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Round Four: Commercial Tenant Lease Options During COVID – Landlord Sues Me; Now What?

Are you currently a tenant leasing space in a commercial (retail, office, industrial usually) property with your business suffering significant losses?  If so, want to know what your options are and what you should be doing about it now and in the future?  

This is the fourth and final part of a series of articles written on this subject.  The first article covered the pros and cons of subleasing and assignment.  The second had to do with not paying rent.  The third article in this series dealt with how to terminate your lease early.  This one deals with what to do if your landlord has filed a lawsuit against you.

I mentioned in my last blog that if a tenant terminates a lease early, most times the landlord doesn’t even sue the tenant and the tenant might only lose their security deposit.  This usually happens when the landlord doesn’t think that pursuing a judgment will be worth it for many reasons.  One of these reasons would be a tenant not having any assets to pay or not having assets that are legally attachable via a judgment (such as retirement accounts and your personally owned residence that you occupy). Another would be because of how much time, energy, and cost it takes.

What happens if your landlord does sue you?  What should you do?  Most of the time its tenants that have legally attachable assets that are concerned about this, such as those with substantial net worth not legally protected in any way.  This would include rental houses, boats, cars, cash, etc.  Sometimes tenants simply don’t understand the legal process and are afraid that it could be very costly, possibly ruin them, hurt their credit, etc. if they lose in court.  However, once again even legal cases that are filed usually get settled before they go to court because of how costly and time consuming the court process is, not only monetarily but also in terms of time.

Let’s say you are headed to court.  There are so many cases currently filed in California that the courts are backlogged close to 3 years right now,  and many of these cases also deal with a tenant not paying rent.  The courts haven’t decided on how they are going to rule over the government shutting down businesses and COVID causing more of the same.  If the court rules in the tenant’s favor in some of the early cases, then I think many of these cases will be dismissed or settled quickly.

Why might a court rule in a tenant’s favor when the lease clearly states the tenant needs to pay rent no matter what?  I think the best defense right now is “frustration of purpose.”  It’s a legal phrase that basically means if you are supposed to do something but can’t because the government says you can’t, or for another good reason, (like COVID) then you are excused from having to do that something.  In this case, that something is paying rent if you are a tenant.  There are other defenses but I think “frustration of purpose” is the best one for a tenant right now in this situation. Check out this article for more on “frustration of purpose” during this pandemic. 

I am not an attorney, but I have been an expert witness and have been involved in resolving many legal cases for many types of commercial real estate matters including why a tenant should pay rent.  In my 35 plus years of being in the commercial real estate business, I have never seen a more appropriate fit for the “frustration of purpose” argument.  It doesn’t get more frustrating for a tenant than a lease stating that the tenant has to pay rent when the government says they can’t be open for business.  I am watching closely what the courts will do here and really hope they rule in the tenant’s favor on this matter.

What bothers me about landlord leases is that they are usually heavily slanted in the landlord’s favor and landlord’s usually have leverage over a tenant so the lease is rarely fair to the tenant.  And never more so in the “force majeure” clause area.  “Force majeure” simply means “acts of God” or things that happen that aren’t in your reasonable control.  This clause is in many landlord drafted leases and when it exists it’s usually written such that a landlord doesn’t have to do what the lease says the landlord must do if it’s out of the landlord’s reasonable control.  But guess what?  This right isn’t usually reciprocal to a tenant and even if it is, it almost always excludes the payment of rent by a tenant.  How fair is that?  Many times, courts will realize the leverage the landlord has over the tenant and will not allow a lease clause to only favor one party unequally.  For instance, in California, courts don’t allow a lease to award legal costs to the landlord only and not also the tenant no matter if the lease states otherwise and by law,  it makes this right reciprocal.  I hope that after COVID the courts will realize that a “force majeure” clause needs to be not only made reciprocal if it’s in a lease but even if the clause itself is absent from the lease that it becomes mandatory anyways.

Each situation is unique and needs to be figured out carefully if you want help making the right decision on how to handle what you should do regarding your commercial lease.   I have settled these types of matters both as a landlord and tenant hundreds of times so I can assist you for a reasonable cost if you need help so please contact me if so as follows:  

David Massie

DJM Commercial Real Estate

david@djmcre.com

805-217-0791

 

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Round Three: Commercial Tenant Lease Options During COVID – Save Money By Terminating Your Lease Early

Are you currently a tenant leasing space in a commercial (retail, office, industrial usually) property with your business suffering significant losses?  If so, do you want to know what your options are and what you should be doing about it now and in the future?  

This is the third part of a series of articles I will be writing on this subject so make sure to tune in for the rest in the future.  The first article covered the pros and cons of subleasing and assignment.  The second had to do with not paying rent.  The next article will cover what to do if you are in a lawsuit with your landlord and in particular, the “frustration of purpose” defense.  This third article in the series deals with how to terminate your lease early and save a lot of money doing so.

I have written on the subject of terminating your lease early but would like to point out some notable updates. Click here to view this original, relevant blog. 

Normally when you terminate a lease early, you restore legal possession of the premises to your landlord, and thereafter, your landlord has an obligation to mitigate your damages.  In my experience and opinion, “mitigating your damages” usually equals 6-12 months of your then-current rent.  This is the amount of time normally awarded by a court to a prevailing legal party.  It doesn’t matter if you have a 10 year or longer lease, the award is the same.  So, usually, a tenant can simply reduce what they owe dramatically by restoring legal possession of the premises to their landlord.  Although it’s unclear how COVID is going to affect this 6-12 month rent period and if the courts are going to extend it because it’s probably going to take longer to find a new tenant to take your place.  However, most of the time these types of cases settle and never make it to court as that saves both landlord and tenant time and money.

Most of the time the landlord doesn’t even sue the tenant for terminating its lease early and the tenant walks away paying nothing.  Why?  There are many good reasons: If the tenant doesn’t have enough assets worth pursuing; even if the tenant has enough assets but they are legally protected (in a trust, retirement account, principal residence tenant owns, etc.); because the landlord doesn’t blame the tenant for the government shutdown and/or COVID; because the landlord thinks it might cost more in time, money and energy to sue you than it’s worth; because the landlord might not win in court (if the courts decide that a “frustration of purpose” or other types of legal argument favors the tenant); or because it will make the landlord look bad if other tenants and brokers find out and then don’t want to do business with this landlord (because this wasn’t the tenant’s fault and/or they like the tenant).

Each situation is unique and needs to be figured out carefully if you want help making the right decision on how to handle what you should do regarding your commercial lease.   I have settled these types of matters both as a landlord and tenant hundreds of times so I can assist you for a reasonable cost if you need help so please contact me if so as follows:  

David Massie

DJM Commercial Real Estate

david@djmcre.com

805-217-0791

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Round Two: Commercial Tenant Lease Options During COVID – Pros And Cons Of Not Paying Rent

Are you currently a tenant leasing space in a commercial (retail, office, industrial usually) property? Is  your business suffering significant losses?  If so, do you want to know what your options are and what you should be doing about it now and in the future?  

This is the second part of a series of articles I am covering on this subject, so make sure to tune in for all of them shortly.  The first article covered the pros and cons of subleasing and assignment.  Future articles will cover when/how to terminate your lease early, and other relevant options.  This particular article of the series will deal with when you should and shouldn’t pay rent, along with the pros and cons of each.

Not paying your rent is usually not a good idea if your landlord has offered you a reasonable alternative like not having to pay  your rent now and adding on the deferred rent to your lease. This can be done at the end of your term via a term extension (adding 3 months or whatever length of the deferred rent amounts to in months) or in some other fashion like raising your rent some time in the future to recoup the abated rent. There are also many other options such as paying a percentage of your rent based on the percentage of your gross/net income that you are currently making, compared to what it would have been before COVID began.  However, if these types of rent arrangements don’t work for you for some good reason, one being that your business simply isn’t going to make it and you are losing money, then you have to find a different solution.

What happens if you ask the landlord for some kind of help and he isn’t responding to you?  Then in my opinion, not paying your rent could be your best option.   Both landlords and lenders don’t want empty buildings as landlords might give a building back to a lender if too many tenants aren’t paying rent or vacating their building.  My experience is that by not paying rent, you will get your landlord’s attention and get a response with what the landlord is willing to do for you quickly.

Some of my clients I have spoken with fear litigation if they don’t pay their rent.  They ask whether the landlord can sue or evict them or if this will hurt their credit?  Assuming the courts are even open, it will probably take over two to three years because of the current legal case backlog for your case just to make it to court. Also, it has not traditionally gone well for the landlord or the lender if they have to spend a lot of money on legal fees chasing tenants and creating vacant spaces at their property.  And you can always change your mind and pay the rent once you get a notice of default as long as you pay within the allotted time, but, even then, most times I would probably recommend that you still don’t pay.  At the same time, it’s unclear how the courts are going to decide the legal matter of a tenant not paying rent if the government shut their business down or the tenant simply couldn’t reasonably open due to COVID related issues.  There is a legal term called “frustration of purpose” and it’s my opinion that this legal doctrine applies to the nonpayment of rent issues and that the courts should not require a tenant to pay rent during such times if they can’t reasonably operate their business.

If you can’t afford to pay all or part of the rent and don’t have any assets that are legally attachable via a legal judgment, then, in my opinion, it’s pretty easy to not pay rent as there isn’t much a landlord can do about it.  Many landlords would rather have the tenant in the space even if they aren’t paying, rather than a vacant space that might take years to release, as at least there is a chance the existing tenant might make it and even be able to pay some of the back rent due in the future.  But if you can afford to pay the rent, even though your business isn’t making much income and have legally attachable assets via a legal judgment, the decision is a little tougher, but not impossible, and not paying rent still might be your best option.

Note to Landlords:  It’s probably in your best option to work with your existing tenant rather than have their space go vacant and try to release it.  Legally pursuing your existing tenant for rent might backfire on you and cost you more in money and time than is worth the effort.  If your lender won’t help you, give them a strong warning about how you might have to default on your loan.  In my opinion, one of the best ways for the tenant, landlord, and lender to get through this is for all three to work together and share in the pain.  Example:  If each party agreed to pay 1/3 of the rent due for 3-12 months, then everyone might get through this as best as possible with no tenant going out of business or a lender having to foreclose on a property at great expense.

Each situation is unique and needs to be figured out carefully but you have to know and consider all of your options so you can pick the best one.   I have settled these types of matters both as a landlord and tenant hundreds of times so I can assist you if you need help so please contact me here:  

David Massie

DJM Commercial Real Estate

david@djmcre.com

805-217-0791

David Massie

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Round One: Commercial Tenant Lease Options During COVID – Subleasing Your Unused Space

Are you currently a tenant leasing space in a commercial (retail, office, industrial usually) property with your business suffering significant losses? If so, do you want to know what your options are and what you should be doing about it now and in the future? This is the first part of a series of articles I will be writing on this subject so make sure to tune in for all of them shortly. Upcoming articles will cover: when not to pay rent to your landlord, when/how to terminate your lease early, and other relevant options.

Let’s start with what a tenant would normally do if they didn’t pick a course of action with any risks of legal action by the landlord, such as terminating a lease or not paying rent. Subleasing part of your space or assigning all of it are two viable options.

Under a sublease, you would lease part of your space and you are still the tenant, but become your new subtenant’s landlord which is called a “sublandlord”. You could also sublease all of your space, but this isn’t as common. You still pay your rent to the landlord normally, and you collect rent from your “subtenant” based on the agreement you have made between you and your subtenant. You and the subtenant can agree to pretty much whatever you want to on lease terms as long as it doesn’t violate the main lease between you and your landlord.

Subleasing sounds simple enough but here are some issues to consider that make it more complicated: a) The subtenant’s business use should be compatible with yours because if it isn’t, it could be very disruptive to your business; b) You should have a very good written sublease agreement prepared by a real estate attorney or possibly your commercial real estate broker if he is qualified and should try not to create or change the form on your own. This is because if something were to go wrong with the relationship, and the subtenant creates a problem (not paying, disruptive, etc.) you want to make sure you are on solid legal ground to evict them and make them pay for any damages they cause you; c) You should check out your subtenant’s criminal and financial background thoroughly just like your prudent landlord did with you and make sure you get enough security deposit and/or personal guaranty but get professional help when making this determination from a CPA or your commercial broker if he is qualified to do so; d) You should market your sublease space to reach the widest audience you can. This will usually require costs (advertising, commission, time, and energy) so it’s best to hire a commercial broker to do so as you simply will not have the same audience reach or expertise that the broker does and this broker will bring you more quality options than you can find on your own and lease your space faster.

Switching to an assignment works somewhat like a sublease but an assignment is normally done when leasing the entire space to someone new rather than just part of it like through a sublease. Your new replacement tenant is called the “assignee” and you become the “assignor”. The assignee pays rent to the landlord directly as opposed to paying you like the sublease example above. However, this assignee pretty much takes your place and assumes your existing lease without making changes to it, although it is still possible to have changes made, your landlord has to agree, and there normally isn’t an incentive for your landlord to do so. You remain on the hook under the terms of your original lease like a guarantor would, so if your assignee defaults on the lease and doesn’t cure it then you will be responsible to do so. This will result in you having to pay any rent difference each month to your landlord that your new assignee doesn’t pay if this assignee is paying less than you were.

Both of the above options normally require landlord approval so check your lease carefully in the applicable sections and make sure you do what it says. Your landlord can usually decline a request to sublease or assign your lease based on reasonable grounds. Reasonable grounds can be items like bad financials or a criminal record, too many employees, business use not compatible with other tenants in the building, etc.

Each situation is unique and needs to be figured out carefully but you have to know and consider all of your options so you can pick the best one.   I have settled these types of matters both as a landlord and tenant hundreds of times so I can assist you if you need help so please contact me here:  

David Massie

DJM Commercial Real Estate

david@djmcre.com

805-217-0791

David Massie

 

 

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COMMERCIAL TENANTS: SHOULD YOU PAY RENT DURING THIS CRISIS?

In my opinion, the answer is generally no; don’t pay your rent for now.

Why?  Because it’s probably the only leverage you have over your landlord right now, and it is good leverage which most tenants don’t typically have with a landlord. A relevant Costar News Article discusses how The Cheesecake Factory is one of many examples of a business that has found it impossible to pay rent.  If you pay your rent as usual, why would a landlord offer you any kind of help?

I have been receiving many calls from business owners from existing clients and those that are becoming new clients related to what they should do regarding their commercial real estate leases.  Negotiate to terminate the lease early, sublease or assign the leased space, apply for governmental aid, make an insurance claim, etc. are some of the potential options. There are pros and cons to each option but one of the best options for a tenant right now is to simply not pay your rent.

Not paying your rent might not be a good idea if your landlord has offered you a reasonable alternative such as not paying rent now and adding on the deferred rent to your lease. This could be done either at the end of your term, via a term extension for three months, or whatever length of the deferred rent amounts to in months, or in some other fashion like raising your rent in the future to recoup the abated rent.  However, if this doesn’t work for you for some reason, then you have to find a different solution like one of the ones mentioned in the paragraph above. Here is a link to another article on this subject that you might find of interest.

But what if you ask the landlord for some kind of help and he isn’t responding to you?  Then in my opinion, not paying your rent could be your best option. Landlords and lenders both don’t want empty buildings as landlords might give a building back to a lender if too many tenants aren’t paying rent or vacating.  My experience is that by not paying rent you will get your landlord’s attention and get a response with what the landlord is willing to do for you quickly.

Some of my clients I have spoken with are worried about litigation if they don’t pay their rent.  “Won’t the landlord evict me?” or “Won’t this hurt my credit?” The answer to these questions is that the courts aren’t open now and might not be for some time. And if the landlord has to spend a lot of money on legal fees chasing a lot of tenants and creating a lot of vacant space at their property that traditionally has not gone well for a landlord or a lender.  Also, you can always change your mind and pay the rent once you get a notice of default as long as you pay within the allotted time but even then most times I would probably recommend that you still don’t pay.

Doug Schneider of Alabama-based Bayer Properties knows what store and shop owners are struggling with amid this COVID-19 crisis. In a recent Costar News article, Tony Wilbert states: 

“To help, Schneider, the executive vice president of operations at Birmingham, Alabama-based Bayer Properties, is starting a program to help tenants access some of the money available to them as part of several federal programs, including the Coronavirus Aid, Relief, and Economic Security (CARES) Act and Small Business Administration Economic Injury Disaster Loans (EIDL). Tax credits are available under expanded provisions of the Family and Medical Leave Act as well, he said.”

Here is another great article from Bisnow: The Coronavirus Tenant-Landlord Playbook Revealed.

Each situation is unique and needs to be figured out carefully, so run it by your attorney, CPA or other counsel if you want help making the right decision on how to handle what you should do regarding your commercial lease.   I have settled these types of matters both as a landlord and tenant hundreds of times so I can assist you if you need help. Reach out at david@djmcre.com or 805-217-0791.

Here is a resourceful list of additional relevant articles:

 

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Tenant Rent Abatement During This Crisis

Many businesses are experiencing the same income drop that you and I are.

In a relevant Costar article, Brad Tisdahl states:

 “The people I’ve been in contact with are asking, how long and how serious is this going to get,” said Tishahl, adding he’s recently received a steady stream of inquiries from current and prospective clients. “Landlords want to get a sense of what they should be doing if they’re getting a lot of rent-relief requests.”

While it is true that many businesses are experiencing income drops, the landlords probably won’t give a rent reduction of any kind because they are going to have losses also as many businesses, especially in retail centers, will go out of business.

It doesn’t hurt to ask your landlord for a rent reduction, but you are going to have to prove your income drop, which is not normally something you do in advance, but rather in arrears after many months of the loss.  You also have to prove that you don’t have enough other financial resources to cover your debts without this income and that you are probably going to terminate the lease early if they don’t help you in some way.

However, no landlord I am aware of will even consider a rent reduction without a tenant sending them proof of their losses and showing they don’t have sufficient assets to cover these losses on their own.

The First thing I would recommend is checking with your insurance carrier to see if you have business interruption insurance (you probably do) and to see if it covers mandatory required government closings and loss of business income otherwise for any other applicable events.  There is usually a 90 day waiting period before a claim can be made on such policies. Click here for a promising link about this type of coverage. The main point here is to make the insurance claim so if your insurance company either decides to cover it or is required to cover it by the government you are in the queue before the other thousands of claims that will come in. This is to ensure, if there is coverage, you will get your money earlier than those who waited.

Landlord’s also have loss of rent insurance so you can check with your landlord to see if their coverage is in effect; if it is they will allow you not to pay rent. Because landlords will have to make a claim, I am recommending they do it sooner rather than later, even if they think there probably won’t be coverage. This is for the same reasons mentioned above regarding your business interruption insurance.

Many tenants are going to be in the same situation as you, so something will have to be done, or the landlords will have a lot of empty space.

In my opinion, your options regarding your current lease are the following: 1) Give back part of your space to the landlord. I don’t think this will appeal to your landlord much because currently the demand for space is very low and it will not be easy to lease it; 2) Sublease part of your space to others, especially those that might be potential referral sources for your business; you might actually end up receiving more rent than you are paying this way, but you also might want to make a better deal for someone who is a potential referral source for you. However, it might not be easy to sublease quickly because of demand for office space right now; 3) Terminate your lease early and relocate to another space in the building or to another property. Again, I don’t think this will appeal to your landlord but they may accept this option, or option #1 because it’s better than losing a tenant entirely. Moving to another property would be a more aggressive approach, but in my experience and opinion, you can usually get out of any lease for 6-12 months of your current rent. California usually requires landlords to mitigate a tenant’s lease damages, and the courts time and time again have stated this is the amount of time it should have taken the landlord to release your current location. I rarely see any award over 12 months of rent, but in most cases, the courts have awarded between 6-9 months of rent, as it really depends on your current market and how fast space is leasing for your particular type of space. 

In a recent Bisnow article, Michael Huddleston states:

” Waiting for the government to force closure is a dangerous game of damned if you do, damned if you don’t, Huddleston said. “The problem is if you voluntarily shut the business down, and you have one of these policies that provide the coverage for when the civil authority shuts you down, you are going to potentially lose the coverage or at least limit the coverage if you shut down before the civil authority acts,” Huddleston said.  “[But] if you wait for the civil authority to act, then you are potentially incurring liability to patrons coming in because you know there is a danger … that’s a liability exposure.” 

I can help you with all of the matters mentioned above, but if you reach out to your landlord to see what options they offer, it won’t hurt.

I hope the above helps, and let me know if you want to discuss any of the above further, as each option has many more details that need to be considered.

Here are two additional resourceful articles on the topic:

Before You Break That Lease Over COVID-19, Negotiate First, Brokers Say

Force Majeure And Business Interruption Insurance May Not Be The Solution CRE Hopes 

If you have questions about selling, buying, or leasing CRE or have any other CRE needs, please contact David Massie at david@djmcre.com or 805-217-0791.

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SELL & LEASE YOUR COMMERCIAL REAL ESTATE FOR THE MAXIMUM PRICE

In my experience as an owner/landlord and broker of commercial real estate (“CRE”), most brokers hired to list office, retail, industrial or other types of CRE properties for sale or lease put up a “for sale” or “for lease” sign and list a property online at a couple of Commercial Real Estate (“CRE”) websites like Loopnet and CoStar.  This passive approach waits for the interested parties to find the property by driving by it or searching for it online.

The passive approach discussed above, while necessary, is not the best way to sell or lease your property for the maximum price and/or fast as possible as it takes the least amount of effort by the broker.  In some hot CRE markets with lots of demand and limited supply, this might be all that is required. However, even then you aren’t seeing all offers and might not be selling or leasing for the highest price or as fast as you could have.  In conjunction with this passive approach, there are many other meaningful actions that can be performed but they take the knowledge that most brokers don’t have as well as time, energy and dollars that these brokers simply don’t want to invest.

One such action a broker can take is contacting your current client base (via LinkedIn, email, phone call, etc.) and even your personal contacts (via Facebook, Twitter, etc.) to see if they have any interest or know of anyone that does.  The power of these contacts is not to be underestimated especially if you have strong business and/or personal relationships and have kept in touch with them. I have found the more personable broker that has a reputation for putting people first over making commissions and that specialize in certain cities or certain parts of larger cities know the local people that actually live and work in these areas. This helps them get more referrals to help them sell their listed properties faster.  I recently received an office lease listing where a large national brokerage firm could not lease the space for 2 years but I was able to lease it in less than 30 days because of the aforementioned personal relationships and referrals to me from them.

Another action a broker can take is changing up the listing and flyer information periodically.  I prefer doing this monthly but it does depend upon the property type and demand for it but at a minimum, I would recommend doing this quarterly.  I recommend changing the listing and flyer to highlight different important property features and use different headers so interested parties that might have seen the original marketing information see new information that they might not have seen the first time.  I recently received a new office lease listing that a large regional brokerage had tried to lease the space for years where the listing, flyer and other marketing information simply was never changed and I was able to make it better and have created new interest in the property with multiple offers coming in now.

To reiterate, there are many other actions a broker can take to help his client sell or lease their CRE for a higher price and/or faster but many brokers simply lack the knowledge, don’t want to invest the time (they might work for a big brokerage and be focused on volume rather than quality), don’t want to pay more for different listings other than what their company has access to, don’t have a good reputation, etc.  And these are areas I have overcome as both an owner/landlord and broker for CRE and I can help you sell or lease your property in a better way.

If you have questions about selling, buying, or leasing CRE or have any other CRE needs, please contact David Massie at david@djmcre.com or 805-217-0791.

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Commercial Landlords In California Facing Potential Large Property Tax Increases

California commercial landlords, owners of office, medical, retail, warehouse/industrial spaces and more, are in for a shock if the current proposition on the ballot passes in November.

In a recent Bisnow article, Rex Hime states: 

“If this comes into effect, they [small businesses] are gone,” Hime said to Bisnow after his presentation during the ICSC Southern California Idea Exchange event Thursday at the Long Beach Convention Center. “The second issue is, you have these large corporate property owners with many, many tenants, and since most are under triple net leases, they are going to pass that tax along to their tenants, and some of them will not be able to survive.”

But what Hime doesn’t state is that this will not just adversely affect retail landlords but all commercial landlords who own commercial properties of any type.  It’s not just retail leases that pass through the cost of property tax increases.  Office and industrial leases usually do it also even though they are modified gross leases and not triple net.

Also, how will these potential tax increases affect commercial real estate prices?  I think it will cause sales prices to drop.

The commercial real estate market in California, and also nationwide across the US, has been doing very well for the past decade with prices at all-time highs with no real end in sight as of now. But if this initiative passes in CA and it causes prices to drop and vacancies to increase as predicted, California is in for some serious financial pain.

And those owners/landlords who bought at high prices in the past decade won’t like it much if this initiative causes prices to fall and vacancies to increase. This will probably also lead to more bankruptcies and foreclosures because of loan defaults.

If you want help with leasing, buying or selling your commercial real estate, whether office, medical, dental, retail or warehouse/industrial space, contact David Massie of DJM Commercial Real Estate at david@djmcre.com or 805-217-0791.  

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More Medical Tenants Leasing At Retail Locations.

In 2017, I had written a blog predicting that medical leasing in a retail center would be beneficial, and more prevalent in the future. This prediction has recently come true, as there is, in fact, a shortage of medical space available.

Bisnow article on the matter states:

“In the last three years, we [retail brokers] have done more medical deals in retail spaces than I have ever done previously in my career,” Franks said. “Additionally, we have done more specialty retail uses in traditional retail space than we ever have done before.”

From my previous blog on the topic, I stated that it would not only be good for a landlord to capture medical tenants and bring in potential new business for the other retail tenants in the center but also that it may bring in new patients for the medical tenants as well.

However, the main problem for medical tenants leasing at retail centers, particularly nice ones where they probably want to be most, is that the rent is usually higher than a nice medical building. Retail landlords don’t typically pay for the medical improvements needed for leased space as a medical building landlord would. Because of this, the medical tenant usually takes the cheaper way out and leases at a medical building. But what if leasing at the more expensive retail center brought in more income because of the retail exposure? If it more than covered the extra costs for rent and improvements, it should make it worth doing.

If you want help with leasing, buying or selling your commercial real estate, whether office, medical, dental, retail or warehouse/industrial space, contact David Massie of DJM Commercial Real Estate at david@djmcre.com or 805-217-0791.

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DANGER: USE AND EXCLUSIVE USE CLAUSES IN COMMERCIAL REAL ESTATE LEASES

Pay attention to how your use clause is written in your lease.  If you don’t, it could come back to haunt you and cost you in many ways. 

Although all tenants need to pay attention to this and make sure the use clause is written correctly, retail tenants need to do this the most.  Imagine you are a retail tenant and you sell a food item, for instance, coffee, as part of your menu.  How do you make sure you always have the right to sell coffee under the terms of your lease?  It’s not as simple as it sounds.  And what if you don’t want other tenants to have the right to sell coffee?  This is where the exclusive use clause comes in.

It is my opinion that a tenant should have a broad use clause.  Example:  “Tenant shall have the right to sell food products”.  That way, the tenant has the right to pretty much sell any type of food product.  But for a landlord, it would be better to limit the use clause to something like “ Tenant shall only have the right to sell coffee and coffee-related drinks”.   In practice, savvy landlords and tenants end up writing the use clause somewhere in between the aforementioned two options.

The exclusive use clause is different than the usual use clause and adds to it in that it should prohibit or severely limit another tenant from selling your main product.  But again, how the exclusive clause is written is of paramount importance.  Example:  “Tenant shall have the exclusive right to sell coffee at the Project” and it might add “except for up to 10% of another’s tenant’s gross income” or something like that with more details for clarification.

The above examples are for retail tenants but the same principle holds true for office, industrial or other types of leases also.  If these clauses aren’t written just right you can have a legal battle on your hands and if the clauses weren’t crafted correctly you probably won’t win the battle so I urge great caution.

I have written and studied thousands of use clauses and make it a priority for my clients to do it right.

If you have questions about any of the above topics or have any CRE needs, please contact David Massie at david@djmcre.com or 805-217-0791