It has all been so abrupt. “Self-quarantine” wasn’t even a phrase three weeks ago, and now April rent is due. Tenants in a strong cash position, but closed for business due to COVID-19, are mulling their options. Tenants closed and fighting for survival fear triggering default clauses. Owners with debt have lender relationships to navigate. And even the tenants who are allowed to operate are scared about the upcoming months.
As the old saying goes, “There are no atheists in a foxhole.” Similarly, there are no ethicists in the midst of a frightening pandemic. Tenants, owners and lenders are of different sizes, capital structures and overall health. Remaining lease term, lease language and the broad mix of property types across retail add to the complexity in these inherently adversarial negotiations as we confront a true worst-case scenario that makes the 2008 recession look mild by comparison.
Both owners and retailers need to be proactive and establish where they stand.
While owners and retailers are scrubbing their leases to understand both their legal obligations and leverage positions, that is only the start. Owners need to first evaluate if the tenant is likely to survive the upcoming months of closure with or without rent relief and second whether the tenant is one they will need or want once we get to the other side of this. While tenants need to quickly study up on the health of the center moving forward, grasp the capital stack behind the center operator and gauge their importance to this owner. All of this homework will not only help the tenant or landlord establish the leverage they may have but also help them understand the flexibility of the group on the other side of the Zoom call.
There is no one-size-fits-all solution.
In this short window we have seen everything – larger owners defer periods of rent to later in the year or into early next year across their portfolio, regardless of requests. We have seen smaller owners offer key tenants an unrequested waiver of rent. We have seen chains continuing to operate yet withholding rent, forcing landlords to make difficult choices. We have seen small tenants close up for good at the time they were offered rent deferrals. The scenarios have been nearly endless, emphasizing that there is no one-size-fits-all solution to this unanticipated mess that even the brightest among us could have crafted a document to solve.
For many larger owners April came too quickly to develop a plan, and a blanket deferral to all tenants who asked became de rigueur: a figurative kick of the can with a month of breathing room to assess how May and June might look across the economy. Others have made the choice to treat each tenant request on a one-off basis. How bad has the tenant been hurt? Will they survive even with a rent deferral or abatement? How much term is remaining on their existing lease? How important are they to the center? How difficult would they be to replace? A few owners have taken this game of three-dimensional Monopoly one step further. These owners see key tenants in their portfolio at risk of survival and are weighing cash infusions, in addition to rent-relief, to help keep these vital tenants afloat.
Chain retailers, similarly unable to catch their breath with the abrupt shock, also were stuck staring at a decision they never anticipated having to make. Many of those with dark stores chose to withhold April rent. Letters were sent with references to co-tenancy clauses or force majeure or maybe just a plea for sympathy, putting the next move on the property owner. And now many owners will put these tenants into default. “Tag, you’re it.”
Landlords and tenants should try and look ahead when working out deals.
In most cases a trip into court is not likely to be a solution for either side. Landlords and tenants will hammer out deals that will come down to the respective leverage of each. A highly profitable store and an owner with a litigious reputation? An anchor tenant with every other tenant attached through co-tenancy? Those are easy.
More common will be deals where the push and pull are more complex. What happens when a recently opened tenant has yet to receive its cash allowance under the lease and the owner is not obligated to pay until they receive the first month of rent? Or what if a tenant with an older lease with archaic use restrictions or poorly written CAM language comes asking for a waiver of rent during a forced closure? The solution in some cases is as simple as stretching the rent deferral over 24 months instead of 6. Unfortunately there won’t be enough simple ones. In any scenario, owners and tenants need to be sure they’ve had a look under the hood, as the decisions they make today will have lasting implications.
In recent downturns or upswings we have often been asked, “what inning?” From our perspective this All Star game pitting tenants and landlords just saw its first pitch, and for some, it was chin music. In the meantime, while everyone stays home for the good of humanity, we should all be asking questions, doing our homework and exchanging information.