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Handling your Commercial Lease Obligations, Right Now

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What your business can do about it’s commercial lease, right now.

We’ve covered an enormous amount of ground on the health, economics and realities that are now starting to set in as roughly 50% of Americans shelter in place at home due to Covid-19. 

With a lot of uncertainty for the foreseeable future, we’re focused on sharing solutions that can provide relief to businesses today or as quickly as possible. The number one priority of everybody working to avoid catastrophe in the business world is to keep businesses from closing for good, period. Keeping businesses open keeps people employed. From lenders to landlords this should (and is in our opinion) be the subject of every conversation. 

However, what can be done for businesses in active leases and have otherwise been good tenants? 

IMPORTANT NOTE: We are not attorneys so these recommendations should not be interpreted as legal advice. If you have a specific question on language in your lease please contact your attorney for their interpretation. As we always recommend, an attorney is your best advocate when negotiating the language of a lease just like a tenant representative is your best advocate for negotiation of the business terms.

This crisis has affected my ability to pay rent. What are my options? 

We believe communication and good-faith negotiation are your best bets. Talk with your landlord and explain your situation. Be ready to provide financial documentation like current cash flows and sales (if applicable) to show a direct connection between the shutdown and your current business.  Most landlords are absolutely inclined to believe their tenants in a situation like this but we’ve literally never had a situation like this one. It’s essential to be honest. 

Once your landlord has a good sense of your situation they can use that information to lean on their financing partners, lenders and other partners to get creative. Remember, most landlords have folks they answer to as well up the chain, giving them the ammunition to make deals that can help you is the first step to finding some relief.

If you’re broad or just verbal, your landlord will not take it as a high priority. Ask for something tangible that is realistic. For example, show the landlord if 90 days of base rent relief buys you 4-5 months of payroll. Make offers they can work with, in their language. If you used a tenant rep or an attorney on your lease, now is the time to get them involved as well to make a formal offer so your landlord doesn’t have any excuses not to consider it. 

What does a formal relief offer to my landlord look like? 

Even something in an email outlining your needs will suffice. Below is a basic email outline.

*Notes: Of course, attorneys will be needed to draft the actual documents of any amendments. Your tenant rep and attorney can assist you with this!

“Dear Landlord,

Our sales have been reduced 90% by the shutdown as you will see in the attached financials. As such we are having issues making payroll. We have been a great tenant for years and always paid on time but as you know, these are extraordinary circumstances. 

The following formal amendment to our lease would help us to keep our people employed so we can reopen when the shutdown ends:

90-Day Base Rent Abatement (only expenses portion of the rent will be due)

3-months extension of primary term of the lease (basically how free rent is loaded into a lease)

One month of free rent (gross) when the shutdown ends so we can ramp up sales again.

We want to continue our business at your location, please consider working with us now. Time is of the essence”

Now, every deal and landlord is unique so what you can get vs what another tenant may get varies widely. Bottom line? Ask, and ask in writing.  Be prepared to pay “some” rent, the reality is most of these buildings have debt and will not receive a total deferral of all of their obligations either. You’re in a similar boat as the landlord here, in some ways each building is its own business too. Keep that in mind so you can work together.

Your situation may vary widely. You may need more or less relief. Ask for what is appropriate and operate in good faith. We’ve heard from lenders all over the country that they will be working with landlords on some type of mortgage relief, these savings should allow landlords to collect less rent right now. Our industry moves slower than anyone likes of course.

Are There Any Immediate Options to Liquidity for My Business? 

If you qualify, you may be able to ask for your cash security deposit back. Landlords are sensitive to collateral more than ever right now, but they also know that making payroll and covering obligations is key for their tenants. Our program can set a landlord up to replace their cash deposits with our AA-rated guarantees efficiently so they can start giving this cash back to their tenancy right now. It’s a real solution, introduce us to your landlord and we can get the ball rolling, now.

What about renegotiation of the lease itself like reducing rental rates, term or size? 

Our opinion is landlords are unlikely to do this unless they’re forced to by the circumstances (and we haven’t seen that yet). Your rep or attorney may know more and, as noted, every situation is different. It is totally fair if you intend to use or operate your space differently after this crisis, but keep in mind a lease is a contract and landlords (and their lenders) rely on these for years of rent and capitalization. Bottom line: changing terms is tough.

Our gut says many landlords may tell you to sublease a portion or assign your lease if possible, which as we all know can be time consuming and costly.  You can also consider trying to buy your way out of the lease if you have the funds available and don’t intend on returning. We won’t cover that here but you should be relying heavily on a good tenant rep to manage that process.

Can I Enforce Force Majeure Clauses in a Lease?

To this point, we’ve covered “friendlier” solutions which encompass the spirit of working out a deal in an extraordinary time. However, there are some “heavier” tools to consider in the box that may require litigation and would not be immediate solutions. if you want to consider. These include things like enforcing “Force Majeure” or “Acts of God” clauses in your leases or using business interruption insurance. This is the hammer in the toolbox – , trying to enforce these will likely end up in court and will not provide fast relief.

Most commercial leases are pretty “landlord friendly.” What does that mean? Well, it means they have many many ways to put a tenant into default, terminate or otherwise enforce performance while the tenant usually has very few ways to get out. This is by design of course, Landlords feel they take on the vast majority of risk in a lease (especially in new deals) so it’s prudent for them to draft documents that are overprotective.  

How About Government Assistance? 

Waiting on the government to enforce some moratoriums on rent or evictions to provide relief is not an immediate solution either.  This is unlikely for commercial real estate and we believe strongly that communication and good-faith honest negotiations are better options in the current environment. Rely on your attorney and rep here, beyond that we can’t offer much advice if you pursue these routes.

What If I Am Already in Default? 

If you are already in default or have had trouble with your lease prior to this crisis, it’s even more essential to engage with the stakeholders and your legal counsel to come up with a solution, you’ll likely have less options given your status but it cannot hurt to have the discussions.

There is help available

Check with the SBA, your state comptroller and your lenders for great resources. Blending the reality of today’s crisis with creative thinking will lead to more businesses staying open and coming out of this crisis stronger. Work with your landlords, rely on prudent advice from your tenant reps and attorneys to make clear business decisions. We believe in the small business community as the engine of America and have no doubt the entrepreneurial spirit and success stories will continue as we start to climb out of this.  In the meantime, if you need any advice or recommendations we are happy to help and point you in the right direction.

Stay safe and healthy, we wish you the best of luck and success with your livelihood.

On a final note, if you’re a landlord right now it’s time to great creative. We’ve put together a comprehensive list of strategies below but one way you can immediately help your tenants survive is by releasing their cash on file in deposits. We’ll secure it with our AA-rated guarantee so you end up with enhanced coverage vs that cash anyway. Let’s get to work and help businesses survive.

 

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