Expert Insight: How Retailers Should Communicate with Landlords Amid COVID-19
Chain store retailers are a diverse group and cross product lines – food, furniture, apparel, eyewear, entertainment, in line, end cap and interior mall access and direct access. In all cases center owners need retailers to be open to generate revenue for the center and to attract consumers, and for them to continue business operations. In a pandemic the chain is broken.
Retailers need to emphasize that and explain in direct terms the disruptive and material impact state and local “shelter in place” proclamations are having on the unwritten partnership that exists between owner and retailer. With national retailers closing in response to governmental orders and – in some cases – because owners are closing their centers for the safety of employees and consumers, every chain retailer needs to proactively communicate with their landlords and stake their position that everyone in the chain needs to participate in successfully repairing the break in the chain and planning for when a “new normal” is established.
The problems for both property owners and tenants is that no one can predict when the new normal will surface and what it will look like (a hockey stick bounce back or a “U” curve). Nevertheless, everyone in the industry knows that tenants will be asking for one or more of the following:
• Full rent abatement for 60 days, tack on months at back end of the term;
• Rent waivers for 60 days (and, in some cases partial rent waivers afterwards in certain select lines), with repayment over time, beginning after a few months of normalization;
• For triple nets (where retailer is paying utilities and other costs direct), and operations are being maintained (takeout food operators), offer to pay an agreed-upon fraction (33%) of base rent; and
• Agreement on reduced hours and operating covenants. The goal is to avoid a declared default, as that changes the leverage. A retailer may have the ability to leverage rent and eviction moratorium orders issued in its local municipality. Astute center owners will recognize that the cost of replacement of any retailer in this environment and the inability to access any court for relief is a higher cost than working cooperatively with the existing tenant.
What works best? In most cases, a chain retailer does not have personal relationships with property owners, and they are diverse - both geographically and financially. Well written – but short - letters outlining the devastating impact this epidemic is having, with concrete examples on sales, employees, and supply chain, work.
Demands and unilateral declarations of legal concepts such as force majeure generally do not work unless there are specific facts to support (like the center owner closing the center). Be sensitive to the fact that you are part of the retail chain, and center owners have debt service, employees and operations that they need to maintain. Follow up with a direct call, and listen and work something out. Have the call at the right senior level.
Also, know the tenant mix of your center, know who has closed, have your financial data of comparable sales at the ready. Some landlords are still in denial that they do not have to offer any of the above. That is changing as they see the economic toll on the consumer economy, and in the majority of cases center owners will recognize that their future success depends on your future success.
Lastly, retailers should check their insurance coverages and file claims with their insurance carriers. This is too large and broadly impactful an event for the insurance industry to not have to share in the cost to restore the losses incurred by the retail industry. Lawsuits are already being filed by some retailers against their insurance carriers. While it will not provide immediate relief, there is a general consensus that some judicial and state regulatory response will materialize over the long run.
Think long term and be persistent short term.
Manuel Fishman is a real estate lawyer shareholder at the Buchalter law firm in San Francisco, specializing in retail, industrial and office leasing. He is an active speaker and author on a variety of real estate topics, including office and shopping center leasing matters.