COVID-19 Update: Difficult Discussions About Rent and Other Commercial Lease Issues

Hope you and your loved ones are well.

Of course, our primary concern has to be with the health and welfare of family, friends, co-workers and customers.  Once you’re doing everything within your control on health and safety issues, it is important to try and protect your business interests.  This applies to landlords, tenants and their lenders.

The Interests of Landlords, Tenants and Lenders are Intertwined

Regardless of whether you’re a landlord, tenant or lender your interests are inextricably intertwined.  For purposes of this post, I will focus on the landlord/tenant relationship. However, these relationships typically involve a lender, often more than one lender.  Without the co-operation and consent of lenders, landlords are often hamstrung, unable to grant concessions they may otherwise be amenable to.

Successful Negotiations Protect/Preserve Relationships While Furthering the Parties’ Interests

You negotiate in order to further your interests, more specifically to put yourself in a better position than you’d be in without negotiation.  At the same time, and at the very least, you want to maintain a good working relationship with your counterparty. Landlords and tenants negotiate within the context of an ongoing relationship, making it essential for each negotiation to help not hinder future negotiations.  COVID-19 is hitting the retail industry particularly hard, with social distancing and mandated closures reeking havoc amongst many landlords and tenants.

Because we can’t see around corners, we don’t know what is coming next.  Neither landlords or tenants know when shuttered stores will be allowed to open or when traffic will return to normal.  So, maintaining a strong relationship is essential; cooperation is critical. In all likelihood you’ll be back at the negotiation table again.  Even if you’re not, the goodwill developed during the course of productive negotiations will make implementation easier, with parties seeking to abide by the letter and spirit of the terms, rather than trying to craft means of clawing back concessions they made grudgingly, and subsequently regret. 

Nurture the Relationship While Pursuing Substantive Issues

While nurturing the relationship, you have to pursue substantive issues, which in this case will be essential to many businesses’ survival.  Fortunately, your interests are not necessarily inconsistent with those of your counterparty.

Many retail stores have been forced to close.  Retail revenues have plummeted. Under the circumstances, many tenants, even strong tenants, will ultimately be unable to fulfill their monetary obligations.  Regardless of lease language, many landlords will act in their own best interests by providing appropriate concessions, seeking to maintain tenancies.  Even before the pandemic, Vornado reduced the rent for the Forever 21 Times Square store by more than 50%. Vornado granted this substantial concession, believing it to be in their own best interest.  Vornado decided that the reduced rent was better than the alternative: no rent; a vacant store; and negative cash flow from having to fund CAM and Real Estate Taxes (RET). In exchange, Vornado received the right to terminate the lease after a year, which it will do once a tenant is in hand.  Until this transpires, Vornado not only receives partial rent, Forever 21 will continue to pay Additional Rent and RET , saving Vornado from incurring these substantial expenditures. A shrewd operator, Vornado fulfilled its fiduciary duty to stockholders by reducing Fixed Minimum Rent by 50%.

When Possible Refrain from Positional Bargaining or Blind Adherence to (Now) Unrealistic Contractual Terms 

It is important for landlords and tenants to be thoroughly familiar with lease provisions as well as the rights and responsibilities.  It is equally important to focus on enlarging the pie, working together in order to create a bigger asset to share.

In some instances, an overly aggressive stance by one party can trigger an equally aggressive response by the counterparty.  This can devolve into a zero sum game, with the parties pursuing a bigger share of a rapidly shrinking pie. Heavily negotiated lease documents often include a plethora of tools that might be used under the current circumstances.  These include force majeure, discussed briefly yesterday.

These also include co-tenancy provisions.  Just like other heavily negotiated clauses, co-tenancy provisions come in an almost infinite variety of flavors.  Basically, co-tenancy protects a tenant from a vacant anchor or a decrease in non-anchor occupancy. As with most lease provisions, the devil is in the details.  Co-tenancy can be very specific, for example springing to life when a specific/particularly attractive anchor ceases operation or when occupancy of in-line spaces falls below a specified level.  Once triggered, the co-tenancy provision allows the tenant to pay an alternative rent (e.g., a specified percentage of sales) or reduced Fixed Minimum Rent, coupled with the right to terminate if co-tenancy mandates are not satisfied within a predetermined amount of time.

Reconcile Interests Whenever Possible

During negotiations, strive to reconcile your interests with those of your counterparty.  Seek to satisfy their interests without sacrificing your own. This approach will facilitate the successful restructuring of many leases, which will in turn benefit employees, customers and communities.

Best wishes for your health and safety.

Randy Airst, CEO at Exceedant

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Copyright 2020 Exceedant and Randy Airst