How To Negotiate a Commercial Lease During COVID-19
COVID-19 has forced thousands of businesses to permanently shut down and there is no immediate end to the pandemic forthcoming. Small business owners across America are hurting, and paying commercial lease obligations has become a challenging struggle for some stores and restaurants.
The restaurant industry has been hit the hardest by the economic downturn and COVID-19 restrictions. The situation is so dire that investment bank UBS predicted that at least 20% of American restaurants could go out of business by the end of 2020.
Before coronavirus suspended the American economy, landlords generally had the advantage in commercial lease negotiations. While restaurant owners typically budget 6% to 10% of gross revenue for their lease, they frequently had to pay more in the pre-COVID economic environment. The pandemic has somewhat altered the commercial landlord-tenant dynamic.
While small businesses are fighting to survive, some landlords are also struggling. Empty spaces and tenants requesting lease abatements while maintaining mortgage, tax, maintenance, and salary obligations is proving tough for some landlords. This has created a tenant opportunity in some spaces for lower rates and better terms as landlords come to understand the pandemic commercial real estate market.
Commercial Lease Modification Options
If you are currently a tenant struggling to pay your rent, do not assume that your landlord will not work with you. It is generally in both parties' best interests to maintain current lease agreements. Market conditions have changed since you executed your lease, and it may be an appropriate opportunity to request a lease modification.
You should always consult a commercial real estate attorney regarding specific details before attempting to negotiate a lease modification, but some of the common strategies are outlined below:
Percentage Leases
With a percentage lease, tenants pay either a percentage of their gross revenue or a decreased base rent amount plus a share of net income earned. Some landlords are willing to negotiate percentage leases as a temporary fix with a gradual transition back to monthly minimum rents as business improves.
Rent Abatement
In general, the word "abatement" means reduction. In the commercial real estate industry, a rent abatement is typically an agreement between the landlord and the tenant that creates a period of free or reduced rent.
Rent Deferral
A rent deferral occurs when a landlord permits a tenant to skip payments now and pay them back later. Typically, this is accomplished by adding additional payments, extending the existing lease, or increasing the future payment amounts.
Lease Extension
Another available option is to extend the lease and either pause or reduce a tenant's current monthly payment. A lease extension allows a landlord to receive the same amount of rent as the original lease or a higher/lower total amount, depending upon the agreed term; but the landlord is able to keep the space rented for an extended period.
Negotiation Tips for Commercial Tenants
It is essential to remember that landlords do not want to deal with commercial eviction proceedings at any time, especially during the pandemic. No owner or landlord wants his/her commercial space vacant, and it is always a best practice to speak with your landlord before financial hardships force a decision.
Here are a few tips for successful commercial lease negotiations during COVID-19:
Communicate openly and honestly regarding financial challenges;
Explore all possible solutions before making a decision; and
Consider your landlord's perspective while trying to develop a mutually beneficial solution
It is in everyone’s best interest to maintain healthy leasing relationships, and approaching negotiation with an open mind and a collaborative spirit can assist in getting to a modification that works for both parties.