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Discount Marketplace and Hawkins Development

General Instructions

This exercise involves the negotiation of a long-term lease between representatives of a

shopping center developer, Hawkins Development Company, and a prospective anchor tenant,
Discount Marketplace, for a regional mall project in Nordstown, Massachusetts.

Hawkins Development is a small but reputable real estate development company founded in
1987 by its president and CEO John Hawkins. The company expanded rapidly during the
economic boom of the late 1990s. Though the economic downturn of 2000 slowed its growth,
favorable economic indicators in recent years have encouraged Hawkins to seek out promising
new development opportunities. John Hawkins recently targeted an old factory site in
Nordstown for a discount shopping mall. The location is excellent – close enough to a major
highway to bring in customers, but far enough from the nearest town center to reduce
competition. Hawkins took out a short-term option to purchase the site to allow time to obtain
site approvals and financing.

As currently planned, the Nordstown Regional Mall would be Hawkins' largest venture to date,
with more than 350,000 square feet of indoor space, of which 84,000 square feet would be
occupied by the primary or anchor tenant. The remainder of the space would house up to 70
smaller retail stores, or satellite tenants.

Hawkins approached Discount Marketplace as a possible anchor because it is a leading national

retailer of discount soft goods, including clothing, shoes, accessories, housewares, and gifts.
With more than 200 stores across the country and a reputation for quality merchandise at
moderate prices, Discount Marketplace stores are much sought after as anchor tenants for
discount malls.

As plans for the mall crystallized, Discount Marketplace's chief counsel and John Hawkins began
negotiating a long-term lease for Discount Marketplace as the mall's anchor tenant. Discount
Marketplace insisted on working from its standard lease. Hawkins was willing to live with most
of it, with only modest revisions. Discount Marketplace was also able to win very favorable
rental terms (namely, $4.80 per square foot plus a percentage of gross revenues if sales are
particularly high). The parties agreed upon a lease term of twenty-five (25) years, with six
successive options running to Discount Marketplace that could extend the period to fifty-eight
(58) years. Although the rental agreements with satellite tenants remain to be negotiated, they

This case was written by Lawrence Bacow, Director, Center for Real Estate Development, M.I.T. and was revised with the assistance of Marjorie
Aaron. Copies are available from the Teaching Negotiation Resource Center (TNRC), online at www.pon.org, by email: tnrc@law.harvard.edu, or
by telephone at 800-258-4406. This case may not be reproduced, revised or translated in whole or in part by any means without the written
permission of the TNRC Coordinator, Program on Negotiation at Harvard Law School, 501 Pound Hall, Cambridge, MA 02138. Please help to
preserve the usefulness of this case by keeping it confidential. Copyright © 1991, 1993, 1995, 1996, 2006, 2007, 2019 by the President and
Fellows of Harvard College. All rights reserved. (Revised 2/19)
Discount Marketplace & Hawkins Development: General Instructions

will be at significantly higher square-footage rates and generally for terms of ten years or less.
Hawkins informed Discount Marketplace that his firm has a tentative lending commitment,
though this is contingent on securing a financeable lease with a credit-worthy anchor tenant.
Such financing is typically for ten (10) years. Hawkins has also indicated that the lender has
raised no objection to the lease provisions agreed upon to this point, however, by the end of
the last negotiating session, the parties had reached an impasse over Article 22 – "Use,
Assignment, and Subletting," which reads as follows:

Use, Assignment, and Subletting (Article 22)

The premises hereby demised may be used for lawful purpose. Tenant may assign this lease or
sublet the whole or any part of the demised premises, but if it does so, it shall remain liable and
responsible under this lease.

Discount Marketplace's counsel would not budge from its company policy to include this version
of Article 22. Hawkins was equally adamant that he cannot accept this provision because it
would not be a financeable lease.

In a last-ditch effort to save the deal, both sides plan to send different representatives to
negotiate this one issue. Both sides also agreed that the final session would be governed by a
good faith agreement that the other lease terms are now resolved and will not be reopened.
Article 22 is the last issue remaining on the table and it is the only issue on the agenda for the
upcoming meeting.

That's where things stand. While the relationship between the parties has been generally
productive to this point, as befits the beginning of a long-term business relationship, now there
seems to be a chill in the air.

Definitions of Use, Assignment, and Subletting

Use: A definition of the restrictive covenants governing use of the leased property. The
definition is typically used to state the purpose of occupancy so that other tenants' uses can be
protected and the predetermined character of the center can be preserved.

Assignment: A tenant's transfer of the right of possession to all or part of a leased property for
the full time remaining on the term. The original tenant retains no right of reversion from the
third party-assignee. The assignee is usually liable to the landlord to perform all the original
tenant's obligations. Assignment does not relieve the assignor of liability under the lease.

Subletting (sublease): A transfer of the right of possession to all or part of leased property for a
time less than the full time remaining on the lease. The original tenant retains a reversion in the
leasehold following the subtenancy. A subtenant is not liable to the landlord for all the original
tenant's obligations.

Copyright © 1991, 1993, 1995, 1996, 2006, 2007, 2019 by the President and Fellows of Harvard College. All rights reserved. (Rev. 2/19)
Discount Marketplace & Hawkins Development: General Instructions

Copyright © 1991, 1993, 1995, 1996, 2006, 2007, 2019 by the President and Fellows of Harvard College. All rights reserved. (Rev. 2/19)
 A university consortium dedicated to developing the theory and practice
of negotiation and dispute resolution. Harvard | MIT | Tufts

Discount Marketplace and Hawkins Development

Confidential Instructions for the Hawkins Development Representative

You are the vice president for new development for the Hawkins Development Company. You
have been with Hawkins for just over a year, having been lured away from a well-known
national development firm by John Hawkins' offer of substantial equity in new projects,
including the planned Nordstown Regional Mall.

Hawkins is a relatively young developer, eager to build on the successes of the late 1990s,
despite the economic slowdown in the region since 2000. Hawkins targeted the Nordstown
area as ideal for a discount shopping mall; and he moved quickly to secure an option on the
land at the old factory site when he learned it was available. The location is obviously desirable
because of its proximity to major highways, and distance from other town centers. Just as
important, there are no other department stores and no other sites in the region as suitable for
future development. Although some in the media and industry have speculated that
Nordstown's viability is tenuous because its economy relies heavily on the defense industry,
Hawkins does not share this concern. He is confident that the area’s demographics – blue- and
white-collar middle-class workers – would remain favorable, and that a discount mall would
remain profitable in the face of shifts in the industry mix over time.

Together, you and John Hawkins have invested a great deal of time on the Nordstown Regional
Mall project. Since acquiring the option to purchase and obtaining preliminary approvals from
the town, Hawkins has been working to negotiate a suitable lease with an anchor tenant and
secure project financing, while you have been involved primarily in locating suitable satellite
tenants.

In fact, you have found several very strong, substantial satellite tenants who would come in on
ten-year leases, as well as a number of attractive but less well-known satellites who would
most likely come in on five-year leases. These satellites (and many others) would be prepared
to sign if Discount were in place as the anchor tenant.

Hawkins approached Equity Finance Company informally to discuss permanent financing for the
project. Equity has expressed interest, provided that a quality anchor tenant like Discount
Marketplace can be found. Like most permanent lenders, Equity insists on reviewing and
approving each lease as a condition of its permanent financing commitment.

This case was written by Lawrence Bacow, Director, Center for Real Estate Development, M.I.T. and was revised with the assistance of Marjorie
Aaron. Copies are available from the Teaching Negotiation Resource Center (TNRC), online at www.pon.org, by email: tnrc@law.harvard.edu, or
by telephone at 800-258-4406. This case may not be reproduced, revised or translated in whole or in part by any means without the written
permission of the TNRC Coordinator, Program on Negotiation at Harvard Law School, 501 Pound Hall, Cambridge, MA 02138. Please help to
preserve the usefulness of this case by keeping it confidential. Copyright © 1991, 1993, 1995, 1996, 2006, 2007, 2019 by the President and
Fellows of Harvard College. All rights reserved. (Revised 2/19)
Discount Marketplace & Hawkins Development: Confidential Instructions for the Hawkins Development Representative

Unfortunately, John Hawkins' negotiations with Discount Marketplace over the terms of the
anchor tenant's lease have not gone as well. Discount Marketplace initially demonstrated a
strong interest in the mall and signed a non-binding letter of intent to locate there. Since then,
it has firmly insisted its own lease terms. Discount Marketplace refused to even consider the
carefully drafted lease document that Hawkins presented at the first negotiating session. It
insisted, politely yet firmly, on working from Discount Marketplace's so-called "standard"
shopping-center lease, and Hawkins agreed.

Although this standard lease is predictably favorable to Discount Marketplace, Hawkins was
willing to accept most of its provisions. Generally, he has confidence in Discount Marketplace
as a reliable tenant. Apparently, Equity Finance does as well, for it has informally approved
those portions of the lease that Hawkins has accepted.

However, during the last negotiating session, Hawkins let it be known that the lease terms on
use, assignment, and subletting in Article 22 of the standard lease were unacceptable and
unfinanceable. Discount Marketplace's representative would not budge on these terms.

As Hawkins explained it to you, his primary concern is that the lease is not financeable with the
current Article 22, because it would give Discount Marketplace complete freedom to use,
assign, or sublet as it sees fit. For example, it would permit the subletting of the Discount space
to many small subtenants, thus depriving the mall of a true anchor. It would also take away
Hawkins' ability to maintain control over the future tenant mix and character of the mall. You
know that this would also be objectionable to many satellite tenants who have articulated
concerns about the potential for competition within the mall. In fact, some of the stronger
satellite tenants are likely to insist on guarantees against competing uses or substantial change
in the character of the mall. At this point, Discount Marketplace has given no substantive
reason for its stance on the use, assignment, and subletting clause. Firm officials maintain that
it is company policy to insist on Article 22 as written in their standard lease.

When the parties agreed to send different representatives to try to overcome an apparent
impasse on this potential deal breaker, Hawkins naturally asked you to pick up the negotiation.
Hawkins expressed confidence that, "you can save the deal, if anyone can." Regarding the
negotiations over the use, assignment, and subletting provisions, Hawkins gave you explicit
authority to agree to anything that will be financeable and will address the company’s interests
as developer of the mall.

While you will make every effort to find a reasonable, acceptable solution so Discount
Marketplace will be the anchor tenant, it is imperative that the negotiations with Discount
Marketplace be completed (or not) during the upcoming negotiating session. As John Hawkins
emphasized, "time is of the essence" because Hawkins' option on the land at the mall site is
about to expire.

If Hawkins can't tie up an anchor quickly, there will not be enough time to secure a financing
commitment before the option expires. Equity will not commit to financing until an anchor
tenant's lease is signed. Hawkins is left with a difficult and undesirable choice: to let the option

Copyright © 1991, 1993, 1995, 1996, 2006, 2007, 2019 by the President and Fellows of Harvard College. All rights reserved. (Revised 2/19) 2
Discount Marketplace & Hawkins Development: Confidential Instructions for the Hawkins Development Representative

expire and most likely lose the mall project, or to buy the land before he has either an anchor in
hand or a commitment for financing – a highly risky proposition.

The only other alternative would be go to someone else – and quickly. Northshops, a less well-
known discount chain, has indicated some interest in the location. Other potential tenants
have yet to be contacted.

Copyright © 1991, 1993, 1995, 1996, 2006, 2007, 2019 by the President and Fellows of Harvard College. All rights reserved. (Revised 2/19) 3