During these uncertain times, many clients have asked whether they should stop paying rent due to the effect of COVID-19 on their business or pursue other options, such as rent abatement for their commercial property. We suggest that before a client simply stops paying rent that he/she contact their landlord regarding their lease agreement and a rent abatement or rent deferral. It is very likely that your rent payment also includes common area maintenance (CAM) charges and other tenant financial obligations under the lease.
For this blog, “rent abatement” means forgiveness of a portion or all rent for an agreed upon number of months; “rent deferral” means the postponement of paying rent for an agreed upon number of months.
Requesting Rent Abatement
At this time, it is very unlikely that your landlord will be surprised by a request for rent abatement or rent deferral. In fact, many landlords have a pre-established protocol for handling a tenant’s request.
First, the landlord will tell you that he/she empathizes with you and that fully understands that your first priority is the safety and health of your employees and their families during these difficult times.
Then, if you are fortunate, your landlord will consider your request. The landlord will likely request that you put in writing that your business has suffered or will suffer adverse financial consequences due to COVID-19, resulting in a “substantial” reduction or loss of income. Examples of the reason for the request could include:
(a) lay-offs, loss of hours or other income reduction resulting from business closure or other economic or employer impacts of COVID-19; or
(b) compliance with a recommendation or a requirement from a government health authority to stay home, self-quarantine, or avoid congregating with others during the pandemic.
What to Include
Be prepared: the landlord will likely request the following information: (a) latest available audited financial report (or unaudited if not available) for the current period and the prior 12 months; including all applicable notes; (b) recently prepared cash flow projections indicating sources and uses of funds for the last 12 months and the next 12 months; (c) business plan or other documents summarizing the restructuring you have or plan to implement during this period of economic uncertainty, including efforts to date to reduce or control other operational expenses; (d) status of all lease restructure negotiations if your business has multiple locations; (e) summary of current ownership and capital structure; and
(f) summary of any government aid, relief or loans, such as the Paycheck Protection Program, received or applied for, including the current status of any application.
If the landlord agrees to a rent abatement or rent deferral, be sure to enter into a lease modification that clearly states the agreed lease terms.
Keep in mind that even if the landlord agrees to modify your lease, any personal guarantee should also be modified to ensure that the guarantor does not remain liable for the rent abatement or rent deferral. It is not unusual for a guarantor to remain liable for rent even if the tenant is excused from paying rent.
Remember: except for limited circumstances such as a very tenant friendly force majeure provision in your lease, you remain obligated to pay rent. As stated above, it is best to reach out to your landlord instead of simply stopping to pay rent.
We realize these are difficult times. As always, we are ready to help with any business issues you may have, especially during in the uncertain weeks and months ahead.