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Fairfield County Business Journal

Q&A from the Corner Office

Kelly Liyakasa

Dec-23-09, 10:57 AM

1 Vote

Topics: Banking, Law, Real Estate, Finance

Both office and retail landlords worked overtime this year to smooth relations with tenants. Andrew Glickson, a partner at law firm Pullman & Comley L.L.C. in Stamford, which also operates a Bridgeport, Hartford and White Plains, N.Y., office, shared how.

Q: What did property owners do to keep cash and credit-strained commercial tenants from defaulting on their leases post economic downturn?

Glickson: “What we’re seeing is the tenant playing ‘chicken’ with the landlord by threatening default under the lease if concessions aren’t given. Or, at the end of a lease term, the tenant will threaten to leave the property if favorable renewal terms aren’t granted.

“The threat of a tenant’s default or departure is significant in a relatively weak leasing market. The landlord may face a prolonged vacancy. When it finds a new tenant, it may incur large costs for ‘fit-up’ and brokerage commissions that might have been avoided if the old tenant had remained in place. Loss of cash flow from the prior tenant will impair the landlord’s ability to pay its mortgage.

“We’ve seen several ‘chain’ tenants approach every one of their landlords, saying, ‘We have to achieve a (certain) percent across-the-board reduction in our leasing costs for the upcoming year, so we’ll reduce our rent, OK?’ The landlord knows if its particular location is a strong performer or a weak performer for the tenant. If the location is strong, the landlord can refuse concessions.

“More than the tenant’s rent money may be at stake. If a tenant in a multi-tenant retail complex closes its doors, this will adversely affect the other tenants. Even if those other tenants’ rents are not based on their sales, their own ability to stay in business may be threatened by a decrease in traffic throughout the property.

“A landlord might impose conditions on concessions or request reciprocal concessions from the tenant. We’ve seen landlords offer a short-term rent reduction, on condition that the reduction be repaid if the tenant closes its doors during the reduced rent period. We’ve seen an office landlord forgo a scheduled rent increase in exchange for the tenant’s commitment to an additional year at the end of the lease.

“A tenant who seeks concessions must understand what the landlord might ask in return. We saw a tenant that defaulted on its rent, just for a short time; the landlord was only too happy to reinstate the lease, and even agreed to a rent reduction, but conditioned its agreement on the tenant's relinquishment of a renewal option that would have interfered with the landlord’s long-term plans.”