We used to have a saying when discussing what to do in a tenant scenario: “RTFL” or “read the full lease.” Although in the real estate industry, we didn’t always say “full.”
Leases are more powerful contracts than businesses often realize. What each specific lease says governs what must occur by both the tenant and landlord. Landlords will often sit at the table with debtholders during a bankruptcy process of a tenant, particularly for organizations with multiple locations.
You may be asking yourselves: Should we have paid our rent in the pandemic? The answer is, “read the full lease.”
I was reviewing a sample of leases in mid-2020 and the relevant lease clauses that would address pandemic-related issues were varied. Most of the time, they buried the clauses in “miscellaneous” type sections. The actual titles vary. What’s important to note is, just because you have already paid prior period rent does not mean you can’t go back and ask for credit. Trust me – the landlord will back bill you in a heartbeat if they see an opportunity.
Here are some things to look out for:
- Force Majeure / Laws & Ordinances: There are often “Force Majeure” or “Laws & Ordinance” clauses governing these situations. While “pandemic” may not be explicitly listed, the forced closures would be.
- Rent Abatement: Some leases include the option for the tenant to have rent abated during these periods.
- Dispute Resolution: The parties may be forced to arbitration and must waive their right to a jury trial.
- Occupancy: Particularly for retailers, there can be clauses regarding named tenants or the building’s overall occupancy that could allow leasers to abate the rent.
It goes without saying that you should consult legal advice before taking any action as interpretation is required and even “and” “or” can make a huge difference. As I mentioned before, even though you have paid your rent, you may well be able to recover that rent as the lease is a binding document.
Without that information accurately summarized in your ERP, your organization will be blind to the required information in making decisions about your leases. What decisions should we make regarding these leases? Should we continue to operate these locations? Should we ask for an abatement? We can help you make those assessments and improve your ERP management reporting.
When a company operates multiple locations, it is essential to gain business unit/location level information about the performance of these locations. If your organization allocates expenses, that’s undoubtedly acceptable. But those allocations can often distort the decisions necessary. An adequately organized chart of accounts and set of business units/locations can help with these assessments.
If you and your landlord already came to agreement on a rent abatement, going back on the lease now would not be appropriate. But if you haven’t there may be opportunities for you to do so. But in the meantime, make sure you RTFL!