Lamy Group: Rents coming due pose critical test for landlords and tenants
With most stores closed throughout much of the United States to help stem the spread of COVID-19, retail landlords are being inundated with requests for rent relief.
That’s according to The Lamy Group, which noted that, as the first week of April approaches, rents are due for the first time during the crisis, which will mark the start of a critical test for landlords and retail tenants alike.
“In many cases, the monthly minimum rent is directly transferred from the tenants' bank accounts to landlords automatically, which will give early indication for how tenants are responding," said Kenneth S. Lamy, founder, president and CEO of The Lamy Group, an international financial management consulting firm specializing in retail and commercial real estate. "It is anybody's guess as to how many rents will be paid in full and on time, because tenants are receiving little to no revenue from reduced operating hours or establishments entirely shuttered. Our landlord clients are starting to address requests to abate or defer rent, given that tenants are struggling to fulfill their obligations."
The Lamy Group has evaluated rent relief for retail landlords for decades, but this is the largest number of tenant requests it has seen coming in such a short period, even including the 2008 economic downturn. The situation will deteriorate further if stores and restaurants remain closed through much of April, greatly affecting their ability to pay their April and May rents.
"We are carefully studying for lingering effects arising from this new reality, how they may present themselves and additional impacts they may present going forward," Lamy said.
Many retail and restaurant tenants believe that rents are automatically forgiven for the periods in which shopping center owners closed the shopping center at will, or when government entities require nonessential stores to close temporarily or restaurants to reduce service to takeout and delivery. However, most lease provisions generally do not relieve a tenant of rent obligations merely because the store was compelled to close, according to Lamy.
Nearly every retail lease has a provision called force majeure (also known as an act of God or unanticipated event clause), which allows for some contractual nonmonetary obligations to be excused if an event such as hurricane damage or, in this case, government restrictions make it impossible for the landlord and tenant to perform their respective obligations under the lease. In most cases, force majeure provisions do not necessarily address rent relief.
Howard F. Kline, a Nevada- and Southern California-based broker and lawyer who specializes in retail leases, suggested that consideration of rent relief is often a business decision. "Why should landlords and retail tenants consider rent relief even when there is no legal obligation for the landlord to provide rent relief?" Kline asked.
"Determining which retail tenants should receive assistance should be based on solid data that demonstrate the store's financial health prior to the crisis and how the crisis is affecting the tenant's dwindling cash reserves to pay rent," Lamy said. "Knowing what other assistance may be available from government sources can help landlords determine the appropriate relief: rent forgiveness, abatement or deferment of rent until a specified future date within the tenant's lease term after the tenant has recovered from the current crisis."
Before acting precipitously, landlords should analyze the overall financial situation of each retail tenant in the specific location covered by the lease, Lamy advised. This will reveal whether the retail tenant was already in financial distress, in which case relief will only forestall the tenant's ability to remain in business.
The Lamy Group's proven retail methodology provides its landlord clients with a financial process to discover, analyze and confirm a retail tenant's status in order to make an informed, fair decision. For stores that are part of a larger chain, the methodology and financial process is applied to the parent company.