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.
- Retail Tenants Are Pre-Negotiating Forced Closures in New Retail Leases – GlobeSt.
- Are short-term leases here to stay? – RetailWire
- Retailers and Landlords Clash Over What Counts as a Sale – Wall Street Journal
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?