Retail Tenants Are Pre-Negotiating Forced Closures in New Retail Leases

Many retailers and landlords were caught off guard during the pandemic. With no modern precedent for any such event and no history of the government implementing the widespread closure of private businesses for an extended period of time, there was no guidance on how to proceed with the lease agreement. Should tenants get full rent abatement? Rent deferral? Nothing, a combination? The response varied wildly from tenant to tenant, but moving forward, tenants are looking to establish game rules in advance. Provisions addressing a future government-forced closure of businesses are becoming popular in new retail leases.

“Retail tenants are asking for some form of pre-negotiated rent abatement or rent deferral in the event of a forced government shut down of retail operations,” Russ Arouh, co-chair of the industrial and warehouse industry team at Arnall Golden Gregory, tells GlobeSt.com.

It’s a challenging conversation because tenants, of course, want to protect themselves, but landlords are hesitant to agree to forgoing any amount of rent. “Landlords never want to be in a situation where the rent can drop completely based on something that is outside of their control,” explains Arouh, adding that as a standard, landlords are unwilling to engage in a discussion about rent abatement.

In many instances, landlords are agreeing to keep the previous terms worked out during the pandemic when businesses were closed. “What I am seeing is some landlords are willing to memorialize as a future agreement what they previously granted to that same tenant during the pandemic,” says Arouh.

These negotiations also require the lease to define a forced business closure, a definition that varied during this last pandemic. There were essential businesses that were allow to operate but with reduced capacity; restaurants that transitioned to a take-out service, meaning they were open but generating less revenue; and other retail businesses that could not open at all. Arouh says that only the latter should really count as a closure of businesses, and that is the scenario that these negotiations are addressing. “From the landlord side, defining forced government closure means that you are not allowed to open,” he explains. I think a lot of retailers are hard pressed to fight against that.”

However, in some rare instances, retailers have tried to broaden the scope. “There are some retailers that have tried to argue that the CDC’s recommendation to not open would be an equivalent, but those are rare. You have to look at a forced government closure as being the state or the federal government telling you that you can’t operate.”

Ultimately, these provisions are making their way into leases, and landlords have seldom objected, largely because they don’t expect another shutdown like we had in 2020. “I think some landlords are willing to absorb that risk because the odds of that happening are fairly slim,” says Arouh. “Of course, it depends on where you are operating these properties.”