Retail Lease Restructuring (COVID-19): Heirarchy of Needs

Retail Lease Restructuring: Occupier Hierarchy of Needs

  1. Collect Lease Docs/Review.  Review Lease Provisions Relevant to COVID-19, e.g., force majeure, co-tenancy, go dark, kickout clause, early termination rights.
  2. Tabulate financial obligations, including but not limited to those stemming directly from the lease, e.g., wages, suppliers, Minimum Base Rent, Additional Rent, Percentage Rent, Real Estate Taxes.

Ascertain corporate as well as personal exposure to liability as well as barriers to such liability, e.g., potential exposure from the landlord’s assertion of monetary and/or non-monetary default, acceleration provision, guarantee(s), right to notice and an opportunity to cure.

3. Estimate anticipated cash flow for the next six months, including any assistance that may be forthcoming from your franchisor, suppliers, income from subtenants etc.

4. Determine what monetary concessions you need in order to survive the COVID-19 pandemic.  Determine the source of such concessions, e.g., landlord, franchisor. Determine what concessions you are going to extend, e.g., a restaurant continuing to pay employees although service is limited to take-out and delivery.  Build flexibility into your model. The extent and duration of the pandemic are unknown. The speed at which we will emerge on the other end is unknown. The requested relief can be tied to sales, incorporating the potential for the landlord to recapture unnecessary (in hindsight) concessions as business gets back to normal.  In this way, your desire to create win-win amendments to the existing lease will be communicated clearly to the landlord. So, if sales go up earlier than anticipated, the landlord will benefit either in the form of percentage rent or a return to part or all of the Lease Rent, or an appropriate percentage of such Lease-Rent. Be familiar with and prepared to discuss your normal profit margins.  Some landlords are offering to defer rent, providing that tenants repay the deferred amount incrementally, once the crisis passes. Know whether and to what extent your business can handle this type of additional burden. Many retailers will be unable to sustain the additional burden of repaying deferred rent. Be realistic about your finances and the burden you can shoulder. Further, any observers believe that any profits eliminated during the pandemic are irretrievably lost and will not be recouped.

5. Don’t ask for less than you need.  The pandemic isn’t your fault. For many retailers, sales have fallen to $0 as malls shutter, non-essential businesses close and the public stays at home.

6. Be prepared for the landlord to ask for concessions.  For example, landlords may want you to extend the current term or add a guarantor.  Know the point at which no deal is better than the deal proposed by the landlord. In order to correctly ascertain this demarcation point, you have to be thoroughly familiar with the lease, and its implications.  Thoroughly understand the concessions you are being asked to make; issues like cross-guarantees, personal guarantees, exclusives, co-tenancy, CAPs on CAM have serious implications, and can detrimentally affect your business and even your personal finances.

7. Ask for reasonable concessions.  Landlords are unlikely to agree to unreasonable requests, particularly those which are not tightly tailored to alleviate the problem.  Moreover, many landlords are constrained in their ability to act unilaterally, often requiring the consent of other stakeholders such as lenders, before agreeing to restructure leases/make material concessions.  Further, landlords often have shareholders; many of you have REIT landlords. These REITs have shareholders, who have been anxiously watching as stock prices plummet, and their chances of receiving a dividend disappears.

8. Communicate.  Communicate early and often.  Ignoring the situation won’t make it go away.

9. Be familiar with the benefits your tenancy confers on the landlord.  It is usually much easier/less expensive to retain an existing tenant than it is to find a new tenant.  For example, before a landlord can begin to collect rent from a new tenant it must typically: sustain a period during which it funds Additional Rent and Real Estate Taxes – rather than being repaid by the tenant; leave the premises vacant and yielding no rent; compensate a broker for procuring the tenant; compensate a lawyer for negotiating the lease; undertake landlord improvements; and provide a tenant improvement allowance.  Landlords like passive recurring revenue. Your status as an existing tenant, suffering through a pandemic, makes you the most likely means of providing the landlord with long-term passive recurring revenue.

10. Be professional.  Be courteous. Be understanding – the landlord is experiencing many of the same problems that you are.  Many landlords answer to banks and shareholders. Listen to the landlord’s pain points; try to help where you can.  Put yourself in their position. Collaborate. Trade concessions of unequal value. Surprisingly, in many instances something of great value to one party, doesn’t cost the other party much.  These types of concessions are often overlooked. Try to identify these and bring them to the landlord’s attention, and facilitate their exchange as a means of enlarging the benefits for all concerned.  

Best wishes for your health and safety,

Randall Airst, CEO, at Exceedant

Learn More > www.exceedant.com > Contact Form or call 1.877.224.3180 EST Name directory or extension

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Copyright 2020 Exceedant

This post is not intended to be legal or investment advice.  No legal or business decision should be based in whole or part on this post.  This is a brief rendition of a few of the issues that occupiers should consider before reaching out to their landlord for restructuring of one or more retail lease provisions.