Retail tenant not paying rent - Covid Force Majeur
Columbus, OH · Member since 2016 · 48 posts · 19 votes
Retail tenant not paying rent - Covid Force Majeur
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Specialist · Lancaster, PA · Member since 2018 · 152 posts · 66 votes
6y@Shay Reddy This a very good topic but a very stressful situation. I and the rest of the people in retail feel your pain. To start, I am going to assume your tenants have the force majeure clause already in their leases. If that is the case, the exact wording of that clause is key! Even though the clause has been around for some time, Covid-19 is very new and it has to be proven in a court of law that the clause actually applies to the pandemic. Not all the clauses are identical and in many states tenants have been losing their cases because either the language was too broad or too narrow. It is also pertinent to remember this clause does not excuse them from paying rent but rather delays their obligation to pay. My question is are they trying to leave or stay? If they are trying to leave, you will have to take them to court for the rent due and the judge will have to rule on the clauses validity. If they are trying to stay, then you have many more options. The bulk of which is in restructuring the leases. There is an infinite number of ways to do this, but I would recommend blending and extending. In other words, give them amnesty from payment while they go dark and tack those missed months onto the back end of their lease. In this way you would in theory maintain the integrity of your NOI. So if you are in a case where you have to sell or refinance, your property value won't be impaired. I stress the fact that only a judge can decide if force majeure applies, not the tenant! As a disclaimer this is not legal advice, and you should consult an attorney. I hope this helps.
10 Replies
- Real Estate Broker · Salt Lake City & Oklahoma City · Member since 2018 · 3k+ posts · 2k+ votes6y
Hey @Shay Reddy, I'm sorry to hear of this situation! My conversations with commercial lenders recently have centered around this idea and the overall implications of force majeure. I would be very diligent to know the commercial landlord tenants laws in your state in regards to the provisions for fore majeure or any event that could be construed as such. This could prove a difficult or improbable hurdle in court if there are government provisions protecting the tenants in such an event.
- Specialist · Lancaster, PA · Member since 2018 · 152 posts · 66 votes6y
@Shay Reddy This a very good topic but a very stressful situation. I and the rest of the people in retail feel your pain. To start, I am going to assume your tenants have the force majeure clause already in their leases. If that is the case, the exact wording of that clause is key! Even though the clause has been around for some time, Covid-19 is very new and it has to be proven in a court of law that the clause actually applies to the pandemic. Not all the clauses are identical and in many states tenants have been losing their cases because either the language was too broad or too narrow. It is also pertinent to remember this clause does not excuse them from paying rent but rather delays their obligation to pay. My question is are they trying to leave or stay? If they are trying to leave, you will have to take them to court for the rent due and the judge will have to rule on the clauses validity. If they are trying to stay, then you have many more options. The bulk of which is in restructuring the leases. There is an infinite number of ways to do this, but I would recommend blending and extending. In other words, give them amnesty from payment while they go dark and tack those missed months onto the back end of their lease. In this way you would in theory maintain the integrity of your NOI. So if you are in a case where you have to sell or refinance, your property value won't be impaired. I stress the fact that only a judge can decide if force majeure applies, not the tenant! As a disclaimer this is not legal advice, and you should consult an attorney. I hope this helps.
- Member since 2018 · 7 posts · 2 votes6y
In CA， there is this covid-19 bill that just passed Sen Judiciary. Basically tenants can walk away from their lease if they choose to
https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201920200SB939
- Member since 2020 · 2 posts · 0 votes6y
@Shay Reddy
blend, extend, amend.
you are in better shape then NYC tenants as the city council is in the process of negating personal guarantees that were part of almost all commercial leases (unconstitutionally, and will probably be challenged).
first off, i doubt pandemic issues are covered in you lease as force majure. so that is probably a dead end. i am sure it will be a highly negotiated clause in future leases, but not now.
the first thing is to do your best to keep the current tenant as i assume your market is not robust with new tenants aggressively seeking space.
there are so many questions here.
First off, how long have they been your tenants, are they good rent payers, did they come to you with the landlord first in order to communicate that there will be difficulty paying rent because they’re not bringing in revenue? or have they avoided you? if they came to you first it is a good sign they are honorable, and that is a start.
if you want to negotiate with them and have them stay in the space, you could decide to 1. Forgive two months of rent and extend their lease another two months on the backend. 2. you could agree to use part of their security towards rent and have that paid back over the next 6 months or year. 3. in return for some mitigation of their obligation you can go back to your original lease and renegotiate different points that you were dissatisfied with when you originally negotiated it.
but before I would do anything, I would ask for their profit and loss statements and balance sheets over the past few years to see if the business was trending down and they’re just looking to receive some benefit due to the pandemic.
If the business was decent, then you need to find out if they have received or applied for any government assistance? (PPP etc) If they have, perhaps you should be getting your rent or at least a piece of it.
This is a complicated issue but communication between both parties is very important and you probably want to talk to an attorney who is done this kind of thing before ie. 2008.
The most important thing right now is consistent communication and the willingness on both parties to see this through to the other side. Martin Luther King once said, “we came over on different ships, but we’re all in the same boat now”
in an ideal situation you and your tenants will work this out because we all have long memories and if they try to screw you and you still have them as tenants in the future, any new situations will probably not be pleasant.
Last thing, naturally, if you have a lender to deal with, all of the above would probably have to go with the lenders approval. Best of luck
- Property Manager · TX · Member since 2019 · 327 posts · 69 votes6y
@Mitch Weiss quick question on: 1. Forgive two months of rent and extend their lease another two months on the backend.
So for example in our case it means we are giving 2 months free rent now (let's say June and July since we are now at the end of May), and if our tenant has 22 months left in current lease we modify it to be 24 months (the last 2 months we just added are still at 100% rent as the other 22 months)?
Thanks.
- Member since 2020 · 2 posts · 0 votes6y
yes. that would be a viable option. the bottom line being that everything in real estate is negotiable.
if the tenant has a viable business model and will be able to carry on post-covid, it is probably in your best interest to give something now for a return later in the term.
- Property Manager · TX · Member since 2019 · 327 posts · 69 votes6y
@Mitch Weiss thank you!
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes6y
"Force majeure"
I have a friend working through a few thousand retail leases right now in their portfolio of ones they manage and ones they own or both.
These letters usually come from the tenants attorney. Most owners and their legal counsels feel it doesn't hold water legally it's just the tenants way of saying we want to work something out. The landlords don't really want to take the tenants to court either.
Now even if a lease doesn't have tenants having to give financials it's open game when they make a request to make request right back. In one current instance tenants given a few months rent relief gave 1 more year added onto existing primary lease term. This way when recovery happens gives more time for primary lease term cash flow versus an option.
Every state now has variations on WHEN they are opening, WHO is allowed to open, and at what TIME and STAGE that can occur. In addition some states have certain businesses deemed essential, non-essential, and high risk and not all states are the same. Arizona for example is very pro-business so when it closed some businesses that were non-essential it wasn't as many because language was very broad on who was essential. Other states almost shut everything down so varies across the board.
Some tenants business is actually UP they are just trying to take advantage of the landlord and others have a true need. For a retail landlord it's almost like someone behind on their mortgage. The question becomes if relief is given is this a temporary problem they recover from or is it only delaying the inevitable?
Now is the time to look at a retail center you own and see if the tenant mix is optimal for today's environment and would it be best if that tenant actually went out and you could replace them with a stronger tenant? You could ask in exchange for rent relief that they show proof of application for PPP loan etc. and have to show you their current business and personal financials. You need to see a true hardship in writing not just in words what they are saying to you.
Some grocery stores are doing great and still asking for rent relief. Landlord responds pay the rent or I am placing you in default and taking to court. The tenant knows the jig is up so pays the rent on time and stays quiet. You have to separate tenants who truly need it from those trying to take advantage with no just cause behind their actions.
Also right now I am seeing some of my clients being approached by medium to large companies expanding trying to buy their medical practices. Because of Covid they are trying to play games with structure of the buyout and stay on agreement and the lease structure they will sign for the real estate. We mention lots of other buyers out there to sell to.
Additionally I am also seeing potential tenants to lease retail spaces trying to offer JUNK terms to landlords to do a lease today but ask for high TI and months of free rent. The lease is horrible and I tell my clients don't agree to that trash. It's better to wait until covid passes and more tenants ram p up expansion plans on regular terms to landlord.
If a retail business was not deemed essential and shut down then most even if remote operating were breaking even at best or losing money. When a soft opening occurs it will likely take many months as social distancing and how many people can be in a space will allow more and more density back to get to full operation levels. So likely over the next 2 to 6 months will see 30%,50%,70%, 90% eventual business efficiency bringing back to close what it was before. This is for those who survive. There are always weak operators, outdated business models, models meant to be online only, models meant for warehouse rent per ft versus retail, etc. that won't make it and that goes for any cycle of the economy and asset class.
No legal advice given
- Kansas City, KS · Member since 2012 · 17 posts · 1 vote6y
One of our tenants with a substantial lease is a corporate dental chain that asked for 3 months free now with lease added 3 months in the end of lease at 8 years. They cited force majeure due to state banning non emergent dental offices forced to close. We held off on agreeing to anything to see when things would open up. One month later this office opens up for emergencies only. So initial claim no longer applies. Where we settled was they get 3 months off now, but every cent off paid back July 1 on top of regular rent amortized over 12 months. Both parties felt this was reasonable.
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