A new type of lease could give retail landlords a new lease on life during the incredibly tough economic times associated with the COVID-19 pandemic. After most of the country shut down in early spring of this year in an attempt to limit the spread of the novel coronavirus, brick-and-mortar retailers have struggled to regain traction over the summer and fall. Even in states where full re-openings have been attempted and at least partially achieved, consumers are more likely than ever to stay home and order online. The result has been devastating for retail landlords and their tenants. They don’t want it to happen again, and many believe including pandemic clauses in their leases could be the solution.
These pandemic clauses are aimed to ameliorate losses for landlords and tenants in the event of additional pandemic-related losses. Most insurance policies did not cover these losses this past spring, meaning that many retail tenants lost their locations and many retail landlords are facing financial ruin as tenants fail to pay their leases. The clauses are designed to create some “breathing room” for both parties. For example, tenants might receive a substantial rate cut if the local government prohibits them from opening their doors, but they agree to pay the reduced rate even if another shutdown occurs this fall. Some landlords are also offering “percentage rent” agreements that limit tenant expenses if sales decline while giving the landlord a percentage of sales as part of the rent.
Tenants are also creating and demanding their own protections in new retail leases. For example, Pet Supplies Plus, a retailer that has expanded over the course of 2020, is strengthening the force majeure language it demands in lease agreements that allows the store to terminate a lease or pay reduced rents as a result of “extraordinary circumstances.” With rents falling, many retail landlords say it is imperative that all focus not be on tenants’ ability to not pay any portion of the rents owed in the event of another shutdown.
“We are seeing rents 25 percent cheaper than pre-COVID-19,” said Corey Bialow, CEO of a firm that represents retail tenants, in an interview with the Wall Street Journal. “Some landlords may not make a profit for six to seven years.”