Trouble in Lease Land

As a condition to rent relief, the landlord may require the tenant to bring all rent payments current before the rent relief begins. This may not be possible in all circumstances for tenants in trouble.

Landlords will insist that the tenant not be in default of the lease during the rent-relief period, including keeping current on required rent payments. The landlord may require that any default trigger a return to full rent retroactive to the first day of rent relief. Tenants will want the loss of rent relief to be prospective, after notice and cure rights. Landlords may also consider requiring full or partial repayment of the unpaid rent if the tenant is in default at any time after the rent-relief period ends.

If the tenant is paying a percentage of gross sales in lieu of fixed rent, rent relief should be expressly conditioned upon the tenant remaining open for business during the rent-relief period in the entire premises and for shopping center hours, even if the tenant has no operating covenant in the lease. Otherwise, if the tenant is closed, the landlord has no rent. The landlord should require the tenant to return to full rent if it closes during the rent- relief period. In the alterative, sales should be presumed for each day of closure. Presumption of sales could be based on sales for the same day in the prior year, or could be prorated daily based on the percentage rent breakpoint that would otherwise have been in effect during the rent relief period. Tenants will want certain closures to be excused, for example, those due to casualty and condemnation, because the tenant would have been permitted to abate rent on those days if it had paid full rent.

If the tenant is permitted to abate extra charges during the rent relief period, then the landlord will want the right to allocate any portion or all of the rent actually paid by the tenant to those charges. Other tenants may have co-tenancy or most-favored-nations provisions tying their obligation to pay such charges to other tenants' paying such charges. If a tenant's charges are abated, the landlord might not satisfy these conditions in other leases. The ability to allocate a portion of the tenant's rent to these costs could satisfy such requirements. The tenant will want to provide that this allocation will not increase the tenant's actual rent obligations.

The landlord should require the tenant to submit a monthly profit and loss statement to demonstrate the tenant's continued financial distress. Some or all of the positive cash flow that the statement reveals (after adding back in depreciation, amortization and unusual expenditures e.g., sudden and extraordinary increases in salaries) should be payable to the landlord to reimburse the landlord for the unpaid or deferred rent.

Landlords often require the right to terminate the lease during the rent-relief period. This gives the landlord the ability to replace the troubled tenant if it can find a new tenant able to pay full rent. The tenant may require that the landlord's right to terminate be effective only if the tenant has continued to pay reduced rent for a specified period of time, and after sufficient notice, to let the tenant find a new location or at least notify employees and close up shop. The tenant may also negotiate a right to negate the termination by returning to full rent.

The landlord should also require the tenant to forfeit the rent relief if it transfers the lease to a third party, or exercises an option to extend the term. Since the rent relief is intended to keep the tenant operating at the center, it should not be transferred to a new tenant that elects to come into the center voluntarily. Also, if the tenant exercises an option, it is making a decision to stay at the center despite its difficulties and should not automatically get the benefit of the rent relief.

The party with leverage in the negotiation might want to take this opportunity to get a release from the other party of any claims the other party may have against the released party arising prior to the date of the rent relief, and a waiver of any prior defaults. This may trigger a similar request from the releasing party. If the parties have agreed that the tenant will pay past due rent, the landlord should not waive the right to collect it. Also, the landlord will not want to release the tenant's obligation to pay any pending adjustments for estimated CAM, taxes, and similar charges, and any unanticipated tax assessments, utility charges or other governmental charges. Each party should also preserve the right to pursue claims arising from the other party's willful misconduct of which the waiving party has no actual knowledge.

A party may also try to renegotiate troublesome lease provisions, obtain concessions that it was not able to obtain when the lease was originally negotiated, or address new issues not previously anticipated. For instance, landlords may want to negotiate a radius restriction, eliminate or modify exclusive use provisions and co-tenancy provisions, require increased or different insurance coverage, add Patriot Act, ADA or hazardous materials provisions, and the like. This is also the chance for the parties to clear up any errors or ambiguities in the lease provisions.

Downsizing/Relocating the Premises

Another way to give a tenant relief is to downsize or relocate its space. A tenant may have too much space for its current needs. Reducing the size of the premises can reduce the tenant's rent obligation. The landlord can agree either to take back a portion of the space or to relocate the tenant to a smaller space.

If the landlord agrees to take back some of the space, the landlord must assure itself the remaining space is of a size and configuration that would make it leasable to another tenant. On a relocation, the landlord may need to move another tenant or shuffle several tenants to effect a move for the troubled tenant. These are the times when that standard relocation provision could come in handy, and it is a reminder to those ever ready to delete the relocation clause in lease negotiations why it can be an important tool for the landlord.

Whether it downsizes the premises or relocates the tenant, the landlord will not want to take back the premises until it has another tenant ready to take the old space. Once the landlord does have a new tenant ready to take possession, the existing tenant must be willing to give back the space when the landlord needs it. A tenant generally will not want to move from its old space until the new space has been built out and is ready for occupancy, to avoid downtime and additional lost sales.

The expense of downsizing or relocating must be weighed against the benefits. For the landlord, re-demising a space could involve moving utility lines, sprinkler reconfiguration and draindowns, addressing exiting or springing ADA issues,
or even possibly adding a new HVAC unit. Tenants have moving and build-out expenses, as well as advertising costs to send existing customers to the new location. These tenant costs may have to be borne by the landlord if the tenant is taking a smaller space because the center is in trouble and the tenant had threatened to close, or if the landlord needs to persuade another tenant to relocate for the benefit of the troubled tenant.

Sales Kickout

If the center is ailing and the tenant has threatened to go dark, another alternative for the landlord is to give the tenant the right to terminate the lease at a date in the future if the tenant's sales do not increase to at least a certain threshold by that date. This is often accompanied by some form of rent relief, to encourage the tenant to remain at the center for that additional period of time. Usually the sales test period is a period of 12 consecutive months.

The sales kickout raises concerns similar to those that arise when a tenant is granted rent relief based on sales. A landlord will want the tenant to forfeit the right to terminate if it is in default during the sales test period. Tenants may resist this, since not all defaults would result in reduced sales. The most significant issue is store closures that reduce sales below the termination threshold. A common compromise is for sales to be presumed for any day that the tenant is closed for business, usually based on the tenant's sales in the prior year for the same day.

In the sales kickout situation, the landlord should resist agreeing to exclude closures due to casualty, condemnation, and the like, which it might otherwise do in the rent relief scenario. The sales threshold in the kickout provision is a measure of how poorly the tenant's sales are in the center due to lack of occupancy and market conditions. A tenant should not have the right to terminate based on the kickout provision because sales were reduced due to a casualty, taking inventory, and other similar circumstance.

As conditions to the right to terminate, the tenant will be required to exercise the termination right within a short window after the end of the sales test period, and to submit a gross sales statement for the sales test period establishing the sales reduction. The landlord should also reserve the right to audit the tenant's sales for the sales test period before the termination actually becomes effective. The tenant will want the landlord to agree to exercise that right promptly after the tenant's notice of termination, to prevent an unwarranted extension of the tenant's continued tenancy.

Sometimes the parties will agree that the landlord may also terminate the lease if the tenant's sales do not meet the threshold amount. Since the landlord's ability to terminate is dependent upon having knowledge of the tenant's sales for the sales test period, landlords will require the right to deem the tenant's sales below the threshold if the tenant fails to submit its sales statements in a timely fashion.

The landlord may also want to require the tenant, upon termination, to repay the unamortized portion of any construction allowance paid to the tenant. Tenants will resist this, since they are leaving behind leasehold improvements that the landlord can lease to a replacement tenant. Tenants should also resist repaying the allowance upon a landlord's termination. Many tenants will also try to accelerate the amortization for purposes of the sale kickout, thereby reducing the payment.

Lease Termination

Sometimes the best course is for the landlord to let the tenant out of its lease. If the tenant is in trouble, it may have no assets for the landlord to go after, and pursuing the tenant in court for past due rent and other default remedies may be throwing good money after bad. The tenant may have threatened to go dark (regardless of any continuous operations clause in the lease), and the landlord would prefer to arrange for a more organized exit.

The tenant may be willing to agree to stay on until the landlord finds a replacement tenant for the space. In that case, the parties will enter into a conditional termination agreement contingent upon the landlord finding a replacement. The agreement acknowledges that the tenant has requested the landlord to locate a new tenant for the space, and grants the landlord the right to terminate the lease upon some limited period of prior notice (usually 30 days). The agreement makes clear that the selection of a replacement tenant is in the sole discretion of the landlord, and imposes no obligation on the landlord to find a replacement.

If the parties settle upon a fixed termination date, the parties may negotiate a termination fee to be paid by the tenant. The termination fee usually is payment of any past due rent plus a portion of future rent and charges for an agreed-upon period (often one year) to cover the time during which the space may be dark while the landlord is attempting to re-let the space.

Lease Assignments

Instead of terminating the lease, which could be costly to the tenant if it is required to pay a termination fee, the tenant may offer the landlord another tenant that is ready, willing, and able to take over the lease. This may be a good solution for both parties, since the tenant gets out from under the lease obligations, and the landlord does not have the down time and costs of reletting. The landlord will want to condition its consent to the assignment on any or all of the following:

Assignee Financial Status

The landlord will want to assure itself that it is getting a creditworthy tenant.

Tenant Mix

The new tenant's use must be compatible with the mix of tenants in the center and not violate any then-existing exclusives or other use restrictions in other leases.

Continuing Tenant Liability

The assigning tenant should remain liable on the lease and not be released, in case the new tenant becomes as troubled as the old one.

Construction Allowance

The landlord may require that the assignor contribute to any construction allowance the new tenant may need for its build-out, and even continue to pay rent during the new tenant's build-out period so the landlord has no loss of rent during that time.

Extensions

In centers that are in trouble, tenants whose leases are about to expire may use the expiration as the opportunity to get out of a failing center. Landlords with plans for rejuvenation will try to entice those tenants to remain in the center while they undertake a redevelopment.

Many tenants may agree to extend the lease for a short time (usually one year), to give the landlord a chance to increase occupancy and customer traffic. This is often accompanied by some form of rent relief. The tenant may also negotiate changes to the old lease that it was not able to obtain the first time around. For instance, caps on CAM and promotion fund charges, deletion of radius restrictions, expansion of use clauses, exclusives, new or additional co-tenancy provisions, and the like. If the extension is for longer than a year, the tenant may require a right to terminate during the extension term, giving the tenant an out if things do not improve.

Considerations for New Developments

The current economic slowdown has had substantial negative repercussions for new developments. Landlords are scrambling to fill space. They often have to grant substantial concessions to do so. Even signed leases are no guaranty that the center will have tenants. Many tenants are deciding to drop expansion plans. Tenants who have signed leases may be unable to procure financing for their build-outs and inventory and are simply unable to proceed. Landlords are faced with not meeting co-tenancy requirements in pending leases, and the prospect of reduced rent and store closures.

Construction Allowance

For a tenant that is having difficulty obtaining financing for its build-out, a landlord may agree to provide, or increase, a construction allowance. Allowance payments may be accelerated, with significant upfront payments, to give the tenant the cash to do its build-out. Allowances may also be given for soft costs (design and plan preparation costs), or even for furniture, fixtures and equipment (FF & E). Some landlords have agreed to build-out the store using the landlord's on-site contractor and the tenant's approved plans, with an increase in rent palatable to the tenant.

Delay Store Opening

For tenants whose expansion plans have been delayed, the landlord may agree to delay the required opening and rent start date, to keep the tenant committed to the center, albeit later than the landlord had originally hoped.

Substitute Brand

A national tenant with multiple brands, whose lease requires the tenant to open a particular brand at the center that is no longer expanding, might agree to stay at the center if permitted to open a different brand store.

Rent Relief

To entice tenants to open in new centers with low initial occupancy, many landlords are granting rent relief to tenants until the occupancy rate increases or until specified tenants open for business. Also, landlords are granting tenants sales kickouts after the first couple years of the term, if expected sales do not materialize.

Co-Tenancy Requirements

Where a lease has a co-tenancy requirement that will not be met, the landlord will try to negotiate with the tenant to change the required co-tenants to those tenants with whom the landlord actually has leases or can reasonably expect to have leases, to avoid co-tenancy failures, reduced rent and possible lease termination. Where co-tenants are not modified, tenants have sometimes agreed to extensions on their rights to pay reduced rent and terminate due to a co-tenancy failure. To prevent this result, landlords should either avoid naming particular tenants upfront in their leases or negotiate the ability to substitute named tenants with replacements. For the landlord, the best course is to define replacements generally, and not add another list of specific tenants that will likely also not appear.

Delay Center Opening Date

Some landlords have delayed the opening date of new centers. This requires amending leases to extend delivery dates in order to avoid the landlord's having to pay late delivery penalties. To prevent this possibility, in negotiating leases for new developments, landlords should include the right to change delivery dates and grand opening dates by notice to the tenant. Tenants will want to require early enough notice to avoid purchasing merchandise and hiring employees for a store whose opening is delayed.

Conclusion

The final installment of this article will discuss lender issues and tax considerations.

M. Rosie Rees is a partner in the Chicago office of Pircher, Nichols & Meeks, a national full-service law firm that specializes in the real estate and related industries. Associates Michael Soejoto and Marisa Doherty assisted in the preparation of this article.

Part One of this article in last month's issue discussed a variety of methods to keep the tenant operating. The article herein continues the discussion.

Conditions for Rent Relief

In order to determine if rent relief is appropriate, the landlord will first want to review the tenant's current financials: its sales and financial resources. The landlord will also need to understand the tenant's plans for the future and the likelihood that rent relief will keep the doors open.

As a condition to rent relief, the landlord may require the tenant to bring all rent payments current before the rent relief begins. This may not be possible in all circumstances for tenants in trouble.

Landlords will insist that the tenant not be in default of the lease during the rent-relief period, including keeping current on required rent payments. The landlord may require that any default trigger a return to full rent retroactive to the first day of rent relief. Tenants will want the loss of rent relief to be prospective, after notice and cure rights. Landlords may also consider requiring full or partial repayment of the unpaid rent if the tenant is in default at any time after the rent-relief period ends.

If the tenant is paying a percentage of gross sales in lieu of fixed rent, rent relief should be expressly conditioned upon the tenant remaining open for business during the rent-relief period in the entire premises and for shopping center hours, even if the tenant has no operating covenant in the lease. Otherwise, if the tenant is closed, the landlord has no rent. The landlord should require the tenant to return to full rent if it closes during the rent- relief period. In the alterative, sales should be presumed for each day of closure. Presumption of sales could be based on sales for the same day in the prior year, or could be prorated daily based on the percentage rent breakpoint that would otherwise have been in effect during the rent relief period. Tenants will want certain closures to be excused, for example, those due to casualty and condemnation, because the tenant would have been permitted to abate rent on those days if it had paid full rent.

If the tenant is permitted to abate extra charges during the rent relief period, then the landlord will want the right to allocate any portion or all of the rent actually paid by the tenant to those charges. Other tenants may have co-tenancy or most-favored-nations provisions tying their obligation to pay such charges to other tenants' paying such charges. If a tenant's charges are abated, the landlord might not satisfy these conditions in other leases. The ability to allocate a portion of the tenant's rent to these costs could satisfy such requirements. The tenant will want to provide that this allocation will not increase the tenant's actual rent obligations.

The landlord should require the tenant to submit a monthly profit and loss statement to demonstrate the tenant's continued financial distress. Some or all of the positive cash flow that the statement reveals (after adding back in depreciation, amortization and unusual expenditures e.g., sudden and extraordinary increases in salaries) should be payable to the landlord to reimburse the landlord for the unpaid or deferred rent.

Landlords often require the right to terminate the lease during the rent-relief period. This gives the landlord the ability to replace the troubled tenant if it can find a new tenant able to pay full rent. The tenant may require that the landlord's right to terminate be effective only if the tenant has continued to pay reduced rent for a specified period of time, and after sufficient notice, to let the tenant find a new location or at least notify employees and close up shop. The tenant may also negotiate a right to negate the termination by returning to full rent.

The landlord should also require the tenant to forfeit the rent relief if it transfers the lease to a third party, or exercises an option to extend the term. Since the rent relief is intended to keep the tenant operating at the center, it should not be transferred to a new tenant that elects to come into the center voluntarily. Also, if the tenant exercises an option, it is making a decision to stay at the center despite its difficulties and should not automatically get the benefit of the rent relief.

The party with leverage in the negotiation might want to take this opportunity to get a release from the other party of any claims the other party may have against the released party arising prior to the date of the rent relief, and a waiver of any prior defaults. This may trigger a similar request from the releasing party. If the parties have agreed that the tenant will pay past due rent, the landlord should not waive the right to collect it. Also, the landlord will not want to release the tenant's obligation to pay any pending adjustments for estimated CAM, taxes, and similar charges, and any unanticipated tax assessments, utility charges or other governmental charges. Each party should also preserve the right to pursue claims arising from the other party's willful misconduct of which the waiving party has no actual knowledge.

A party may also try to renegotiate troublesome lease provisions, obtain concessions that it was not able to obtain when the lease was originally negotiated, or address new issues not previously anticipated. For instance, landlords may want to negotiate a radius restriction, eliminate or modify exclusive use provisions and co-tenancy provisions, require increased or different insurance coverage, add Patriot Act, ADA or hazardous materials provisions, and the like. This is also the chance for the parties to clear up any errors or ambiguities in the lease provisions.

Downsizing/Relocating the Premises

Another way to give a tenant relief is to downsize or relocate its space. A tenant may have too much space for its current needs. Reducing the size of the premises can reduce the tenant's rent obligation. The landlord can agree either to take back a portion of the space or to relocate the tenant to a smaller space.

If the landlord agrees to take back some of the space, the landlord must assure itself the remaining space is of a size and configuration that would make it leasable to another tenant. On a relocation, the landlord may need to move another tenant or shuffle several tenants to effect a move for the troubled tenant. These are the times when that standard relocation provision could come in handy, and it is a reminder to those ever ready to delete the relocation clause in lease negotiations why it can be an important tool for the landlord.

Whether it downsizes the premises or relocates the tenant, the landlord will not want to take back the premises until it has another tenant ready to take the old space. Once the landlord does have a new tenant ready to take possession, the existing tenant must be willing to give back the space when the landlord needs it. A tenant generally will not want to move from its old space until the new space has been built out and is ready for occupancy, to avoid downtime and additional lost sales.

The expense of downsizing or relocating must be weighed against the benefits. For the landlord, re-demising a space could involve moving utility lines, sprinkler reconfiguration and draindowns, addressing exiting or springing ADA issues,
or even possibly adding a new HVAC unit. Tenants have moving and build-out expenses, as well as advertising costs to send existing customers to the new location. These tenant costs may have to be borne by the landlord if the tenant is taking a smaller space because the center is in trouble and the tenant had threatened to close, or if the landlord needs to persuade another tenant to relocate for the benefit of the troubled tenant.

Sales Kickout

If the center is ailing and the tenant has threatened to go dark, another alternative for the landlord is to give the tenant the right to terminate the lease at a date in the future if the tenant's sales do not increase to at least a certain threshold by that date. This is often accompanied by some form of rent relief, to encourage the tenant to remain at the center for that additional period of time. Usually the sales test period is a period of 12 consecutive months.

The sales kickout raises concerns similar to those that arise when a tenant is granted rent relief based on sales. A landlord will want the tenant to forfeit the right to terminate if it is in default during the sales test period. Tenants may resist this, since not all defaults would result in reduced sales. The most significant issue is store closures that reduce sales below the termination threshold. A common compromise is for sales to be presumed for any day that the tenant is closed for business, usually based on the tenant's sales in the prior year for the same day.

In the sales kickout situation, the landlord should resist agreeing to exclude closures due to casualty, condemnation, and the like, which it might otherwise do in the rent relief scenario. The sales threshold in the kickout provision is a measure of how poorly the tenant's sales are in the center due to lack of occupancy and market conditions. A tenant should not have the right to terminate based on the kickout provision because sales were reduced due to a casualty, taking inventory, and other similar circumstance.

As conditions to the right to terminate, the tenant will be required to exercise the termination right within a short window after the end of the sales test period, and to submit a gross sales statement for the sales test period establishing the sales reduction. The landlord should also reserve the right to audit the tenant's sales for the sales test period before the termination actually becomes effective. The tenant will want the landlord to agree to exercise that right promptly after the tenant's notice of termination, to prevent an unwarranted extension of the tenant's continued tenancy.

Sometimes the parties will agree that the landlord may also terminate the lease if the tenant's sales do not meet the threshold amount. Since the landlord's ability to terminate is dependent upon having knowledge of the tenant's sales for the sales test period, landlords will require the right to deem the tenant's sales below the threshold if the tenant fails to submit its sales statements in a timely fashion.

The landlord may also want to require the tenant, upon termination, to repay the unamortized portion of any construction allowance paid to the tenant. Tenants will resist this, since they are leaving behind leasehold improvements that the landlord can lease to a replacement tenant. Tenants should also resist repaying the allowance upon a landlord's termination. Many tenants will also try to accelerate the amortization for purposes of the sale kickout, thereby reducing the payment.

Lease Termination

Sometimes the best course is for the landlord to let the tenant out of its lease. If the tenant is in trouble, it may have no assets for the landlord to go after, and pursuing the tenant in court for past due rent and other default remedies may be throwing good money after bad. The tenant may have threatened to go dark (regardless of any continuous operations clause in the lease), and the landlord would prefer to arrange for a more organized exit.

The tenant may be willing to agree to stay on until the landlord finds a replacement tenant for the space. In that case, the parties will enter into a conditional termination agreement contingent upon the landlord finding a replacement. The agreement acknowledges that the tenant has requested the landlord to locate a new tenant for the space, and grants the landlord the right to terminate the lease upon some limited period of prior notice (usually 30 days). The agreement makes clear that the selection of a replacement tenant is in the sole discretion of the landlord, and imposes no obligation on the landlord to find a replacement.

If the parties settle upon a fixed termination date, the parties may negotiate a termination fee to be paid by the tenant. The termination fee usually is payment of any past due rent plus a portion of future rent and charges for an agreed-upon period (often one year) to cover the time during which the space may be dark while the landlord is attempting to re-let the space.

Lease Assignments

Instead of terminating the lease, which could be costly to the tenant if it is required to pay a termination fee, the tenant may offer the landlord another tenant that is ready, willing, and able to take over the lease. This may be a good solution for both parties, since the tenant gets out from under the lease obligations, and the landlord does not have the down time and costs of reletting. The landlord will want to condition its consent to the assignment on any or all of the following:

Assignee Financial Status

The landlord will want to assure itself that it is getting a creditworthy tenant.

Tenant Mix

The new tenant's use must be compatible with the mix of tenants in the center and not violate any then-existing exclusives or other use restrictions in other leases.

Continuing Tenant Liability

The assigning tenant should remain liable on the lease and not be released, in case the new tenant becomes as troubled as the old one.

Construction Allowance

The landlord may require that the assignor contribute to any construction allowance the new tenant may need for its build-out, and even continue to pay rent during the new tenant's build-out period so the landlord has no loss of rent during that time.

Extensions

In centers that are in trouble, tenants whose leases are about to expire may use the expiration as the opportunity to get out of a failing center. Landlords with plans for rejuvenation will try to entice those tenants to remain in the center while they undertake a redevelopment.

Many tenants may agree to extend the lease for a short time (usually one year), to give the landlord a chance to increase occupancy and customer traffic. This is often accompanied by some form of rent relief. The tenant may also negotiate changes to the old lease that it was not able to obtain the first time around. For instance, caps on CAM and promotion fund charges, deletion of radius restrictions, expansion of use clauses, exclusives, new or additional co-tenancy provisions, and the like. If the extension is for longer than a year, the tenant may require a right to terminate during the extension term, giving the tenant an out if things do not improve.

Considerations for New Developments

The current economic slowdown has had substantial negative repercussions for new developments. Landlords are scrambling to fill space. They often have to grant substantial concessions to do so. Even signed leases are no guaranty that the center will have tenants. Many tenants are deciding to drop expansion plans. Tenants who have signed leases may be unable to procure financing for their build-outs and inventory and are simply unable to proceed. Landlords are faced with not meeting co-tenancy requirements in pending leases, and the prospect of reduced rent and store closures.

Construction Allowance

For a tenant that is having difficulty obtaining financing for its build-out, a landlord may agree to provide, or increase, a construction allowance. Allowance payments may be accelerated, with significant upfront payments, to give the tenant the cash to do its build-out. Allowances may also be given for soft costs (design and plan preparation costs), or even for furniture, fixtures and equipment (FF & E). Some landlords have agreed to build-out the store using the landlord's on-site contractor and the tenant's approved plans, with an increase in rent palatable to the tenant.

Delay Store Opening

For tenants whose expansion plans have been delayed, the landlord may agree to delay the required opening and rent start date, to keep the tenant committed to the center, albeit later than the landlord had originally hoped.

Substitute Brand

A national tenant with multiple brands, whose lease requires the tenant to open a particular brand at the center that is no longer expanding, might agree to stay at the center if permitted to open a different brand store.

Rent Relief

To entice tenants to open in new centers with low initial occupancy, many landlords are granting rent relief to tenants until the occupancy rate increases or until specified tenants open for business. Also, landlords are granting tenants sales kickouts after the first couple years of the term, if expected sales do not materialize.

Co-Tenancy Requirements

Where a lease has a co-tenancy requirement that will not be met, the landlord will try to negotiate with the tenant to change the required co-tenants to those tenants with whom the landlord actually has leases or can reasonably expect to have leases, to avoid co-tenancy failures, reduced rent and possible lease termination. Where co-tenants are not modified, tenants have sometimes agreed to extensions on their rights to pay reduced rent and terminate due to a co-tenancy failure. To prevent this result, landlords should either avoid naming particular tenants upfront in their leases or negotiate the ability to substitute named tenants with replacements. For the landlord, the best course is to define replacements generally, and not add another list of specific tenants that will likely also not appear.

Delay Center Opening Date

Some landlords have delayed the opening date of new centers. This requires amending leases to extend delivery dates in order to avoid the landlord's having to pay late delivery penalties. To prevent this possibility, in negotiating leases for new developments, landlords should include the right to change delivery dates and grand opening dates by notice to the tenant. Tenants will want to require early enough notice to avoid purchasing merchandise and hiring employees for a store whose opening is delayed.

Conclusion

The final installment of this article will discuss lender issues and tax considerations.

M. Rosie Rees is a partner in the Chicago office of Pircher, Nichols & Meeks, a national full-service law firm that specializes in the real estate and related industries. Associates Michael Soejoto and Marisa Doherty assisted in the preparation of this article.