In this environment, office and retail landlords should probably work with tenants when they need a break with rent.
But Jeff Lerman, co-founder of Lerman Law Partners, LLP, says they shouldn’t give away the farm.
“One of the biggest mistakes is that the landlord feels like they have no choice but to give the tenant everything,” Lerman says. “But that’s not always necessary.”
When discussions start, rent abatement is one option.
“The amount of rent reduction is going to vary, depending on what kind of a commercial setting they’re in,” Lerman says. “The types of rent abatement that we’re typically talking about are base rent, which is the actual biggest component of rent. Then if you’re dealing with office or retail, you can also be talking about common area maintenance payments.”
Another question revolves around how the landlord will offer rent reductions, which Lerman says is “one of the worst concessions” to make.
“There’s a negotiation as to how long it will go, when will it be repaid and will it be repaid,” Lerman says. “Will it be paid in installments or at the end of the lease term?”
Lerman says there is also an option to convert the rent payments to a promissory note, which may be easier to enforce than a deferral on the lease. “If it’s a lease, then a tenant’s lawyer might get creative and come up with some arguments to make it more difficult for the landlord to collect,” Lerman says. “So getting the rent deferral documented in a separate promissory note is very easy to collect on relative to a lease commercial lease. That is something that landlords should consider doing.”
If the landlord does get the promissory note and the tenant doesn’t pay, Lerman says other questions revolve around what the landlord can recover. Another option for the landlord is to hold the security deposit and possibly use some of that to cover the rent that’s owed. “Typically, that’s not going to be enough to cover 100 percent of the amount of the rent that the tenant owes, but it’s an option,” Lerman says.
But if the landlord applies the security deposit to rent, they will need to find other capital for any new issues. “If there are things the landlord would have used the security deposit to take care of, such as damages that the tenant made to the property, that’s not going to be there,” Lerman says.
If the tenant is coming to the landlord with requests for additional concessions, Lerman thinks landlords should look at the concessions they gave at the beginning of the lease. There may be an opportunity to claw back some of those.
“Maybe those concessions included extending the terms of the lease, reducing the size of the space, increasing the size of the space or giving the landlord some additional corporate or personal guarantees,” Lerman says. “Whatever it happens to be, it is the beginning of a bigger discussion.”