Loss Of Shopping Center Tenants - What Can You Do To Salvage Your Holiday Season?

If you are the landlord or tenant of a shopping center that has lost a major anchor or has experienced an exodus of tenants, making it appear to be a retail ghost town, what can you do to salvage the holiday season? A center with a high vacancy level will likely experience a significant drop-off in holiday shoppers visiting the center, so you need to be proactive to minimize the impact. Here are some practical suggestions.

Start By Reading the Lease For retail tenants, there may be provisions in the lease that can help you weather the financial storm. Major retail chains have undertaken systematic reviews of all of their leases to ascertain their options. Reviewing the lease is a great starting place.

Does the lease grant certain rights (such as rent adjustments or cancellation options) if an anchor tenant shuts down, a certain vacancy level is reached in the center or sales drop below a specified level?

Examine those rights to see what is practical. The rights may include termination of the lease, a permanent or temporary decrease in base rent, a deferral or abatement of base rent, or the conversion of rent to percentage rent only.

If your lease provides only an option that you do not want to exercise, such as terminating the lease, you can still use the termination right to negotiate with the landlord for more practical relief, such as the alternative rental arrangements noted above. Or be creative and propose other alternatives that may be helpful, such as decreasing the number of hours you are required to be open during the holidays to lower your overhead, obtaining the agreement of the landlord to fund holiday advertising for the center, using windows in the vacant spaces for holiday promotions, or (if you could use some extra sales area for the holiday season) temporarily occupying empty space for nominal rent. Everyone will benefit from the appearance of fewer vacant storefronts in the center. Remember, this is not a situation that the landlord welcomes either, so be creative in looking for alternatives.

Even if your lease does not contain specific protections or options, you can still negotiate concessions if you are in a precarious financial condition. Approach your landlord with supporting financials and suggest concessions the landlord can make to help you stay in business. Many landlords are willing to grant concessions to keep you from defaulting or declaring bankruptcy. It is better for the landlord to make a reasonable accommodation than deal with another empty store.

If you are the landlord, look for alternatives to help both your bottom line as well as your tenants.

If a tenant is proposing some of the options noted above, do what you can to minimize the financial impact on the center while being responsive to legitimate tenant needs. For example, if the tenant proposes to terminate its lease, suggest a rent abatement or postponing a termination right until after the holiday season in exchange for some of the other concessions noted above. If the tenant is asking for a rent abatement, suggest instead a deferral of rent until a new anchor is found or the vacancy levels drop below an agreed-upon percentage.

If you are granting concessions to a tenant, look for provisions in the lease that you might want to modify in exchange. For example, if the tenant has an exclusive that is hindering your efforts to lease vacant space in the center, try to negotiate a modification of the exclusive that may facilitate filling the empty space. You may also want to alter an existing cotenancy provision, or if the term of the lease is expiring soon, use this opportunity to negotiate an extended term at modified rents.

Ask for reasonable verification of the negative impact claimed by the tenant as a result of the loss of cotenants, such as recent sales information.

Make sure that the tenant is in fact entitled to exercise the rights that it is asserting as leverage in asking for concessions. For example, a cotenancy termination right in some cases may only be exercised if the tenant is not in default of its obligations under the lease, or may not be exercised at all if the lease was assigned by the original tenant to the current tenant.

Before agreeing to lease modifications, check your loan documents. There may be restrictions on your ability to modify lease terms without the lender's consent, especially modifications to rent provisions. You do not want to put your loan in default and risk a foreclosure of the center to accommodate a tenant lease modification request.

In these difficult times, landlords and tenants of retail centers need to work together to make sure that they are both around after the holiday season to enjoy what will hopefully be a better 2010 retail environment.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Ms Mindy Sherman

Perkins Coie LLP

Perkins Coie LLP

1201 Third Avenue

Seattle

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Suite 4800

UNITED STATES

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