Lease Renegotiation Strategies in Response to COVID-19

Disclaimer: The information in this document is for informational purposes only and does not constitute legal advice. US Foods is not a law firm and does not provide legal services. Thus, this information shall not be construed as legal advice or an offer to provide legal representation. Use at your own risk. This is not an exhaustive list of each, and every strategy or consideration involved in a lease renegotiation. The specifics of your particular business and lease may vary, and we make no warranty that this document is applicable to your business or any dealings you may have with your landlord. We hope that you will find the information informative and useful but recommend you contact your own legal counsel to obtain legal advice with respect to the matters discussed in this document.

What Types of Renegotiation Options Do I Have?

Before you approach your landlord with a lease renegotiation request, determine your desired outcome and develop a plan to achieve it. As part of your planning, you may wish to consult with a tenant-broker, a person that specializes in representing your real estate interests and legal counsel to determine your options. Here are a few common rent relief strategies to consider in response to COVID-19:

• Rent Deferral: Rent payments or a portion of rent payments are suspended for a certain period of time. Tenant makes additional payments later in the lease term to compensate landlord for the rent reduction during the deferral period. It’s not uncommon for the parties to negotiate for interest in addition to the amount of rent deferred or to extend the lease term by the length of the deferral period
• Rent Abatement/Partial Rent Abatement: Rent payments or a portion of rent payments are suspended for a period of time. There is no repayment obligation under this scenario
• Expense Only Payments: Paying only expenses (e.g., real estate taxes, building insurance, maintenance and utilities) while rent is abated or deferred for a period of time
• New Lease: Negotiating a new lease with a lower rent
• Sublease: Many landlords allow tenants to sublease, provided doing so is permitted under the lease. This means another party can sublease the space while you’re not occupying it or if you have extra space, you may be able to sublease the unoccupied space to another party

Some Considerations for Lease Renegotiations

Now that we’ve covered some of the potential strategies to consider, let’s discuss some tips on how to approach your landlord. Be sure to approach your landlord in a timely manner with confidence, professionalism, a plan, and a desire to find a solution for all parties involved.

• Say something early: If the end of your lease is approaching, or if business isn’t going well, consider talking to your landlord as soon as possible
• Contact your landlord: Meeting in person may not be an option right now. Try a phone conversation along with an email asking for a discussion. Once you’ve had a chance to discuss specifics, send a follow up email detailing the salient points of the discussion. A lease amendment should be executed by the tenant and landlord to memorialize the agreed upon solution. It is recommended that your legal counsel be involved in these communications
• Have the right attitude: Whatever platform you use to communicate with your landlord, be sure to approach with confidence and professionalism. Hopefully, you already have a good relationship with your landlord. This is your opportunity to remind them that you’re a valuable tenant who is trying to find a solution that works for both parties
• Do your research and know what to ask for: Lots of tenants go into a negotiation with no idea what they want or even what they can request. Don’t go in with vague questions like, “What can you do to help?” or “How much of a rent reduction can you give me?” Decide whether you want a permanent rent reduction, a rent deferral, rent abatement, permission to sublease the space, or something else. Have all the paperwork ready. If you’ve done your homework, it will improve your chances of success
• What to include in your proposal: You should explain the reasoning behind your request. If market research indicates that tenants leasing similar properties are getting better rates, show the data. If your business simply cannot make rent payments for the foreseeable future, be prepared to demonstrate that. This may mean presenting your financial statements and a detailed plan to remain a viable business entity
• Assess your relative leverage and attendant risks: Read and understand your lease and the provisions which may excuse rent payment obligations, review and understand the relationships you have with your guarantors, and analyze your current and long-term debt obligations
• Agree: You may need to consider relinquishing certain lease rights (space expansion rights, early termination rights, tenant improvement allowances, option renewals, etc.) in exchange for rent relief
• Offer: Consider your network and propose additional guarantors as part of your rent relief strategy, or a limited guaranty to cover your obligations
• What to do if the answer is “no”: If the answer is “no,” you must be ready with a backup offer. This is a negotiation, after all, so it may take several tries to reach a solution. If you have trouble reaching an agreement, you may want to seek outside assistance from a tenant broker, a person that specializes in representing your real estate interests. As mentioned earlier, you may want to speak with one for insight before you begin the negotiation process
• Leverage your track record: If you have always paid your rent on time, your landlord may be more likely to consider your proposal
• Think about the future: Point out the benefits of keeping you as a tenant, which won’t happen if your business fails. Given the economic downturn is widespread and not limited to any one industry, geographic location, or your specific business, there may not be a lot of other businesses available to take your space
• Confirmation: Whatever solution you and your landlord agree on, you should get confirmation that your landlord is ready to document the changes in a lease amendment. You should also get confirmation that your landlord will not issue any default notices in the meantime or during the period of time you are negotiating. It is recommended your legal counsel be involved in this process
• Documentation: In most cases, a lease will specify that any changes must be documented in writing and signed by both parties. It’s important to make sure that any changes to your lease – especially with respect to any rent payments – be documented. It is recommended to have legal counsel review any changes to the lease before signing anything that may impact your lease terms