How To Renegotiate Your Business Rent During the Pandemic
If you are a retail business, there is perhaps nothing more critical for reopening or continuing operations than your lease. During this time of quarantine and reopening, both landlords and tenants have been casting about trying to find solutions. No one really knows what to do or what will come next. You will benefit immensely by taking the lead in your discussions to renegotiate your lease with your landlord about how your business can return to a healthy existence, return to being a great tenant and how the landlord can help make that happen. If you have not taken the lead yet, it is not too late. Your landlord is facing an uncertain future with many unknowns and simply trying to sort out their best path forward.
Key Terms in Rent Negotiation
Here are a few terms you should know before talking to your landlord to renegotiate your lease:
- REIT is a real estate investment trust
- Rent abatement is an agreement between the landlord and the tenant that provides a period of free rent
- Rent postponement or rent deferral requires payment of your rent at a later date; it does not automatically forgive rent payment unless your landlord agrees to that
- Rent relief is any change to your current lease
- PPP is the federal Paycheck Protection Program
We recommend that you do not simply stick your head in the sand, send a check for less than full rent or no check at all without contacting your landlord. We propose that you take a reasoned approach to solving the problem. The best approach is to do what you have done all along to be successful in business which is to assess your situation and make a plan.
Guidance for Rent Relief Requests to Renegotiate Your Lease Due to COVID
If your small business has been hurt by COVID, here are some tips to renegotiate your lease or ask for rent relief or rent abatement:
1. Slow down and assess your needs
Figure out what you can actually afford and figure out what rent relief from the landlord will actually make a difference. If you are a multi-unit operator, think in terms of both the unit economics of any particular store and also the overall business. Even if you have one particular store that can afford the rent, consider asking for rent relief anyway in order to keep the overall business healthy. You may also want to consider whether a weak store that you’ve been considering closing is something that you should close.
2. Make a plan
You should make projections and be ready to share them if you are asked to do so. You will set yourself apart with your landlord by having a plan, as many other tenants will not even try to plan. Take comfort now in the understanding that no matter what your projections are, they’re going to be wrong. Rest assured that the landlord and everyone else knows that. You are setting yourself apart by being a planner, and by extension, someone who can react when the plans need to change.
You need to pick up the phone and contact the landlord to renegotiate your lease. Remember that you are talking to a person who is assessing what to do, has their own fears and curiosity. By talking to your landlord about your situation and what you’re seeing, you’re providing the landlord color commentary on what’s going on out there, commentary the landlord is frankly dying to hear. Open a dialogue and do what you can to avoid acting unilaterally with respect to your rent.
4. Ask For Enough to Make a Difference
Ask for what you need, communicate the problem clearly, and let them know how your revenue is down, let them know if you are completely shut down. Spell out what you need from the landlord specifically to keep the unit that services the lease healthy, or spell out what you need from the landlord as part of the plan to keep the business healthy. Make your requests to renegotiate your lease specific and outline whether you are asking for deferment of rent or abatement of rent. If you are asking for deferment, spell out the terms of the repayment that you propose. If you cannot accommodate this request make sure that you have some kind of a plan to show the landlord as to how you will use your revenue when you open. It is likely that you have capital needs that can only be met by using initial operating revenue and by not paying rent.
5. Don’t throw out your strategic brain
For each lease you have, think about what you need in the future. Will more options need to be added? Do you need tenant improvement money for an upcoming upgrade that is required by your franchisor? Were you planning to close the unit early? Do you have concessions from your bank and/or your franchisor? If so, let the landlord know. People let to be part of a crowd and they really like it when others go first. If your bank and your franchisor have signed off on concessions, then your landlord is more likely to think that those concessions are a good idea and follow suit. You want to position yourself as a partner with your landlord and if you have an upcoming request such as a plan to extend the lease, make sure the landlord knows about that.
6. Don’t give up too much
Don’t give up options, extra time on the lease, or a personal guarantee if you are just asking for rent relief. Make sure that what you are being asked to give up are equivalent to what you’re getting. Some landlords want to add terms that make it clear that any murky portion of the lease that has to do with the COVID-19 situation is cleared up and gets entered in the lease as part of the amendment. Resist doing this and consider consulting with an attorney if such a request is made because you may need those things as leverage later if things get worse instead of better.
7. Assess your landlord
Consider what you know about your landlord. If your landlord is a REIT and you’re dealing with a bureaucracy, tailor your approach to that bureaucracy. If your landlord is a retired couple living on the income generated by your property, consider that when you ask for rent relief. Does your landlord have a large mortgage? Is the property free and clear of any debt? Does your landlord have many properties? Has your landlord historically been difficult to deal with? All of these are things to consider when deciding how you are going to approach your landlord for rent relief.
For example, the retired couple may need some cash to live on. They may need some kind of small payment. The REIT may care less about not getting rent right now so long as the total rent they receive over the life of the lease is the same. That REIT might agree to no rent now, so long as it all gets paid back eventually over the lease term.
8. Take the lead and give them something that’s simple to sign.
Give the landlord something to sign if they agree with specific dollar amounts that cover all relevant discussed issues. Make sure it is short, simple and easy to read. The most important point is to get it any agreement in writing. If nobody’s going to sign anything, at least get it confirmed by email. Make sure there is no discussion later about what was agreed to and what would be done.
9. Think like a lawyer
Don’t offer financials unless asked. Start with topline revenue in your presentation and keep it simple. If the unit economics look bad, just work with that. If the unit economics look good, stress the overall effect on the business. If the business looks good on paper and you’re still asking for rent relief, stress the uncertainty going forward.
Never play hide the ball or mislead but at the same time don’t fall all over yourself volunteering information.
10. PPP Money
The terms of PPP use and the changes to the PPP forgiveness regulations are beyond the scope of this article. Everyone’s situation with respect to PPP is different. Address the issues with PPP head-on with the landlord. Explain how much you have and what you’re using it for. This is a tricky conversation and if you have a significant amount of PPP money, we strongly encourage you to consult with an attorney about how to approach your landlord in terms of what you’re doing with your PPP money and what you are proposing to pay the landlord. You will want to stress that you need to adhere to the constraints of the loans to maximize forgiveness, which makes only a certain amount available for rent and expenses other than payroll and that you have other necessary expenses competing for the money with rent. (You’ll need to think of what those are of course). This one can get tricky. Don’t make promises you will take back later and call in a lawyer if it gets too confusing.
11. Don’t forget about your franchisor in the development agreement
If you are a franchisee with a development agreement that requires you to open new units, you should consider asking for extensions and getting those extensions in writing now. If you’re going to have to close a store and your development agreement required you to have a “net gain” of stores, get that store closure excluded. Now is the time to ask as economies start to reopen and panic and uncertainty recedes, these requests will be harder to obtain.
12. Force majeure
A lot has been written about force majeure clauses in leases and a discussion of your force majeure clause is beyond the scope of this article. Suffice it to say that the issue is complicated and for the most part force majeure clauses don’t help the tenant as they require the tenant to continue to pay rent while excusing the obligation to be open. If you think your force majeure clause might be a help to you in dealing with the landlord we strongly encourage you to contact an attorney right away to discuss that force majeure clause and what can be done.
13. Business interruption insurance
We strongly encourage you to apply for business interruption insurance. While it is almost certain your application will be denied, there is so much litigation and discussion around what should happen with business interruption insurance that you might as well get the denial anyway. You may have a claim later and at the very least you will have the denial to be able to show to your landlords and other stakeholders so that they know that that insurance is not currently available for helping with the business. Do not let your agent dissuade you from making the claim.
Asking your landlord for a rent abatement or to renegotiate your lease is a lot to manage. If you’d like to discuss any of this with us as part of a free consultation, please do not hesitate to call or email!