commercial real estate · Malls · Retail leases · Shopping Center · Uncategorized

“… and the breakpoint shall be likewise abated…” – a thought about rent relief

We have seen the articles today, “Cheesecake Factory and Primark refuse to pay April rent.” Some of this is the media looking for clicks. The landlord-tenant relationship has always, out of necessity, been a symbiotic one. The economic environment at any given time may shift the “advantage” back and forth, but it really does go back and forth. I have found that the best landlords and the best tenants are in it for the long run – not a quick score and then run. (Not saying there are some of those out there.)

Landlords understand what tenants are going through right now. For the most part, they truly would like to help the tenants and, for the long term benefit of both, would do what they can. Hard as it may seem for some tenants to believe (and even more so for the media), some landlords are actively, proactively, considering rent relief. But, like many tenants, some landlords are hamstrung – they have lenders and loan covenants that prevent them from voluntarily making changes.

We have had the tremendous opportunity to work with many of the leading commercial landlords throughout the US (and in other parts of the world – on day-to-day operations, on acquisitions, on long term asset management plans; with administrators, accountants, leasing, development, marketing, management and C-suite. The overwhelming majority of people that we have worked with are great people out to do what is best for the tenants and landlords alike. It’s not a win for the landlord or a win for the tenant. It really has to be win-win.

“…If minimum rent is abated, the breakpoint shall likewise be abated…”

With that in mind, I wanted to remind landlords and tenants alike about a clause in the majority of leases where there is a percentage rent requirement that may help with rent relief considerations. It typically reads, “…If minimum rent is abated, the breakpoint shall likewise be abated…”

A quick synopsis of this language means that if the landlord and tenant agree to a reduced rent, the percentage rent breakpoint is reduced proportionately. If a tenant’s rent is $60,000 per year and they are required to pay 6% of sales over $1,000,000, and landlord and tenant agree to reduce the rent to $45,000 per year, the tenant would then be required to pay 6% of sales over $750,000. If the tenant does better, the landlord picks up some of that lost rent.

That really only helps in a small percentage of leases – ones where the tenant is either in or near percentage rent. If the tenant has no percentage rent requirement or if the tenant was only doing $500,000 in sales for the prior 12 months, reducing the breakpoint to $750,000 is not going to allow the landlord to pick anything up. But if they were on track to exceed $1m pre-coronavirus, the reduction in rent and the reduction in breakpoint could help.  (And, the landlord would still have to deal with restrictions related to its loans.) But it is a possibility.

Ultimately, whether it is a national, regional or local, mom and pop, there is not a landlord out there that does not realize it is in the best interest of all parties for the tenants to survive. This is not a matter of one or the other “winning.” Both parties must win for the others to win as well.

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