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Should retail leases include clauses covering future shutdowns?
Beginning in March of 2020, most retailers throughout the U.S. were forced to close for at least a few weeks to comply with government shutdown orders due to the pandemic. When it came to retail tenants paying the landlord under such circumstances, it was not clear who was on the hook for what. Now that retailers appreciate the possibility of facing emergency shutdowns, some are asking for shutdown-related stipulations in writing.
Retailers are trying to negotiate terms like rent abatement or rent deferral in case of a new forced closure, according to GlobeSt. This is leading to difficult conversations with landlords who tend to be outright uninterested in discussing tenant rent abatement.
Some landlords who agreed to terms during the first shutdown have been amenable to carrying those over in the case of future forced business closures. The definition of a forced business closure is slippery, too, given the difference observed in 2020 between businesses that could not operate at all and those that could operate in a limited capacity via delivery or e-commerce.
The request for such clauses is not the first rethinking of what goes into a landlord-retail tenant lease since the start of the pandemic.
Early in 2021, as a result of the spike in the number of retail real estate vacancies, retailers negotiated more short-term leases with landlords. Such leases are advantageous to retailers because they require less of a commitment and carry a reduced risk of being stuck in a lease during a downturn in foot traffic (or a forced closure). At the same time, they can allow a landlord to increase rent or kick out a tenant more quickly, possibly just as the retailer is developing a loyal customer base in the location.
Also in March of that year, The Wall Street Journal reported that landlords had begun negotiating with retail tenants to allow the retailers to pay a percentage of their monthly sales in rent rather than a fixed rate. That method of revenue sharing, however, led to conflict over what was considered a sale from a given location and how online sales should be appreciated in the calculation.
Discussion Questions
DISCUSSION QUESTIONS: How important is it that retailers negotiate clauses pertaining to potential future government shutdowns into their leases? Will this become the norm for the industry?
Poll
Loading …BrainTrust
Neil Saunders
Managing Director, GlobalData
Christine Russo
Principal, Retail Creative and Consulting Agency
Retail landlords are sometimes looked upon as the bad guys. In all cases, they want their tenants to win. Getting an abatement of rent is probably the hardest strategy, as most retailers are at a loss as to when they will start again. Landlords like to get dates. The percentage rent clause is one of the most popular: with X percentage of cash sales and a lower percentage of credit sales. This is probably the most used language I have heard during COVID-19.
Shutdowns are an exception, not a rule – and hopefully none of us will see another one in our lifetimes. However landlords need to be flexible in such circumstances: the idea that it’s business as usual for them when everyone else suffers is laughable. However whether they’ll be willing to codify this in lease agreements is another matter. All that said, in my opinion some governments overdid it with lockdowns and we should strongly resist such onerous restrictions in the future.
A shutdown places severe hardships all around, so I”m not sure why the landlord should be left with the financial loss for a future shutdown. Given the past few years, I doubt such a loss would be insurable. Percentage rent (on top of base rent) seems to be the only reasonable method of sharing both burden and success.
It is not uncommon to have clauses in contracts that cover certain issues, disasters, “acts of terrorism,” etc. Often there is a Force Majeure clause to cover such problems. Let’s hope COVID-19 doesn’t happen again, but if it does, I’m sure the new retail leases will have their version of a COVID-19 clause.
There’s what we know, what we know we don’t know, and what we don’t know we don’t know. It would be nice to cover all of the above, but it is just not possible.
Honestly, this really falls back to the insurance industry. It’s not a retailer vs. landlord thing. We are in “new” times with pandemics, endemics, war, riots, insurrections, street crime and organized crime and general disruption to consumer “enjoyment.” Insurance policies have not kept up and need to that way the retailer and landlord aren’t duking it out and are partners.
A cynic might argue it matters little,’cuz if a tenant doesn’t have the money, they’re not gonna’ pay … lease or no. That is, I think, a simplistic view and it’s usually better if events can be anticipated and planned for.
That having been said, there’s a limit to what can be accomplished. How would “percent of sales” clauses helped in 100% shutdowns? And should we really fixate much on events that were unprecedented and hopefully will be rare in the future? The far bigger problem for lessors is tenants that can’t pay for conventional reasons … perhaps they should seek a bigger voice in seeing that the business is well run (and yes, LBO targets, we’re looking at you, too).
Just like retailers, landlords are someone’s customer. The landlord has payments due to the bank. Everyone wants to make landlords out to be the bad guys, but it is in their best interest to see their tenants succeed. Whether it’s a house or a retail outlet, a landlord only makes money if they are getting paid. It’s unfair for a retailer to stop paying rent. If they need to vacate, then they need to vacate. If the retailer stops making payments, then how is the landlord supposed to make their payment? Many landlords gave up huge profits or lost their properties in 2020 and 2021 and 2022 because they weren’t getting paid. Those landlords lost their livelihoods just like many retailers and other businesses. Unfortunately, none of us has a crystal ball. Unforeseen situations happen. We all make commitments knowing things can change. It’s a risk we take as business owners. We shouldn’t expect another business owner to have to pay.
No, no, no. Leases are a promise to pay, per contractual terms, that both parties agree reflects the value of the leased property. It cannot and should not be so encompassing that it is meant to cover any and all exceptions. Instead it should be a reasonable contract between both parties. The Covid shutdown was such a unique event that no-one could foretell its coming, nor prepare for it to happen again. Governmental ordered shutdowns are rare events. The landlord and the lessee should not create an even more complex lease that includes this as well as any other rare events (i.e. moose stampedes, bear destruction, etc.) unless it is more common in that area and for that time.