Here are some rent relief negotiating tactics we recommend you follow during the COVID-19 outbreak and current shelter-in-place.
Step 1: Understand the potential impacts of COVID-19 will have on your business
- How much impact will there be to your ability to generate revenue?
- How much impact will there be to your supply chain?
- How long can your business reasonably be able to last with the current amount of revenue?
- What will be the long-term impacts to your business on revenue and profit?
This will help you build a numbers-driven case for your landlord to justify giving rent relief. It will also give you an idea of much rent relief you need (i.e. months of free or reduced rent).
Step 2: Understand your liabilities under the lease
- Are you personally guaranteeing the lease? If you, as an individual, are the Lessee or if you signed a Personal Guarantee addendum, then you are personally guaranteeing the lease. This means that you are personally liable for performing all obligations within the lease, including payment of rent for the rest of the term.
- Know your total monthly rent obligation, including base rent and any operating expense reimbursements.
- Are you up to date on rent payments as of March?
- How much security deposit have you given the landlord?
- Does your lease have a “force majeure” or “act of God” clause? If so, and you think it might contractually entitle your business to receive rent abatement during such circumstances, consult with an attorney. Work with your attorney to understand whether you are owed rent relief under this clause.
If you are personally guaranteeing your lease, the landlord can technically go after any personal assets you have including real estate, vehicles, banking accounts. Though this reduces that amount of leverage you have in rent relief negotiations, you should still follow the steps below. Just be aware that you will be backstopping the lease, should the impact of COVID-19 be permanent on your business.
Step 3: Make contact with the landlord
Draft an email for your landlord allowing the following lines:
- It is better to be up front about what you are going through. Use concrete data (i.e how much your sales have fallen, etc)
- Ask for rent relief that will get you through the foreseeable future. This will mostly likely take the form of free rent. It is unlikely that the landlord will give you more than 2 months free right now, since the general sentiment is that this is still temporary. You can always go back to them if the current magnitude of the impact of COVID-19 lasts through April.
- Build a case reinforcing that the landlord is faced with a decision between: 1) A few months of rent abatement or 2) potentially losing you as a tenant and needing to incur downtime to re-lease the unit.
- Be cordial, yet direct in your initial ask.
If your landlord rejects or ignores your request, give them a call.
Step 4: Negotiate the final terms of this agreement
The best likely outcome is to receive a few months of free rent, with no other conditions.
If the landlord pushes back on the initial request, you can propose the following. Suggest these one at a time, going down the list until a deal is struck:
- Give a few months of free rent, but add those months to the back end of the term (e.g. 2 months of free rent immediately, make your remaining lease term 26 months instead of 24 months).
- Give a few months of free rent, and pay that free rent back over the remaining term.
- If your business is not severely impacted, you can ask for a rent discount for the next few months (e.g. 50% rent).
Keep in mind that you are not alone in experiencing the unprecedented impact of COVID-19. The current leasing market is all but frozen at the moment, with no near-term end in sight. In general, landlords are willing to strike deals to help their tenants through the next few months, since the alternative is to incur leasing costs and downtime to re-lease the unit.
Step 5: Document the terms
Memorialize this agreement in writing and have both you and landlord sign off on this written agreement. Ideally, this will take the form of a lease amendment, but a lease letter where both parties sign could also be sufficient.
Any promised rent relief that is not documented in writing might not be adhered to, so this part is very important.
If you have any questions, please e-mail Michael, Regional Director, Manufacture : San Jose.