1. © 2009 Robinson & Cole LLP Leasing Issues Arising when Landlords and Tenants Are in Financial Distress Anticipating Problems and Modifying Lease Terms September 25, 2009

2. Outline for Discussion General Overview Landlord’s Concerns Tenant’s Concerns Potential Changes to Lease Provisions Handling Tenant Defaults Negotiating Effective Non-disturbance Agreements With Lenders

3. General Overview Changed economic climate has changed the way landlords and tenants negotiate leases Leverage has changed from landlords to tenants, as landlords must attract and keep tenants Concessions now available, even for smaller tenants, especially retail tenants Result – leases are being restructured, not only by distressed tenants but those capitalizing on market Goal not to maximize profits but minimize losses until economy turns around

4. Landlord’s Concerns Restructuring lease with this tenant must be less costly than consequences of losing tenant because of tenant's breach or decision to move Key question is whether landlord is better off modifying existing lease with current tenant or seeking to find new tenant for this space

5. Landlord’s Concerns Landlords want to avoid: Loss of good existing tenant by default, early termination or relocation to another property Tenant bankruptcy Costly tenant improvements Complete loss or reduction of cash flow Increased burden of maintenance and repair because of inability to pass through operating costs and real estate taxes Occupancy levels falling below loan document requirements Loss of equity due to foreclosure by lender upon landlord’s default under loan Tarnishing image of landlord, building or shopping center Failure to meet co-tenancy requirements in other retail leases, which could lead to losing more tenants

6. Landlord’s Concerns – Landlord’s Financial Condition and Market Conditions Landlord must understand its own financial condition, and market conditions and trends as applied to this building Tenant mix and impact of dark stores and terminations by other tenants under co-tenancy provisions or otherwise Restrictions on ability to modify leases, such as required lender or joint venture partner approval Impact on ability to meet debt service requirements Understand lease terms regarding default, remedies, assignment/subletting, termination, reduction, expansion and extension options, opening and operating covenants, co- tenancy requirements, etc. Will changes or loss of tenant trigger lenders’ rights under loan documents to approve rents or leases

7. Landlord’s Concerns – Tenant’s Financial Condition Landlord must understand tenant’s economic condition and reasons for requesting relief Tenant's occupancy costs as percentage of revenue How critical is this space to tenant’s business operations Tenant's overall business condition and effect on its credit and space needs Tenant's financial condition and funding sources Likelihood tenant will file bankruptcy and consequences of such filing

8. Landlord’s Concerns – Lender Approval Lenders will consider whether: Reduced cash flow and lower debt service coverage make a difference under loan terms Landlord can pay the difference (and continue to pay its debt service) if no changes are made It would be better off foreclosing on the property Note that most lenders understand need to cooperate to avoid default, foreclosure and inheritance of same problems facing its borrowers

9. Tenant’s Concerns – Tenant’s Position Tenants seeking to survive economic downturn need to: Reduce overall expenses by lowering total occupancy costs Tenant must understand its own position Analyze lease to learn financial and non-financial exposure Have lawyer review lease for costs tenant may not realize, such as excessive mark-ups on utilities and taxes, and additional operating expense exclusions Decide what must accomplish to make lease work for them Any personal guaranty or security deposit

10. Tenant’s Concerns – Landlord’s Position and Market Condition Tenant must understand landlord’s position/exposure Landlord’s financial condition and reputation Condition and quality of building Current and anticipated vacancy in building Value of building Who is lender and how much debt exists on building; is loan recourse; chance of foreclosure Timing and cost of losing tenant (tenant improvements, brokerage fees and re-letting costs; co-tenancy failures) Timing and cost of eviction and enforcement actions Tenant must understand current leasing market Know available space in market and what landlords are currently offering new tenants Compare current lease document to market leases

11. Tenant’s Concerns – Don’t Be Shy, But Don’t Be Greedy! Tenant should submit an offer that is fair to both parties If want to keep this landlord, avoid situations where landlord lacks capital to maintain and operate building Avoid forcing landlord into bankruptcy, resulting in new ownership, change in level of services/maintenance or tenant improvement allowances not being paid Include key financial and non-financial terms and important language changes tenant wants in new lease Offer comprehensive plan that shares the pain with landlord Remember that offer may be subject to lender’s approval

12. Potential Changes to Lease Provisions Decrease or defer rent payments to back end of lease term Give additional free rent periods or period of percentage rent only, or modify percentage rent rate/break point Reduce and/or cap tenant’s payments for capital improvements and other operating expenses, including additional exclusions Eliminate or reduce mark-up on real estate taxes, utility costs, additional services and other additional rent charges (landlords beware of most favored nations clauses given to other tenants because may need to give them same changes) Defer tenant’s non-critical maintenance/repair obligations Defer landlord’s non-critical maintenance/repairs for which tenant is required to contribute as part of operating costs

13. Potential Changes to Lease Provisions Reduce space Provide flexibility to accommodate tenant’s current needs to contract, with right to expand if conditions improve Reduce or extend lease term Provide flexibility to accommodate tenant’s current needs, with right to extend at fair market rent if conditions improve Tenant consider whether wants to extend lease in declining building when may be able to upgrade to better space, whether wants to relinquish valuable extension/expansion rights and whether makes sense to wait longer to request changes to improve deal Delay required completion of construction and/or opening date under new leases

14. Potential Changes to Lease Provisions Tenant improvements Additional tenant improvement allowance or landlord perform improvements at landlord’s cost Permit longer amortization of tenant improvements Omit requirement for tenant restoration at lease expiration If landlord in financial trouble, tenant wants self help right to finish landlord’s work with reimbursement, assurances that money is available and/or security for performance of work, and offset right for unpaid tenant improvement allowances and sums spent performing landlord’s work

15. Potential Changes to Lease Provisions Add flexibility for occupancy Give tenant future termination rights (note that landlord may want to omit tenant’s existing termination rights) Expand permitted use clause or remove restrictions on use so tenant can change or add to its business operations (note that landlord may want to omit/limit exclusive use and co-tenancy provisions to make it easier to substitute for anchor or big box tenants) Permit assignment/subletting without landlord consent to any affiliates of tenant and to any entity created by merger, consolidation or transfer of all of tenant’s assets Extend cure period before failure to perform becomes event of default or incurs late charges or interest (note that landlords may be even more concerned about defaults, but really want cure instead of termination or monetary penalty)

16. Potential Changes to Lease Provisions Security deposits and guaranties Tenant wants to eliminate guaranty or reduce security to free up capital, but landlord wants to increase security or obtain guaranty from parent company or principals Letters of credit will be hard to get for troubled tenants The parties may want financial information regarding the other distressed party going forward Omit landlord relocation option and radius restriction (note that landlord may want to add relocation option for flexibility) If tenant downsizing, landlord reclaim building exterior and lobby signage rights to use to induce replacement tenants Condition deal on getting non-disturbance agreement from existing and future lenders

17. Potential Changes to Lease Provisions Co-tenancy Requirements Extend time for landlord to meet co-tenancy requirements Add monetary penalties and termination rights for landlord’s failure to meet co-tenancy requirements If tenant has not yet opened and co-tenancy not satisfied, consider whether tenant must perform its work and open It may make more sense to negotiate to terminate lease and make termination payment, especially if the lease already provides tenant with an exit strategy Add a mutual release of any prior defaults by the parties Add a confidentiality provision

18. Handling Tenant Defaults – If Restructuring Is Unsuccessful or Undesirable Eviction may not be landlord’s best option, unless space can be relet to more creditworthy tenant (may result in dark space, co-tenancy failures, etc.) If lease permits, landlord may sue for breach to collect rent due without evicting tenant Consider requesting voluntary surrender of space, but retain right to pursue tenant for damages for breach Consider whether tenant and guarantors have sufficient assets to support enforcement of lease Permit tenant to do below market assignment or sublease to mitigate damages, provided tenant remains responsible for rent deficiency

19. Tenant Defaults – Bankruptcy Implications of tenant bankruptcy Apply security deposit to cure outstanding defaults before bankruptcy filing (first satisfy lease requirements for application of security) because once bankruptcy filed, automatic stay will prevent landlord from applying security deposit absent relief from bankruptcy court (which could lead to substantial delays in application of same) Although letters of credit given as security are not deemed part of bankruptcy estate, similar issues arise because must meet lease requirements for draw, especially if draw must be based on event of default under lease which requires notice to tenant: If notice and grace period not expire before filing, relief from automatic stay will be required for draw and no assurance court will grant same; if draw without satisfying lease requirements, possible damages for breach of lease and disgorgement of improperly drawn sum

20. Negotiating Effective Non-Disturbance Agreements With Lenders Tenants should consider the following items when negotiating SNDA’s: Lease subject and subordinate to lien of mortgage (not the mortgage and all of its terms) because want lease to control on restoration after casualty and proceeds applied to same Lender agree not to terminate lease or disturb tenant’s right of possession unless tenant is in default beyond applicable notice and cure periods under the lease In sublease, attornment should be on executory provisions of sublease (not lease), so subtenant’s rent is not increased Lender or any successor landlord must be obligated to cure continuing defaults under lease and tenant’s rights under the lease (including offset rights) must continue to apply Tenant’s rights against prior landlord should not be extinguished

21. Negotiating Effective Non-Disturbance Agreements With Lenders Lender or successor landlord should be required to pay any improvement allowance or other sum due to tenant which accrues after attornment (otherwise, tenant must sue prior landlord for same) Lender or successor landlord should be obligated to perform all repairs, improvements, maintenance and restoration (e.g., on casualty/condemnation whether or not insurance proceeds are paid) landlord required to perform under lease Lender’s time to cure default should be limited to 30 or 60 days after landlord’s cure period under lease (rather than a “reasonable time”) Tenant’s payment to lender or successor landlord upon notice given after landlord’s default must constitute performance of tenant’s corresponding lease obligation

22. Contacts Garry C. Berman Robinson & Cole LLP 280 Trumbull Street Hartford, CT 06103-3597 Direct (860) 275-8204 Cell (860) 869-3494 gberman@rc.comgberman@rc.com | www.rc.com www.rc.com