Retailers Seeking Rent Breaks Give Up Some Rights to End Leases or Say Who’s Next Door

Updated: Oct 21

Changing Future for Shopping Reshapes Landlord, Tenant Relationships

Photo Courtesy of Getty Images.

U.S. retailers seeking breaks on rent are giving up some control over shopping center store lineups and the ability to break leases, marking a turning point in their relationships with landlords because of the pandemic.


The moves give both sides more elbow room as tenants and landlords brace for an uncertain future for brick-and-mortar retail that could result in tens of thousands more stores going dark, and shopping centers and malls closing.


“It’s a point of negotiations,” Michael Wiener, president of Excess Space Retail Services, a division of Newmark Knight Frank that focuses on disposition, lease restructuring and lease renewal services for retailers nationwide, said about reworking rent and tenancy structures.


“There are lots of ways to slice it,” he said.


Since retail restrictions to curb the pandemic took effect in most states in mid-March, most retailers and their landlords have seen revenues plunge. When stores closed temporarily, there were zero dollars coming in the door, and retailers who were able had no choice but to sell their wares online. As a result, many chose not to pay rent or began asking for rent concessions.


Without rent payments, the majority of which are the difference between profitability and losses, some landlords unable to pay their own bills also found themselves falling into revenue holes.


The latest negotiations come against a backdrop of an improving situation. As of Sept. 15, more than 77% of retailers had paid rent, according to Datex Property Solutions, which tracks rent collections. That’s below the near 88% percent paid in the same time a year earlier and a big improvement over the slightly more than 50% that had made rent as of May 15 this year.


At the peak of the temporary shutdowns, 73% of the nation’s leading chain retailers had turned off the lights on at least three-quarters of their physical store locations, according to a new survey by the National Retail Federation and PJ Solomon, the financial advisory firm. They talked to 48 top-level executives at retailers with 2019 sales of more than $100 million and at least 10 stores.


More than 50% are ending up with some rent breaks from landlords, with back-rent deferrals to late 2020 or 2021 being the most common concession, the report found. The most popular trade-offs are delays in kick-out clauses, which allow tenants or landlords to break leases if certain conditions cannot be met. Another trade-off is reduced co-tenancy rights, which allow rent reductions and even lease terminations if specified tenants stop operating and are not replaced with similar tenants or if a percentage of the overall shopping center space is vacant.


Co-tenancy clauses have become a big issue for retailers and landlords after so many major anchor tenants — Sears, J.C. Penney, Macy’s and Neiman Marcus, to name a few — have either gone into bankruptcy or have trimmed their footprints to avoid it. At the same time, a number of longtime shopping center staples are closing or shrinking their store numbers, including Victoria’s Secret, New York & Co., Gap, Wilson’s Leathers, Papyrus, Zales and Kay Jewelers.


With that changing scenario playing out, landlords such as Saul Centers, the Bethesda, Maryland, real estate investment trust with a portfolio of 50 shopping centers and seven mixed-use properties, offers an example of what landlords are facing and how they’re dealing with it.


At the end of August, 88% of its total billings were paid, 85% of that coming from retailers. That’s an improvement over the end of the second quarter when 81% of billings were paid, only 76% of which came from retailers.


Saul Centers granted 10% rent deferrals on second-quarter collections, equivalent to 51% of unpaid balances, the company said in a regulatory filing. The deferrals typically cover three months’ rent with payments scheduled in 2021 and 2022.


In return, tenants extended their lease terms and agreed to waive some rights for adjacent space use and common areas, Saul Centers said in the filing. It didn't immediately return a request for further comments.


“The pendulum swings and right now it’s in favor of the retailer because of a tragic event,” Wiener said, referring to the COVID-19 pandemic. “Landlords are going to be a continued part of the negotiations well into 20121 and 2022 as bankruptcies continue to unfold.


“This will be part of life for the next few years for sure,” he said.


Source: 2020 CoStar News.

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