By Benno Rothschild, partner, Hartman Simons
Let’s assume the real estate market has hit bottom, and things are starting to look up. (Fingers crossed.) On the way out of this recession, I have three tips, from a legal perspective, for landlords negotiating leases. I addressed these issues recently with Invesco’s real estate group in Texas, where I was one of several service providers invited to speak.
For retail
#1 Don’t wait until the last minute to deal with subordination non-disturbance agreements. Tenants today are much more focused on SNDAs — and with good reason. They don’t want their leases to be disrupted if landlords lose control of buildings, and this recession has taught them that even the owners that seem the most stable may not be. The key for landlords is to deal with this issue early, so it doesn’t hold up the deal.
#2 Co-tenancy clauses should be scrutinized. A lot of co-tenancy agreements were signed without much thought during the go-go days. When the economy tanked, those after-thought clauses came back to haunt the landlords. Owners need to think about what they are promising because it may be hard to fill up a certain box in a shopping center, particularly with a similar kind of retailer. When Circuit City went away, landlords were scrambling to find another electronics tenant just to keep the peace with other tenants. Landlords don’t want to get in a situation where tenants can get percentage rents forever because of a co-tenancy clause. At the very least, make sure there is a sunset (or end) to how long that percentage rent will go on.
#3 Doing favors for your tenants is not going to get you a favor in return. Those days are over. If you help a tenant out on the first 10 stores, don’t expect that retailer to cut you any slack in the 11th negotiation. A lot of relationships are frayed, and even when tenants have less power (i.e. the economy is better), the way business is done will not return to the back-slapping days of old, at least not immediately.
These are my top three. I’d welcome your input of other things landlords need to remember now that the economy is (hopefully) turning around. At Hartman Simons, we are proud that to be a business partner for our clients and we are committed to helping them grow their businesses, as well as providing legal counsel.