With total jobless claims surpassing 26 million & America currently sheltered in place, it is no surprise that many businesses small & large are looking for ways to mitigate cost, retain employees & establish a framework for recovery moving forward. With offices (& restaurants, malls, dentist offices etc) sitting empty, rent relief has quickly become a subject of discussion (and contention). Landlord’s across all asset classes & geographies are being flooded with requests for rent relief. This post will explore the issue from both sides & give tips on how to increase the odds of a mutually beneficial agreement for both Tenants & Landlords.

First is is important to understand the options & obligations of both parties. I am certainly NOT an attorney & cannot speak authoritatively to force majeure or business interruption clauses within leases (and recommend you speak with your attorney to explore these further) — However anecdotally, it seems neither can be counted on for relief at the present time.

Thus most Tenants are left with an enforceable contract, a less functional space then when they signed their lease & a difficult decision if funds are tight. The CARES act has appropriated funds for small businesses through two SBA programs: The Economic Injury Disaster Loan (EIDL) and Payment Protection Program (PPP). The programs give favorable loan terms & potentially forgivable funds if certain criteria are met. Meanwhile, commercial Landlord’s have been given very little protection (although they too could potentially apply for these loan programs for the operation component of their business) and still have mortgage & operating expense obligations (the CARES act allows federally backed residential & multi-tenant loans to be placed in forbearance but this does not extend to other commercial loans). In fact short term operating expenses may have increased due to additional cleaning & sanitation measures put in place for essential employees still working at the building.

It is therefore unrealistic to expect Landlord’s to grant all (or for some Landlord’s any) of the requests received. The Landlord too is running a business and has obligations that must be met. However, it is also in a Landlord’s best interest to the extent possible to aid in their Tenant’s long term success (and therefore their continued rent payments). If a short term rent reduction or deferral can help stabilize a temporarily struggling company and ensure long term payments are made, it would be wise of the Landlord to do so. Because funds for most Landlord’s are limited, the Landlord therefore must select the most deserving & affected from the many waving hands in the air. 

Suggestions to Tenant’s if/when making a request:

1. Consider if you are deserving – COVID has impacted almost all businesses and individuals. Has your company been impacted more than average?
2. If so, explain your business model (it may not be readily understandable to your Landlord or remembered from previous conversations) & how it has been specifically affected by the current pandemic.
3. In addition to this narrative provide updated financials & back-able metrics (i.e. revenue has fallen x%, but payroll remains the same).
4. Explore and pursue other avenues of relief if available (such as EIDL & PPP Loans). I have seen Landlord’s use this as a proxy for a company’s true need (i.e. If a company has not considered or applied for potentially forgivable loans for their company their situation must not be that serious).
5. Provide a very specific ask for Landlord’s consideration including the plan & timeline for repayment.
6. If possible, provide a plan for your businesses recovery (showing long term viability). 

Suggestions to Landlord’s when assessing claims:

1. Take your Tenant’s request for discussion. Even if you are unable to provide relief or feel they are undeserving, showing sympathy and being willing to listen will help keep your Tenant’s happy & a small accommodation may go a long way/ save a long term Tenant for the building. 
2. Before making any concession (and potentially before agreeing to a conversation) request detailed financials (showing current balance sheet & specific impact of COVID on P&L), a description of their business model and funding sources, & a specific request for consideration. There is no need to negotiate against yourself & the needs of one Tenant may be very different than an others. These requests will likely deter some companies from proceeding with the ask.
3. Request increased credit support (larger Security Deposit or Letter of Credit) to minimize additional risk exposure (if rent is being paid at a later date the chance the company will default before this portion of the rent is paid has increased).  

While the ideal solution for Tenant’s would be the outright forgiveness of rent this is not fair to the Landlord and will almost certainly be rejected. Instead a mutually beneficial solution will likely need to provide equal or greater total rent over the term of the lease (or provide additional term in exchange for rent forgiveness), be paid back in the shortest duration possible & provide partial payment in the short term if possible (to help Landlord fulfill mortgage and operation costs).

Examples of rent restructuring:

1.  Partial or full rent deferral to be paid back in an amortized form (the longer the amortization period the more likely Landlord will want interest)
   • Three months @ 50% rent to be paid back over the following three months (in addition to regular payments – full rent is paid back within 6 months).
   • 2 months free rent to be paid back equally over the following 6 months (full rent paid back within 8 months)
2. Partial or full rent deferral to be paid back at the end of the lease term via extended term (this is more likely to require additional securitization)
   • 6 months @ 50% rent. Lease extended by three months. Increased Security Deposit.
3. “Blend & Extend,” renewal 
   • Extension is signed at reduced market terms & blended with the current rate – As an oversimplified example, if you were currently paying $5.00/SF with one year of term remaining, and signed a 1 year extension at $3.00/SF, the blended rent would now be $4.00/SF for two years providing up front relief for the Tenant and additional term for the Landlord (this ignores annual rent increases).