It is the call that Commercial Landlords dread. But, it is the call received frequently in the current economy. A Tenant is downsizing, experiencing cash flow problems or both. The Tenant needs a reduction in space or a current or permanent rent reduction in order to stay afloat. Each Tenant in such position carries the implicit (or sometimes explicit) threat to the Landlord that it will go out of business or move elsewhere. Space is now plentiful and relatively inexpensive. In many instances, the Landlord does not stand alone to deal with the Tenant. Often, standing behind the Landlord is a Lender which has financed the Landlord’s building in reliance upon cash flow to be generated by the Tenant and others. The Tenant and particularly, the Landlord, must be cognizant of the Landlord’s loan covenants. A potential breach of such covenants caused by any relief granted to Tenant, will in all likelihood compel the Lender’s active participation in negotiations. As a preliminary step and essential tool for negotiations, a well prepared Tenant must be ready to present detailed financial statements, cash flow projections and other documentation to make its case to the Landlord. Such documents should include reliable data showing a specific hardship and a business plan for returning to profitability. An astute Lender and Landlord will accept nothing less. The Landlord and Lender should scrutinize such material presented by the Tenant to determine the type of rental abatement or space reduction the Tenant might realistically need to continue conducting its business. If the statements indicate that the Tenant is spiraling toward bankruptcy, then the Landlord and Lender may wish for the Tenant to vacate its space, and the negotiations will shift to lease termination.
If the Tenant can make a compelling case for continuing the Lease with amended terms, there are provisions the Tenant may offer and the Landlord should consider demanding which make the overall transaction more palatable to the Landlord and its Lender. These terms include the following:
- a guaranty from a financially reliable source;
- waivers of rights of first refusal or options to expand;
- an extension of the lease term coupled with a forfeiture of early termination rights;
- waiver of co-tenancy clauses;
- waiver of exclusive-use clauses or other provisions which limit the Landlord from leasing to certain tenants;
- insertion of relocation clauses;
- transfer of responsibility for certain maintenance from Landlord to Tenant;
- with respect to retail leases, (i) waiver or elimination of the “kick-out” clause, or (ii) increase in potential percentage rent to offset a reduction in fixed rent;
- waiver of existing Landlord defaults;
- backend or escalating payments of abated rents; or
- in exchange for requested reductions in CAM charges in leases which have escalation provisions, a new lower base year.
The Landlord may have relief, other than rent reduction which can be offered to the Tenant. Such relief includes:
- in the case of a triple net lease, a credit toward operating expenses, an offer to contest the real estate taxes or a temporary abatement of common area charges;
- a reduction or deferral of CAM charges;
- an easing of the lease terms with respect to subletting.
By creative, thoughtful and flexible negotiation, the Landlord, Lender and Tenant can work together to navigate the current economic downturn. A well negotiated lease modification can position all parties to benefit when the economy improves.