The decline in retail sales in the greater Sacramento area has resulted in a substantial number of commercial tenants seeking rent reductions or early termination of their commercial leases. While the normal reaction of most landlords will be to resist a rent reduction under nearly all circumstances, landlords should take the opportunity to perform an in-depth evaluation of its tenants.
In order to properly evaluate a tenant’s proposal, the landlord should request that the tenant furnish the following information: (i) profit and loss statements for the relevant location and for tenant’s overall operations, so that the landlord can ascertain whether the tenant’s operations are truly distressed; (ii) marketing expenditures for the current year and for prior years, both for this location and for tenant’s other stores within the market; and (iii) historical comparative sales figures for the tenant’s locations, preferably additionally showing sales per square foot for each location. If the tenant is a sole proprietor, also request the tenant furnish (i) the last two years of tax returns; and (ii) a personal financial statement signed under penalty of perjury.
The tenant may well resist providing this sort of economic information, fearing that it will place the tenant at a disadvantage in future lease negotiations; however, the landlord should explain that one of its requirements is to determine whether the poor performance at landlord’s center is unique to that center, or whether tenant is suffering distress throughout all locations. Further explain that this information will help the landlord determine whether rent relief will assist with the viability of tenant’s business.
If the poor sales are localized at the landlord’s center, then the landlord should evaluate whether the decline is within the tenant’s control, such as poor local management or disproportionately reduced marketing expenses, or whether it may be caused by underperformance of the center. Review of tenant’s financial information will also alert landlord as to whether the tenant is likely to survive the current downturn in the economy, irrespective of whether the landlord affords the tenant rent relief.
If the landlord determines that the tenant is likely to fail in any event, the landlord may be best served to enter into a consensual lease termination in order to avoid being dragged into the tenant’s bankruptcy.