In these challenging times, paying rent is becoming problematic for many companies. Here is some advice for tenants from Benjamin Osgood, managing director of Recreate’s Tenant Advisory Group.
Landlords want their tenants to stay in business, that is according to Benjamin Osgood important to remember.
“Landlords understand that it’s smart business to help their tenants get through a rough patch. The future income they’ll collect over the long term will far eclipse the temporary economic relief they may need to provide in the short term. They prefer a percentage of something, instead of 100 percent of nothing.”
So, your advice would be to talk to the landlord?
“Absolutely! The sooner, the better.”
Not paying the rent and winding up in default and then in breach of the lease is, according to Osgood, the worst thing a tenant can do.
“Not only may the tenant begin losing certain rights within the lease such as options to renew, but landlords also become substantially less interested in negotiating a solution once rent becomes late. Be proactive and begin discussions with the landlord as early as possible, before there’s a default.”
What are some possible options for rent relief strategies?
“Free rent. As it suggests, we ask our clients landlords to forgive rental payments for some time.”
Other optional strategies that Osgood would recommend are to offer extension of the lease against free rent, rent deferment with amortization or, a discount on the rent.
What can we expect from insurance companies, and would a force majeure clause in a lease help protect a tenant?
“In the case of COVID-19, the force majeure clause within a tenant’s lease will probably offer no assistance as they generally and specifically do not protect a tenant against non-payment of rent.”
After SARS and MERS, Osgood explained, epidemics insurance companies updated their policies to expressly exclude coverage for viruses, bacteria, and other microorganisms.
“Business losses are also not covered under business interruption insurance because they require physical loss from a covered cause.”
Recreate is a San Francisco based full-service commercial real estate agency that helps tenants and buyers around the world find and create “the perfect workspace”.
Possible strategies when you need to talk with your landlord
Free rent against added terms
The landlord gives the tenant free rent, but then amends the lease to extend the term by the number of months of free rent given.
Rent deferment with amortization
Rent is deferred for a period of time, and the value of the deferment is then amortized over the remaining months of the lease or a set schedule.
Instead of free rent, the landlord allows the tenant to pay a percentage of what they’re required to pay. This is a great hybrid solution because it can provide some relief for the tenant while helping the landlord to keep some income coming in to cover the operational costs of running the building. This approach can then be combined with any of the other strategies above (ex. 6 months of 1/2 rent with three months of paid rent added to the final months of the lease).
Security deposit conversion
The landlord agrees to apply the tenant’s cash security deposit towards rent. This is especially effective for tenants who do not have many terms remaining on their lease.
Source: Recreate’s Tenant Advisory Group