Posts Tagged ‘early lease termination’

Rent Reduction Agreements

April 28, 2009

The following article gives a concise point of view on the issues that a Landlord will consider prior to giving a tenant a rent reduction.  Of course, please contact an attorney whose primary focus is lease terminatination and rent reduction services in order to better understand the issues surrounding your specific set of facts.

 

As a result of the current economic downturn, many commercial tenants are finding themselves in precarious financial positions and are approaching landlords to seek rent reduction in order to survive until the economy recovers. While landlords are often hesitant to diminish their revenue stream by granting rent reduction, they may have a strong self-interest in facilitating a successful lease restructure if the tenant need is genuine. The prospect of a vacancy and its resultant effects on surrounding tenants may justify reconsideration of lease workout proposals and motivate landlords to come to the negotiating table. A landlord may wish to act promptly so as to avoid the loss of an anchor tenant or a key tenancy which triggers the exodus of other tenants, as well as the additional costs involved in replacing a tenant through brokerage fees, lease inducements and other costs.

Granting rent assistance by entering into a lease restructuring arrangement can also be an excellent opportunity for landlords to effectively regain leverage or concessions granted during the initial lease transaction, either through the claw-back of tenant rights or by obtaining additional security and rights in favour of the landlord. Therefore, landlords should consider rent reduction arrangements holistically and not just in terms of a break on rent in favour of the tenant. When determining whether or not to negotiate with a troubled tenant, there should also be consideration of the advantages a landlord can secure in exchange for its temporary concessions.

PRELIMINARY CONSIDERATIONS
In order to be effective for both parties, rent reduction must be sufficient to avoid a future default or bankruptcy by the tenant, at least until the economy improves. Accordingly, the elements of a successful lease restructure can be numerous and complex. From the landlord’s perspective, the costs of the rent reduction must be affordable and less than the consequences of a tenant’s breach. When approached by a tenant for rent reduction, landlords should analyze whether there is any benefit to a restructuring arrangement and if there is actual need on the part of the tenant for a rent reduction. Owners should also consider whether rent reduction will have the intended effect: does the tenant have a viable business operation, or will a rent reduction simply delay the inevitable demise of the tenant.

RENT ABATEMENT VS. RENT DEFERRAL
A fundamental consideration is whether the rent reduction arrangement should be structured to allow for a temporary forgiveness of rent or merely rent deferral until the tenant can recover. While tenants prefer that some or all of the rent abate or be forgiven fully, the landlord’s inclination is to provide that a portion of the rent be deferred until a later date such that aggregate subsequent rent payments are increased. This strategy is advantageous to the landlord by allowing recapture of presently conceded rent at a later date, and by creating the appearance that the net return on the lease is not diminished. Going forward, the landlord retains the option of forgiving the deferred rent or financial concessions in exchange for timely payment or other proper performance of lease obligations by the tenant. Owners may also pursue creative solutions such as temporary conversion from base rent to percentage rent, or the deferral of non-critical management costs.

TERMINATION OF RENT REDUCTION PERIOD
From the landlord’s perspective, the rent reduction agreement should be finite and short in duration, and should expressly allow the landlord to terminate the rent assistance immediately upon default or certain circumstances such as the following: (i) transfer of the lease by assignment or subletting; (ii) disclosure of the terms of the rent reduction agreement to a third party; (iii) a corporate tenant making any distributions by way of dividends, bonuses or repayment of loans to any of its shareholders, directors or officers or anyone not at arm’s length of the client; (iv) increase to the salary or other remuneration of any of the foregoing; and/or (v) the tenant or other entity directly or indirectly lending financial assistance to or guaranteeing the debts or obligations of another entity. Rent reduction should also automatically be deemed as terminated one day prior to the tenant becoming bankrupt or filing for creditor protection so as to avoid any bankruptcy trustee obtaining the benefit of the rent reduction.

ADDITIONAL SECURITY AND ACCELERATED PAYMENTS
Keeping in mind that rent reduction is part of a larger restructuring strategy, landlords should also consider obtaining additional security.

Where the deferral of rent is significant, proactive landlords can become secured creditors by requiring the tenant to grant a security interest equal in value to the amount of the deferred/abated rent in its personal property, accounts, inventory and other assets. By registering its interest, the landlord will augment its position in bankruptcy or insolvency proceedings. Furthermore, requests by other lenders for postponement of this security will flag the landlord to claims of other secured creditors who may be lending money to the tenant. Landlords may also require the addition of an indemnifier or guarantor if there is not one in place already, or to expand the obligations of any existing covenantors.

RECAPTURE OF TENANT’S FAVOURABLE RIGHTS
Granting rent reduction to a tenant should coincide with the landlord taking back, either permanently or temporarily, rights given to the tenant during the initial lease negotiations including renewal rights, rights of first refusal, expansion rights, broad use clauses, lease termination rights, co-tenancy provisions and exclusivity clauses. The original lease deal can also be amended favourably to the landlord by extending the term of the lease and reclaiming signage rights to be used as inducement to replacement tenants.

This is also an excellent time for the landlord to couple the relief with additional landlord rights, or to impose various new restrictions such as continuous operating covenants. Landlords may also revisit previously negotiated exclusions from operating costs or eliminate year-end reconciliations and lease audit rights. Landlords can also impose new relocation obligations or demolition clauses on the tenant, or require payment of additional or increased security deposits.

In order to facilitate re-letting the space to a more reliable and solvent tenant, landlords should add a blanket right to terminate the lease at any time. This right will provide the landlord with flexibility in order to market the premises if a replacement tenant is found who is prepared to pay the full rent.

SUGGESTIONS FOR LANDLORDS
Landlords should keep in mind the following restructuring strategies while considering a request for rent reduction:

  • Determine the relative bargaining positions of both the landlord and the tenant. Market conditions and trends are key in considering options, as is the tenant’s economic justification for rent reduction. Acquire knowledge of the tenant’s core business, supply and funding sources and creditworthiness. The tenant should be required to provide financial statements to the landlord regularly at set intervals in order to track the needs for rent reduction including monthly gross revenue reports.
  • Consider supplementary factors such as tenant mix and the impact that dark storefronts may have on the centre and whether losing an anchor tenant may have a domino effect on the business of other tenants through the operation of co-tenancy clauses.
  • Keep in mind financial or other restrictions on the landlord’s ability to modify leases, such as the need to obtain lender or partner consents to lease modifications. The landlord should be particularly attentive to the potential effects that restructuring may have on its own ability to meet debt service in co-tenancy/operating requirements of other leases.
  • Develop standardized procedures for evaluating rent assistance requests. Consider forming internal committees comprised of leasing agents, property managers or financial analysts to address the inquiries. The mandate of such committees usually includes conducting credit checks, assessing inventory levels and supply sources, and reviewing the tenant’s business plan and financial statements. Often when faced with a detailed information request, the tenant without a bona fide need for relief will withdraw their request for assistance. 
  • Consider obtaining a release or estoppel from the tenant for any landlord defaults, omissions of payment of tenant allowances or any liability arising out of the lease prior to the restructuring arrangement.

TENANT CONSIDERATIONS Tenants should be prepared to provide a solid business basis and detailed financial information together with the relief request and should keep the following considerations in mind:

  • Be cognizant of your bargaining power and vulnerabilities. Understand the market value of the premises in the centre/building in order to practically consider your options. Have a solid understanding of your financial condition and be prepared to demonstrate that while the tenant is financially threatened, it is not so greatly impaired that it will be considered a lost cause which the landlord will have little motivation to assist.
  • Weigh opportunity costs. By obtaining temporary relief through a rough economic period is the tenant losing an opportunity to relocate to a better premises? Consider the likelihood that you may be able to negotiate an even better deal by delaying this request for relief. Tenants should consider whether they would be better off negotiating a lump sum lease buyout payment in exchange for termination now and seeking premises elsewhere. Also consider if there an easier exit strategy from the lease such as assignment/subletting or going dark.
  • Analyze whether any landlord defaults exist and if so, how remedies may be part of the overall restructuring approach.

As the above considerations demonstrate, with a systematic and thoughtful approach, both landlords and tenants can work together to negotiate a lease restructuring and rent reduction arrangement in order to achieve a constructive resolution to a potentially undesirable tenant departure during challenging economic times.

 

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Lease Termination Agreement Form

April 28, 2009

The Lease Termination Agreement Form below should not be used without consulting an attorney.  There are many issues that need to be resolved prior to executing a lease termination agreement, including, but not limited to: local release statutes, outstanding debts or obligations owed to either party and early termination penalties.

 

 

LEASE CANCELLATION AND TERMINATION AGREEMENT

 

 

            This LEASE CANCELLATION AND TERMINATION AGREEMENT (this “Agreement”) is made by and among XXX (the “Landlord”), on their own behalf and on behalf of all other persons or entities having an interest as landlord under that certain Lease dated __________________ ___, ________ (the “Lease”) demising certain leased premises described therein (the “Premises”), on property located at __________________, City of __________________ County of __________________, State of __________________ (the “Building”), and by YYYY (the “Tenant”), for its own behalf and on behalf of all of its predecessors-in-interest in the Lease and all other persons or entities having an interest as tenant under the Lease.

 

            Landlord and Tenant have agreed that the Lease shall be cancelled and terminated in consideration of the mutual covenants set forth below and in accordance with the terms and conditions set forth herein.

 

            1.         Recitals Incorporated.  The foregoing recitals are incorporated herein by reference into this Agreement as though set forth at length.

 

            2.         Security Deposit.  The parties acknowledge that Tenant has deposited with Landlord the amount of $__________.

 

            3.         Lease Modification.  The term of the Lease shall expire and shall be deemed terminated and cancelled effective on __________________ ___, _____ (the “Expiration Date”).  Except as modified herein, the Lease is unmodified and in full force and effect.

 

            4.         Lease Termination and Termination Payment.  Notwithstanding the foregoing, if, on or before the Expiration Date, Tenant vacates the Premises and leaves such Premises in reasonably good condition and repair and otherwise in such condition as is required under Paragraph 6, below and under the Lease with respect to surrender of the Premises at the end of the term of such Lease, then, in such event, as of the date that Tenant so vacates the Premises (such date being the “Termination Date”), (i) the Lease shall be deemed terminated and cancelled with the same effect as if such date were the normal expiration date of the Lease; (ii) Landlord shall pay or cause to be paid to Tenant, a cash termination payment of __________________ Dollars ($__________________.00); (iii) neither party shall have any claim against the other, and each party releases the other from any and all claims, liabilities, damages or actions of any kind whatsoever arising out of or pursuant to the Lease or Tenant’s use or occupancy of the Premises; and (iv) Landlord shall return the security deposit to Tenant.  Notwithstanding any provision in the Lease or in this Agreement, if for any reason Tenant fails to perform any obligation hereunder or under the Lease, including, without limitation, Tenant’s obligation to vacates the Premises and leaves such Premises in reasonably good condition and repair and otherwise in such condition as is required under Paragraph 6, below on or before the Expiration Date, then, in such event, the Prepayment shall be due and payable by Tenant to Landlord immediately.

 

            5.         Compliance with Obligations.  Tenant shall be responsible for all obligations of Tenant under the Lease through and including the Termination Date, including, without limitation, Tenant’s obligation to pay monthly rent, additional rent, utility charges and all other amounts and charges owing under the Lease.

 

            6.         Condition of Premises.  On or before the Termination Date, Tenant shall remove all of its trade fixtures and personal property; repair all damage to the Premises caused by such removal; vacate the Premises and leave such Premises in reasonably good, broom swept clean condition and repair and otherwise in such condition as is required under the Lease with respect to surrender of the Premises at the end of the term of such Lease; and deliver the keys to the Premises to Landlord.

 

            7.         Mutual Release.  By this Agreement, effective on the Termination Date and so long as neither party shall be in default under its obligations hereunder, each party hereto releases the other party hereto from all claims, demands, damages, rights, liabilities, and causes of action of any nature whatsoever, whether at law or equity, known or unknown, suspected or unsuspected, which are related or in any manner incidental to the Lease or the Premises and which first arise out of transactions and occurrences from and after the Termination Date.  Each party waives and relinquishes any right or benefit which it has or may have under applicable law regarding waiver of unknown claims to the full extent that it may lawfully waive such rights and benefits.  In connection with such waiver and relinquishment, each party acknowledges that it is aware that it or its attorneys or accountants may hereafter discover facts in addition to or different from those which it now knows or believes to exist with respect to the subject matter of this Agreement or the other party hereto, but that is such parties intention hereby fully, finally, and forever to settle and release all of the claims, disputes, and differences, known or unknown, suspected or unsuspected, which now exist or may exist hereafter between each party with regard to the Lease or the Premises.  This Agreement shall be and remain in effect as a full and complete release notwithstanding the discovery or existence of any such additional or different facts.  Notwithstanding the foregoing to the contrary, this Mutual Release is not intended to release or offset actions by either party for claims arising as a result of (i) a breach of the Lease and occurring on or before the Termination Date, (ii) a breach of this Agreement, or (iii) transactions and occurrences on or before the Termination Date.

 

            8.         Knowing Release.  In executing this Agreement, each party hereto acknowledges that they have consulted with and received the advice of counsel and that the parties have executed this Agreement after independent investigation and without fraud, duress, or undue influence.

 

            9.         Authority of Tenant.  Tenant represents and warrants that (i) it is the owner and holder of the tenant’s interest in the Lease and that it has the power, right and authority to execute this Agreement and to carry out the intent hereof, (ii) the execution and delivery of this Agreement shall not violate or contravene any agreement, contract, security agreement, lease or indenture to which Tenant is a party or by which it is bound or requires the consent of any party to any of the foregoing and (iii) the Premises, including all improvements and betterments thereto, are unencumbered, free of any security interests, liens, chattel mortgages, leases, lease purchase agreements or any other security or financing devices and, all such installations have been fully paid for.

 

            10.       Attorney Fees.  If any party initiates legal proceedings to enforce its rights under this Agreement, the substantially prevailing party shall be entitled to reimbursement of its reasonable attorney fees, costs, expenses and disbursements from the other parties.

 

            11.       Final and Complete Expression.  This Agreement is the final and complete expression of the parties.  This Agreement may not be modified, interpreted, amended, waived or revoked orally, but only by a writing signed by all of the parties hereto.

 

            12.       Severability.  If any provision in this Agreement is deemed invalid, then the remaining provisions thereof will continue in full force and effect and will be construed as if the invalid provision had not been a part of this Agreement.

 

            13.       Counterparts.  This Agreement may be executed in counterparts, each of which shall constitute an original and all of which together shall constitute one and the same document.

 

            Dated this        day of              , 20____.

 

TENANT:                                                       YYYY

 

 

                                                                        __________________________________

                                                                        YYYY

 

LANDLORD:                                                XXXX

 

 

                                                                        __________________________________

                                                                        XXXX