the planning board the right to consider compliance of all aspects of the site plan with the site plan ordinance. Thus, the planning board could require that any item that is not a legally protected nonconformity be brought up to current standards, all due to a change in signs.

Next, the court ruled that the planning board acted in an arbitrary, capricious and unreasonable manner by denying the site plan application on the basis of alleged parking and on-site traffic impacts. The only "evidence" of such impacts in the record, according to the court, consisted of general statements by members of the planning board about a perceived parking shortage and a perceived higher intensity of use than had characterized Woolworths. No expert testimony was presented, nor were the individual experiences of planning board members set forth in the record in a manner that would have accorded the retailer an opportunity to refute them with its own evidence. According to the court, the retailer "cannot be expected to meet the amorphous notion of something wrong" at the shopping center. Additionally, the court found record support to be lacking for the planning board’s "inflammatory conclusions" and found that the alleged lack of parking was "not demonstrated by competent evidence in the record." Finally, the court upheld denial of the sign variance.

Subleasers Need Protection Strategies

The retailer’s sublease did not contain a permitting contingency, an omission that in this instance proved costly. The retailer was forced to pay rent for a period of fifteen months from the date the sublease commenced until the date of entry of the court’s order--without the ability to legally occupy the premises and without earning one penny in revenue. In order to minimize its loss of revenue, the retailer decided to proceed with fitting up the premises while the planning board and the municipality still have the right to appeal the trail court’s decision. What could the retailer have done differently to avoid this series of events, or at least have been better prepared for them? While one can never predict what actions obstinate municipal officials may take, there are steps that can protect against them:

Insist on a permitting contingency in your lease, sublease or assignment, even where only interior renovations are contemplated and there is no apparent change in use. Try to get a contingency that allows you to terminate the deal if building permits are not issued within a fixed period of time. If the landlord flatly refuses, at least insist on a contingency for site plan approval or its equivalent. Most landlords should be willing to agree since such approvals typically are not required for existing retail spaces.

Ask your attorney or planner to thoroughly review the applicable municipal ordinances for any provisions that could trigger discretionary board approvals. The zoning section should be checked to make sure that the use is permitted, and the site plan section should be reviewed to see whether every change of occupancy, even those that involve only interior renovations, requires site plan approval. If the required number of parking spaces under local ordinance is based on the individual use, site plan approval may be required whenever the required number of parking spaces changes due to a change of use.

Pay particular attention to signs. If the local ordinance has a provision like the one encountered by the unfortunate retailer described above, any change in signs could trigger site plan approval. If an existing sign is in place, it can often simply be refaced without the need for board approvals. Consider asking the landlord or departing tenant to leave the sign in place or insert a blank facing in an effort to preserve any existing vested legal rights.

Meet with the local construction, zoning and other permitting officials before signing the deal. Explain the project to them and gauge their position. If you receive a hostile reception, be particularly vigilant in demanding a permitting contingency from the landlord.

Review municipal records in an effort to determine whether other new tenants have been required to obtain approvals. If your findings differ from what local officials have told you, be very cautious and consider consulting an attorney or planner.

Finally, remember that no matter how diligent you are, there are some circumstances in which the political dynamic is such that the only way to get approval is by court order so that local officials can claim they did everything in their power to protect the community from an unwanted tenant.

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