COVID-19 and related restrictions have made it necessary for many business owners and commercial landlords to evaluate options and create some measure of flexibility. “These discussions require both sides to assess a variety circumstances and issues, many of which are in a state of flux due to the uncertainty of COVID-19,” cautions real estate and finance attorney Steve Ostrow. He outlines some short-term options:
- Rent Relief: Deferral versus abatement of base rent only or all rent including a tenant’s share of pass-through obligations for operating expenses and real estate taxes.
- Rent Repayment: Repayment schedule for deferred rent including appropriate acceleration triggers for earlier repayment due to future lease defaults or adverse events such as a tenant’s permanent closure of its business, bankruptcy filing or loan default.
- Tenant Assurances and Reporting and Landlord Forbearance: Arrangements addressing a tenant’s obligations to mitigate business interruptions and resume full operations; tenant reporting to landlord of ongoing financial condition, operating status and receipt of financial assistance under governmental relief laws; tenant and any guarantor providing additional security to landlord; and landlord forbearance.
- Modification of Operating Clauses, Etc.: Temporary suspension or modification of operating covenants, co-tenancy, kick-out clauses and other lease terms.
- Third Party Consents: Landlords and tenants obtaining required consents to lease modifications and rent relief from lenders and other third parties.
In a recent virtual town hall hosted by MassMutual and The Business Journals, Chris Vanderzyden (CPA, CEPA, principal, Legacy Partners, LLP.) shared this advice about proactive B2B communications with landlords (as well as banks and vendors).
Every business owner should be in contact with all stakeholders continuously when in crisis. All phone calls should be followed up with emails in order to memorialize all discussions. Any changes in terms should be documented in writing. Recognize in your communication that your banks, vendors, landlords are mostly likely in crisis too, so expect the discussion to be a negotiation in search for a win-win for both sides of the table.
A [landlord], vendor, or supplier would much rather negotiate in advance terms that can be managed as opposed to a complete default. A business owner should be ready to present a solution that will help them and be supported with financial information. Again, expect the resolution to be a compromise on both sides.
If you are considering buying or selling a business, lease negotiations will likely be an important aspect of the interaction. According to Jeffrey D. Jones, ASA, CBA, CBI | President of Advanced Business Brokers, Inc.,
Lease negotiations with the landlord and/or the current tenant will be necessary to make deals happen. From a landlord standpoint, areas of negotiations include offering some free rent time, deferring several months of rent payments to the back end of the lease, or offering to lower the rent for some specified period of time. At the very least, asking landlords not to raise the rent over the current amount even though the lease may have automatic rent increases specified in the lease. Getting little or no concessions from the landlord may require the seller to offer creative financing alternatives to the buyer and/or offer to subsidize the rent for some specified period of time.
An experienced broker and business advisor can be instrumental in helping to navigate the choppy waters in which we find ourselves, and to facilitating cooperative outcomes. Contact us for support.