STRATEGIES TO TRADE RENT FOR BARTER IN COMMERCIAL LEASES
This LARG looks at barter lease deals—where the landlord takes all or a portion of the rent in goods and services provided by the tenant. The first section lists some common scenarios in which this sort of deal is found. The second section is a check list which itemizes issues directly relating to barter deals. The Lease Clause Critique contains extensive excerpts from two separate barter deals. One is a trade-out agreement for airline tickets, and the other is a consulting agreement for services.
Why Would A Sensible Landlord Do A Barter Rent Deal?
What could possess an ordinary, clear thinking landlord to do a barter deal—a lease which requires the landlord to accept all or part of the rent in the form of goods or services in lieu of normal cash rent—with a tenant? After all, getting cash for the rent will never cause a problem for the landlord. Taking something in trade, on the other hand, is almost always going to be more trouble. Even so, barter deals are out there in the marketplace, though they run an extremely distant second to their cash rent cousins.
What make these barter deals happen? Some of the ingredients that are often found in barter deals include the following:
- Special Tenant Relationship. The landlord and the tenant already know each other well. Sometimes the tenant is a former employee of the landlord who started its own business, and the landlord wants to continue to use the tenant for work on the landlord's account. Examples include attorneys, advertising and public relations professionals, marketing firms, and property management concerns. In these deals, where the parties work together on a daily basis, the convenience of being located in the same building is important, and the landlord knows the tenant well enough to consider taking all or some of the rent in the form of services from the tenant.
- Aggressive Tenants Selling Something the Landlord Can Use. There are tenants who take an aggressive posture in trying to trade the goods or services they produce for rental space. If the landlord can use the goods, and if the goods are valued at market rates when they are traded for rent, why shouldn't the landlord at least consider taking some of the rent in trade? Examples of tenants in this category include airlines, long distance telephone service companies, office products firms, and restaurants who can locate in office buildings.
- Landlord Takeover Targets. The landlord may be favorably disposed to a barter deal with a firm that it would like to absorb or buy out. Independent property management companies are a good example of takeover targets that the landlord may want to swallow to correct management gaps in its own organization.
- Smart Tenants in Markets With High Vacancy Rates. In markets with high vacancy rates, it's not so easy for landlords to lease space. The landlord may have to consider "creative" deals that it would never look at twice in a market with low vacancies. Barter is nothing if not creative for the landlord.
Barter Lease Check List
If the landlord and tenant decide to do a barter deal where the landlord accepts goods or services from the tenant in lieu of traditional cash rent, the parties should consider the following points during their negotiations:
- How will the barter arrangement be documented—with a lease addendum, with a separate goods or services agreement, or with both?
- Are the precise type of goods and/or services which the tenant will furnish spelled out with adequate specificity?
- Does the tenant have the right to pay with barter only for the monthly minimum rental, or does barter apply to additional rent such as operating and common area maintenance costs as well?
- Is there a maximum amount of barter the tenant can apply to rent and additional rent for any given month (e.g., fifty percent of all rent for the month)?
- If so, what if the tenant exceeds the agreed amount of services provided to the landlord during any given month—can the tenant carry the value of these excess services forward to apply to future rentals?
- If the landlord is unhappy with the quality of goods or services furnished by the tenant, can the landlord terminate the barter agreement?
- If the landlord does terminate, can the tenant elect to terminate the lease, or is the tenant locked into the remaining term of the lease with rental cash payments?
- If the barter arrangement only applies to a portion of the rent, does the documentation make it clear that the tenant must pay the balance of the rent in cash pursuant to the lease?
- Does the barter documentation or lease contain any provision for rental increases during the term?
- If so, is the increase payable in bartered goods and services, or in cash?
- If the tenant is providing services for rent, is the tenant's right to assign the barter agreement subject to the landlord's prior approval?
- If the tenant is a corporation or partnership providing services for rent, may the landlord terminate the barter deal if key personnel leave the tenant's firm?
- Do the lease and the barter agreement contain cross default clauses?
End of Excerpt