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Landlords offer stores pandemic-related escape clauses

"Anyone who wants to survive probably will be in a position to renegotiate their rent on the spot."
Image: a Cheesecake Factory restaurant in Los Angeles
A server carries a to-go bag of food to diners at a Cheesecake Factory restaurant in Los Angeles on Aug. 1, 2017.Patrick T. Fallon / Bloomberg via Getty Images file

New pandemic escape clauses are making their way into retail leases as the coronavirus, and long-term economic trends, continue to batter the industry, according to retail brokers, attorneys and retail analysts.

Recently commercial retailers and landlords have started adjusting lease terms to include rent payments that correlate with a retailer's open capacity. For instance, if a restaurant is operating at 50 percent capacity, it is only obligated to pay 50 percent of the rent. And for some leases in high traffic commercial hubs, landlords are conceding to easier lease termination agreements if occupancy falls below a certain percentage in the area. Other landlords are offering to defer rent and lengthen the lease term to make up for the lost rent at the back end of the contract.

“The pandemic has laid bare how interdependent landlords and tenants are,” said Judith Bachman, a real estate attorney based in New City, New York who has negotiated several retail leases since the start of the pandemic.

Before the coronavirus, pandemic clauses were practically non-existent terms in leases and insurance coverage, said Steven Soutendijk, executive managing director with the commercial real estate services firm Cushman & Wakefield. Insurance companies cover damage or a loss in sales when a business is struck by a natural disaster, but it does not include coverage for a deadly pandemic. Post COVID-19, Soutendijk anticipates nearly all new leases will include some language around a pandemic even after the coronavirus is no longer a concern.

“People are going to remember this experience and want to protect themselves from something like it going forward,” he said.

A July report from Moody’s Analytics showed retail properties were stable in terms of occupancy through the second quarter. But Barbara Byrne Denham, a senior economist with Moody’s Analytics Real Estate Information Services told NBC News that occupancies are likely to plummet after the summer tourism and back-to-school shopping seasons.

“Anyone who wants to survive probably will be in a position to renegotiate their rent on the spot,” she said.

The firm forecasts the retail sector will see 46 million square feet in new vacancies in 2020, which amounts to a vacancy rate of about 12 percent, and an additional 11 million square feet in vacancies in 2021. It estimates effective rents will decline by about 11 percent by the end of 2020.

The issue of rent has embroiled several mall operators and retailers in court battles since the pandemic struck the country earlier this year.

Retailers such as Urban Outfitters and Cheesecake Factory and PetSmart have all stopped paying rent, citing falling foot traffic and sales because of the pandemic. Simon Property filed a countersuit against Gap Inc. earlier this month over $107 million in unpaid rent and other charges. Meanwhile retailers including Victoria’s Secret have filed court summons to invalidate leases because of the pandemic.

Simon Property, the country’s largest mall chain, told investors earlier this month only 70 percent of tenants in July paid rent even though 91 percent of storefronts are open. Mall of America, the country’s biggest mall, has also fallen behind on its $1.6 billion mortgage payments, recently coming to a cash deal to stave off foreclosure.

“The pandemic has obviously had a dramatic impact...and I've experienced a lot of volatility in my career,” David Simon, CEO of Simon Property, told investors in early August. “I don't think it's going to be an immediate snapback.”

Buy-in for these new kinds of pandemic-related clauses can be tricky because it requires investors and lenders to agree to a landlord’s new tenant contracts, said Greg Maloney, president and CEO of retail with the commercial real estate services firm JLL.

“What is happening is not good but what has come of this is some good communication,” said Maloney. “But collectively maybe we can get through this and get together.”