As tough economic times continue, landlords have begun to feel the pain of many of their tenants. The landlord’s struggle to replace tenants is much more difficult in today’s market, and causes many landlords to get creative with tenant retention.
When the landlord first meets with the tenant, the landlord must evaluate the situation and decide whether the landlord is better off with or without the tenant. In particular, the landlord must consider: 1) transactional costs such as broker fees; 2) increased costs for common ground areas as there are less tenants; as well as 3) legal fees for the recovery of past rent under a breach of contract or other similar claim. Regardless of how the landlord evaluates the situation, a loss in revenue is always an increase in costs.
Recently, landlords have been willing to make what is commonly referred to as “rent concessions.” These concessions allow the tenant to remain in the property at a reduced rate that is best for each party. As is typically the case, there are multiple ways to structure rent concessions.
The first rent concession is known as the blend-ex-tend, in which the lease is extended at a blended rate of the existing lease rate and a lower market rate. If this option is chosen, the landlord should be clear whether the rent concession modification constitutes an extension of the lease or just simply a modification to the current lease with no extension. Rent concessions can take many forms including: 1) reduction in rent during tenant’s slow business months while increases during tenant’s busy season; or 2) reduction for a short period of time with the difference being extended on the later months.
In any event, the landlord should require the tenant to continually pay operating expenses on the property, including common area expenses to decrease the landlords costs. Furthermore, the landlord should use the rent concession modification time as a time to: 1)re-evaluate the lease 2) re-evaluate break-even points for rental income; 3) remove advantageous rights in the lease that the tenant once had (like right of first refusal, renewal rights or exclusive use rights); and 4) include an estoppel statement removing any claims against the landlord. The landlord may also consider requiring the tenant to produce a larger deposit, personal guaranties by the principals or a confidentiality clause on the rent concession in order to keep other tenants from hearing about the decrease in rent.