How A Retailer Can Lose A Million Dollars With One (Dumb) Mistake

Unfortunately folks, this headline is not sensationalized.

For nearly two years, a Chicago destination for live music, Double Door, has been embroiled in a highly publicized eviction case. At the heart of the dispute? Double Door’s landlord claims the bar failed to provide 180-day notice in renewing its lease.

Without exercising a renewal option (or worse, not negotiating one in the first place), a tenant is left at the mercy of its landlord, and must once again take a seat at the negotiating table. Especially in submarkets where property values have risen since the lease originated, you can expect steep rent hikes.

Overlooking a lease renewal is more common than you may think, particularly among longer-term restaurant/retail tenants. It’s difficult (and understandably so) to recall every clause from a 50-page document stuffed in a drawer over a decade ago. 

SVN’s Tim Rasmussen, who specializes in restaurant/hospitality transactions, has seen this story unfold several times. He tells us he's seen tenants swallow 50% rate hikes, shaving hundreds of thousands of dollars off the bottom line, for not sending a piece of certified mail.

The only real alternative to eating a rate hike is relocation, which is risky and often outweighs the cost of additional rent. Suspending operations, costly build-outs, additional security deposits, overlapping lease obligations and hefty moving expenses can quickly add up…and landlords know it.

Tim's suggestion: Consider an auto-renewal clause so the tenant only has to provide notice if it doesn't wish to renew. Practically speaking, a tenant desperate to get out of a lease is incentivized to identify out-clauses, well ahead of the notice period.

And keep in mind, the tenant can still play the auto-renewal “card” just like they would any other option to terminate. Most commercial real estate professionals agree: going to market is never a bad idea. Merely soliciting offers from competing landlords can result in more favorable renewal terms.

Bernard Edelman (pictured above), a leading commercial real estate attorney, tells us brokers should be addressing terms for lease renewal in the very first RFP.

When it comes to precise language and navigating precedent conditions (point in case, you probably just glossed over the phrase, precedent conditions), legal counsel is a necessity.

Tim tells us it goes beyond just negotiating renewal options. "Any attorney will look at the clause and realize, for example, should a tenant miss rent by five days, even in just one instance, the renewal option becomes totally void.”