Commercial tenants and landlords need to work together to balance losses caused by the coronavirus.
Small business owners nationwide are struggling to pay their commercial real estate leases right now, leaving many tenant-landlord relationships at an impasse. While commercial tenants are laying off employees and watching revenues bottom out, landlords have their own financial obligations — like taxes, maintenance costs, and mortgages.
Both parties need to find ways to balance the losses of the COVID pandemic and resulting economic downturn, while keeping in mind their shared common interest of maintaining the lease arrangement.
“Small business owners presume that landlords want rent, and they want it now. What landlords truly care about most is future income, and strong financials that they can show to their banks and other lenders down the road,” says Jon Kepler, commercial landlord and property manager.
Your best bet as an SBO is to talk to your landlord to negotiate an adjustment to the lease. Here’s what you need to know.
“Small business owners presume that landlords want rent, and they want it now. What landlords truly care about most is future income, and strong financials that they can show to their banks and other lenders down the road.”
Some options for modifying a lease
There are many. You’ll want to consult a commercial real estate lawyer, but the following options will help you begin to understand some of the possibilities. “Remember that the options are vast, and creative solutions are often the best,” says Dana Delman, partner at business and real estate law firm Delman Vukmanovic LLP.
Abatement is a lessening or reduction or something. In regard to commercial real estate leases, it’s when both parties agree to some sort of reprieve, whether it’s rent deferral or temporary forgiveness of base rent or all rent payable under the lease (which includes taxes and insurance obligations).
Deferral is when landlords allow tenants to delay payments for now with the understanding the money will be paid back later. Tenants are responsible for repaying the deferred amount at a later date, whether as additional equal payments or added on in increasing amounts — graduated — to later payments.
Extension of the lease
In some cases, landlords may be willing to pause monthly payments in exchange for an extension of the lease for an equal number of payments. The landlord then has a better chance of maintaining property value, as they retain the same number of rent producing months as before COVID. This is important because it affects the income production — and therefore value — of a lease, which is important for future lending or to future buyers.
Tips for negotiating with your landlord
Landlords do not want commercial spaces sitting vacant, nor the hassle of litigation over nonpayment of rent, force majeure clauses, or business interruption insurance. It’s costly and time consuming.
“Open communication and a willingness to work together will help the relationship between the parties and result in a solution for both the tenant and the landlord.”
Before taking things to court, landlords and tenants should communicate openly in an attempt to reach a resolution. Both parties need to realize that their interests can correspond and work to find a solution from there.
“Open communication and a willingness to work together will help the relationship between the parties and result in a solution for both the tenant and the landlord,” says Antonella Colella, business and real estate lawyer.
“Landlords certainly do not want a defaulting tenant so I’m seeing that they are more willing to accept payment plans or partial payments on leases, but communication is extremely important,” Colella adds.
Provide financial information
Offer to provide financial statements, if you’re comfortable with it.
“Landlords don’t know who can and cannot pay, because tenants are not required to share financial statements,” Delman says. They may be swayed by seeing the evidence of your current financial situation before entering into short or long-term lease amendment negotiations.
Lean on objective information
Negotiation consultant and MBA instructor Fotini Iconomopoulos advises tenants to consider the circumstances from the other parties’ perspective, and to build an argument on objective information.
“You might say for example: ‘So many businesses without relief have already started closing their doors and are now sitting empty. Who knows how long it will take for a new tenant to take over in a recession and under these conditions? I certainly don’t want to be one of those businesses, and I’m sure you don’t want to be sitting on an empty property collecting nothing for who knows how long. What can we do to make sure that both of us weather this storm?” Iconomopoulos says.
Consider other options
Delman recommends speaking to a bankruptcy attorney before approaching your landlord. “Don’t resign consulting a bankruptcy lawyer as a last resort. It should be one of the things you do as you gather information before approaching your landlord,” she says. A reorg bankruptcy like Chapter 11 may help save the business and the lease.
Iconomopoulos’ final advice is to think creatively in helping your landlord see the long term. “Get them looking into the future with you, it will increase their dependence on you. That changes the dynamic and makes people more cooperative in the short term.”