Our society has been derailed by the COVID-19 pandemic, with personal health and safety as the foremost concern. During this upcoming month, the next hot topic will be commercial real estate.
April 1st was the first major “due date” of the commercial real estate industry since the commencement of the COVID-19 National Emergency. What’s more, the more leveraged the property, or the stricter the loan covenants associated with that leveraging (such as with CMBS loans), the more urgent the circumstances.
What can you do when you need to collect rent?
As a landlord, you may have several options available, including consulting with a local attorney who can give you advice specific to your situation. Do you need immediate legal assistance to help look over your lease? Learn more about how to defend yourself here.
However, before you decide what to do, it’s worth reviewing some things. Here is a reaction plan to help navigate this brewing nightmare for the many commercial landlords whose solvency is in jeopardy:
1. Carefully strategize The first, and arguably most important, is to look at your lease. Check for provisions such as force majeure, or early termination. A carefully-crafted plan tailored to your specific situation can avoid drastic worst-case scenarios such as bankruptcy or foreclosure. With the smart restructuring of obligations owed by tenants and to lenders, it could perhaps even result in a stronger position at the end of the pandemic than when it started.
2. Evaluate obligations The second is to take stock of your tenants and their businesses. If you have more than one tenant, keep in mind that each tenant is a separate entity, so there is no one size fits all solution.
The core of a commercial real estate landlord’s plan is addressing its obligations, which requires knowing your obligations. The core obligations usually are those contained in lease agreements and loan agreements.
3. Approach tenants Having identified your obligations, monetary and otherwise, now be proactive. Contact all your tenants with a “status check-in” (tactfully and empathetically done), identify those that are in distress (i.e., likely unable to meet rent requirements soon), and open a dialogue with them on a negotiated solution.
Some general guidelines to follow when negotiating:
You may decide to draw up an amended agreement for both parties to sign since this will effectively modify the lease, which could include the following:
- Rent reduction: The landlord and tenant would agree that rent is reduced for either a predetermined period or for the remainder of the lease.
- Rent forgiveness: The landlord agrees to forgive the tenant a specified amount of past-due rent as long as the tenant stays current afterward. This differs from rent reduction as the tenant must already be behind in rent.
- Rent deferral: The landlord agrees to defer a portion of the rent to a later date. Sometimes this amount is tacked on at the end in one lump sum, or the following payments are larger to accommodate the deferred payments.
- Subletting or Assigning the Lease: If the tenant does not think they can continue their business in their current space, they can find a new tenant to sublet, or they can assign the lease. Both of these usually require the landlord’s permission, but the landlord continues to be paid.
- Termination of Lease: If the tenant cannot continue, they may request that the lease be terminated. There may be a provision in the contract for early termination, or both of you have to negotiate an early termination.
4. Seek assistance After evaluating your obligations and meaningful discussions with your tenants, it should be apparent whether you will meet your property’s operating expenses (mortgage, taxes, etc.). If things appear bleak, you will need to look for outside help.
It is always a good idea to consult with a local attorney who can give you up-to-date advice on both how to proceed with an eviction and what restrictions might apply in your area.
Would you like to discuss strategies for collecting rent? Maybe you could use some help with lease renegotiations? Contact Nick Heimlich Law today with your questions. Our team of attorneys are here to help.
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