However, landlords providing rental reductions pose various obstacles. First and foremost, landlords typically buy buildings with debt with the belief that the rents received will offset the mortgage and other expenses and hopefully provide some level of return on investment. Any rental reduction will obviously affect the landlord's return on investment. Decreased rents can also impact the ability of the landlord entity to maintain and provide certain services to the building, which in turn can affect the likelihood of leasing vacant spaces, which further impacts the cash flow of the property. As a result, a rent reduction may not be an alternative available to every landlord out there.

Tenant's View:

Differing greatly from landlord's intentions, tenant's typically ask for rental relief due to the fact that the cash flow from their clients is decreasing or their accounts receivable is aging longer into the future, both circumstances creating a precarious position for the tenant to pay their bills. Case in point, a client recently showed us a letter that one of their clients systematically distributes to all of their venders asking for a no questions asked 10% decrease in funds due. It was pretty much, please sign this form and we will continue to use your services. A few nationwide retail tenants have also sent out similar letters to "all" of their landlords across the country.

We also have numerous other clients whose gross revenues are off dramatically and who are attempting to renegotiate their leases with their existing landlords. The landlords are asking for current income statements and balance sheets, along with an explanation as to how the tenant proposes to increase their future revenues in order for them to stay in business. Basically, the landlord is looking for their business plan, a reason to grant a rent reduction and comfort that the tenant is going to survive the current down economy. As a result, a tenant seeking a rent reduction should gather all this information upfront and approach its landlord with its best foot forward. Landlords need to believe that it is worth "betting" on its tenant's business and that the landlord's loyalty will pay off in the future.

Conclusion:

We believe we will see more of these requests coming in the future months and there needs to be some up front, candid discussions early on between the tenant and landlord. Additionally, the tenant needs to understand a landlord's motivation and vice versa. No one wants to "delay the inevitable," so tenants should come to the table armed with evidence of how it plans on weathering the current economic downturn.

The views expressed in this article are those of the author and not GlobeSt.com.

Brad Nielsen is a partner in the Orange County office of the law firm of Allen Matkins Leck Gamble Mallory & Natsis LLP. He can be reached at 949-553-1313 or bnielsen@allenmatkins.com. Randolph Mason is a senior vice president and one of the partners of Lee & Associates—Irvine Inc. He can be reached at 949-790-3113 or rmason@lee-associates.com.

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Rental Relief--Necessary Evil or Delaying the Inevitable?

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