As the number of vaccinated Americans continues to grow, workforces that have largely been operating remotely during the pandemic are beginning to contemplate a return to the physical office. Regardless of whether this labor reentry will be swift or staggered, office users — who largely punted major leasing decisions to 2021 — will now be more closely evaluating their next lease.
And office users aren’t alone. According to OpenTable, restaurants began experiencing sharply increased in-person dining as of mid-March, while in-person retail sales are also expected to climb as vaccinated Americans take tentative steps back into the brick-and-mortar world. With more than 29 million square feet of retail space across the United States vacated in 2020 — according to CoStar, publisher of LoopNet — this may seem like the ideal time to open that brew pub you’ve always dreamed of.
But if you’re among the retailers, restaurateurs or office occupiers contemplating a new lease, one question is likely repeating in your brain like a song you can’t stop humming: how do I protect my rights as a commercial real estate tenant in the event of another pandemic or similar event? (Admittedly, it may not be the catchiest tune).
To gain some insight around that conundrum, LoopNet spoke with two real estate attorneys: Jacob Imir, partner at Sacks Law Group, P.C., a commercial real estate-focused firm representing landlords and tenants throughout the United States; and Daniel Gildin, managing partner of Kaufmann, Gildin, Robbins LLP, who possesses more than 35 years of national commercial real estate leasing experience.
Based on LoopNet’s conversations with Imir and Gildin, LoopNet broke down the key post-pandemic provisions that office and retail tenants should seek to include in their leases:
It’s worth acknowledging that these clauses were of interest to most, if not all, commercial real estate tenants before the pandemic, but they have taken on increased importance following the significant disruptions precipitated by COVID-19.
Of course, “Being smart enough to figure out what to ask for is not the issue,” as Gildin observed. “It’s having the leverage to get the landlord to agree to it.”
When it comes to lease provisions, there is one clause that almost every tenant would like to include in their new lease. “The most obvious one is rent abatement,” Imir succinctly observed.
Imir elaborated by suggesting such a provision might stipulate that, “in the event that any governmental authority shuts everything down like they did [in response to COVID-19], the tenant won’t have to comply with their rent obligations under the lease until things open back up again.”
Specificity is key to ensuring that such a provision has any real value, though, according to Gildin. “One could simply ask for a provision that says that in the event of pandemic, my rent will be abated,” Gildin noted. “The problem is that you have to define pandemic. You have to define other possible contexts in which an abatement might be appropriate. It might not be a pandemic; it might be a war; it might be civil unrest. Anything that keeps you from using your premises or prevents your customers or clients [from] coming to your premises. Part of the difficulty of this [process] is defining the contexts in an objective manner so that everyone understands the ground rules.”
To illustrate the complexity of this issue, Gildin used a restaurant as an example. Let’s say that a restaurant operator successfully negotiated a lease clause which stated that if they are required to close due to government regulations, their rent is abated. But what if the restaurant is allowed to remain open, albeit only for take-out and delivery service or only at 25% capacity?
There has to be a mechanism to define what percentage of the rent would be payable under a variety of circumstances, according to Gildin. “It’s going to be extremely difficult for any tenant to protect itself for anything other than a fairly short period of time, and even that will require fairly specific and objective standards and very specific ways of computing the type and amount of rent relief.”
Even if you can achieve some form of rent abatement, Imir cautioned that tenants shouldn’t anticipate being granted any kind of long-term or open-ended forbearance. Even in the best of circumstances, he said, “abatements get capped.”
The other question that many tenants confront with regard to rent abatement or termination clauses is whether to insert new language into the lease’s boilerplate force majeure clause, or to create an entirely new provision specific to pandemics and other similar events.
Imir felt that adapting the existing force majeure clause is usually the better approach, as “oftentimes, it’s a two-way street.” In other words, alterations to the force majeure clause could protect the tenant’s interests, while also safeguarding the landlord in the event that there are lease stipulations that they can’t comply with due to a shutdown or other regulations. From a negotiating perspective, a clause that benefits both parties may be more likely to be approved by the landlord.
Gildin, however, didn’t necessarily agree with that approach. He believes drafting a tailored provision for the sake of clarity is a preferable approach. “I’m a great believer in both parties understanding what their obligations are. So, I’m not going to try to slide something in somewhere, especially something this important,” he said.
Imir noted that another area of the lease documentation where tenants may want to protect themselves concerns pandemic-related delays to tenant-managed build-outs.
This is particularly true for leases signed in the near term, as backlogs in permitting offices and shortages in supplies and materials are currently hindering construction projects.
“Whoever is doing the [construction] work in the lease, they’re going to request as much time as possible and also plug in certain extensions in the event of any issues that are outside of their control,” Imir said. These provisions could enable a tenant to push back the lease commencement date based on a build-out delay, regardless of whether the impediment has been caused directly by the pandemic (e.g., a government shutdown of all construction work) or indirectly through issues such as delays in obtaining construction materials or permits.
If the owner is responsible for the build-out, tenants should anticipate that the landlord will also attempt to safeguard their own interests with these kinds of provisions. In that scenario, a tenant needs to ensure that they have the right to delay commencement of the lease until the build-out is complete and perhaps assign certain penalties in the event of a significant delay.
Unlike rent abatement or termination options, both Imir and Gildin believe that owners are relatively amenable, and even proactive, regarding lease stipulations that mandated specific cleaning procedures or HVAC system requirements.
In terms of HVAC requirements, “Many tenants negotiating office leases will require that the base building air handling systems serving the demised premises and public spaces, such as lobbies and common areas, have filters with a minimum rating of MERV 13,” Imir said. “Tenants also want to make sure that all minimum ASHRAE and OSHA standards for HVAC within the [entire] building are being met throughout the term of their lease, at no additional cost to the tenant.”
In addition to these requirements, some office tenants will request that a minimum amount of outdoor air is delivered to the premises, at a rate of typically 0.15 cubic feet per minute per usable square foot, Imir added.
As for cleaning requirements, Imir noted that he’s begun to see landlord-drafted riders attached to leases that clearly articulate the property’s cleaning processes and protocols. Gildin said that landlords are anticipating that potential tenants are going to be concerned about cleanliness and safety and “a way of marketing their building is to make it clear that they are conducting these enhanced cleanings.”
In the past year, these cleaning clauses have become so commonplace that Gildin suggested that, “if a tenant has to ask for it, they’re probably not going to want to be in that building.”
These lease clauses usually apply to retail tenants in large retail shopping centers or malls but could also apply to mixed-use multitenant buildings. Co-tenancy provisions are typically most relevant in the early days of a retail center’s development, as they enable a tenant to reduce or abate their rent, or even terminate their lease, in the event that another tenant — often an anchor tenant at the center —is delayed in opening. However, Gildin felt that these clauses could have new relevance in the post-pandemic era.
According to Gildin, some tenants have been successful at negotiating continuing co-tenancy provisions that account for the post-pandemic era. According to these clauses, if an anchor tenant or neighboring store is closed — due to government regulations, for instance — the tenant has the right to rent abatement or lease termination.
Continuous operations clauses are similar to co-tenancy provisions, Imir noted, except that these clauses are usually designed to protect the landlord’s interests. They usually stipulate that your business must remain open and operate at daily hours congruent with your neighbors through the length of your lease. “If you’re a shopping center landlord, you want to make sure that when people come to shop at Target, they can also pop into Domino’s or McDonald’s, for instance,” Imir said.
However, given recent closures, occupancy limits and other restrictions during the pandemic, tenants have been seeking the right to “go dark if there’s some kind of event,” Imir added, regardless of whether such a closure is being mandated by the government.
Ultimately, a tenant’s ability to secure any of these terms comes down to one thing: leverage.
“If there’s one space left in a building and the landlord can find another tenant, you’re getting nothing. If, on the other hand, the building is 40% empty and the landlord is having very little luck, then the landlord may be more willing to take a chance,” Gildin remarked.
Gildin advised that it’s important for tenants to make a realistic appraisal of their leverage and act accordingly. Much of this will be driven by local market dynamics and the existing occupancy of the property in question. However, if a tenant has strong credit and a business that is performing particularly well, their leverage will increase, even in a competitive market. But assessing leverage isn’t just about determining how important a business’ tenancy is to a landlord; it’s equally critical for a tenant to evaluate how crucial a particular space is to the success of their enterprise.
As for other factors that dictate leverage: “It depends on the landlord and how secure the landlord is that if you don’t take the space, someone else will. It depends on whether or not having you as a tenant draws other tenants to the property and somehow makes the landlord’s property more valuable than if they had someone else,” Gildin said.
Gildin added that persistence is another key factor in negotiating these provisions. “This is not going to be something where you’re going to draft it and the landlord’s going to say, ‘okay.’ You’re going to draft it, the landlord’s going to say ‘no’ about four times. Maybe the fifth time you’ll get through a little bit.”
Knowing when to deploy your leverage is almost as crucial as possessing an advantage at all, Gildin added. “If you’re 95% of the way through your deal, and the last issue is, ‘I need some protection in case something happens,’ you may get a landlord that says, ‘I’ve gone through this deal, the next guy’s going to ask me for the same thing anyway — I may as well get it over with.’”
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