Practical Issues for Re-Negotiating Commercial Leases - Perspectives to Consider

After several talks with my peers around various industries and listening in on various webinars of both tenants and landlords, I’ve come across some general tenets for both sides to keep in mind during this time. How tenants and companies thrive (or not) will be largely determined by the way they handle their leases currently in place and any adjustments made.

1) General Considerations 

• Commercial leases are relationship driven. Leases are mostly long term so taking aggressive approach by either side may not always be beneficial nor practical. 
• Tenant is the moving party due to base obligation to pay rent. They are the key leverage point here. 
• Contract terms around rent payment exemption all the way through force majeure provisions; co-tenancy clauses; condemnation; and rent abatement provisions will be major drivers of any re-negotiation discussions. As these vary widely from lease to lease, no two deals are the same. 
• Business interruption insurance will likely NOT ride to the rescue.

2) Tenant-Specific Considerations 

• Tenants should consider their business reputation if they get aggressive and stop paying rent without proper communication.
• Consider footprint. How many leases with same landlord? Is it worth damaging relationship across footprint for one or two locations?
• If lease was assigned, the old guarantor may still be on lease
• Type of lease and business type will make a difference. Restaurants obviously significantly impacted and likely require adjustments. You working from home but still generating revenue does not. For industrial, are you still shipping?
• Are the tenants just looking for a better deal or do you have a real financial difficulty? LL’s want to see proof. What’s the revenue impact from COVID-19?
• Remaining duration of lease is major consideration. How long is left before renewal/expiration? Remaining tenor will determine best approach to take. 
• What does contract say w/r/t paying lease? For force majeure clauses, 90-95% of them will exclude performance by both parties, but have a catch all at end that always require tenant to pay rent. 
• But this may not be the be all end all of discussion
• Two approaches to take with LL. Unilateral or collaborative. This is where relationship comes into play. Collaborative is the best.
• Location analysis important. Key locations driving revenue may get priority over lesser performing locations. 
• Tenants who have been overlooking LL non performance in certain areas 

3) Landlord-Specific Considerations 

• Get everything in writing, do not follow any verbal statements and do not make any verbal commitments without documenting in writing. 
• Re-establish LL is performing per terms of lease in writing and reiterate nothing is agreed to unless in writing. 
• Tenants should be able to document financial impact and ongoing financial difficulty if lease payments must be met. 
• Set specific and clear time periods and terms on any arrangements. Do not leave up to interpretation.
• Security deposits can be used as long as there is s plan to replenish it later on. 
• Options to offer tenants

Rent abatement

Rent deferral

• Monthly OpEx/CAM/taxes
• Require tenant apply for CARES act and other government benefits. Tie any abatements or deferments to receipt of CARES act funds
• Guarantees should be re-established or re-negotiated on any amendments. 
• Investigate suspending any mortgage payments on properties. Important to notify banks of any material modifications of rent agreements as this may violate covenants in place. Communication up food chain is important. 

4) Types of Deals to Consider for Both Sides

• Abatements vs deferrals. Current activity is either for April/May/June and may extend into July depending on re-opening schedule. 
• Collect only base rent vs entire rent

Base Rent - Rent per sq foot

Exclude Rent Additions - CAM, other OpEx and maybe taxes

• Extension of lease term which matches rent abatement period. 
• Negotiate extensions/renewals. LL’s may insist on longer terms or execution of renewal clauses to give rent abatement. 
• LL’s may ask for more personal guarantees or higher Letters of Credit in exchange for loosening payment terms. 

Reality is some businesses were already in trouble prior to COVID-19 and loss of income during this period will put them under. However, many were performing just fine and if shutdown does not go on much longer and with proper government backstopping they may be able to thrive. Depending on what side of the tenant/landlord divide you sit on and how you approach negotiations with other side will be a large determinant of who comes out with the least amount of scars.

James ("Jim") Morales has over 20 years of experience working for well-known companies such as PricewaterhouseCoopers, Deloitte, Volvo, Sony, Sysco and Burger King as well as consulting for several early stage companies. His unique combination of Strategy, Finance, IT, Project Management and Organizational Design experience gives Jim the ability to look at an organization holistically and turn vision into action. Jim built three FP&A departments from ground up providing strategic and financial leadership to the C suite and has implemented strategic management systems using the Balanced Scorecard framework. He is a Chartered Financial Analyst (CFA?), Certified Management Accountant (CMA?), Certified in Financial Planning & Analysis (FP&A?) and Certified in Strategy & Competitive Analysis (CSCA?). Jim entertains opportunities to collaborate with others to support their growth or transformation process and help them build sustainable platforms for success.