Retail in the COVID Era

— By Gary Glick —

Top 3 lease provisions negotiated by landlords and tenants.

 

Almost a year into this pandemic, retailers are still facing uncertainty in light of the recent spike of COVID-19 cases accompanied by a new wave of lockdowns and regulations across the nation. Eager to protect themselves from ever-changing governmental restrictions and closures, retail tenants, whether traditional retailers, restaurants, fitness centers or theaters, are now requesting a variety of specific lease provisions in almost every newly negotiated retail lease.

Gary Glick

In addition, prior to the COVID-19 outbreak, virtually every retail lease contained force majeure provisions which, arguably, could be interpreted to apply to governmental restrictions related to pandemics.  In most cases, these provisions expressly stated that force majeure events did not excuse the tenant from paying rent and additional charges. Nevertheless, many retail landlords have provided some economic relief to retailers who were most impacted by COVID-19, often in the form of base rent deferral for a defined period of time.

As the COVID-19 crisis drags on and uncertainty becomes the norm, landlords and tenants are now seeking to formalize and codify these arrangements to better protect themselves. As a result, three new common lease provisions have emerged in leases that are being signed today:

Dedicated Short Term Parking for Pickup and Delivery

During this pandemic, restaurants and retailers have relied on pickup and delivery of both food and goods to keep their businesses afloat. Therefore, many retail tenants now require that a few parking spaces in front of their premises be dedicated to short term parking for pickup and delivery. Landlords should be able to accommodate this request as long as the spaces are set aside as non-exclusive so as not to violate existing leases or Covenants, Conditions & Restrictions, which typically require that all parking spaces be utilized on a non-exclusive basis. Landlords should also ensure that they are not required to monitor or enforce the new short-term designated spaces, and that tenants are responsible for the cost of new signage.

Opening Requirements

Tenants who are significantly affected by drastic COVID restrictions will want to be able to elect not to open until such restrictions are lifted. However, if restrictions are not too onerous, landlords should be able to request that tenants stay open. For example, if a restaurant is able to operate for indoor dining at 50% capacity, the landlord should require the restaurant open at that level. If the tenant agrees that it will open in this situation, in lieu of the stated base rent set forth in the lease, it will want the right to pay a percentage of its gross sales as base rent for as long as the capacity restriction remains in effect, although it will generally agree to pay its share of taxes, insurance and common area expenses. Most of the time, it is in the landlord’s interest to agree to such an arrangement since it is preferable to maintain a lively and bustling shopping center rather than having tenants go “dark” for any period of time. Once the capacity restrictions are lifted, the landlord will expect the tenant to pay the fixed base rent set forth in the lease in lieu of a payment based on a percentage of gross sales.

Impact on Operating Retail Businesses

Many retail tenants are attempting to negotiate provisions in their leases that would give them the right to close or pay base rent based upon a percentage of their gross sales should new COVID-19 related governmental restrictions be imposed after they have substantially opened all of their premises. Landlords will want to incentivize such tenants to stay open for business despite the restrictions for several reasons.  First and foremost, it is important for the synergy of the shopping center. Secondly, it allows the landlord to continue to receive some rent and 100% of tenants’ share of taxes, insurance and common area expenses. Landlords may attempt to negotiate a provision that limits their tenants’ right to pay base rent based upon gross sales (or other type of alternate rent) if the tenant’s gross sales do not decline by more than an agreed percentage due to the governmental restrictions.  Although this is a fair request, it may be met with resistance by a tenant that argues that its sales would have increased much more significantly but for the restrictions.

COVID-19 has created a new paradigm for retail lease negotiations. In spite of the major toll it has taken on the retail industry, many tenants are still aggressively looking for new locations. Indeed, some see the current economic climate as an opportunity to enter markets or shopping centers that were previously unavailable. To be successful in future lease negotiations, landlords will need to show a creative and flexible mindset to address COVID-19 related circumstances.

 

 

— Gary Glick is a partner at Cox, Castle & Nicholson, a leading real estate-focused law firm that focuses on retail development and commercial leasing.

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