Are retailers and landlords destined to head to court over rents?
Many retailers and restaurants, particularly those that were struggling before the coronavirus pandemic hit the U.S., are in dire straits as the virus continues to spread across the nation. The fallout is affecting almost every aspect of society and the cost to the American economy continues to grow as medical authorities and government officials seek ways to mitigate the damage. Despite valiant attempts from all sectors, the business news is not good.
A new report from Moody’s Investors Service concludes that the current situation is more dire than the financial crisis that hit the U.S. in 2007 and 2008. The credit ratings service has revised its outlook for the broad retailing industry downward, predicting overall sales ranging from flat to down three percent for the year and for operating income to fall between two percent and five percent.
“Even prior to the COVID-19 outbreak, retailers were already fighting hard to shore up market share and margins. The one bright spot for the industry had been a strong consumer backed by a healthy US economy and low unemployment — strengths that have evaporated overnight with the onslaught of the coronavirus pandemic,” write the report’s authors.
Store closures are expected to have a dramatic ripple effect across the economy.
“Temporary store closures due to government-mandated stay at home orders will lead to lost sales and inventory markdowns, which will weigh heavily on topline and profitability,” according to Moody’s. “Retailers with closed stores have fixed costs such as rent. This cost cannot simply be curtailed just because the store is closed, which will only compound losses, although we expect many retailers to seek relief by renegotiating leases with their landlords.”
According to a Bloomberg report, retailers and restaurants including Mattress Firm and Subway are asking landlords to amend leases to reflect the new coronavirus reality. Some companies may attempt to invoke “force majeure” clauses in their contracts to delay or reduce payments due to an unforeseen event.
“The court system is just going to get flooded with a million of these disputes between tenants and landlords,” Vince Tibone, an analyst at Green Street Advisors, told Bloomberg. “If the government doesn’t step in in any form or fashion, it could get ugly. They need to respond quickly.”
Neither recently passed legislation nor the new measures being voted on by the Senate today specifically address rent payments.
- Going negative as coronavirus-related disruptions set to batter earnings – Moody’s Investors Service
- Retailers plan to stop paying rent to offset virus-related closures – Bloomberg/Crain’s Chicago Business
- White House, Senate reach historic $2 trillion stimulus deal amid growing coronavirus fears – CNN
DISCUSSION QUESTIONS: What should retailers that have had to close stores due to the coronavirus be doing now? Do you expect to see a large number of legal disputes over rents between retailers, landlords and insurance companies? Should the Federal or state governments intervene?