- 4 Key Provisions Developers Should Consider in Reciprocal Easement Agreements (REAs)
- September 10, 2015 | Author: Sharon Nelson Craig
- Law Firm: Lerch, Early & Brewer, Chartered - Bethesda Office
- A developer who owns a lot with the intention of dividing that lot into separate parcels for future development (each, a “development parcel”) will need a reciprocal easement agreement (“REA”). The purposes of the REA are to link the development parcels and their existing and future owners and users together through the development process and beyond, and set forth the rights and obligations of such owners and users, taking into consideration the property’s physical attributes, the anticipated improvements, the uses and the intended users, and the functionality of the project itself.
The goal of the project developer is to develop the project in accordance with the commitments it has made to the governmental authorities, investors and lenders, while at the same time maintaining flexibility for market changes. Because of this goal, the project developer wants to maintain as much control over the project and its development as it can. However, instead of making the REA “all about the project developer,” a lot of time and money can be saved if the project developer contemplates in the REA the interests of future owners and users of portions of the property. The following are a few of the issues that future owners and users may raise that a project developer should anticipate in drafting the REA:
Coordination of construction activities within the project
The REA should include mutual construction provisions for ingress and egress, access, utility relocation, and crane swing and subsurface rights, as coordination of construction activities is a must for the safety and protection of all parties and the public. All parties should be required to cooperate with each other during the approval and construction process, provided that such cooperating owner or user is not materially affected by the constructing owner’s approvals or construction. Included in the obligation to “cooperate” should be the execution by owners of governmental and utility company documents, such as public use easements, storm water management covenants, subordination agreements, and other similar documents. These documents can cause delay in a project and should be specifically included in any cooperation provision in the REA.
Common area maintenance costs allocation
At the beginning of a project, the project developer may not know exactly what the common areas and facilities will consist of in the project, or the costs of maintenance of the same. However, the project developer can include in the REA a formula for computing each owners’ share of such costs. Fair allocations of common area costs may include those based on land area, anticipated density, or anticipated usage of the common areas and facilities. Common area maintenance pools may also be set up on a parcel by parcel basis or based on a particular type of use. The REA may also provide for an owner’s obligation to pay its share of common area maintenance costs to be deferred until it has developed its parcel and obtained a certificate of occupancy.
Ability of the project developer to amend the REA after it is recorded
The project developer will want the right to unilaterally amend the REA document while it still owns a significant portion of the project. This generally is not acceptable to other owners or their lenders. However, the parties will typically agree to the right of the project developer to amend the REA , provided that it obtains the consent of owners affected by the amendment, and is obligated to deliver written notice of any amendments to all owners. Finally, the project developer may provide in the REA its right to enter into and record separate covenants and restrictions for a particular portion of the project that has special needs or attributes (i.e., the residential or retail portions of the project). This is also an acceptable mechanism to allow changes to be made in the REA that affect some but not all of the owners and users of the project.
Mortgagee favorable provisions
The lien of a mortgagee on a development parcel must be subordinate to the REA because the REA is a critical part of the collateral for the mortgagee’s loan. Therefore, if a mortgagee forecloses, the REA will not terminate. That being the case, a lender and its counsel have to review the REA assuming the worse - that the lender could be the development parcel owner and subject to the terms of the REA in place of their borrower. The project developer should include in the REA, at least the following types of provisions for the benefit of mortgagees: (i) the right to written notice of a default by its borrower under the REA, and an opportunity to cure; (ii) elimination of transfer restrictions, such as rights of first offer or rights of first refusal, in the event of a foreclosure; (iii) the right to approve any material amendments to the REA, and (iv) the requirement of each owner and property association, if applicable, to deliver estoppel certificates.
Contemplating the issues that will be raised by future owners and users in an REA does not mean that a project developer will get it right the first time and never have to amend its REA. Because REA’s usually “outlive” the project that they are initially put in place for, they are amended, or amended and restated, to address development issues, governmental approval changes, market changes, and user specific matters; however, the more thought that goes into the REA on the front-end, the less likely significant amendments will be required.