As the global pandemic continues to affect many businesses' ability to return to their office, the mounting pressure to pay rent on an unused space has become increasingly challenging.
Many city governments have enacted commercial eviction moratoriums to protect tenants, however the law requires full repayment of the deferred rent. Additionally, the law does not protect tenants from accruing substantial late fees and interest charges, nor does it preserve rights granted in the lease that become void upon non payment of rent, such as options to renew, expand or sublease. Additionally, in some leases, the tenant is immediately required to pay back any free rent received if a rental payment is missed. This can get very, very expensive.
If you're a business that needs to seek rental relief from your landlord, there are much better alternatives than evoking a city-enacted eviction moratorium. Most landlords are receptive to working on solutions to help keep their tenants afloat when they're approached BEFORE there are missed rental payments.
In the case of COVID-19, the force majeure clause within a tenant's lease will probably offer no assistance as they generally and specifically do not protect a tenant against non payment of rent. Additionally, SARS and MERS epidemics insurance companies updated their policies to specifically exclude coverage for viruses, bacterium and other microorganisms. Business losses are also not covered under business interruption insurance because they require physical loss from a covered cause (ie. the covered cause is fire, the physical loss is the building).
The best approach is for the tenant and their representative to be proactive and begin discussions with the landlord as early as possible, before there's a default. Wise landlords understand that it's smart business to help their tenants get through a rough patch. If they can help keep them in business, the future income they'll collect over the long term will far eclipse the temporary economic relief they may need to provide in the short term. They understand that it's better to have "a percentage of something, instead of 100% of nothing".
In light of the current COVID-19 crisis, many lenders and insurance companies are proactively reaching out to commercial building owners and offering 30 to 60-day deferrals of their mortgage payments and insurance premiums, respectively. Additionally, many investors in commercial buildings are temporarily deferring their profit distributions. This is giving some landlords much needed flexibility to be able to work with their tenants and develop an assistance package. Ultimately though, all of the buildings we are negotiating with are run by good people, with good intentions and they know that this is the time for us all to pull together and help each other weather this storm.
Below are some of the successful strategies that we use to negotiate forgiven or deferred rent on behalf of our clients:
- Free rent: As it suggests, we simply ask the landlord to forgive rental payments for a period of time (ex. 1-3 months).
- Free rent with added term: The landlord allows the tenant to miss a number of months' rent, but then amends the lease to extend the term by the number of months of free rent given.
- Rent deferment with amortization: Rent is deferred for a period of time and the value of the deferment is then amortized over the remaining months of the lease or a set schedule (ex. The deferred amount is paid back over the next six months).
- Discounted rent: In lieu of free rent, the landlord allows the tenant to pay a percentage of what they're required to pay (ex. 50%). This is a great hybrid solution because it can provide some relief for the tenant while helping the landlord to keep some income coming in to cover the mortgage, insurance and operational costs of running the building. This approach can then be combined with any of the other strategies above (ex. 6 months of 1/2 rent with 3 months of paid rent added to the final months of the lease.
- Security deposit conversion: The landlord agrees to apply the tenant's cash security deposit towards rent. This is especially effective for tenants who do not have much term remaining on their lease.
Again, we can't stress enough how important it is for tenants to avoid non payment of rent at all costs, and to consult with their real estate advisor and attorney to explore all options that include cooperating with their landlord to develop a solution. An appeal to not only a landlord's keen business sense, but also to their humanity is the key to negotiating a favorable outcome for rent relief.