Long-Term, Low-Rent Leases
In today's market, landlords are learning that
prospective tenants command substantially lower rents than were
achieved before the economic downturn. This is frequently
true both for new leases and amendments to existing leases. In
addition to lower rents, tenants are often granted long-term leases,
either by virtue of a lengthy initial term or a short initial term
together with a series of renewal options.
Although landlords are justifiably eager to lease up
their vacant space, they recognize that the combination of lower
rents and longer terms can have a negative impact on their
property. While these leases afford landlords current
continuous occupancy revenues, they also have a good possibility
of reducing the value of their property over time due to their
To mitigate the risk of these low-rent, long-term
leases, we suggest that landlords endeavor to include the following
provisions in those leases:
- CPI Increases.
To protect the landlord from the consequences of inflation,
landlords should require that the base rent be subject to
regular increases based on CPI.
- Fair Market Rent. While
landlords may be forced to accept lower rents for the initial
lease term, to the extent possible, leases should require that
rents be adjusted when lease renewals are exercised to reflect
fair market rent. Hopefully, by the time the initial term
expires, the economy will have improved and the rents will
increase accordingly. If the initial term is long (more
than 5 years, for example), then landlords should try to
negotiate periodic rent increases based on fair market rent.
- Limitation on Rent Concessions.
Landlords should also require that rent concessions apply only
so long as the original tenant is conducting business at the
leased premises and is not in breach of the lease. The goal of
this requirement is to prevent a tenant who is no longer
conducting its business from the premises from using its lease
to leverage the value of the property by subleasing or assigning
the lease for a higher rent than the rent stated in the
lease. Although leases often require tenants to pay the
landlord 100% of the "profits" realized as a result of
a subletting or assignment, tenants may attempt to circumvent
this provision by creating a mechanism where the profits
are not reflected in the base rent amounts. By limiting
rent concessions to the original tenant, this potential problem
can be minimized.
- Right to Recapture.
For reasons similar to those set forth above, in order to
avoid the situation where a tenant decides it would be more
profitable to be a landlord rather than a business operator,
Landlords should insist upon the right to recapture the leased
space in the event a tenant attempts to sublease its space or
assign its lease (other than in connection with the sale of the
- Percentage Rent.
Landlords who own retail properties should negotiate for
percentage rent payable after a gross sales break point is
reached. The inclusion of percentage rent can help to minimize
landlord loss (in real dollars) from the consequences of
Landlords anxious to achieve full occupancy of their
properties face many challenges in the current climate. The
last thing a landlord needs is for a new lease to contribute to the
further erosion of the value of its property. We'll work with
you to draft lease provisions to address these concerns. If you
want to learn more, please email us or give us a call.