Thinking of Asking for Rent Relief? Consider this BEFORE Approaching Your Landlord.
Lease agreements are long and complex documents. They generally cover every potential situation, no matter how improbable they may be. Unfortunately, the worldwide coronavirus pandemic is so unprecedented, it goes unmentioned in many leases and may be excluded from typical insurance coverage. Many of the businesses we’re working with are finding the protections they had negotiated and planned for when making their last leasing decision don’t apply in this situation
Now is a good time to work with your Tenant Rep, Attorney, and insurance provider to discuss your specific Force Majeure and Business Interruption insurance language. From our understanding, the vast majority of these clauses may not be the answer many organizations are hoping for.
Are you concerned about the potential of lost revenue and your subsequent abilities to avoid layoffs and continue to make your rent payments? The most appropriate answer may be to turn to your (mostly) silent business partner, your landlord. This will be a business discussion for you, your tenant rep, and your landlord with their advisors. It’s in everybody’s best interest that these discussions are handled by an expert and trusted advisor. The alternative could be catastrophic, on a global scale.
Here are some tips to make sure that the conversation goes smoothly.
1. Understand they are facing uncertainty as well:
Landlords of all shapes and sizes are worried about the state of their portfolio, especially those with retail tenants. Be cognizant of the fact they have lenders, investors, staff and a bevy of other expenses to pay. You’re also not the only tenant in their portfolio who is coming to them with similar requests. An increasing number of asset managers are waking up to multiple emails with the subject line “Rent Relief Request”. If every tenant refused to pay rent, they’d likely go out of business and the world’s economy would sink even further.
2. Be prepared to show financials:
Most organizations are struggling right now. Lack of workers utilizing your office space probably won’t be reason enough for a landlord to grant rent relief. Priority will go to those tenants that are able to demonstrate a sudden and drastic reduction in revenue and to those who have a strong financial history, outside of this past month. Seeking rent relief on April 1 is likely to be a tougher task than many realize. Landlords are sympathetic to the times, but they’ll also be asking some questions:
- What sort of reserves do you have, and how does that impact long term stability?
- What other large financial obligations do you have? Have you sought relief from them prior to asking me?
3. Be fair and realistic:
This is not a time to ask something for nothing. As I mentioned above, it is in everyone’s best interest that some sort of agreement is reached. That being said, don’t expect your landlord to completely forgive your rental obligation. The structure of any agreement should be carefully weighed by you and your commercial real estate advisors. Below are a few solutions I would suggest exploring:
a. Temporary Rental rate reduction
b. Rent Deferral:
c. Loan conversion:
d. Rent abatement as part of an extension
This is a non-exhaustive list of potential remedies and should be considered carefully as it pertains to your specific business. If you have questions about what to do next, please feel free to reach out to me or anyone on the MGA team. We’re in turbulent times but I’m optimistic about the resiliency of the Washington DC business community and our ability to adapt.
Stay safe!
Adam Collins, Managing Director- MGA Commercial Real Estate. Acollins@MGAco.com