LEASE CHALLENGES DURING THE COVID-19 PANDEMIC – PART 3
Once tenants have taken the necessary steps to prepare, they should contact the landlord or engage an advisor to act as mediator. Tenants should be as transparent as possible about the state of their business and financials in order to succeed in negotiating the best possible outcome. Ideally you can share that there is a “light at the end of the tunnel”. Engaging in this manner mitigates tension in an already stressful situation and facilitate collaboration for both tenant and landlord in achieving a mutually beneficial end.
The most likely solution is a rent reduction or deferral. A deferral could be for a specific time period or revert to a tenancy-at-will permitting the landlord to terminate with, say, 30-days’ prior written notice. If structured as a deferral, this would simply require rent payment at a later agreed-upon date. Here are several scenarios to consider:
Reduced or Deferred Rent – Typically, the tenant adds interest or amortizes the future rent repayment over some specified period.
Extension –The lease is extended at market rates, including any market-based concessions; security deposit is updated and any guaranty or Letter of Credit is revised as needed.
Draw Down Security Deposit – If the landlord holds a security deposit, apply some or all of it and credit towards upcoming rent payment.
Assignment or Sublease – Most leases contain a sublease or assignment right which reduces, or even fully relieves a tenant of it’s obligations under the lease. If space is subleased and subdivided, the tenant would be able to continue operations on a smaller scale.
Buyout – A lease buyout terminates the lease, discontinues any further financial or legal obligation. This could be a full buyout, relieving tenant of all further lease payments, or a partial buyout which allows the tenant to remain in operation, but in smaller, more affordable space. The challenge is that landlords pledge the lease to a lender in return for financing and debt on a property. Landlords may agree to a buyout based on the present value of the lease or simply a percentage discount where a tenant pays, say 80%, of the remaining lease liability.
Losing tenants is disruptive and costly to landlords. They may incur significant income loss after having already had cash outlays for legal fees, commissions and tenant improvement costs. Most landlords have mortgage commitments and are required to re-pay the loan regardless of occupancy levels in the property. Tenant bankruptcy is certainly the worst case. This puts the landlord in a situation where they are subject to bankruptcy rules and lose control of the lease to a bankruptcy administrator.
Beacon Street Realty Advisors has advised clients on lease extensions, renewals, buyouts and subleases for over 25 years. We are available to assist you. Please call Mitch Jacoby @ 978.476.1223 or connect via LinkedIn to arrange for a confidential discussion about your situation.