Most commercial business owners never considered a pandemic when they signed the dotted line of their lease agreements. In a matter of a few months, business strategies have been turned upside down. Tenants are treading water while landlords have jumped into the deep end, searching for both temporary and long-term solutions.
The Pandemic Clause
While a pandemic clause isn’t typically found in a commercial lease, it may become more common in the future. In one example, UK retailer Edinburgh Woollen Mill is now beginning to add a pandemic clause in their leases. Under this clause, a retailer just starting their lease will not have to pay rent until the store is actually open. And should a future pandemic arise, rent would be paused and possibly refunded for closed retailers.
Important Aspects of the Landlord-Tenant Relationship
Unique situations like this pandemic usually cause tenants to look for clauses in their leases that could plead their case for rent relief. And depending on the lease, some of that wording may exist. But while the pandemic is the current focus, there are plenty of other, common tenant-landlord issues to note. Understanding these three specific topics could make all the difference in the tenant-landlord relationship:
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- Tenants and Landlords Need Each Other
The bottom line of any commercial real estate investment is that it needs to be an income-producing asset. Whether the investor fills the property with their business or leases it out to another company, it has to generate income. Tenant rents are the main way that landlords can incur cash flow from their properties.In the event of a recession or a difficult local market, tenants sometimes need temporary rent adjustments. Even if a tenant requires rent relief, the landlord may rather make rent concessions than face the arduous task of finding a new tenant. So in the case of a wide-spread market downturn, a tenant may be able to negotiate a lease in their favor. And landlords may prefer a temporary drop in rent to a long-term vacancy. - Landlords May Pay for Tenant Improvements
Tenants don’t always know that their landlords can pay for tenant improvements (TI). Tenant improvements include upgrades to the physical space according to the needs of each tenant. Sometimes landlords pay the tenant for their TI. Or, in some cases, the landlord will discount the rent rate in order for the tenant to use the additional money on the facility.TI is especially important for medical tenants. Many times, their spaces require specific ceiling heights or additional plumbing and cabinet space. It can be very expensive to transform an existing facility for a medical practice, making TI a significant component of their lease agreement. The options for TI depend on the location and age of the property, among a few other factors. But regardless of the type of facility, TI should be considered during lease negotiations.
- Both Parties Should Consider the Operating Expenses Clause
Landlords use the operating expenses clause to recoup expenses related to running the building. It’s a standard clause, but the details should correlate with the specific building and rented area. If the clause is vague, the tenant may wind up paying for items that are not related to their lease. Both parties should consider consulting a commercial real estate advisor to learn which items could be included in their operating expense clause.
- Tenants and Landlords Need Each Other
Regardless of the state of the market or current events, leases can be a win-win for both landlords and tenants. If any either party has questions regarding their specific leases and how they can tailor it to their business models, they should reach out to a commercial advisor. Commercial real estate advisors are skilled in guiding the tenants and landlords through lease negotiations, ensuring that their clients don’t miss important details.
If you are interested in learning more about investing in commercial real estate, or if you have questions about buying, selling, or leasing a commercial property, please contact an HBRE advisor. Our team of experienced CRE professionals have the skills and insight to assist with all property transactions. To reach out to us directly, email [email protected] or call 615-564-4133.
