What should tenants be doing with existing leases or renewals now? Real estate expenses are one of the largest components of cost structure in most companies today. Here are important considerations to help develop a cohesive strategy for cash preservation while maintaining your leased premises:
Review Lease Terms and Conditions
Rent – Identify key rent components and amounts. Is rent NNN or gross? When is the next scheduled escalation and amount?
Lease Expiration Date & Options – When does the lease expire? What is the renewal option notice date? Is there a termination right? Is there a contraction right or “give back” option? What is economic impact of each?
Default – What terms of default exist and what are the landlord’s remedies in the event of a lease default? Is there a right to cure and what is the timeframe? Defaulting on the lease could result in tenants paying late penalties, interest, damages or even eviction.
Guarantees – What entity is liable in the event of default? Tenants should address the length of tenancy and past instances of default, if any.
Security Deposit – Is the landlord holding a cash security deposit? Is there a Letter of Credit? What is the amount? What happens if the Letter of Credit is not extended?
Operating Expenses & Real Estate Taxes – Are these included as part of the gross rent and subject to a base year escalation? Are these passed through to you on a NNN lease? Is it likely there will be an increase during the next true-up? Be sure to obtain the landlord’s true-up statement and all backup detail.
Insurance – What coverages are required of the tenant? Landlord? Seek the advice of your insurance carrier to determine applicability to the COVID-19 pandemic.
Force Majeure – Does an “Act of God” clause reduce or eliminate either party’s performance under the lease? It is important to note Force Majeure clauses differ from lease to lease: they need to be reviewed in detail. Seek the advice of an attorney.
Collaborate with Your Landlord
Scrutinizing leases prior to approaching the landlord for rent relief will enable tenants to devise scenarios to give a landlord options. Tenants and landlords will need to work collaboratively in order achieve a mutually agreeable solution. Landlords are empathetic to tenants’ needs, but they must continue to receive rent and pay their mortgages, while tenants need to conserve cash in order to meet the needs of the business. Landlords are often open to working with tenant’s real estate advisors in order to expedite solutions.
It is always recommended to consult an attorney on legal covenants within the lease. Using the foregoing as guide should allow tenants and landlord to come to reasonable terms during this difficult time.
Beacon Street Realty Advisors is available to assist you. Please call Mitch Jacoby @ 978.476.1223 or connect via LinkedIn to arrange for a confidential discussion about your situation.