Business owners who lease their premises and who are facing upcoming lease renewals or new leases should consider certain lease provisions that may make business owners more nimble in the face of economic challenges:
- Assignment and subletting should be permitted with as few restrictions as can be negotiated. If the tenant must downsize or vacate, assigning or subletting is an alternative to defaulting or negotiating a lease workout.
- A shorter lease term with more renewal options versus a longer lease term. There is usually a trade-off, though, between the length of a lease term and the amount of tenant improvement contribution a landlord will provide. If a longer lease term is unavoidable or desired in order to obtain a larger tenant improvement contribution, consider the bullet point below.
- A termination right exercisable by the tenant in exchange for a termination fee that is generally calculated to reimburse the landlord for its unamortized tenant improvement contribution, leasing commissions and anticipated rent loss. The certainty that a termination right provides, both in terms of amount and timing, is often of great value, particularly if the leasing market softens and assigning or subletting becomes challenging.
- Limiting a tenant’s restoration obligation at the end of the lease. The cost of removing tenant improvements and alterations can be expensive. Additionally, if a tenant assigns or subleases, the practicality of ensuring restoration by an assignee or subtenant is difficult.
- Focus on lease security from the perspective of a possible tenant default. Landlords familiar with – and in some cases scarred by – tenant bankruptcies prefer letters of credit to cash security deposits or to personal guaranties. A letter of credit is not considered an asset of the tenant’s bankruptcy estate, and as such is not subject to the bankruptcy’s automatic stay (freeze), and potentially not subject to the bankruptcy cap on a landlord’s damages. Try to negotiate the burn-down of the letter of credit on the basis of absence of tenant default over time rather than the basis of the tenant’s net worth. Of course, avoid personal guaranties.
If lease default appears imminent, contact lease workout counsel sooner rather than later. A landlord has incentive to negotiate a lease workout prior to a bankruptcy filing. For more information or assistance, please contact Lisa Stalteri or David Brown, Co-Chairs of the Real Estate Department at Hopkins Carley.