Renegotiating Commercial Lease Space Post-COVID
Across the nation, businesses both large and small have struggled to keep their doors open during the uncertainty of the COVID-19 pandemic. Unfortunately, such hardships have created tension between commercial tenants and their landlords. The question has become, how do tenants move forward with their commercial leases in these uncertain times? While many businesses have gone fully remote, such an option is not feasible for restaurants and retailers. In many cases the answer for these businesses is renegotiating their leases, which helps cut significant costs in a time when every cent matters.
According to real-estate advisory firm A&G Real Estate Partners, as quoted by The Wall Street Journal, their clients have saved over a collective $1 billion by renegotiating their commercial leases. Because of the COVID-19 pandemic, landlords have become more realistic and open to rent concessions in order to avoid widespread tenant departures. Landlords are hyper aware of the vast business closures, store and office vacancies, and bankruptcy filings during 2020.
It would be unwise to take a hardline approach and simply refuse to pay or demand a lower rent on your business’ lease. Such tactics gloss over the fact that landlords still have bills to pay, and may in fact sour any future negotiations to the point of no return. Instead, retailers and franchise owners must realize that their financial futures are inextricably linked to that of their landlords, and so must be willing to work together to find common ground for the benefit of all.
Here, we will outline the best ways to navigate renegotiating your commercial lease.
Prepare for a Negotiation
Before you meet with your landlord, be sure you complete the following so you are fully prepared.
Review your leases ASAP.
In a store-by-store manner, review your leases with an advisor, or your lease-management agency. They will help you identify:
- Provisions that are worded in such a way that can be interpreted as helpful to your request for rent abatement.
- Pass-through expenses, and if they are set to increase.
- Lease-renewal options.
- What actions the landlord(s) takes should a lease default, and what constitutes a default on the lease.
- If the lease includes force majeure, effectively excusing a tenant’s rent performance due to outside circumstances.
Review each store’s performance.
Create a spreadsheet or document for your landlord’s review that details each store’s revenue, expenses, and expense factors that are out of your control, i.e. poor tenant mix, area vacancy rates, etc. Such documents will help in your landlord’s consideration of your lease renegotiation or relief request.
Create an overall restructuring plan.
This document should:
- Outline the specific reasons for your rent relief request.
- Provide copies—if you are comfortable—of your financial statements. Doing so will provide your landlord concrete evidence of your financial situation, which may, in turn, help to sway their decision to amend your commercial lease.
- This is important when considering that many landlords may be wary that such relief requests may merely be an effort to “take advantage” of the financial situation COVID-19 has wrought.
- Clearly define how your business plans to operate over the next year, or until the US economy returns to pre-COVID conditions, including how the business will maintain liquidity and any phases of reopening you’re planning.
- Address any anticipated government assistance, such as grants and loans.
Analyze your insurance policies.
Check if your store is covered for business interruption, including whether or not rent coverage is specified. If so, you may want to consider filing a claim after reviewing with your advisor.
Determine the level of rent relief to request.
There are many options for modifying your lease. Before broaching the subject with your landlord, speak with your advisor to determine the level of modification that is best suited for your particular store. Some of the most common requests are as follows:
- Deferral: This term refers to when a tenant is allowed by the landlord to temporarily delay payments. All payments must be paid at a later date, and it is the tenant’s responsibility to do so.
- Abatement: When used in commercial-lease scenarios, this term refers to the reduction or freeze of rent payments. This may result in forgiveness of rent, rent deferral, or rent suspension for a select period of time.
- Loan Conversion: With this method, any overdue rent payments are converted into loans, which the tenant will pay back by a particular date.
- Lease Extension: This request sees the tenant expand their original lease to a longer term at a lower rental rate. Such a request could be viewed favorably, as it ensures the landlord’s property is occupied and the cashflow continues, albeit at a decreased amount.
Note that it is unlikely that landlords will completely waive, forgive, or drastically reduce rent. Instead, deferral is the most likely compromise. However, no matter which form of rent modification you seek, prepare to negotiate:
- The period of time that the rent will be “modified” (i.e. deferred, frozen, forgiven, etc.)
- The interest, if any, that will be accrued during the “modification” period
- The repayment schedule, you don’t want to start paying back to early
Finally, create an open dialogue with your landlord.
As discussed, it is generally unwise to outright refuse to pay rent or demand a reduction without open communication. Hence the importance of approaching your landlord with the intent of reaching a resolution that is beneficial to both parties.
- Broach the subject objectively.
- Keep in mind your landlords’ own financial commitments to the property.
- Because there is no “one size fits all” blanket solution, tailor your rent-reduction requests to specific store locations.
- Bring up any language in your lease that supports rent abatement, deferral, or temporary forgiveness.
- Provide your overall restructuring plan.
Ultimately, the total impact of the COVID-19 pandemic on commercial retailers and restaurants cannot yet be tallied. Such an unprecedented situation absolutely calls for unprecedented measures, including lease renegotiations that at one time neither landlords nor their tenants ever expected. Regardless, it is up to both parties to work together to determine the best way forward for both short- and long-term success during these challenging times.
Because rent disruption due to COVID-19 requires case-by-case negotiations, it is highly recommended you work closely with your advisor, be that a real-estate attorney or lease-management agency. For help with your particular situation, reach out to us at PropertyWorks. We look forward to helping you better position your portfolio of properties with lease-negotiation services.