How to Renegotiate a Lease: NNN Landlords

Jul 8, 2021 | Blog, Triple Net - NNN or Net Net Net

If you are the landlord of a triple-net (NNN) lease property and your investment-grade tenant comes to you with a lease renegotiation request, what do you do? What are your rights? Can you say no or are you at the mercy of the corporation’s demands? Get answers to these and other questions here, and rest assured, you have every right to ‘negotiate’ the lease in keeping with your best interests.

First, Find Out the Reason for the Lease Renegotiation Request

When you receive a letter requesting a lease renegotiation, first, find out the reason for the request. What are the circumstances prompting the change? There are hundreds of possible reasons a company might want to renegotiate a lease, usually, it’s a financial hardship of some kind.

For example, a business may be suffering a temporary setback due to something like building damage or a bad location. Last year, Westwood Net Lease Advisors helped many clients renegotiate leases with temporary terms due to the pandemic. Every situation is going to be different. The reason for the request and the type of request needs to be clearly defined.

The two most common lease changes are 1). rent reduction and 2). early lease termination. If one of these is the cause, we recommend:

    1. Negotiating a temporary rent abatement and a lease extension once the tenant gets back on its feet. It may be in your best interest to agree to a rent reduction only if the rent increases later, to the previous amount.
    2. Possibly negotiating a buyout where the company pays you a lump sum, which could be beneficial. You would collect a large dollar amount upfront and have time to re-lease the property to a more successful tenant, possibly with higher rent.

Businessman and customer are in consultation

Acquire Up-to-Date Financial Statements on the Exact Location – Not Just the Company

Often, investment-grade corporations will send out blanket lease renegotiation letters to all their landlords just to see what they can get. When you get a letter like this, you have to be strong enough and cognizant enough to say,  “Okay, prove to me why you need this lease renegotiated.”

Regardless of the reason for the lease renegotiation, ask the tenant to provide actual up-to-date financial statements for that exact location to see if the request is warranted. Not corporate sales figures and projections – YOUR NNN lease property’s financial performance.

The majority of Westwood Net Lease Advisors’ NNN lease investors don’t know that it is their right, as property owners, to ask for the business’s financial statements. You can actually do this at any time – it’s good business practice to keep an eye on your tenant’s business, just as you would your own.

The biggest thing here is to not be afraid to ask for financial statements to prove the company’s request is legitimate.

Rental agreement landlord signature line with pen on it

What Are the Landlord’s Rights in the Lease Renegotiation? Can You Say No?

Since most NNN lease contracts are set by the tenant’s corporation, there is usually no room for negotiation when you initially purchase a NNN property. However, if for example, your tenant has been in the property for 10 years, there are five years left on the lease, and the corporation comes to you asking for a lease renegotiation, you have every right to investigate why the company wants the lease changed and say no if you feel the integrity of your investment will be compromised.

In a lease renegotiation, you have the right to:

    • Seek legal counsel or advisory for assistance with the request.
    • Perform due diligence on the new contract to review all details and any potentially hidden clauses.
    • Ask for the location’s financial statements.
    • Say no to terms that are not in your best interest.
    • Engage in negotiations until the new lease is beneficial for you both.

Most often, it is wise for the landlord to work with the tenant. Nobody wants an empty building and the hassle of re-tenanting, especially if your current tenant is backed by a corporation that has been and will continue to be reliable, providing guaranteed income with few or no landlord responsibilities.

On the other hand, if the tenant has been unreliable and you wish to re-tenant or sell the property, a lease renegotiation request could work in your favor.

Can You Renegotiate a Lease if You Have a Commercial Loan on the Property?

If the tenant requests a lease renegotiation and you have taken on debt to purchase the property, the lender must be involved in the renegotiation. Typically, the rent received is servicing the debt, which means you must obtain the cooperation and approval of the lender to proceed, especially for a rent reduction, rent abatement, lease termination, or an alteration to the length of the lease.

When a rent reduction or abatement is requested, the lender will want to know where the money to service the debt will come from and if you would be at risk of default. Also, the lease is the lender’s collateral, so the renegotiation request will be evaluated to determine if it reduces the value of the lease.

Two entrepreneur person working and colleague analyzing data for new start-up business and marketing.

Westwood Buyers Advisors Help with Lease Renegotiations

Westwood Buyer Advisors are NNN lease specialists who help existing and new clients deal with lease renegotiation requests. Our team performs due diligence on the new lease terms, acquires the location’s financial statements and knows what to look for, helps you understand your options, and guides you through the process to ensure the outcome is in your best interests going forward.

We also have nationwide relationships and experience with the companies that operate under NNN and NN+ leases – Dollar General, Walgreens, CVS, AutoZone, Firestone, 7-Eleven, McDonald’s, KFC, Dunkin’ Donuts, DaVita, and others – so we are familiar with their requests and what they are likely and unlikely to agree to if a lease renegotiation request comes up.

It is important to note that major brands and investment-grade corporations do not frequently renegotiate leases. Unless a location is severely underperforming or there is a situation completely out of their control, they typically honor the original lease, while you carry on earning monthly income without landlord worries.

To Wrap It Up – Landlords, Make Sure the Lease Renegotiation Request is Warranted & Know Your Rights

    1. If you receive a lease renegotiation request from the company that is tenanting your property, the first thing you want to do is find out why the company wants the lease to be changed and if the request is warranted.
    2. To understand if it’s warranted, ask for your specific location’s financial statements.
    3. If the tenant is struggling financially, find out if it’s a long-term problem or a short-term issue that can be solved with a temporary lease renegotiation, and ultimately, agree to a lease that is in your best interests.
    4. When there is a commercial mortgage on the property, the lender must be involved in the lease renegotiation and approve the changes.

If your tenant operates with a NNN lease backed by an investment-grade corporation, it is usually beneficial to work with the company to keep your tenant in place and continue earning guaranteed worry-free income. If your tenant wants to end the lease early, a lump-sum buyout will allow you to re-lease the building or sell the property.

Before you act on or respond to a lease renegotiation letter, we recommend contacting either your attorney or a Westwood Net Lease Advisor. We can walk you through the process, alleviate the stress, help you negotiate, and represent your best interests throughout the transaction. Our consultations are free – if you have any questions, please contact us or give us a call, 314-997-5227.


 

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