The recent months have required landlords to become active investors. Seemingly gone are the days when net lease landlords could sign long-term leases with credit tenants and expect to own the property for the duration of the lease without receiving a letter or call from the tenant asking for a rent reduction or deferral.
We understand that even experienced net lease landlords lack the capacity to negotiate against $5 billion companies alone, so we prepared a step-by-step guide for rent reduction or deferral requests below.
Step 1 – Review the lease
The first step upon receipt of a rent reduction or deferral request is to review the lease. We suggest having your lease abstracted, because the lease is a key point of leverage in negotiations for tenants and landlords alike. In short, you should be keenly aware of what your lease entails!
The key is to look for applicable clauses, such as government mandates, force majeure, uneconomic performance, or landlord’s prohibiting access to the premise and quiet enjoyment.
Lease expiration date, current rent level, rent increases, and renewal and termination options are also vital to understand.
Step 2 – Call your tenant
There are rarely cases in which the outright rejection of an offer is the best-case scenario. We enter into every situation with the goal of coming to an amicable and mutually beneficial outcome for both the landlord and tenant.
An introductory call helps strengthen and build a personal relationship with the other side. Ultimately, the landlord-tenant relationship will continue for an extended period of time, and it is important to maintain healthy relationships when possible.
This call should be used to gain a better understanding of the reasoning behind the request. Good questions to ask are: Is this request site specific or company-wide? Is the request based on creditor pressure to reduce expenses? Are sales declining across the company or at this location?
Step 3 – Request information and written offer from tenant
We have a set list of items we request following the introductory call, which are highlighted below. We also outline our understanding of their request, and its surrounding circumstances. This prevents any misunderstandings down the road.
- Location level sales reports for preceding 5 years
- Corporate financials for preceding 3 years (if private)
- Capital expenditure ledger for preceding 5 years
- As-builts and site plan
- Certificates of insurance
- Any other items which are applicable to the property and not in the landlord’s possession
The tenant’s response to these items is a large component of our negotiation tone going forward. Failure to accommodate all of these items is a gesture of bad faith on the tenant’s behalf. Some of these items are more sensitive than others, and a tenant may be unlikely to be forthcoming. This especially applies to financials.
Step 4 – Review the tenant’s situation
We carefully review the information provided by the tenant. High capital expenditures indicate their commitment to the location. Low capital expenditures may indicate financial struggles or lack of commitment to the property. Insurance certificates should comply with a tenant’s lease obligations.
Financials are critical. Site level financials provide good insight into whether the location is viable for the tenant, and corporate level financials allow for landlords to determine a tenant’s ability to continue as a going concern.
Step 5 – Review the situation and market data around property
Every property is unique. Questions we ask ourselves and obtain the answers to include: Is the rental rate far above market? Far below? Is this site plan attractive to another tenant should this tenant fail or vacate the premise? What are the traffic counts and ingress and egress points? Is the surrounding area growing or declining? Are there other strong tenants who are not in the immediate area surrounding this property (5 miles)?
The answers to these questions determine the overall strategy for the property going forward, and how hard of a negotiating line you may take with the tenant.
Step 6 – Call other landlords of your tenant
This applies especially to landlords with only one location with the tenant. It is imperative that you let others know what is happening at your site and find out how they are handling the situation if it applies to them. This may also streamline the negotiation process if you find out what has worked in other locations.
Step 7 – Review the lease again
This time around we review the lease for clauses that are concerning based on our discoveries throughout the process. Areas of concern may be addressed by adding lease clauses, changing language, or removing clauses in exchange for the rent request.
Step 8 – Accept, counter, or reject the tenant’s offer
Following the procurement of the necessary background information you should be prepared to develop a negotiation strategy, and present a counteroffer, acceptance, or rejection of the tenant’s deferral or rent reduction offer.
This process is by no means simple, but sophisticated landlords will see a tenant’s request for a rent reduction or deferral as an opportunity to strengthen their position at the property. The lease is law, and as a landlord you have the ability to reject the tenant’s offer and hold them to the terms they agreed to in the lease if you are not able to come to a mutually beneficial agreement.
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Hopefully this outline helps you along your ownership journey!
We offer multiple ways to benefit from our expertise if you have questions or are in need of help. We offer service plans that correspond to the needs of landlords throughout the ownership life cycle, and for a period of time, our Senior Director of Asset Management, Noah Shaffer, is answering submitted questions.