Where Were You When The Revolution Began? – Revisiting How We Work Our Deals

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In 1970, the Harvard Business Review published an article by Peter Pyhrr in which he promoted the idea of zero-based budgeting. Different descriptions of this approach have been offered. Most explain that one should begin each periodic budgeting process tabula rasa – with a blank slate, and then justify every expense anew, not just adjust the last period’s budget by adding or removing items. A simpler explanation is that one should “rigorously review every dollar” in each successive budget. We doubt many have truly adopted this approach. It’s just too much work. It’s easier to cut and paste last year’s budget. In fact, momentum causes a repeating of last year’s expense items. Perceived “new” needs often result in just adding more expenditures each year. Only when income shortfalls force a review, do items get dropped.

Leases, loan documents, and similar agreements are just like those budgets. Few are ever revisited tabula rasa. Almost always, what we do is add and add and add. When was the last time you critically revisited your documents to justify the existence of their many provisions?

The fallout from the coronavirus pandemic is like an income shortfall. Things are not going to return to what we’ve misspoken as “normal.” There is no normal and there really has never been a “normal.” What we’ve experienced for a long time has been a slow drift. Shopping centers began populated with what we called “retailers.” Occasionally, out of need or otherwise, an oddball user moved in, perhaps a medical office. Then eating establishments, once only a convenience feature for shoppers, perhaps to keep them at the center “a little longer,” crept in. Then the restaurants “grew up” and became destination uses. Entertainment, health, and similar uses moved in as merchandisers move on. Now, take a walk through a retail center and ask yourself “what makes this retail?”

Take a look at your leases? You can bet a dollar to a donut (real money against nothing of value – a sure bet) that its frame was built when “retail was retail,” the good old days. It was designed when the sale of goods was “king” and the sale of services was an afterthought. Yes, a lot of provisions have been hung on that frame, some fitting well, and some not so well. [We’ve written a great deal about leases and other documents with “added” provisions that conflicted with earlier ones, resulting in unwanted consequences.]

The old “normal” isn’t coming back. Most of us are experiencing the greatest industry disruption we’ve ever seen. A lot of tenants, some that were the backbone of “retail,” aren’t coming back. Others have adapted to survive. It’s time to concede that our industry isn’t going to revert to 2019 or earlier. Tenants need outdoor delivery areas to compete with online sellers and to support their own online shopping presence. Yet, most leases prohibit that. Tenants can no longer be shackled to their 2020 (or earlier) offerings. Yet, we still have restrictive use clauses, often imposed on the tenants who need the most flexibility. We need to stop protecting businesses that could disappear with or without such protection, yet tenants continue to insist on having a landlord guard them against market forces.

What should we be doing? Let’s begin by justifying every word or every provision of our “form” documents. Let’s imagine what is needed now and what will be needed five, ten or more years from now. Then, let’s rewrite our forms for the future, not for the past.

And, while we are on it, let’s negotiate our deals the same way. Let’s begin by justifying every “refusal” we throw at each other. We need to stop merely relying on the shibboleths we think have served us well in the past. It’s time to rethink (or, perhaps, think about for the first time) our responses to one or another’s business needs. Those speaking for landlords, stand in the tenant’s shoes; those speaking for tenants, stand in the landlord’s shoes.

There is a parable (here, as described by Wikipedia). It imagines a frog being slowly boiled alive. “The premise is that if a frog is put suddenly into boiling water, it will jump out, but if the frog is put in tepid water which is then brought to a boil slowly, it will not perceive the danger and will be cooked to death.”

Up until early this year, we were in that slowly warming water, failing to perceive the changes taking place in our industry. Fortunately or not, we’re now experiencing a sudden plunge into boiling water.  Let’s jump out and respond by leaping into the future, starting with a zero-based approach to how we make deals and craft the agreements that memorialize and govern those deals.

Yes, it’s a lot of work to do so. The revolution has only started. Only the successful will survive.


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