Retail Tenants Need Rents Linked to Income

Retail Rent Collections Continue to Increase in September

The pandemic has sparked a number of changes in the commercial real estate industry, and rental structures are no exception. Gary Glick, a partner at Cox, Castle & Nicholson LLPtalked about new lease terms on the table in retail contract negotiations. One move by tenants is to link rent to gross income to protect tenants in the event of further business closings due to COVID-19.

"Many retail tenants try to negotiate provisions in their leases provided that if a COVID-19 restriction is imposed on their business after they have essentially opened all of their premises, they retain the right to close the base rent based on a or pay a percentage of their gross sales, ”Glick told “Landlords want to offer these tenants incentives to stay open despite the restrictions, as maintaining an appropriate mix of tenants is crucial in order to maximize synergies for the mall. In addition, the landlord can still receive a certain rent and 100% of the tenant's share of taxes, insurance and overheads. "

Landlords do not have the opportunity to meet tenants halfway on the matter. For example, Glick recommends restricting deployment. "The landlord can attempt to negotiate a provision that restricts the tenant's right to payment of the basic rent on the basis of gross sales or other types of alternative rent if the gross sales of the tenant do not exceed an agreed percentage due to Covid-19 restrictions is going down, "he says." While this is a fair request, a tenant may face resistance who argues that their sales would have increased much more significantly without the COVID-19 restrictions. "

Instead, landlords can also negotiate rent reductions or deferrals. "If COVID-19 restrictions force a retail tenant to close all or almost all of their premises, the tenant may prefer to reduce the total base rent and the additional rent," says Glick. "If the landlord agrees to such a reduction, he should try to defer and pay the reduced rent for a period of one year, starting a few months after the tenant is again able to use a substantial part of the premises to carry out his business to acquire . ”

Additionally, some tenants may change their rental period instead. "Some parties can agree to extend the term of the lease for periods in which the tenant has the right to reduce or defer the basic rent due to Covid-19 restrictions," says Glick.

It is important to note that these changes in rental payments do not include taxes or insurance in the event of business closures. "The landlord usually requires the tenant to keep paying their share of taxes, insurance and overheads during all closings," says Glick. "All of these points are negotiated on the basis of the relative bargaining power of the parties."


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