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SOME DAYS YOU’RE THE DOG . . . SOME DAYS YOU’RE THE HYDRANT: COMMERCIAL LEASING IN THE CURRENT ECONOMY

by Jane M. Myers, Esq.

 

Imagine this: a lawyer receives a call from a surprised landlord who has just received a letter from a prominent, national retail chain — his anchor tenant.  The letter announces that due to tough economic times, the tenant has decided to reduce their rent by 25% — effective immediately.  Have a nice day.

It really happened.

Needless to say the landlord was not pleased.  The sting of the tenant’s presumptuousness faded as the landlord focused on where he would get the money to pay his mortgagee, the insurance premiums, real estate taxes, and service vendors who maintained the building.  I suspect this story will repeat itself many times in the months ahead.

How should a landlord respond in this circumstance?  There are legal and practical business issues that must be considered.

As a legal matter, the landlord can certainly stand on its rights under the lease – if the full rent isn’t paid the landlord can declare a default and evict the tenant.  Under most well-drafted commercial leases, the tenant will still remain liable for the rent for the balance of the lease term (with a credit for rent the landlord collects from a substitute tenant, if any).  The downside for the landlord is that the tenant’s liability to pay rent generally accrues month by month.  Bringing a monthly lawsuit against the tenant is impractical.  For collection efforts to be worthwhile, the landlord will usually choose to wait until the end of the lease term, or at least until a sizeable amount of unpaid rent has accrued.  The risk  is that by the time the landlord sues, the tenant may be out of business and the judgment worthless.

Some leases contain an acceleration clause – which provides that following a default all of the rent for the balance of the lease term will become due and payable in a lump sum (much like a mortgage) – but leases containing such provisions are more the exception than the rule.

In large part, the landlord’s response will come down to a business decision: does it make better sense to keep the “devil you know” but at a reduced rent?  Or … find a new tenant, sue the defaulting tenant and/or its guarantors for any shortfall in the rent and hope to recover on the judgment?

If the landlord decides to keep the defaulting tenant, there are ways to re-structure rent payments so that it’s less onerous for the landlord and doesn’t waive any of the landlord’s rights under the lease.

The parties might agree that a portion of the next 12 months’ rent will be reduced, but not forgiven, and that the difference will be amortized, perhaps interest added, and paid back over the balance of the lease term or some shorter period.  The landlord might also require the tenant to agree to an extension of the lease term in exchange for a rent reduction.  Along the same lines, the landlord could require the tenant to assume responsibilities for its office cleaning or maintenance as a condition of granting the reduction.

If negotiations with the tenant are pursued, the landlord should include in any communications with the tenant a clear disclaimer that the communication is for discussion purposes only and that there won’t be any change in the lease terms without a written lease amendment signed by both of the parties.

A word of caution: if a tenant delivers a check for less than the rent stated in the lease, the landlord should not deposit the check without adding certain specific language to its endorsement.  By doing so, the tenant can’t later claim that the landlord, by cashing the check, consented to the rent reduction for the balance of the lease term.

While it’s understandable that in today’s economy it may seem to landlords that tenants have the upper hand, landlords can, with some creativity, get through these rocky times and not let the tail wag the dog.

 

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Please note that this article is intended only as a general discussion of issues pertaining to leasing and that it should not be taken as creating an attorney-client relationship or as legal advice with respect to any particular person, business or situation.  Circumstances and the applicable legal principles vary and you should consult with an attorney regarding any questions you may have regarding your specific situation.