Litigation vs. Negotiation: Which is the path to salvation?

Negotiation is the art and science of deal-making. Of all the activities performed in commercial real estate, it is the one that takes the least amount of time and produces the greatest monetary return on that investment of time. Litigation is the domain of the attorney. Lawyers in the world of Contract Law receive a greater monetary return if things take longer to resolve. More billable hours translate to greater rewards to the lawyers when it takes longer to resolve a contract dispute. Doing the math, quicker resolutions to landlord/tenant disputes means less vacancy or tenant business operations interruptions.

Over the past two years, we have seen major changes in the retail and office asset classes resulting in closures and downsizing. Landlords with fixed mortgage payments have been resistant to rent reductions, sometimes resulting in bankruptcy and/or lawsuits. These often result in a vacancy. Landlords are then faced with lost rental income (during the vacancy), reduced rental income (after reletting), commissions, professional fees and, tenant improvement allowances. Tenants who get displaced would experience cashflow losses during business interruption, loss of market share, and the cost of relocation to new facilities. Some of these losses could be mitigated by doing business online during the (brick and mortar) relocation, but the possibility of permanent damage to the brand could be irreversible.

The deal maker approach would get out in front of the conflict to reach an equitable agreement for landlords and tenants. Here are some strategies for consideration:

Increase the lease term - In the near term, radically reduce the rent (say 3-5 years), then add term at the tail end of the lease, adding back the rent reduction to these additional 3-5 years at the end of the lease.

Structured buyouts - The tenant would pay a lump sum equal to 50% of the rent for the remaining lease term. This lump sum could be used by the landlord to finance securing a new tenant (or tenants) in the vacated space.

Size reduction/sublet - Both Landlord and Tenant would attempt to secure a subtenant to occupy a portion of the tenant’s existing space. The total cost of subdivision and subletting could be added to and phased into the reduced rent of the primary tenant.

Tenant improvement allowance - The Landlord could offer a cash allowance or a rent abatement to the tenant, to assist the tenant in increasing sales and market share. The tenant would pay a percentage of sales to amortize the landlord’s investment starting immediately upon the completion of improvements. Any unamortized allowance could be added to a renewal option, which if unexercised, would be due and payable upon lease termination.

Rent reduction/percentage rent - The landlord could offer a rent reduction or abatement immediately then charge a percentage rent above a negotiated threshold. Assuming sales rebound, the landlord would be made whole, and the tenant would receive immediate assistance with occupancy costs during the downturn.

These are just a few ideas for creative solutions between landlords and tenants to resolve their differences without dragging in the lawyers and clogging up the legal system. The rationale for the use of negotiation over litigation is to keep the discussions between the principals, rather than turning things over to third parties who are not stakeholders in the investment; attorneys who profit by extending the time, energy, and money required to reach equitable resolution.

Broad River Capital has extensive experience in restructuring, downsizing, and surplus property disposal. Call us today for a consultation to discuss your specific needs. We can assist you in seeing new possibilities to maximize your returns and minimize your cost impacts. We look forward to being of service.