Sacramento commercial landlords agreeing to reduce the rent for a troubled tenant must carefully evaluate how they can benefit from the agreement. Landlords must first decide if the rent reduction will be a permanent waiver of the rent or if the landlord will seek to recapture the reduced rent at a later date (i.e., a rent forgiveness vs. a rent forbearance). Most tenants will balk at increasing the rent in the future, arguing that rent called for in the lease agreement represents the maximum occupancy costs that the tenant can afford; reducing the current rent in exchange for increasing the scheduled rent at a future date is merely postponing a financial problem.
But, the landlord can still recover reduced rents without penalizing a struggling tenant. For instance, the landlord can recover the reduced rent through a “super percentage rent” provision that provides that if a tenant’s sales for any month exceed the sales for that same month in a prior prosperous year, then the tenant pays as additional rent a designated percentage of the excess sales, up to the amount of abated rent. This type of provision allows the landlord to recoup some or all of the abated rent and still assist a struggling tenant.
Another option is to permanently terminate the rent reduction if the tenant’s sales exceed prior sales for a set number of consecutive months. Once the rent reduction is terminated, the rent would resume at the original lease rate. This option assists a struggling tenant in the economic downturn while ensuring that the landlord receives the rent stated in the lease agreement once the economic downturn is over. Of course, many landlords obtain the same result by merely negotiating 3 to 6 month rent reductions and advising the tenant that they will revisit any further rent reductions in the future.
Regardless of the type of rent reduction granted, landlords must always be cognizant of the fact that a tent could file for bankruptcy while the rent reduction is in place. Per current bankruptcy laws, the tenant’s trustee in bankruptcy is then able to freely assign the lease to another tenant, possibly capturing a premium for being able to transfer the leasehold at below market rents. This is the worst possible scenario for the landlord. To avoid this result, the landlord should consider including in the rent reducing lease amendment a provision that if the lease is assigned, whether voluntarily or involuntarily, the amount of accrued, reduced rent becomes payable in a lump sum, and the rent then reverts to rent stated in the lease agreement. This provision should also provide that the rent reducing lease amendment is not transferable and is personal to the tenant. Since there are provisions in the bankruptcy code that render unenforceable any provisions in a lease that restrict the bankruptcy trustee’s ability to transfer the tenant’s leasehold, such a provision may not be enforceable. The law on this issue is unclear.
The landlord should also seek some consideration for agreeing to reduce the rent. The landlord should review the lease and determine what provisions would be beneficial to amend. For example: (i) the tenant’s agreement to extend the term of the lease (or to waive options to extend); (ii) the tenant’s waiver of its co-tenancy remedies; (iii) the tenant’s agreement to restrict its transfer rights from those otherwise permitted by the lease; or (iv) the tenant’s waiver of restrictions against the landlord leasing portions of the center for non-retail purposes.