For retailers and restaurants opting to not pay rent to their landlords, contractual language in their lease agreements is not likely to provide much relief, according to industry sources who asked for anonymity due to the sensitive nature of negotiations.
A number of chains are struggling to pay their bills because their locations are shuttered as part of the effort to help contain the coronavirus. Rents for retailers and restaurants were due April 1, though agreements typically allow a five- to 10-day grace period.
“A lot of retailers are not paying April rent,” said Joseph Malfitano, founder of and restructuring advisor at Malfitano Partners. Many of these tenants sent letters out April 1, and while most are engaged in discussions with landlords, some are not, he said.
Cheesecake Factory, for example, told its landlords in a letter dated March 18 that it will not pay rent for the month of April.
The restaurant chain said in a public filing last week that it is in various stages of discussions with its landlords regarding its rent obligations, including deferral, abatement or restructuring of its rent. When contacted, the company declined to provide a comment beyond its public statement.
Apparel retailer Urban Outfitters, likewise, said on Tuesday it would temporarily suspend rent payments. Sandwich maker Subway and Mattress Firm were also reported to have sent letters to landlords warning they may postpone or abate rents. All three companies did not respond to Adweek’s request for comment.
Lease language may not provide an out
Many of these companies may have little legal cover for doing so, according to a corporate attorney, who is currently advising a number of retailers on the matter, as well as a real estate executive.
For companies with only a few landlords, they are likely already in direct talks, Malfitano said, but for those with hundreds of landlords, it’s not feasible to have contacted them all prior to April 1. The strategy for the latter is to send a letter and invite discussions, he said.
“The game right now is to conserve cash,” Malfitano said. Most retailers are seeking rent relief for one to two months, while others are aggressively asking for three months of free rent.
Some of these retailers and restaurant chains, however, may also have no choice financially but to not pay rent, the lawyer said. They also said that “Cheesecake Factory is a huge, sophisticated company. It wouldn’t have done that without a lot of thought.”
Solvent businesses in particular do not have a viable rationale for withholding payment, the real estate executive said. Adidas, which is financially sound for example, was criticized by the German government for its plan to not pay rent. Consequently, the sneaker maker backtracked on that decision.
And while landlords are sensitive to the financial struggles of distressed retailers and willing to work with them, in either case tenants need to engage in discussions rather than send letters declaring their intent, the executive said, emphasizing that it is a contractual matter.
Most lease agreements—if not all—between retailers and their landlords include a “force majeure” clause, which may remove liabilities due to a catastrophic event, such as a natural disaster. A number of companies are invoking the provision to withhold payment.
Force majeure clauses can either be worded broadly or they can list specific events that qualify as such. In most cases, such clauses will not relieve a tenant of either their obligation to pay rent or their other economic obligations under the lease, the lawyer said.
One of the instances that force majeure does provide relief for tenants is that it may allow them to close a store that would otherwise be required to be open. But since landlords are also having to shutter these facilities, the point is moot.