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Expert explains how tenants like Geisha House might have gotten out of its lease
Did Atlantic Station approach tenants like Geisha House and American Eagle with a deal impossible to refuse?
Ever wonder how restaurant or retail tenants can get out of its 3, 5 or even 10 year lease, scot-free?
There’s no scientific method to the madness but there are definitely some logical scenarios.
Atlantic Station’s new ownership group is very ambitious, forward thinking and recognizes the value of creating a sustainable and quality tenant mix versus just collecting rent on a month to month basis.
The quality of the tenant mix will ultimately drive Atlantic Station’s rental rates up, with the potential of making it one of the more desirable retail sectors in Atlanta.
As the Midtown development evolves, it has to go back to the basics and look at the entire picture and incorporate the cards (tenants) that were dealt to them in the purchase of the asset.
Rumor in the commercial real estate industry has it that Atlantic Station is (on an ongoing basis) approaching tenants that are not only struggling to pay rent, but also may not represent Atlantic Station’s envisioned concept and are giving them a “free” get out of your lease pass: no defaults, no additional payments (probably default of security deposit) or lawsuits.
But that offer is not two-way. Atlantic Station would offer the tenant a drop dead date and a definitive decision must be made by the lessee.
In my opinion, this is win-win scenario.
Tenants who are truly struggling to pay their rent, if paying at all (many of them were several months behind), have a small window of good fortune to make a business decision: either start paying rent on time and operate within the guidelines, rules, and regulations of the development or vacate the space without being held in default.
It presents an interesting scenario: a tenant, by electing to vacate, are closing their doors, accepting failure and walking away from their original investment of the capital improvements, marketing, etc. On the other hand, they have the ability to get out from under their lease obligations, which is typically in the top three expenses on a tenant’s balance sheet.
Outside of Atlantic Station, here are the four ways a tenant can break its lease:
1. Tenant defaults per the original lease terms:
Default — an ugly process often accompanied by a lawsuit — can occur from a myriad of occurrences. The main occurrence is a tenant’s inability to pay rent and associated charges. A lesser occurrence is for a tenants failure to operate under the specified use of the lease (Example: Sign a lease as a restaurant, but operates as a nightclub). A tenant in default is often a tenant who is about to go out of business and one who has failed to negotiate a buyout with the landlord.
2. Tenant Termination Option:
Often a special stipulation negotiated by the tenant. Tenant has the right to terminate at a specified period within the lease (Example; At year 5 in a 7 year lease). Tenant can terminate for any reason and often the tenant’s termination penalty (negotiable) is the unamortized tenant improvement allowances, commissions, and free rent. In retail, national tenants will sometimes have the right to terminate the lease after several years, if they are not hitting certain sale numbers
3. Tenant Relocation Clause:
Typically applicable to smaller tenants. Landlords will often negotiate for a tenant relocation clause, which allows Landlords to relocate tenants to a space of equal size and quality; the landlord will pay all associated costs with the move and build out of new space; should tenant not be satisfied with the relocation space, both parties can terminate. This could occur if a larger tenant wants to expand and the only contingent space is the smaller tenant next door; the smaller tenant becomes the casualty.
A sublease is not a break of the lease. The original tenant is responsible for upholding all of the original lease terms (rent, etc); if the subtenant defaults, the original tenant is still on the hook for the lease.