Retail Leases Can be Negotiated with Landlords Amid COVID-19: Expert

Date:

Share post:

By Jeff Howell

Social distancing will undoubtably be the term of the year. Unfortunately for the world of retail, it is a very toxic term. If there was a term that is the opposite of foot traffic, I think we have found it. 

This “force majeure” or “Act of God” scenarios is typically not well dealt with in commercial leases. In face, it’s almost 100% the case that retail socage users have nothing in their lease that addresses what happens in the event of a pandemic. 

With many retail tenants just holding on prior to this coronavirus, the fall out will no doubt be like nothing we have seen before. 

But ironically there is some safety in these numbers. It is not in any landlord’s best interests to shut the doors and start the efforts to find replacement tenants. People are not even allowed to leave their homes — there are certainly no corporate retail estate executives conducting space tours. The Black Swan event is upon us and for now there is very little economic activity, particularly in the retail and real estate worlds. 

PHOTO: CADILLAC FAIRVIEW

Municipalities and banks need their realty taxes and mortgage payments and those ultimately come through the commercial space user, as small business is still the engine for economies.

So what is the win-win here? Finding a reasonable period of time in which the tenant has immediate rent relief in exchange for a back-end loaded lease. This could come in the form of increased rental rates after a grace period, or it could simply come in the form of a longer commitment.

If a landlord plays hardball, an insolvency will not benefit them, as the market is not dynamic and fluid – not many tenants will be looking to relocate in this market. Robust leasing activity will be nonexistent, so landlords will be incentivized to work with the dance partners they already have – not to find new ones.

There are no set rules on how these negotiations go. It really comes down to creditworthiness and long-term viability of the tenant (and the landlord), and what concessions the landlord can achieve with the powers that they answer to (municipalities and lenders).

CF PACIFIC CENTRE, VANCOUVER. PHOTOS: CADILLAC FAIRVIEW

In places like New York (and to a lesser extent New Jersey), the eviction process is typically a full year (and that’s when the courts are not overwhelmed with what will certainly be years worth of litigation). For this reason, New York-based leases typically have a Good Guy clause in which the tenant agrees to walk away from the lease with a minor penalty just so the landlord can get the space back quickly. 

So what is the silver bullet here?

As governments scramble to provide relief packages, the first step a landlord and tenant can take is to evaluate when the quarantine period will lapse and the new normal will start (whatever that looks like). The agreed upon period will essentially be full shut down mode with little if any sales (most leases do not factor in online sales). Rent should be fully abated during this period if possible. Then there will be a recovery mode in which ideally the taxes, maintenance and insurance is covered by the tenant, but not base rent or minimum rent due.

VAUGHAN MILLS. PHOTO: IVANHOE CAMBRIDGE

In exchange for assistance from the landlord to weather the storm, an extension on the length of term would add long term value to the property. There can also be discussion around a rent escalator, or an immediate percentage rent clause, enabling the landlord to participate in the rebound of sales for a period of time. If the lease is already a percentage lease, then the natural breakpoint for that can be lowered, or the percentage could be increased for the balance of the lease.

These negotiation points are not standard – there are no hard and fast rules, especially in this circumstance in which Twitter seems to be breaking a new story hourly. The only certainty for now seems to be that grocery stores are the only retailer really thriving as people are panic purchasing. That is certainly a silver lining for the grocery-led properties.

In the meantime tenants should be investigating their leases to see if there is any “force majeure” specific wording in their leases and they should check their business interruption insurance to see if they have a policy that covers pandemic scenarios.

Jeff Howell is the Founder of Lease Ref, an online commercial lease review company that specializes in assisting retail tenants with their commercial lease matters. Jeff has been working with retail tenants for twenty years. For further information please contact Jeff at jeff@leaseref.com or at www.leaseref.com.

1 COMMENT

  1. […] Mach 28, 2020 April 1, 2020, will undoubtedly be a historic commercial rent payment deadline, as all non-essential businesses have been shut down by the Covid-19 pandemic and the Ontario state of emergency.  “Social distancing” has become the new norm. Commercial tenants have shut their doors and very few tenants have adequate cash flow reserves to fund their rent obligations. The vast majority of commercial leases do not adequately address what should occur in the event of a social distancing pandemic such as Covid-19 (an “Act of God/Force Majeure) and do not provide rent relief under such circumstances.  If landlords take the hard-line, declare an event of default and enforce their remedies, this will likely result in a vacant unit until a reasonable period after the pandemic (including any “second wave”) is eradicated. This is unprecedented and certainly not “business as usual”. Commercial landlords and tenants (including their real estate advisors and lawyers) need to communicate with each other and think creatively to find a mutual solution.  The following article addresses some “blend and extend” strategies that can be used to provide temporary rent relief to tenants and also provide landlords with extended lease value: https://retail-insider.com/retail-insider/2020/3/retail-leases-can-be-negotiated-with-landlords-… […]

LEAVE A REPLY

Please enter your comment!
Please enter your name here

More From Retail Insider

Iconic Flo’s Diner in Toronto’s Yorkville Forced to Close After 33 Years Amid Landlord Dispute 

Retail Insider interviewed Flo’s co-owner who discusses the “heart wrenching” situation where he is being forced to close his business that began on Bellair Street in 1991.

Anatomy of a Leader: Teresa Spinelli, Owner of Alberta-Based Italian Centre Shop Ltd.

Spinelli discusses her leadership of the popular retailer which has expanded over the years, describing how she struggled to run the company at first and grew to love it.

Upscale Canadian Fashion Brand SMYTHE Expands with New Standalone Calgary Store [Interview/Photos]

It's the second store location for the Toronto-based brand, which is seeing success with its exclusive womenswear collections.

Toronto’s CF Sherway Gardens Hits Sales Milestone with Exciting Retail Growth and Future Plans [Interview]

The shopping centre is adding new retailers as sales per square foot hit an all-time high, with plans to re-tenant Nordstorm as foot traffic grows following Eataly's opening in the mall a few months ago.

ECS Coffee Opens Canada’s Largest Coffee and Espresso Equipment Gear Showroom and Retail Space in Toronto [Interview]

The new Etobicoke location is unique to Canada if not North America, according to its founder, with coffee roasting, equipment showroom, over 500 varieties of coffee, Youtube studio and various in-store experiences. He has plans to expand the concept nationally.

New Loblaws City Market Opens in Vancouver’s ‘The Post’ Building, Adding Grocery Competition to the Downtown Core [Podcast]

Craig and Lee discuss the opening of a new Loblaws City Market in downtown Vancouver's renovated Post building, and they explore its potential impact on local grocery shopping.

Loblaw Announces $2 Billion Investment in Canada for 2024 with Dozens of New Stores and 7,500 New Jobs [Expert Comment]

The retail behemoth will be growing substantially this year, following backlash over profits as inflation continues to impact Canadians.

Dubai-Based Asian Street Food Concept ‘Wok Boyz’ Expands into Canada with Plans for Multiple Locations [Interview]

The company's founder says the popular concept, with personalized meals, has an opportunity to grow substantially with its high-quality ingredients and theatrical flare, complete with fiery customer-facing woks.

Calgary Surge Basketball Team Launches Innovative Pop-Up at CF Chinook Centre to Boost Community Engagement [Interview]

The retail activation, which opened this month, is resulting in heavier foot traffic in a quieter part of the mall.

Upscale Pusateri’s Fine Foods to Close Yorkville Grocery Store in Toronto After 20 Years

The 5,500 square foot store opened to much fanfare in 2003, with valet parking, private chefs and pricey goods. 

Loblaw and Walmart Could be Forced to Adhere to Grocery Code of Conduct with Legislation [Op-Ed]

Sylvain Charlebois says that it's rare for all of Canada's political parties to agree, signalling a shift that could force grocers to comply amid record inflation.

Factory Direct to Shut All 14 Stores Amid Bankruptcy, Liquidation to Begin Saturday

The company, founded in 1995, is one of Canada’s largest privately owned discount retailers which struggled with declining sales and increasing costs following the pandemic.

What to Expect for the Canadian Retail and Hospitality Sectors in 2024 [Video Interview]

Michael Kehoe provides an expansive overview of what's expected for Canada's retail industry in 2024, and how the commercial real estate industry is becoming more dynamic than ever.

Anatomy of a Leader: David Lui, CEO of Kit and Ace and Co-Founder of Unity Brands

Lui has an extensive background in retail with over 30 years of experience and is known for his award-winning brand transformations, e-commerce and digital knowledge along with his passion for scaling businesses.

Robotic Retail Gaining Traction in Canada, But Some Consumers are Being Left Behind [Op-Ed]

Automated retailers without in-store staff are opening across Canada, such as Aisle 24, RC Coffee and PizzaForno -- but consumers without smart phones, credit cards, or with vision issues may not be able to access these retailers says a researcher.

Oakridge Park Announces 1st Luxury Retailers, Attracting Top Brands to Vancouver [Podcast]

Craig and Lee discuss the latest Oakridge Park announcement, highlighting the addition of luxury and upper contemporary brands to Vancouver's retail landscape and how it will impact downtown.

Interview on What it Takes: Lee Valley Tools Named Top Retailer in Ontario for Customer Service

The company's COO Jason Tasse discusses the retailer's secret sauce for having an engaged workforce, while also discussing plans to expand with more stores and retail concepts.

Survey Data Shows Canadians will Prioritize Romance Over Budget Cuts This Valentine’s Day [Interviews]

David Litwin of Moneris notes that Valentine's is an interesting bellwether for what businesses might expect from consumers for the rest of the year.

Anine Bing to Open 2nd Canadian Storefront at the Four Seasons Hotel in Toronto 

The US-based women’s fashion brand recently opened its first Canadian store at Yorkdale, and will open its second location in a downtown luxury hotel. 

Retail Burnout Crisis in Canada: The Call for Empathetic Leadership and Proactive Solutions Amid Operational Strains [Feature]

It's never been more difficult to work in retail, with store managers burning out amid lower staffing numbers, increased task and store robberies. Two industry experts discuss the situation.

RECENT RETAIL INSIDER VIDEOS

Advertisment

Subscribe to the Newsletter

Subscribe

* indicates required

RECENT articles

Iconic Flo’s Diner in Toronto’s Yorkville Forced to Close After 33 Years Amid Landlord Dispute 

Retail Insider interviewed Flo’s co-owner who discusses the “heart wrenching” situation where he is being forced to close his business that began on Bellair Street in 1991.

Anatomy of a Leader: Teresa Spinelli, Owner of Alberta-Based Italian Centre Shop Ltd.

Spinelli discusses her leadership of the popular retailer which has expanded over the years, describing how she struggled to run the company at first and grew to love it.

Upscale Canadian Fashion Brand SMYTHE Expands with New Standalone Calgary Store [Interview/Photos]

It's the second store location for the Toronto-based brand, which is seeing success with its exclusive womenswear collections.

Toronto’s CF Sherway Gardens Hits Sales Milestone with Exciting Retail Growth and Future Plans [Interview]

The shopping centre is adding new retailers as sales per square foot hit an all-time high, with plans to re-tenant Nordstorm as foot traffic grows following Eataly's opening in the mall a few months ago.

ECS Coffee Opens Canada’s Largest Coffee and Espresso Equipment Gear Showroom and Retail Space in Toronto [Interview]

The new Etobicoke location is unique to Canada if not North America, according to its founder, with coffee roasting, equipment showroom, over 500 varieties of coffee, Youtube studio and various in-store experiences. He has plans to expand the concept nationally.

New Loblaws City Market Opens in Vancouver’s ‘The Post’ Building, Adding Grocery Competition to the Downtown Core [Podcast]

Craig and Lee discuss the opening of a new Loblaws City Market in downtown Vancouver's renovated Post building, and they explore its potential impact on local grocery shopping.

Loblaw Announces $2 Billion Investment in Canada for 2024 with Dozens of New Stores and 7,500 New Jobs [Expert Comment]

The retail behemoth will be growing substantially this year, following backlash over profits as inflation continues to impact Canadians.

Dubai-Based Asian Street Food Concept ‘Wok Boyz’ Expands into Canada with Plans for Multiple Locations [Interview]

The company's founder says the popular concept, with personalized meals, has an opportunity to grow substantially with its high-quality ingredients and theatrical flare, complete with fiery customer-facing woks.

Calgary Surge Basketball Team Launches Innovative Pop-Up at CF Chinook Centre to Boost Community Engagement [Interview]

The retail activation, which opened this month, is resulting in heavier foot traffic in a quieter part of the mall.

Upscale Pusateri’s Fine Foods to Close Yorkville Grocery Store in Toronto After 20 Years

The 5,500 square foot store opened to much fanfare in 2003, with valet parking, private chefs and pricey goods. 

Loblaw and Walmart Could be Forced to Adhere to Grocery Code of Conduct with Legislation [Op-Ed]

Sylvain Charlebois says that it's rare for all of Canada's political parties to agree, signalling a shift that could force grocers to comply amid record inflation.

Factory Direct to Shut All 14 Stores Amid Bankruptcy, Liquidation to Begin Saturday

The company, founded in 1995, is one of Canada’s largest privately owned discount retailers which struggled with declining sales and increasing costs following the pandemic.

What to Expect for the Canadian Retail and Hospitality Sectors in 2024 [Video Interview]

Michael Kehoe provides an expansive overview of what's expected for Canada's retail industry in 2024, and how the commercial real estate industry is becoming more dynamic than ever.

Anatomy of a Leader: David Lui, CEO of Kit and Ace and Co-Founder of Unity Brands

Lui has an extensive background in retail with over 30 years of experience and is known for his award-winning brand transformations, e-commerce and digital knowledge along with his passion for scaling businesses.

Robotic Retail Gaining Traction in Canada, But Some Consumers are Being Left Behind [Op-Ed]

Automated retailers without in-store staff are opening across Canada, such as Aisle 24, RC Coffee and PizzaForno -- but consumers without smart phones, credit cards, or with vision issues may not be able to access these retailers says a researcher.

Oakridge Park Announces 1st Luxury Retailers, Attracting Top Brands to Vancouver [Podcast]

Craig and Lee discuss the latest Oakridge Park announcement, highlighting the addition of luxury and upper contemporary brands to Vancouver's retail landscape and how it will impact downtown.

Interview on What it Takes: Lee Valley Tools Named Top Retailer in Ontario for Customer Service

The company's COO Jason Tasse discusses the retailer's secret sauce for having an engaged workforce, while also discussing plans to expand with more stores and retail concepts.

Survey Data Shows Canadians will Prioritize Romance Over Budget Cuts This Valentine’s Day [Interviews]

David Litwin of Moneris notes that Valentine's is an interesting bellwether for what businesses might expect from consumers for the rest of the year.

Anine Bing to Open 2nd Canadian Storefront at the Four Seasons Hotel in Toronto 

The US-based women’s fashion brand recently opened its first Canadian store at Yorkdale, and will open its second location in a downtown luxury hotel. 

Retail Burnout Crisis in Canada: The Call for Empathetic Leadership and Proactive Solutions Amid Operational Strains [Feature]

It's never been more difficult to work in retail, with store managers burning out amid lower staffing numbers, increased task and store robberies. Two industry experts discuss the situation.