How to Negotiate Temporary Commercial Rent Reductions
If your business is suffering due to Coronavirus, the monthly rental payment on your business lease may not be manageable. Here’s how to talk with your landlord.
In this video, Patric McCallum, principal attorney of Drew|McCallum, and Wendy Bowser, Houston business owner and founder of Bowser Insurance, discuss commercial leases and COVID-19. From their discussion, these top tips emerged for dealing with business leases and rent:
- Know how your lease payments are calculated
- Focus on joint compromise
- Don’t forget the rent! By the end of the lease, how will the payments be caught up?
- Check how your lease handles force majeure clauses
Tip #1: Know how your lease payments are calculated so you can have an educated discussion with your landlord.
Commercial lease payments are made up of multiple parts. When you understand the rent calculation for your lease and what each part of the equation does, you’re doing a big part to jumpstart the landlord conversation and find joint compromise.
Tip #2: This is not the landlord’s fault, and it is not the tenant’s fault. Joint compromise is the best way to find a solution.
The global pandemic is not a problem created by either the landlord or the tenant. Everyone is negatively affected. And landlords have bills to pay on their business (ie. the building), too. Examples include: mortgages, taxes, insurance, building and grounds maintenance, water/electrical/garbage services, security services. The list goes on. And the function of these services affects your business, too. If the grounds are unkempt, does that encourage people to visit your business or the building?
Joint compromise usually means everyone gives a little and everyone gets a little. You share the pain.
Tip #3: Stair-step payment plans are a good way to catch up lease payments after a forbearance.
It will be much easier to negotiate a temporary partial rent reduction during this time if you also have a plan for catching up the missed rent. While it is hard for landlords to accept lower payments, it is much more likely they will agree if there is also a written plan to make up the payments. Stair-step repayment plans are a favored option, and there are multiple ways these can be structured.
Tip #4: Coronavirus will fall into most, if not all, force majeure lease clauses.
Force majeure clauses generally relieve people of their obligations under a contract. The force majeure clause in your contact may address rent obligations during this global crisis. Even if rent is not directly addressed, the force majeure provisions may offer a framework for resolving problems. Look for the words “force majeure” or “act of God” near the end of your lease contract.
Watch the full video above to hear the conversation. If you have more questions about any of these topics or if you would like help resolving a problem you are having, schedule your free telephone consultation today. We are here to help.
Prefer to Read the Transcript?
Wendy: Thank you so much for joining us today. Patric and I are here to discuss a lot of the business impacts, the things that are going on, the programs that are available out there to folks in business that are a result and impact of the COVID-19 virus Shall we get started?
Patric: Let's do, let's do.
Wendy: Okay. Awesome. So Patric, today I've a couple more questions for you mostly around commercial leases You know, with everything that is going on in this world around COVID rent is, next to payroll, is one of the largest expenses that a lot of companies have on their books. Is there a way that if someone is locked into a lease that... Firstly, can you tell us what is encompassed in a lease? I know you said the other day when we were chatting that a lease, generally, includes three things. And we were laughing about that being the trifecta. But can you tell me again what those three things are that are typically included in a lease?
Patric: Sure, so yes, you're absolutely right. One of the biggest overhead expenses any business has is its space. And so, when you're dealing with that cost it's important to understand if you're going to go negotiate a reduction, or a waiver, a temporary waiver of that cost, what's in that cost? What is that? What does that really mean to the landlord? And that commercial leases typically have two aspects to their rent. One is the rent for the space. The literal what you get within the walls of your space. And then the other is what we call the, it goes by a lot of names, triple net is a very common one, CAM is another one, or additional rent, or something like that is, you know. But they all really are trying to refer to the same thing and that is the triple net. And that means that triple net is short for net, net, net. And what that means is what the first net is insurance for the building. The second net is taxes for the building, and then the third net is the Common Area Maintenance or the CAM. Sometimes people will call it CAM when they are referring to triple net, they'll use that interchangeably. But CAM is actually part of the trifecta, the taxes, the insurance and the common area maintenance basically. The things that keep the building open and maintained. So, when you're looking to negotiate rent right now one of the things that the landlords and tenants are coming to agreement on is maybe doing a temporary waiver of the rent, the space, the rent for my space, but I would still pay the triple net so that the landlord can pay insurance, can pay taxes, and pay common area maintenance to keep the building up And Common Area Maintenance is typically things like landscaping, security, garbage, that kind of thing. Those things that you do want going on so that the building doesn't start to fall into disrepair or start to look abandoned. And so, that's one very common compromise that people are coming to is doing that so that landlords have some money coming in so they can cover those things but tenants get a break while we're in this place of not business as usual.
Wendy: Sure. If a business owner were to want to have a conversation along these lines would they need to seek counsel or do you think they just go? How do they start that conversation with their landlord?
Patric: Oh, that's a great question. So, I'm a big believer in the relationship. And I like to have a good relationship with my landlords. And I think most business owners like to have a good relationship with landlords and landlords like to have a good relationship with tenants. And I think a foundation of a good relationship is open communication. I think that landlords wish that tenants, if tenants were getting into trouble or having financial difficulty because right now cash flow is a very sensitive topic for everybody. Then I think that if you can come to your landlord earlier and come to the person that you have the relationship with. This is not the time to start a new relationship. If you have one already established, don't go to a new person. Go to the person that you have a relationship with and have an open and candid conversation about what's going on. And don't come to the landlord with just a problem and just staring at them waiting for them to solve it. Come to your landlord with solutions; make this easy for your landlord and go that route. And if you need some guidance on verbiage or how to talk landlord or how to, you know, what kind of language do I need to say that tells the landlord, I'm talking about my lease I know what my lease says and I'm talking about my lease. Then certainly, seek out a CPA, a lawyer, somebody that deals routinely with commercial leases. Just get a little bit of prep and a little bit of help in how you, what you want to say, how you want that message to come across. You don't want to be confrontational, you know, that kind of thing. So there can be a little bit of coaching to help with that conversation. But, I typically recommend that the tenant with a little bit of coaching go to the landlord and start that conversation because that is where the relationship is. The relationship is typically not between the landlord and the tenant's lawyer. And so, you don't want to start this off any more awkward than it already is, so that's the way that I like it to go.
Wendy: Sure, that's great advice to be vulnerable. That's really what it is, right?
Patric: Absolutely. Look, I mean, business people are not bulletproof. We're not. We like to act like it. Just like we all want to look like we're millionaires but on our tax returns, we want to be broke at the end of the year, you know. You know a business relationship is like any other relationship. It's complicated. But it's still a human relationship. Business is still got a level of humanity to it. And I think that if you will, if you're willing to let yourself look a little bit vulnerable, then I think you open up a conversation and you open up a safer space for your landlord to also be vulnerable and to evoke that empathy, and the feeling and the want to help. Because your landlord then can say, "Yeah, I'd really love to work with you but here are my problems and here's what I've got going on. But I hear yours, what I'm hearing is we're all suffering so that means that we all have to come to a solution that none of us really necessarily like because what we would like is you would like to have the money to pay full rent and I would like to have the ability to take it and provide you know, full building, but we're not there. And so, we're going to have to come up with a way to compromise." A little conversation and little vulnerability go a long way in doing that.
Wendy: Yeah, I agree. I'm thinking about Brene Brown, around and all her work that she does around vulnerability. I guess she's top of mind 'cause I watched a webinar with her yesterday. She's so amazing.
Patric: She is, yes she is.
Wendy: Yes. What is this, when you're talking about being vulnerable in coming up with a compromise together. Is that what you were referring to when we were discussing this the other day when you said, common compromise?
Patric: Yeah, what I meant was that the compromise of paying the triple net and getting a temporary abatement or forgiveness, I wouldn't say forgiveness, abatement of the underlying lease cost, is a very... is a compromise that is being used a lot. It's being viewed as probably the most fair way that we can reduce overhead and reduce burdens on tenants but still get enough money going to landlords that they can meet their obligations and they don't get into trouble because nobody's in good shape if the landlord starts having problems with its creditors and starts having problems with keeping, literally keeping lights on and air conditioning on and all of that stuff. So, it's common in that that's where most people tend to go. Some of the challenge in that negotiation comes with, well, what are we going to do with, you know, getting you caught back up? This isn't intended to be a forgiveness, nobody wants the landlord to literally be basically denied its contractual right to a certain amount of money over this period of time. Then the question becomes, well, then we need to negotiate in, you know, the stair step. You start paying rent but it doesn't just start coming due immediately. We stair step that up and then for a period of time, either we tack onto the end of the lease or we build in for a certain period of months a heightened a little bit higher rent to make up for you know, to basically pay this back to the firm and back so that at the end of the day when all this is said and done you and the landlord are right back where you would have been had this not happened. You've just worked out the hump together.
Wendy: Yeah, so everybody's whole again at the end of the term?
Patric: That's it, yeah.
Wendy: Awesome. Point of curiosity: is this COVID-19 does it fall under a... It is a crisis, but in terms of landlord type things and commercial leasing, does it fall under a crisis or does it fall under like, act of God, I don't know?
Patric: That's a great question. You know the clause you're talking about is called Force Majeure which is French for, "Oh my goodness really bad stuff." And that's what this clause is for. And if you read those clauses, you know, you kind of see the evolution of the law when it comes to those clauses. Because what we do as lawyers is when I redraft my Force Majeure clauses for my leases, for my landlord clients next year, pandemic is going to be in the list of stuff. Because right now, there's fire, flood, famine, war. You know, there's this list of exemplar things that are Force Majeure. Pandemic isn't there because we haven't had one of these since, I believe the Spanish Influenza back in the early 1900s. So that's fallen out of lawyers minds and therefore out of our pens. And so, I think that it is definitely a Force Majeure event. You could call it an act of God because it's not a man made, this isn't a manmade virus. This is a natural virus. Just like a hurricane is a natural event, this also is a natural event. And it significantly disrupts business to the point that people can't meet their obligations
Patric: on contracts which is what a Force Majeure is. So, it is absolutely a Force Majeure, you could call it an act of God because it's a natural event just like any of the other catastrophes and disasters that fall under act of God. But I think you'll also see going forward people will start putting pandemic into their Force Majeure clauses. You'll start seeing that over the next couple of years I think.
Wendy: Yeah, prayerfully we won't ever have another one of these things again.
Patric: You know, I would also love no wars, no fires, no famines, and all the other things. That would be a little bit of awesome, I could take today.
Wendy: Yes, all the things. Well, I can't think of any other questions I have around this at this time. Do you have any of the last words of wisdom you want to share before we say goodbye for today.
Patric: Nothing is jumping to mind. I would just say that to the extent that you can be nice to your landlord, be nice to your tenant because you never know when you're going to be here. It's a long term relationship, it's a complicated relationship, and it's something that should be treated with care. And this is no, and what's going on right now is no exception. This is not the tenants fault. This is not the landlords fault. But it is a business disruption and as business people we have to act like adults and work together to just get through it and this is part of it.
Wendy: Yeah. Awesome, well, thank you so much, I appreciate that.
Patric: Thank you so much, Wendy.
Wendy: So everybody, please turn on your notifications so you know when our next conversation will be up. We will continually be striving to include important information to help you in your business. And we would be so grateful, if you would share our video and follow us on all of our social channels. And you'll see that information at the end of this video. Thank you so much for watching and until next time, bye.
Our Guest for this Video
Our guest for this video is Wendy Bowser. Wendy is the owner and lead agent at Bowser Insurance. Bowser Insurance offers both group and individual health insurance. Putting together a benefits package can be a challenging task, and Bowser Insurance can make it easier for you. Whether you are starting from scratch, creating a plan for your organization for the very first time, or taking a look at you existing plan to enhance it or save on premiums, Bowser Insurance can help.