COVID-19 Sets Stage for Tenants Seeking to Renegotiate Current Leases

By Cassandra McGarvey, Founder of McGarvey PLLC on August 13, 2020

The future of commercial real estate may be changing in light of COVID-19, possibly in significant ways. Interim guidelines, published by the Centers for Disease Control & Prevention to prevent workplace exposures in the short term, are primarily focused on standards for health and wellness, engineering and administrative controls, and people processes in commercial facilities. We anticipate, over time, continued – and possibly permanent – policy changes. How that will function remains unknown until a substantial percentage of the workforce ventures back into the workplace.

As communities begin to open up, many workers may continue to work primarily remotely, work part-time from home, or consider shift work to minimize contact with coworkers. As a result, businesses may determine that they can reduce the size of their office footprint, switch to satellite office environments, or take advantage of co-working spaces to allow employees to split time between home and office. All of these scenarios can significantly impact office functions as we have known them to date. For example, if employees work in shifts to allow for adequate distancing, building amenities, accessibility, parking, and even HVAC requirements may need to adjust.

What is certain? Landlords are feeling the pinch as tenants pump the brakes on renewals, more businesses hold off on expansion plans, and prospective tenants stall on inking new deals. This may prove an opportune time for struggling tenants to renegotiate lease terms in their favor. If you choose to re-negotiate your lease, first and foremost, become familiar with the terms of the lease, know how much time is remaining, and know what your renewal options are, if any. Additionally, be aware of security deposit amounts, operating covenants, force majeure clauses, and insurance requirements. Landlords may be willing to work with tenants creatively to prevent a glut of empty space and lost revenue. Key things to understand prior to approaching your landlord to renegotiate include:

Rent. How is your monthly rent structured? Do you have a straight “gross” lease or are additional charges added to the base rental amount? Negotiating the “extras’, if any, may be a tactic to lower the cost of your lease.

Default. What does lease default mean? What are the landlord’s remedies if you must default? How much time do you have before a lockout?

Personal Guaranty. Are you or someone else personally liable for the lease? Is the lease structured in your name as an individual(s) or your business?

Negotiating with a Landlord. Before you start negotiations, make sure you have your current lease including all extensions and amendments. Review the lease and make sure you fully understand your obligations – both financial and otherwise – and the landlord’s obligations to you. Negotiation requires an understanding of both parties’ rights and obligations under the document. You need to fully understand the document to craft an effective deal for your business.

Do not wait to approach the landlord when you are behind! A successful renegotiation begins with a proactive approach while you are current on lease terms, if possible. Types of relief that may be available include rent or fee reductions, or rent deferral. A tenant may also offer to extend the lease and include rent escalations within the upcoming term. The extension gives the tenant the ability to spread the deficiency over several months.

Be open, honest, and straightforward about your financial situation and what you can afford. While working toward a compromise, be aware that the landlord also has financial obligations to meet.

Understand that you may need to make sacrifices that could include extending the term of the lease, providing a guarantor, or increasing rent payments in the future. Most importantly, whatever your solution, get it in writing. At the initial meeting, formulate a summary of the changes to the lease. Your attorney (or your landlord’s attorney) can then draft an amendment or restatement of the lease for you and the landlord. If the landlord prepared the amendment or restatement, please have your attorney review. Remember, whatever the outcome, your agreement MUST be in writing and be signed by both parties.

For more information on how to renegotiate your lease terms, contact Cassie McGarvey at cmcgarvey@mcgarveypllc.com.

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