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Pandemic Lease Considerations: Devil is in the Details for CFOs
Editors’ Note: BrainSell recently added James A. Thurston as VP of Financial Process Management. In light of the COVID-19 pandemic, Thurston (as we call him) wanted to share some of his insights from his experience administering leases.
We used to have a saying when discussing what to do in a tenant scenario: “read the full lease” (although in the real estate industry, we didn’t always say “full”).
Leases are more powerful contracts than businesses often realize. What each specific lease says, governs what must occur by both the tenant and landlord.
Landlords will often sit at the table with debtholders during a bankruptcy process, particularly for organizations with multiple locations. You may be asking yourselves: Should we be paying our rent? The answer is, “read the full lease.”
I was recently reviewing some leases, and the relevant lease clauses were varied. Most of the time, they buried the clauses in “miscellaneous” sections. Notice periods are almost always applicable to these occasions.
Here are some things to look out for:
- Force Majeure / Laws & Ordinances: There are often “Force Majeure” or “Laws & Ordinance” clauses governing these situations. While pandemic may not be explicitly listed, the forced closures would be.
- Rent Abatement: Some leases include the option for the tenant to have rent abated during these periods.
- Dispute Resolution: The parties may be forced to arbitration and must waive their right to a jury trial.
- Occupancy: Particularly for retailers, there can be clauses regarding named tenants or the building’s overall occupancy that could allow leasers to abate the rent.
It goes without saying that you should consult legal advice before taking any action as interpretation is required and even “and” “or” can make a huge difference. Even though you have paid your rent, you may well be able to recover that rent as the lease is a binding document.
When companies operate multiple locations, it is essential to gain business unit/location level information about the performance of these locations. If your organization allocates expenses, that’s undoubtedly acceptable. But those allocations can often distort the decisions necessary. An adequately organized chart of accounts and set of business units/locations can help with these assessments. Without that information accurately summarized in your ERP, your organization will be blind to the required information in making decisions about your leases. What decisions should we make regarding these leases? Should we continue to operate these locations? Should we ask for an abatement? We can help you make those assessments and improve your ERP management reporting.
In the meantime, RTFL!
Jim Thurston is the VP of Financial Process Management at BrainSell. He has 20 years of finance and accounting experience (CPA) and 14 years of real estate experience with two of the best-in-class, industry-leading S&P 500 companies in the United States.Read More
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