Personal Or General Misfortunes

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We’ve stolen our title from an article (or possibly it is a blog piece) dealing with the same concept but in a completely different field of endeavor. It wasn’t even about anything objective. But, its title and subject matter got us thinking about just what its author was discussing: that is “who should bear the risk?” We wrote about this a long time ago and, at the time, thought we had written a definitive piece on the subject. Now, we know we had not. Neither will be today’s posting. [For those intent on visiting the past, here’s a link to our 2013 rambling: LINK.]

Who deserves to lose when uncontrollable events present such an opportunity? We think few would argue that a tenant whose business goes south at all or most of its locations shouldn’t blame itself and should not blame any particular landlord. Similarly, if the neighborhood turns for the worst, and rental values fall, individual tenants are blameless when it comes to the landlord’s investment loss. But those examples aren’t entirely correct.

Landlords must take the “blame” for choosing their tenants. They bet on which ones will prosper and which ones will fail. Their choices are made in the context of which tenants, in the first place, are interested in the available space. Even where there is only one prospective tenant, the choice is between that tenant and waiting for another to come along, if ever. The reverse is also true. Tenants must bear their own responsibility for choosing one space over another. If the location goes “downhill,” the tenant will bear the consequences of its own decision. Pay attention though, in each of the examples, the landlord or tenant, as the case may be, is only bearing the consequence of its own decision not that of the other.

But what about things that are unanticipated or so unlikely, at the time of the decision, to happen in the future that it can fairly be said neither the landlord nor its tenant bears any responsibility? Can we think of a perfect example? No, we can’t. So we’ll go with a less than perfect one. [Why let perfect be the enemy of the good?] Imagine an earthquake that cuts off access to a shopping center, access that will not be restored for two years. Should the tenant have to pay rent even though the shopping center no longer can offer access to potential customers? That’s an example of the bottom line question – who should bear the risk of bad things for which neither party is really responsible?

Here’s our current thinking. Though it isn’t very different than what we were thinking in 2013, it represents a refinement. We now think, or might it be that we now understand, that it depends on how many people are affected. So, if without blame rightly placed on either the landlord or the tenant, power is lost to the entire community or even to the entire shopping center, let the consequences be borne by the landlord. If, without blame on the part of either party, power is lost to only the tenant’s space, let the tenant bear the cost and consequence. How about six of the twenty leased spaces? We don’t know.

Perhaps readers will be less emotional, less “tribal” to use a current political concept, if we give an example and express a principle from long, long ago. When a tenant rented a farm for a fixed amount and the farm’s water dried up, thus preventing a crop, the law or custom at the time looked at the geographic scope of the problem. If it was just that farm’s supply water supply or only the supply for a few adjacent farms, tough luck for the farmer – the rent remained due and owing. But, if the entire region suffered from a drought, rent was abated.

Before advocates for the combatants go back to their corners to prepare to duke it out over what we’ve just written, we beseech you to bear along with us as we present another one of our many amorphous principles: no one is guaranteed success. Others say the same thing but in a way that calls for no deep thought – “No pain, no gain.” Landlords, when you invest in a property, stuff happens sometimes and you accept that the reason you had any right to an upside is that there could be a downside. That’s the area-wide drought or the earthquake. Tenants, anchor tenants go out of business and, as a result, customer traffic may shrink. Yes, stuff happens.

Friends and colleagues, there’s no rule against negotiating how risk will be allocated for things not under either party’s control. In fact, doing so puts the risk (but not the event) under your control. But let’s not pretend that there isn’t a conceptual starting point, and if it hasn’t been clear, that’s what we are suggesting in today’s posting.

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