The Covid-19 pandemic has shut down most of the economy and retailers are among the businesses that could be closed for months. Even when they reopen, they will have suffered devastating losses of revenue.
For most of these companies, the biggest fixed expense is rent -- which means many will consider asking their landlords for some relief. Before they do that, they should develop a strategy for the upcoming negotiations built on understanding landlords’ needs, limitations and psychology.
Here are some tips for doing just that:
Think Like a Landlord
Recognize the landlord’s perspective. A single company might have many tenants, and providing relief to you could set a bad precedent. The landlord does not want to make individual, one-off judgments about relief as doing so could open up a Pandora’s Box. Every tenant will assert (perhaps truthfully) that its situation is unique. But most landlords won’t want to be expected to sort through the differences from multiple tenants.
That said, you should prepare to disclose financials (subject to a nondisclosure agreement) if your landlord wants to see them. The landlord’s representative must demonstrate to their boss that relief is justified, so holding back information makes your request less credible.
You also should be able to demonstrate that you’ve trimmed costs by cutting expenses, furloughing employees, reducing salaries and stretching out trade vendors. The landlord probably won’t help a tenant that has failed to seek relief from all stakeholders.
Consider the Tenant Mix Around You
Your landlord probably has its own institutional indebtedness, and it may have default covenants triggered when a minimum level of occupancy is not maintained. It also has other tenants that likely have co-tenancy provisions permitting exits from leases if overall occupancy drops below a certain level. If you’re seeking to surrender premises rather than a rent reduction or deferral, you should recognize that the landlord cannot risk cascading tenant losses.
Also, think about how important you are to the landlord. What would be the impact on other tenants if your space became a “dark hole?” How large are you in terms of percentage of aggregate square footage? How large are you in terms of percentage of aggregate square footage in the landlord’s portfolio of properties? How long would it take to replace you as a tenant?
Be Creative in Your Requests
If your financial condition is strong and you have sufficient liquidity, you might be able to agree to a creative but mutually beneficial arrangement with your landlord. Given that many retailers may be unable to pay rent and that the pandemic will inevitably hit the landlord’s cashflow, you could be positioned to obtain a present-value discount for prepaying rent.
If the occupied mall location performs well for you in a normal economy, consider offering the landlord a lease extension in exchange for interim relief. And, if your location is desirable, consider offering to move to another spot as part of a relief package.
Sometimes, a short period of interim relief is easier to achieve with a promise to revisit the situation later. But if you prefer longer-term help, consider a provision enabling the landlord to recapture some of the relief if revenue exceeds projections.
This is an instance where sharing financials, including sales figures pursuant to a nondisclosure agreement, can be helpful if you can provide with additional payments when you exceed projected results. It is preferable to work from a percentage of sales minus returns and allowances in these cases. Working off cashflow or net income invites too much inquiry and verification effort by the landlord.
Besides rent concessions, what can the landlord otherwise provide? Review the lease against your strategic plan and consider paying full rent now (or close to it) in exchange for concessions that should be valuable when business returns to normal. If the tenant mix has changed, can your lease permit the sale of additional products? Can your hours of operation be amended? Are there other restrictions that can be loosened?
And a most-favored-nation clause is worth asking for -- especially if you are told that the landlord’s offer is the best that any other tenant is receiving.
Leverage Your Size (if You Can) and Understand the Moment
If you lease multiple properties with the landlord, assess how many are profitable, marginal or loss-generating. You could offer full rental payments on the historically profitable stores and extensions of those leases in exchange for relief on the other stores.
If you have unprofitable stores in a property that is profitable for most other tenants, you could surrender the underperforming locations in exchange for relief elsewhere. You also could package the surrender of some good locations with those that are underperforming. The landlord might value locations differently than you do.
It’s also important to remember that the property owner does not want to spend on legal fees and that bankruptcy judges are sympathetic to business owners affected by situations out of their control, especially in unprecedented moments. In other words, understand the landlord’s risk when it comes to pushing you into bankruptcy while being careful to not overplay your hand.
Find out if the landlord has a security deposit or letter of credit that can cover rent in the near term. The landlord can tack on additional rent over the remaining life of the lease to replenish the security deposit. A draw on a letter of credit might be much more difficult for a struggling retailer if it will trigger other consequences from an already nervous lender.
You also should review your insurance coverage for force majeure applicability. If there is coverage, what amount should be anticipated -- it’s possible that it can be pledged or assigned to the landlord in exchange for interim relief.
Businesses are in a perilous moment, especially bricks-and-mortar retailers that were struggling even before recent events. They need to be smart and strategic right now, especially if they ask for help from landlords -- who typically hate making rent concessions.
Reprinted with permission from the April 13, 2020, issue of Chain Store Age (CSA). © 2020 EnsembleIQ. All Rights Reserved. Further duplication without permission is prohibited.
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