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renegotiating commercial lease terms

Renegotiating Commercial Lease Terms Amid COVID-19

Since the influx of COVID-19, businesses all over the U.S. have had difficulty navigating the future of their profits, customer bases, and overall growth. Unfortunately, despite efforts to balance the changing landscape of business, many have had to resort to layoffs and furloughs just to stay afloat. While furloughs and layoffs can help mitigate the strain of labor costs, for those operating out of brick and mortar locations remaining in business can be especially daunting. Real estate and leasing costs (often a business’ second highest expense) are often a more complicated issue to handle as they can be linked to the owner’s personal assets or corporate collateral.

However, there are ways for your business to remain in location and keep your doors open. The widespread impact of COVID-19, can be used to show landlords that evicting current tenants might not provide them with new tenants who are able to pay, but might instead leave them entirely tenant-less. Due to this uncertainty, in most cases, it is in the best interest of both landlords and commercial tenants to have an open dialogue toward practical solutions by renegotiating commercial lease terms.

Renegotiating Commercial Lease Terms with Your Landlord

Negotiating with your landlord or leasing company can be complicated and tedious. It is advisable that you engage, or at least consult, with an attorney who has specialized real estate experience prior to entering discussions. As they walk you through the process, here are some general guidelines to consider:

  1. Review Your Lease Documents. Before getting into negotiations, you will need to understand the obligations of your existing lease terms.  You should confirm whether or not modifications, terminations, or acceptance of less rent is permitted.  Also, an understanding of what changes may trigger a default is important.
  2. Be Honest About Your Tenant History. Landlords are less likely to negotiation with a business that was already experiencing financial hardship before COVID-19 or a business that was a difficult or demanding tenant. Be prepared to present evidence of good tenant history and on time rent payments.
  3. What Can You Afford? Take a deep dive into your finances and decide how much rent or mortgage, if any, you can pay. Approaching negotiations with a well thought out plan shows your landlord that you are approaching the situation in good faith, understand the financial issues and obligations, and are doing what you can to work towards a mutually beneficial solution. Keep in mind that, if possible, offering to pay a portion of the rent, as scheduled, is preferred to requesting complete deferment. Often times, deferred rent will be tacked onto the end of the lease and will be due in full upon expiration, which can make it more difficult for your business to stay survive. Other options include:
    • tying rent to your business revenue so that the landlord is invested in helping your business move forward.
    • for tenants with multiple leases with the same landlord, you can offer to pay more rent for locations seeing more profit to make up for not paying or paying less at locations that are struggling.  
  4. Other Negotiation Points.
    • Co-tenancy Concerns. Most state and local governments mandated the closure of gyms, salons, theaters, bars, and restaurants at the beginning of the COVID-19 pandemic. Sometimes, co-tenancy terms in commercial leases provide a tenant with certain rights, including reduction of rent or lease termination, if a certain amount or type of business tenant is not open and operating for a period of time. This is because a reduction in hours, traffic, etc. from neighboring businesses can impact yours.
    • Understand Effects of Force Majeure. Most lease agreements include a force majeure clause that halts, permanently or temporarily, the lease terms upon the occurrence of certain events that are outside of the tenant’s control, such as a war or natural disasters. You should discuss this option with your attorney as many courts strictly interpret this term and unless pandemic or disease is specifically named, a court may not agree to suspend absent a catch-all provision.
  5. Document New Terms. After you have negotiated and reached a new set of terms. Make sure your attorney oversees the language and documentation of the changes; with clearly defined terms for abatement, deferment, modification, or forbearance, as applicable. Until the new or revised agreement is signed, continue to operate as usual.

It goes without saying that landlords need to protect their finances and commercial property. However, with businesses starting to reopen, COVID-19 has given many landlords the opportunity to strengthen their dealings with tenants by supporting creative solutions that help both parties weather the storm.

Navigating the right path for your business after unforeseen and unprecedented circumstances can be overwhelming. Fortunately, Capital Partners Law is here to help you gather relevant documents and information to put you in the best position to secure the future of your business. Contact us today to get help renegotiating commercial lease terms.

What Should You Do Next?

If you are interested in learning more or speaking with an attorney at Capital Partners Law, there are plenty of ways to get in touch:

This article is for informational purposes only. It does not create an attorney-client relationship with any reader nor should it be construed as legal advice. If you need legal advice, please contact our firm.