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Lease Strategies

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This LARG contains the following reference materials:

The Slippery Terrain Of The Most Favored Nations Clause, and the Lease Clause Critique: The Most Favored Nations Clause For A Retail Tenant.

Number of Single Spaced Pages: 12




The Most Favored Nations Clause


This LARG focuses upon Most Favored Nations (MFN) clauses. The first article mulls over certain drafting challenges posed by MFN clauses. The second article contains a fairly elaborate MFN clause for a retail lease with extensive comment. In both articles, the tenant with the MFN clause in its lease is sometimes referred to as the "MFN tenant," and the lease of the third party tenant that may be more favorable than the MFN tenant's lease is sometimes referred to as the "comparison lease."

The Slippery Terrain of the Most Favored Nations Clause

The effect of Most Favored Nations (MFN) clauses is to ensure that the MFN tenant gets the "best deal" of any tenant in the retail, office or industrial complex containing the premises, by obligating the landlord to match (through subsequent amendments to the MFN tenant's lease) more favorable lease provisions given to other tenants in the complex. MFN clauses are extremely troublesome for landlords because of their impact on the landlord's subsequent leasing activities, and due to the financial exposure they pose for the landlord in the form of rent reductions.

In markets with reasonable vacancy rates for office, industrial and retail space, requests from tenants for MFN status are generally greeted by landlords with guffaws or flat refusals. Since they are so one sided in favor of the tenant, they are given by landlords very rarely; MFN tenants almost always have extraordinary leverage. For the most part, the guffaws or refusals are accepted by the tenants who move on to other points in the lease more susceptible to negotiation.

However, in soft markets with high vacancy rates, or when taking space in a troubled retail complex, a large credit tenant has a much better chance of negotiating MFN treatment. This is especially true if the tenant is willing to accept limitations upon the duration and maximum financial impact of the clause, if the clause contains exclusions for certain other tenants in the same project, and if the tenant is the first large tenant in an otherwise empty complex.

While the idea of the clause is easy to grasp, the drafting exercise posed by MFN clauses can be formidable, depending upon the precise deal struck by the landlord and the tenant. There are, of course, numerous ways to negotiate and draft a MFN clause. The tenant can attempt to negotiate a MFN clause that covers only rental provisions, or one that covers the entire lease (i.e., rental provisions plus all other nonmonetary elements of the lease). A "rent only" clause provides that if the landlord makes a deal with another tenant for more favorable rental terms than those enjoyed by the MFN tenant, then the landlord must amend the lease of the MFN tenant to match the more favorable rental terms. A MFN clause that covers the entire lease requires modifications for more favorable nonmonetary provisions as well.

What's More Favorable?

During the negotiations, both the landlord and the tenant must carefully think through how the MFN clause will work. For example, must the entire economic bargain of both the MFN tenant and the comparison tenant be compared to decide if the comparison tenant has a more favorable deal? Or is the MFN tenant free to ask for lease modifications based upon individual components of the rental deal in the comparison lease without regard to the balance of the rental provisions in both leases? And if the comparison lease is judged to be more favorable, what precisely will be changed in the MFN tenant's lease to make it match the other lease?

A landlord could reasonably object to being obligated to match only the more favorable terms in the comparison lease without considering the balance of the economic deal of both leases. The landlord might contend, for example, that the low minimum rent in the more favorable lease induced the tenant to pay a higher percentage rent figure than the tenant would otherwise pay, and that it would be unfair for the MFN tenant to get the same low minimum rent without increasing its percentage rent figure. If that is the case, the clause had better require comparison of the entire economic deal.

In another drafting approach, the MFN clause could permit the MFN tenant to compare each component of the rental deal (or of the entire lease) individually to its comparable provision in the comparison lease, without regard to the overall economic deal in the leases. The MFN clause in the article which follows is drafted along these lines. It allows the tenant to "cherry pick" individual rental components in the leases of other tenants in the complex, and gain rent reductions without having to modify its own lease when it is more favorable. The clause does not require that the entire economic deal in both leases be compared.


End of Excerpt