Since the coronavirus crisis began, I have been negotiating rent concessions for many commercial tenants’ clients. In this blog post, I will outline some of the issues and possible resolutions of these lease renegotiations.
First, I advise the client to contact the landlord directly to inform them that they can’t pay the total rent. This should be done unless the landlord and tenant are not on good terms. Regardless of how well that conversation goes, tenants should retain counsel before engaging in in-depth renegotiations or signing any agreement. I then contact the landlord’s counsel. These conversations are usually productive. The landlords have a strong incentive to grant concessions to their tenants. If the predictions about the coming recession (depression?!) are accurate, they will not find a new tenant anytime soon.
The best form of these concessions is when the landlord forgives a portion of the rent during the shutdown. In this scenario, the landlord will not demand the tenant reimburse him at a later date.
The next best option in these renegotiations is a rent forbearance agreement where the tenant pays a percentage of their rent during the coronavirus crisis but has to repay the shortfall later. The tenant pays the abated rent to the landlord over the next 6-18 months after the tenant reopens.
Extensions of Lease Terms
An alternative forbearance agreement is extending the lease for a few months at the end of its term. This extension would be at a slight premium, and the rent due under the extension would compensate the landlord for the abated rent.
Some landlords and tenants agree that the tenant would pay a percentage of their profits for the first few months after they reopen. This frequently involves the tenant providing the landlord with its financial records,
One issue the landlord’s attorney raises in response to all these requests is that no one knows when this shutdown will end or whether the tenant’s business will survive after the mandatory coronavirus closure. Both the Landlord and Tenant have to assume some risk, as everyone has to during this crisis. Both parties should understand that the lease renegotiations will likely continue after the economy reopens.
Government Aid to Businesses
Another question that landlords ask during these renegotiations is whether my client has applied for the Small Business Administration’s Payroll Protection Program instituted during the coronavirus pandemic. If they have, landlords sometimes request that the tenant assign them a portion of those funds. This agreement would be precarious for the tenant. The rules about this program have already been modified and may well be again. Now, 75% has to go to payroll, and only 25% can go to rent or other costs. The tenant should not commit the 25% as they do not know how much they will need over the ensuing months.
All the above options, or a combination thereof, should be pursued through cooperation. The landlords have mortgages, property taxes, and building maintenance expenses. During these renegotiations, tenant’s attorneys must be mindful of that and creative when making agreements recognizing both parties’ interests.