How To Renegotiate Your Commercial Lease
Source: US Chamber
As the coronavirus pandemic continues to pressure businesses financially, now is a good time for them to renegotiate their leases. Here are four tips to help them do just that.
During the COVID-19 pandemic, many small businesses have fallen on hard times and are looking for ways to alleviate financial stress. One such way to help ends meet is approaching your landlord to renegotiate your commercial lease, a strategy that was useful even in pre-pandemic times.
Businesses can take several approaches in order to work out new terms with their landlords. Here are several tips to help with renegotiating your lease.
Read the terms of your agreement
Before you start the process of trying to renegotiate, it’s important to clearly understand the terms of your lease agreement. A typical provision in some leases is the “force majeure” clause, which can help in the case of an event that can’t be reasonably anticipated. COVID-19 shutdowns of businesses, for example, could be an example of force majeure.
The United States Bankruptcy Court for the Northern District of Illinois recently ruled that “the force majeure clause unambiguously applies, ‘at least in part,’ to the rental payments that were due after the effective date of [the Illinois business shutdown] Order,” writes Stoll Keenon Ogden PLLC. Effectively, there is a strong legal case that a force majeure clause could reduce rent and help begin a renegotiation of lease terms.
Do research
As you begin the renegotiation process, it will be vital to research and document local trends. If landlords have renegotiated with nearby tenets and offered altered terms, that information could help you make a stronger case for changing your own lease’s terms. This research also includes figuring out exactly what you want to ask your landlord for, including how much you want rent reduced, if you want rent abated for a certain number of months, if you would like to sublease space or if you can afford to offer a profit-sharing agreement in exchange for more favorable terms.
Write a letter or call to explain your situation
One of the first things you should do in this process is to contact your landlord early, either in written form or via a phone call, to discuss renegotiation. Tell them what is happening with the business in as much detail as you can and explain how you are planning to boost revenues as you plan the future of your business. Lenore Horton, a partner at FisherBroyles, LLP, recently spoke about this strategy on a panel for CO—’s The Big Week for Small Business event.
“One thing I absolutely agree with … is to be proactive and to keep the conversation going,” Horton said. “I’ve seen where we draft letters and we help the client craft communications to their creditors to simply explain what is going on, what they are doing to generate new revenues, how they are looking to pivot and just making sure those creditors stay in the loop. Radio silence is not going to be a confidence-building measure for those you owe money to right now.”
Alter the lease terms
Finally, let’s outline about specific options a business owner might want to pursue when it comes to renegotiating a lease. There are multiple ways you can alter lease terms in order to find a more suitable financial agreement that could allow you to stay.
Rent reduction or abatement
The most common scenario for renegotiation is rent reduction, where you can ask for a specific amount reduced each month for the remainder of your lease, especially if market prices have dropped substantially in your local area. You could also ask for a temporary rent reduction, with the expectation that revenue will rise after a certain period has passed.
Secondly, you could ask for a rent abatement, where you could ask to delay paying rent for a certain period. After the period is up — for example, six months — you will pay back the rent owed, sometimes with interest. There is also the option of a partial rent abatement, where you could pay some of your standard rent on time and then the other portion is due after a while.
Subleasing
Another common option in a lease renegotiation is asking to sublease all or part of your space to another business. For example, if you have an office space that is not being used, there may be another company that could use the space while your employees are working from home.
Lease extension
Another way to approach a landlord during negotiation is to offer to extend your lease for a longer period in exchange for more favorable terms. This could be a win-win, with your business having less monthly rent and the landlord not needing to find another tenant if you were to leave.
Income sharing
Finally, one other way to negotiate could be to create an income-sharing agreement. Instead of owing the standard rent for a defined time (one year, for example), you could offer a percentage of business income. Income sharing has a potentially high upside for the landlord if your business normalizes, and your income share exceeds the average rent.