Given the recent and precipitous decline in retail sales, increasingly commercial landlords are being approached by national tenants with requests to reduce rent, reduce store size, or grant other concessions in order to induce the tenant to remain in the shopping center.  These requests for concessions are accompanied by considerable leverage, as most national tenants will not have any obligation in their lease to continue operating, and therefore the threat of “going dark” leaves the landlord with the prospect of facing not only a depressing effect on the remainder of its shopping center, but also the possible triggering of co-tenancy, termination, or other adverse provisions of other leases at the shopping center with tenants who may be dependent upon the continued operation of the national tenant who is seeking the rent reduction.

However, there are various global and lease specific issues that a landlord should consider before agreeing to any such concessions, which include the following:

1. Global Considerations – Following are some of the global concerns which the landlord must consider:
    
   1. Permitted Lease Amendments Under Loan Documents – The landlord must confirm whether or not its existing loan documents (or whether the Subordination, Non-Disturbance and Attornment Agreement (“SNDA”) executed by and among the landlord, national tenant, and the lender) permit it to enter into such a lease amendment without the consent of the lender.  If lender consent is required, the landlord must make such consent a condition to the amendment, and the landlord should clarify that it is not obligated to pay any sum or incur any other obligation (such as modifying its loan documents) to obtain that consent.
   2. Reciprocal Concessions – The landlord should consider whether the particular lease with the national tenant needs to be amended to grant any reciprocal concessions to the landlord in consideration of the concessions requested by the national tenant.  Primarily, the type of concessions which a landlord should consider are those typical restrictions in the national tenant’s lease which allow the national tenant to exert control over the shopping center, and which if removed or modified, would increase the flexibility of the landlord to modify the shopping center in a way which may increase its aggregate value.  Examples of these types of concessions would include items such as (i) additional exceptions to any exclusive the national tenant may have to expand the scope of permitted tenants within the shopping center, (ii) changes to existing use restrictions that limit the ability of the landlord to lease other space in the shopping center, or (iii) restrictions that limit the landlord’s ability to build other buildings within the shopping center or modify the existing buildings or common areas in the shopping center.
   3. Effect on Other Leases – Other leases at the shopping center need to be reviewed to determine whether or not permitting the national tenant to cease operating would trigger any co-tenancy, “kick-out”, or similar rent reduction or termination rights.
   4. Time Limit – Any and all concessions must be limited in duration – they should not be on-going.
       
2. Threshold Condition to Granting Concession – Preferably, the national tenant should be required to evidence the need for the concessions it is requesting.  For example, the tenant should be required to disclose its existing level of gross sales at the store, and a comparison of that store’s performance to all other stores operated by that tenant in the same market.  If the store in question is not markedly below other stores, on the basis of comparative rent to comparative occupancy costs (calculated on a per-square-foot basis), it would seem there is no reason for the landlord to grant concessions.
   However, unless the lease already requires the national tenant to provide such information, national tenants are often reluctant to provide such information (for competitive purposes), and it is not unusual for a national tenant to refuse to provide such information, or to refuse to base its right to receive the requested concessions upon “proving” that such concessions are necessary.  Again, because the national tenant usually has the right to simply go dark, it relies on the leverage of that threat rather than having to “prove” the need to receive concessions.
   
   However, unless the lease already requires the national tenant to provide such information, national tenants are often reluctant to provide such information (for competitive purposes), and it is not unusual for a national tenant to refuse to provide such information, or to refuse the base its right to receive the requested concessions upon “proving” that such concessions are necessary.  Again, because the national tenant usually has the right to simply go dark, it relies on the leverage of that threat rather than having to “prove” the need to receive concessions.
    
   If, however, the parties do agree that the concessions are dependent upon the “need” for such concessions, based upon the comparative gross sales/occupancy costs at the store, such existing conditions can be used as a “base line” to establish an on-going condition to the continuance of the agreed-upon concessions.  Accordingly, so long as the requisite conditions which justify the initial concessions continue, the concessions will also continue; once the comparative gross sales/occupancy costs at the store have exceeded the “base line” amount, the parties could consider either terminating the agreed-upon concessions or providing alternative restitution to the landlord (i.e., the payment of percentage rent based upon an agreed-upon percentage for gross sales that exceed the “base line” amount).
    
3. Ongoing Conditions to Continuance of Concessions – If the decision has been made to grant concessions to the tenant, the following should also be considered as requirements to be satisfied during the continuance of the concessions:
    
   1. Obligation to Remain Open – As the national tenant already has the right to cease operating, there is no reason to grant a concession (e.g., rent reduction) unless the tenant is required to remain open for business.  However, national tenants are always reluctant to agree to any operating covenant; therefore, as an alternative, the parties could agree that although the tenant is not required to remain open during the pendency of the concessions, if it does, in fact, elect to cease operating, then either (i) all on-going concessions will cease, and all previous concessions will be repaid to the landlord (the landlord’s preferred position), or (ii) all on-going concessions will cease (probably the tenant’s preferred position).
   2. Continued Use – Similarly, the concessions are based upon the operation of that store by the national tenant for its particular use, as the request for concessions is driven by the respective gross sales generated at the particular store, which obviously are in large measure dependent upon the particular use of the store.  Accordingly, there is no reason for concessions to be granted to a tenant and then be transferred to an assignee or subtenant who operates for a different purpose.  Under no circumstances should the tenant be able to receive concessions and then capitalize on the value of those concessions by assigning the lease or subletting the premises to an assignee or subtenant.  Therefore, either (i) no assignment or subletting should be permitted during the pendency of the concessions, or (ii) the permitted concessions must cease and/or be refunded if an assignment or sublease occurs (assuming that the tenant will not agree to restrict its permitted assignment and subletting rights during the pendency of the concessions).  
   3. Suspension of Certain Rights – If the national tenant has any current rent reduction or termination rights in its lease (e.g., co-tenancy, “kick-out” rights, or similar rights), those rights should be terminated (landlords’ preferred result) or at least suspended during the pendency of the agreed-upon concessions.  In the alternative, such rights can be modified.  For example, if the tenant has the right to terminate its lease if its gross sales do not exceed a stated amount, that threshold can be reduced by the same percentage by which base rent is reduced.
   4. Radius Restriction – Although national tenants rarely agree to a radius restriction, during the pendency of the concessions a radius restriction should be considered.  It would be unfair for a tenant to receive concessions and then to open a store that competes with the existing location.
       
4. Lease Specific Considerations – Depending upon the particular provisions contained in the national tenant’s existing lease, the following items should also be considered:
     
   1. Extension of Term – Particularly if the tenant desires rent reductions, in order to preserve the value of the existing lease, the existing term of the lease could be extended for the period of time commensurate with the period of rent reductions.  Of course, from a national tenant’s perspective, if it truly believes the site is under-performing, it will be reluctant to commit itself to extending the term, as that would increase the overall anticipated expense of the store.
   2. Adjustment of Additional Provisions – National tenants often have limitations on the amount that they are obligated to contribute to common area costs, taxes, or insurance for the shopping center, either by exclusion of specific categories of expenses or by an absolute cap on the amounts to be paid.  As these are direct, out-of-pocket expenses incurred by the landlord, the limitation on such contributions by the national tenant could be terminated (again, the landlords’ preferred result) or at least amended or suspended during the pendency of the agreed-upon concessions.  In that manner, the landlord can mitigate the effect of the concessions.  Of course, given that the national tenant is already requesting concessions, it may be very difficult to achieve a form of “pay back” in this other context.
      
   3. Adjustment of Percentage Rent – If the national tenant is paying percentage rent already, then if the percentage rent it pays will not adjust automatically in accordance with a reduction in base rent, the required level of gross sales should be adjusted downward in accordance with the percentage decrease in rent payable by the national tenant.  In addition, if the national tenant is not presently paying percentage rent at all, as is commonly the case, a percentage rent factor could be added to the lease.
   4. Recapture Rights – Although the national tenant normally does not have any obligation to operate, the lease will typically provide the right to the landlord to terminate the lease and recapture the store under certain conditions (such as the tenant ceasing operations for 180 days).  Particularly if the tenant will not agree to continue operating during the pendency of the agreed-upon concessions, the landlord should consider modifying these parameters, including shortening the time period before which the landlord is permitted to terminate the lease, extending any time period within which the landlord is permitted to exercise its termination right, reducing any sums payable by the landlord to the tenant if the landlord does elect to terminate the lease, etc.
       
5. Alternative Strategies – An additional strategy to consider, rather than granting concessions to the national tenant, would be to down size its existing store, and allow a rent reduction to occur at such time as landlord successfully re-lets the remaining portion of the original store.  In this manner, the national tenant has the potential of reducing its occupancy costs, and the landlord can recapture the space and hopefully re-let it at a higher rent per square foot than is typically payable by the national tenant.  In this scenario, however, the landlord cannot be obligated to re-let the remaining portion of the store; instead, it must have the right to proceed with an additional lease only on the same terms and conditions under which it would lease other vacant space in the shopping center generally.