In the healing of New York, more and more businesses are starting to move back to offices slowly. Commercial landlords are getting creative with their incentives to get new tenants to sign long-term leases while ensuring the tenants will observe Covid-19 safety precautions.
In order for financially bleeding businesses to come back to their pre-pandemic volumes, many tenants – especially those operating in the suffering hospitality industry – are successfully negotiating monthly rents based on a percentage of their revenue (typically between 8% and 12%).
In these instances, it’s fundamental to draft in great detail the clauses of the lease concerning what is included in the definition of “gross sales” and how the tenant will prepare periodic financial reports to the landlord.
Before the pandemic hit, the “force majeure” was typically a boilerplate and neglected section of commercial leases. From March 2020, this clause listing a number of extraordinary events (“acts of god”) that could excuse the contractual performance of the parties got a lot of attention, and many tenants were disappointed when they learned that Covid-19 was not considered such an event. On the other hand, new leases entered in 2021 often expand the reach of the “force majeure” clause to include pandemic events.
Landlords have become increasingly flexible with subletting terms, easing the strict control on the consent to be granted to allow subtenants in the leased premises, thus creating new income avenues to tenants that now might rent out more efficiently or short terms office spaces that are not currently used. In this context, pop-up projects launched have become a desirable option in the retail industry for sub-tenants that cannot afford long and expensive lease commitments.
Concessions. There is no better time for a financially new solid tenant than at the outset of recovery following a big crisis to get favorable lease terms and grants from the landlord. Yes, thanks to government aids and tax credits, as well as creative alternative solutions to sell goods and services, there is a minority of businesses that not only managed to survive the storm but is also well-positioned to branch out. These businesses are enjoying the unusual generosity of landlords that are often offering several months of free rent (six months has now become almost standard) and granting large tenant allowances, which are lump sums made available to tenants to tailor the premises to tenant’s blueprint and to make them compliant with all the regulations, guidelines and precautions to avoid the spread of Covid-19. In exchange for these concessions, tenants should not be surprised that landlords want tenants to carry a broader business insurance coverage, to the effect that rent payments will flow to the landlord even if the tenant becomes unable to operate.
The common emerging feature of the new office and retail leases is their flexibility. Tenants are in a strong position to obtain a legal structure that would allow for both growth and reduction of the workforce, short-term commitments, and expanded termination rights. On the other hand, some of the most forward-looking landlords understand that while hybrid and creative models of tenancies might guarantee a lower fixed income from a single tenant, the benefits of offering more options to all their tenants will trickle down and increase the overall revenues of landlords.
- Michele Cea, Esq., Founding Member & Managing Attorney, CEA LEGAL P.C.
- Email: firstname.lastname@example.org, Phone: (212) 618 1644
Compliments of CEA Legal P.C. – a member of the EACCNY.