Retail Landlords Are Offering Pandemic Clauses In New Leases

A belated but necessary adjustment which monetizes the current and possibly future risk assessment reality. JL

Esther Fung reports in the Wall Street Journal:

Because many insurance policies didn’t cover pandemic-related losses, landlords have offered various concessions to attract and retain tenants, including allowing them to defer part of their rent if another shutdown is ordered. Both sides get breathing room: Tenants are able to lower expenses while landlords are still able to collect some money for overhead and their mortgage. “You have to provide the tenant an easy decision. If you make it complicated, you’re not going to get this done.”

Retail landlords are including pandemic language in new leases, a previously rare feature as tenants seek protection after the first government-mandated coronavirus shutdowns in March complicated their negotiations for rent relief.

Because many insurance policies didn’t cover pandemic-related losses, landlords have offered various concessions to attract and retain tenants, including allowing them to defer part of their rent if another shutdown is ordered. Both sides get breathing room: Tenants are able to lower expenses while landlords are still able to collect some money for overhead and their mortgage.

“You have to provide the tenant an easy decision. If you make it complicated, you’re not going to get this done,” said Philippe Lanier, principal at EastBanc, a property developer, owner and manager of more than 45 open-air retail properties in Washington, D.C.’s Georgetown neighborhood.

Mr. Lanier has offered to cut the minimum base rent to 50% if the District of Columbia prohibits tenants from operating their business again because of the coronavirus, and for the tenant to repay the difference in six equal monthly installments on the first day after reopening. He also is open to leases structured on a percentage of the retailer’s sales—“percentage rents”—which would limit tenants’ expenses if their sales decline. He said he had signed amended leases with around 30 retail tenants, with an additional 15 still in the works.

Real-estate brokers said landlords have to contend with a glut of stores and social-distancing measures that have forced many retailers to shrink the number of stores. The trend puts more bargaining power in hands of tenants such as restaurants, apparel retailers, grocery stores and discount stores that are still expanding.

“We have begun to clarify and strengthen some of our force majeure language to more clearly define governmental shutdown, et cetera, which could happen for a multitude of reasons,” said Josh Goldstein, director of real estate and store development at Pet Supplies Plus, referring to “act of God” clauses that allow tenants to terminate leases or reduce rents in extraordinary circumstances.

While the pet industry has been deemed essential and is less affected by the recent store closures, future shutdowns could include such businesses, brokers said.

Pet Supplies Plus also is getting language related to delays on store openings included in new leases. Some stores haven’t been able to open on time because they have been affected by limitations on training new staff and building inspectors working from home, Mr. Goldstein said. The company, based in Livonia, Mich., has more than 500 stores across 34 states and is opening nearly 40 stores this year.

Questions remain about how long Covid-19 will persist, and some businesses are wary about the recent resurgence in infections in California, Texas and Florida. Landlords have extended more relief to tenants such as small local and regional apparel retailers, salons and restaurants that have felt the most pain. They also said they anticipate more tenant bankruptcies.

In downtown Detroit, Bedrock, a development company founded by billionaire Dan Gilbert, offered to waive base rents in return for 7% of gross sales for eligible tenants in its portfolio of 125 restaurants and retailers. It also allowed the use of security deposits for other purposes, including for reopening or reconfiguring of stores. Only one blow-dry salon and an apparel retailer closed permanently during the past few months, Bedrock said.

While landlords said their focus is on sustaining occupancy, they also are adamant that they shouldn’t bear all the risk of another government shutdown. One issue that many wouldn’t budge on is to include pandemics as a force majeure event.

Having such language in a lease hurts owners’ ability to get financing for the property. With courts still far from consensus on whether the pandemic constitutes force majeure, many owners are pushing back against clauses they deem excessive. Instead, they have offered sweeteners including bigger allowances for new and existing tenants to improve their spaces as well as easier access and help for retailers and restaurants looking to place tables on the sidewalks or to provide curbside pickup for goods bought online.

Some, such as retail-property investor and landlord Pacific Retail Capital Partners, are signing more license agreements with tenants, which have shorter terms and are more easily revocable by either party compared with traditional leases.

National tenants are more aggressive in demanding more pandemic language in new leases. “This is an effect of the pandemic that is going to last,” said Steve Plenge, managing principal of Pacific Retail.

Others have rent structures tied to a tenant’s revenue, or more favorable kick-out clauses allowing tenants to vacate the premises if sales don’t reach a certain number or if occupancy at a shopping center falls below a lower threshold.

“We are seeing rents 25% cheaper than pre-Covid 19,” said Corey Bialow, chief executive at Bialow Real Estate LLC, a firm that represents retail tenants. “Some landlords may not make a profit for six to seven years.”