How to Renegotiate Your Lease if Your Business Has Been Impacted by COVID-19
Coronavirus Is Taking A Toll on Small Business Owners
The COVID-19 outbreak is rapidly shutting down our economy.
Small business owners across the country are either shutting their doors due to safety concerns or have been required to close by the government.
Even major corporations, like Delta Airlines, are filing for bailout from the U.S. government in unprecedented fashion.
But where does that leave America’s small business community?
While the federal government is doing what it can to move quickly to provide resources through SBA loans and grants, the aid isn’t coming in quickly enough or is impossible to navigate.
Many companies are caught between a rock and a hard place – how can you keep your company busy and profitable when money isn’t coming through the door?
Unfortunately, it’s becoming more and more difficult to do every day, leading to layoffs en masse like this country has never seen before.
And while laying off employees and cutting back on most operating expenses will certainly help preserve your financials, there’s still the question, “What about my rent?”
The Most Frequently Asked Questions
I work with small businesses every day.
In fact, it’s what I’ve focused on since I started my career in commercial real estate 7 years ago.
The small business community has been near and dear to me for as long as I can remember. I’m sure it’s the entrepreneurial side of me that loves the hustle and grind that comes with owning your own business.
So, with a large clientele of small business owners, we’ve received a flood of questions over the last couple of weeks asking how these businesses should approach their commercial lease because they’ve been shut down by coronavirus.
Here are the most asked questions:
“Do We Have to Pay Rent?”
If the government has mandated your shut down, this question is likely the first that has popped in your mind.
The short answer – likely yes, but it depends.
Here’s the long answer.
Commercial leases are contracts that are entered between two or more parties that are legally binding documents, whether there are drastic economic circumstances or not.
I highly recommend you discuss your lease with your attorney to see if you already have some options based on the document you and the landlord agreed to.
However, just like most insurance policies, the chances of your being covered by a pandemic in your lease are very low.
So, for the time being, you likely have to continue paying your rent.
“What Should I Even Do?”
I can certainly relate to this question.
We’re in completely unnavigated territory right now, so it’s no surprise that most businesses have no idea how they should even handle this.
However, the best recommendation I can give you is this: open the conversation with the landlord immediately.
The sooner you create a line of communication and you’re honest with your landlord about your position, the sooner you can start working through it together.
As a property owner myself, I’ve had a number of tenants reach out to ask me how we’re going to be handling this situation.
The tenants that have reached out to me to let me know that they won’t be able to pay rent and have asked if we can help them out will definitely be receiving our assistance.
I recommend you do the same with your landlord – this pandemic has nothing to do with your ability to run a business. And landlords are aware that the coronavirus has had an impact on every business in the country.
To them, it’s not a matter of if you’re going to have issues paying your rent. It’s a matter of when.
If you do not communicate with your landlord and decide to not pay rent without notifying them, they will probably be much less willing to work with you.
Start the conversation!
“If We Don’t Pay Rent, Can We Still Get Evicted?”
Yes. Yes, you absolutely can.
That’s why you should open that line of communication as quickly as possible and start working together to solve your current issues.
While the government has put a halt on evictions for tenants in properties with Fannie Mae and Freddie Mac loans, the overwhelming majority (if not all) of commercial real estate loans are not done through these programs.
That means you currently do not have any eviction protection.
Your landlord would have to be dead-set on creating an absolutely horrible reputation right now to take you down the path of eviction.
Who in their right minds would put a small business out on the streets at this time?
Sure, there will be landlords that won’t be willing to work with you, but in my experience so far, property owners have been willing to bend over backwards to assist businesses with their commercial leases.
How to Approach Your Landlord About Rent
There are a few different strategies that you could take when approaching your landlord.
I highly recommend you have this conversation over the phone and not over text or email. It’s far too easy to take words or statements out of context when you’re not talking over the phone.
However – you should immediately memorialize your conversation in an email to your landlord so that everything you discussed is in writing and there is no confusion later down the road as to what was said.
One thing to keep in mind: property owners are businesses, too.
They have expenses, such as mortgages, taxes, insurance, etc. that they have to pay on the property.
Continue without Changing Your Lease
If you can continue paying your rent and it won’t severely impact your business, it may be prudent to take this path.
Again, I’m writing this article for the businesses that have to deal with the 1% of landlords that may not be willing to work with you.
If your landlord is unwilling to take any of the steps below, you’ll have to carry on adhering to the legal document you signed.
You could, of course, default on the lease or close down the business to escape rent payments, but that’s the worst outcome possible here (aside from a lawsuit).
If you have a good and understanding landlord, I definitely don’t recommend taking this path.
Most banks are waiving mortgage payments for landlords in good-standing, so if your landlord is lucky enough to have their payments waived, they should pass those savings on to you.
Sublease Your Space
This option is the easiest direction you could take without having to heavily involve your landlord.
As always, review the language in your lease to see how a sublease would be handled and adhere to whatever you agreed to in that document.
A sublease is when you, as the tenant, lease a portion of your space to another tenant.
This option is wonderful for businesses that have unused space anyway – basically free money if you can find someone to take it.
Having that extra rent come in to you as the sublessor, or “landlord,” will certainly help you make ends meet for at least the foreseeable future.
Having a roommate may not be a solid permanent fix for you and your business, but anything is better than nothing when you’re scrambling to make ends meet.
Request a Partial or Total Rent Abatement
Rent abatement is essentially a deferral of rent payments to the landlord.
In this scenario, you will still be responsible for operating expenses, such as utilities, phonelines, etc.
Landlords are not going to jump at the opportunity to forego rent payments completely, but it certainly doesn’t hurt to ask.
After all, if you want to win in a negotiation, ask for the stars and settle for the moon, knowing full well you would’ve been find just getting into outer space.
And don’t just ask the landlord to “give” you free rent. Be willing to concede something to them, as well.
If you come in with an offer, such as tacking the rent on at the end of the term at a higher rate or amortizing it over the term of the lease, it will be much more achievable and realistic in a landlord’s eyes.
Partial rent abatement is the majority of the concessions we’re seeing from landlords right now.
Like I said earlier, landlords still have expenses, so they likely can’t completely forgive all rent payments, but they’re likely willing to help you with a partial rent abatement.
What’s Important to Remember
We’re all in this together.
We can either get through this pandemic as a community or we will all fall.
Keep your chin up and do everything you can in the meantime. This pandemic will end and the world will have to get back to where we were before this began, which means your business will come back.
If you have any specific questions regarding your lease, I’m happy to answer them and help you work through scenarios with your landlord.
We won’t charge for these services – I do it because I can’t stand seeing small businesses close their doors.
Tyler Cauble, Founder & President of The Cauble Group, is a commercial real estate broker and investor based in East Nashville. He’s the best selling author of Open for Business: The Insider’s Guide to Leasing Commercial Real Estate and has focused his career on serving Nashville’s small business community. More info may be found at www.TylerCauble.com