Chris Carmen / May 13, 2020
Let’s go ahead and say it; these are extraordinary times. How many times recently have we heard that phrase or seen those words in print? While many of us are wrestling with the trials of shutdowns, layoffs, shortages, or worse, these out of the ordinary occurrences should not make us stray from good business practices.
As a commercial real estate professional that focuses on the representation of tenants and providing corporate real estate services, I’ve spent much of my time during the past two months working with my clients on how to lighten the load of the office lease obligations and working with my clients’ landlords to attain some rental relief and I’ll be honest with you, this is not an easy task.
However, regardless of business size, every tenant should now take the time to reassess their current lease and develop a strategy for surviving and, hopefully, thriving during this pandemic. In doing so, be sure to pay attention to these three areas:
Revisit Your Lease
Tenants need to fully understand their lease obligations and available remedies during this time. Frequently, a lease contains a force majeure clause which excuses certain activities due to extraordinary events—like, say, a pandemic. These clauses may include language for circumstances beyond the parties’ reasonable control. They may be interpreted to include the current COVID-19 crisis, even if not expressly listed as a force majeure event. Tread cautiously, though, as a typical condition of invoking force majeure is the prompt payment of rent.
Simply, a lease audit is an assessment of an existing lease. Typically, the audit looks at lease expenses, expiry, default clauses, guarantees, and other lease language. Some auditors may even look at electric/energy charges or additional utility charges as part of the review, which may hold significant weight at a time when offices are mostly unoccupied.
If you’ve turned on the news for even a short while, you’ve likely been bombarded with acronyms like SBA, PPP, EIDL, and CARES, among others. While this alphabet soup may confuse first, they all pertain to government relief programs and fiscal measures to help businesses. The Small Business Administration (SBA), is working to help companies to overcome the challenges created by the health crisis and is offering multiple funding options for those seeking relief. While each of the SBA’s programs has its own conditions, significant funding is available, and in some cases, loaned money will be forgiven from repayment.
Other assistance during this time may come from insurance providers and legal counsel. While insurance policies often exclude things like pandemics, a provider will be able to outline the possibility of a claim in light of COVID-19. Your company lawyer will be able to explain your options if you default on your rent or other payments and can help you securely navigate potential claims leveled by terminated employees.
Communicate with Your Landlord
Possibly the most important thing you can do as a tenant that has been negatively affected by the COVID-19 pandemic and resulting economic shutdown, is to communicate with your landlord. Like nearly every business today, landlords are feeling the pinch of the economic shutdown. Although many tenants have missed rental payments, the landlord’s mortgage is still due…and believe me, during nearly every conversation I have with landlords about providing my clients with rental relief, they are quick to remind me of this point. In the best of times, finding good tenants is difficult. The last thing they want is to compound that difficulty in finding a replacement for your business.
Most landlords are going to want to work with you to keep your business in their building. However, many building owners are limited by the help they can provide their tenants by the mortgages on their building. Many mortgages restrict the landlord from making any changes to the tenant’s rental payment schedule that could inhibit the landlord’s ability to pay the mortgage, and making such changes as providing a tenant with rent deferment can put them in default of their mortgage. But some landlords have more flexibility to provide their tenant with relief. A landlord may suggest a rent reduction or deferral for some specified period. The construct of that consideration can vary from landlord to landlord but may include clauses based on a future condition such as avoiding default.
In order to make a solid case of why your business needs the landlord’s help, be transparent by providing them with documentation that shows how the business was performing prior to the shutdown and the changes resulting from the shutdown. A few pieces of information that can be helpful in making a case for the landlord to work with your business are:
- Last year’s financial statements and YTD 2020 statements, showing the changes in the business resulting from the shutdown.
- A business plan to demonstrate the plan to recover once the shutdown is lifted. Rather than a full top-to-bottom business plan, this can be an abbreviated version focused on post-shutdown recovery.
- Suggested help from your landlord, so that the landlord understands what they need to contribute by providing your firm rental credits or rent deferment. Don’t simply ask for help, without some understanding of what help you need from the landlord to bring the business back to health.
Other areas of conversation with your landlord may include the application of a security deposit, a transference of the space to another tenant, or exchange of the lease for a buyout by the landlord. These are more aggressive steps but can provide alternatives when faced with tough situations. Regardless of which path you go down, the important point is to have a conversation as there are options.
In ending this post, we have to acknowledge that these are challenging times and emphasize the need for diligence. Businesses that lease space are particularly challenged, but as the saying goes, an ounce of prevention is worth a pound of cure. Take the time now to work with your real estate professional and create a strategy that’s right for your business.
The Tenant Advisor.
Intentionally Different From Traditional Brokers.
Contact Chris Carmen at CARMEN Commercial Real Estate to confidentially discuss your office space situation. We’d love to help you.