How to Be a ‘Good’ Commercial Landlord During Covid-19
Balancing Empathy with the Need to Collect Rent
As the current economic situation develops, businesses are being hit hard, and money for the rent might not be in their budget. What can you do when you need to collect the rent, but your tenants are struggling?
As a landlord, you may have several options available, including consulting with a local attorney who can give you advice specific to your situation. However, before you decide what to do, it’s worth reviewing some things. The first, and arguably most important, is to look at your lease. Check for provisions such as force majeure, or early termination.
The second is to take stock of your tenants and their businesses. If you have more than one tenant, keep in mind that each tenant is a separate entity, so there is no one size fits all solution. Some tenants will recover more quickly than others, and some might have to close permanently. Being aware of that and having realistic expectations will help with the negotiation process.
Other things to consider when deciding on the most suitable option are what best fits the tenant’s business model, but also how long the tenant will need the accommodation. You may also want to consider the type of lease you have – if your tenant is responsible for upkeep or taxes, you want to make sure those obligations are still being met. You may decide to draw up an amended agreement for both parties to sign since this will effectively modify the lease.
- Rent reduction: The landlord and tenant would agree that rent is reduced for either a predetermined period of time or for the remainder of the lease.
- Rent forgiveness: The landlord agrees to forgive the tenant a specified amount of past due rent as long as the tenant stays current afterwards. This differs from rent reduction as the tenant must already be behind in rent.
- Rent deferral: The landlord agrees to defer a portion of the rent to a later date. Sometimes this amount is tacked on at the end in one lump sum, or the later payments are larger to accommodate the deferred payments.
- Subletting or Assigning the Lease: If the tenant does not think they can continue their business in their current space, they can find a new tenant to either sublet from them or they can assign the lease. Both of these usually require the landlord’s permission but would mean that the landlord continues to be paid rent.
- Termination of Lease: If the tenant cannot continue, they may request that the lease be terminated. There may be provision in the contract for early termination, or both of you have to negotiate an early termination.
Each of these options has advantages and disadvantages. Rent reduction, forgiveness, or deferral are common ways to help the tenant stay in the property, but they only help if the tenant’s business recovers and the tenant is able to continue to pay rent. It is generally advisable to have any changes agreed to in writing as they are changing the terms of the original lease.
Subletting and assigning the lease are often discussed the lease agreement. Subletting would mean that the new party was renting all or part of the space from the tenant, and the tenant would still be responsible for the lease, whereas with an assignment, the tenant would assign the entire lease to the new party, and the landlord would deal directly with them. The obvious downside to this right now is that there are a lot more tenants trying to get out of leases than there are prospective tenants, so finding someone willing to do either of these may be impossible. Keep in mind that no matter what’s going on, you should still do your due diligence with any prospective tenant.
Termination if often discussed in the rental agreement, so if you and the tenant are considering it as an option, it is important to check that agreement first. If the contract does not discuss early termination, then you and the tenant need to agree to terms for the tenant to vacate. Ideally, the amount would be enough to cover the costs associated with re-leasing the premises, but if the business is in financial difficulty, the tenant may struggle to produce a lump sum upfront.
Something else to keep in mind should any of these options turn into a possible eviction is that a few states are considering or have adopted restrictions on eviction for COVID-19 related reasons. It is always a good idea to consult with a local attorney who can give you up-to-date advice on both how to proceed with an eviction and also what restrictions might apply in your area.
Would you like to discuss strategies for collecting rent? Maybe you could use some help with lease re- negotiations? Contact Law 4 Small Business today with your questions. Our team of experienced attorneys will be here to help.