Negotiating Tips

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Put four things in a clause excusing tenant for costs billed long after they were incurred.

Consider four forms of compromise.

For anchors and retail tenants with bargaining clout, the name of the game is drawing as many shoppers to the shopping center as possible. So, they’re apt to insist that the landlord refrain from renting to offices, educational facilities, and other non-retail tenants.

When negotiating a percentage rent lease, don’t be surprised if a retail tenant demands that you exclude bad debts from the formula for calculating gross sales. This is hardly an unreasonable demand. After all, why should the tenant have to pay percentage rent on customer receivables that it can’t collect? But if you’re not careful, giving in to this demand can cost you more than you bargain for.

Getting tenants to leave their space when the lease ends can be a difficult and costly proposition. For one thing, you may have to initiate an eviction suit to get the tenant out. And if you’ve already re-rented the space, holdovers expose you to the risk of being sued by the new tenant for failing to deliver the space on time. All of this makes the holdover rent rate a crucial issue in typical lease negotiations. If a tenant is in a strong bargaining position, you may have to give in on rates.

Any time a property is sold there’s the possibility that the sale will trigger a tax assessment. And that creates the risk of a major real estate tax increase. Who pays for that increase when and if it occurs? Obviously, tenants won’t want to. They try to exclude tax increases resulting from a building sale from the taxes they must pay. While landlords often go along on this point, they may pay a hefty price to the extent it cuts the property’s price value when they eventually sell it.

It’s become abundantly clear that to overcome the economic dislocation caused by COVID-19, landlords must be able to work not only with their tenants but also their lenders. For one thing, you probably can’t offer tenants rent concessions and other relief without your lenders’ consent. You may also need your lenders to cut you some slack on loan repayments while you wrestle with cashflow challenges.

The COVID-19 crisis has forced landlords and tenants around the country to rework their leases. And while the process will continue for months and even years, we’ve reached the point where we can step back and consider the big-picture leasing lessons from the tumultuous months of March, April, and May. Because we know you still have tons of work to do, we’ll keep it brief by boiling down what leasing experts and attorneys steeped in the process say they’ve learned and will carry forward with them in future lease negotiations and renegotiations.

The months of April and May were a nightmare for rent collections. Things may not improve dramatically in June, July, or August. And with evictions temporarily barred in so many jurisdictions, landlords may feel they have no choice but to put up with tenant defaults and negotiate the best possible settlement arrangement.

But hardball may still be an option, at least with tenants that have guarantors. Here’s a strategy you can use to leverage the guarantors’ obligation to collect the unpaid rent without resorting to eviction or litigation.

You’re negotiating a lease with a retail tenant that sells some goods on an installment basis in which customers make a series of payments over a period of time. How do you calculate these sales for purposes of calculating percentage rent? The tenant wants installment sales to count as “gross sales” only after the customer makes the final payment. Should you agree?

“Alternative dispute resolution” (ADR) methods, including arbitration, are often used by commercial real estate owners to resolve differences with tenants out of court. Arbitration is a great solution for parties who are in disagreement about a single, clear-cut issue. Common, but potentially costly, issues like renewals and extensions are well suited to arbitration.