An office tenant's guide to rent relief
On April Fool’s Day, some landlords will receive calls or letters that they ordinarily would consider hoaxes. They will get requests for free, partial, or delayed rent – or even empty mailboxes. How a tenant approaches this conversation could have a serious impact on tenant-landlord relationships and business viability for many companies. It is crucial to evaluate your situation and create a plan on how to best move forward during this unprecedented time.
The Covid-19 Pandemic continues to have a significant impact on businesses across the country. I have spoken with many clients, colleagues and landlords this month. In early March, companies initially focused on continuity planning and HR issues. Businesses that can function remotely have implemented teleworking policies; their employees are learning to collaborate via Zoom and engage their clients in new ways. Many others have had to lay off employees and cut costs dramatically. This has all happened after March 1 – so in the search for cash flow by office users, the first rent impact is coming on April 1.
Three keys in establishing a strategy are to recognize the relationship, create a line of communication, and be transparent – these are critical to establishing positive outcomes.
The lease document is a static agreement, but the best landlord/tenant relationships are dynamic and often supersede the written words to create a mutually beneficial partnership. It is essential to recognize that the landlord likely has a mortgage and lender obligations. It costs them money to operate the building, pay vendors and pay their employees. The pandemic is also posing a hardship on them – by way of example, the Colliers Property Management team is working around the clock to keep buildings clean and operating safely.
Legal articles published this week focus on Force Majeure (Acts of God) and obligations of the landlord, but the jury is out (literally) as to whether COVID-19 or Shelter-In-Place edicts qualify. Several white papers discuss business interruption insurance for both landlords and tenants. Anecdotal reports from our clients indicate that they will not be covered, but it is prudent to consult with your legal and insurance advisors to discuss these complex matters. One landlord stated a tenant asked them, “What are you going to do for me?” Suffice to say they didn’t respond with empathy.
The initial approach to your landlord should be non-confrontational. Let’s not start by debating lease clauses and obligations – there will be time for that.
You are likely in a long term relationship - start by recognizing and stating its importance. We are looking for a conversation.
These are uncertain times for everyone. Timely and clear communication is critical to creating a meaningful dialogue. Start the conversation sooner rather than later – even if you are not asking for immediate concessions, but have future concerns. The landlord will appreciate your candor, and it will establish credibility and a line of communication if future cash flow becomes problematic. We all hope that this situation will improve in a couple of months, but hope is not a strategy. If the current situation particularly impacts your industry or business, let the landlord know the details of the impact, what you are doing to mitigate it, and how it is affecting your organization - both in terms of cash flow and human cost.
Some tenants may ask landlords for concessions for sport - if you are in a business that is doing well, or minimally impacted, it would be a quixotic endeavor. Requests should be made by companies that are being materially affected by the current situation whereby the cash flow assistance will create an operational difference.
Whom should you speak with about this? As a broker with 30 years of experience, I am in constant communication with landlord representatives, asset managers and owners. My Colliers partners and I can lay the groundwork and have an initial conversation, facilitate a call, or help determine the right place to start.
Early and forthright communication will lead to a better outcome and even enhance the business relationship.
The key to successful rent forbearance is full transparency. Landlords are starting to get rent relief requests. To consider them seriously, they will need details on the impact to your business and will require a business justification to do so.
I have spoken with landlords who say it is too early and ones that will evaluate on a case-by-case basis. They are going to ask if you have looked at your business interruption insurance. They will ask if you have sought SBA loans and the CARES act stimulus package details. They will require financials, past and present, and an understanding of your business plan going forward, including employee headcounts and a viable path to sustainable business. Many landlords have mortgages, and cannot simply waive rents, or even restructure leases, without lender approvals.
Historically, lenders tend to react more slowly – another reason to get out in front of this if you foresee a problem. Some owners are better capitalized, or entrepreneurial, and maybe more willing to consider requests, while others may be inundated with rent relief requests or cash flow issues. Even if a landlord will defer rent, remember that they have costs to operate the building.
Help them help you by stating your case openly and honestly.
The request needs to be specific. What are you asking? For how many months? What are you willing to offer in return? There are many potential solutions – here are examples:
- Three months of free rent in exchange for three months added to the lease
- Four months of free rent, amortized over the remainder of the lease
- Four months of ½ rent, to be paid back the last two months of 2020
- One month of rent waived to be revisited on May 1. Reimbursed in 2021.
- Two months of free rent, add a year to the lease and partially guaranteed
Lastly – if your lease expires in the next 18 months, there is an excellent opportunity to restructure the entire lease and get significant concessions in exchange for a lease extension. The landlord will scrutinize credit more closely, but this is a tremendous opportunity to take fair advantage of the uncertainty.
As John Lennon said, these are “strange days indeed.” Nobody knows the duration and the actual economic and social impact. There are ways to evaluate your situation and see if you can make a reasonable case for rent forbearance. We, along with your legal and financial advisors, can help you evaluate your options, make your case, and provide ideas that meet your needs. Our objective is to assist you while preserving the tenant/landlord relationship. There are no certainties, but understanding the market and creating an appropriate strategy to move forward will give you the best chance for success.