Get Right to End Reduced Rent if Tenant Defaults

To entice a retail tenant to sign your lease, you may need to agree to let it pay a reduced minimum rent if its gross sales during a set time period—for example, during the second or third years of the lease—are less than a threshold amount. Typically, the reduced minimum rent will remain in effect until the tenant's gross sales meet or exceed the threshold for an entire lease year. This reduced-rent right gives the tenant some protection if its store is not a money maker.

However, in today's strong real estate market, you have the negotiating power to get your own protection if you give a tenant a reduced-rent right, says Dallas attorney T. Andrew Dow. How? By getting the ability to pull the plug on the reduced-rent right if the tenant turns out to be a deadbeat.

If your lease is like many we have seen, it probably does not mention that owner protection. And if the tenant resorts to its reduced-rent right, your cash flow could be severely hurt.

Bump Up Past and Future Reduced Rent

To plug this loophole and protect your cash flow, state in your lease that if the tenant defaults during the reduced rent period, its minimum rent will immediately be bumped up to the amount that it would have paid if the rent had not been reduced, says Dow.

And to add more teeth to this protection, also state that the minimum rent will be bumped up retroactively. This way, the tenant owes you the difference between the reduced amount it paid and the minimum rent originally required for that period by the lease, he explains.

Example: A tenant's monthly minimum rent is $5,000. Because its gross sales do not meet a certain threshold, the tenant has the right to a reduced monthly minimum rent of $2,500 as of July 1, 2006. After paying reduced rent for eight months, the tenant defaults under the lease by failing to pay its additional rent. The tenant's monthly minimum rent is immediately bumped up to the amount that the lease originally required—that is, $5,000. Plus, the tenant owes $20,000 ($5,000 - $2,500 = $2,500; $2,500 × 8 months) in back rent.

Also, don't let the tenant drag its feet in paying you the back rent amount, warns Dow. Require the payment soon—for example, within 15 days—after the tenant gets your notice of its default, he says. Eliminating the tenant's reduced rent prospectively and retroactively, and forcing it to pay you the retroactive amount quickly, should give the tenant an incentive not to default during the reduced-rent period, he notes.

Dow now demands these owner protections when negotiating retail leases for his owner-clients. And he has been finding that tenants are agreeing to them.

Add Lease Language

Get this protection by adding the following language to the reduced rent lease clause, says Dow. You will need to define “Reduced Rent Period” elsewhere in the clause:

Model Lease Language

If Tenant defaults during the Reduced Rent Period, the Minimum Rent will be increased (both prospectively and retroactively), effective immediately, to the amount originally specified under the Lease, and Tenant must pay to Landlord any deficiency for Minimum Rent created by such increase within [insert #, e.g., 75] days after receipt of notice by Landlord of such default.

CLLI Source

T. Andrew Dow. Esq.: Member, Winstead Sechrest & Minick PC, 5400 Renaissance Tower, 1201 Elm St., Dallas, TX 75270-2199; 214-745-5400, ADow@winstead.com.

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