Is the Lease About to Expire?
The first thing to do is look at your lease and determine when the lease is set to expire. Is your tenant attempting to renegotiate for a future lease agreement, or are they trying to renegotiate the rental rate on their current lease? Most leases will specify that the tenant must notify the landlord within a set time frame on whether or not they want to extend the lease. Tenants will usually start the ball rolling on negotiating the cost of rent or other amenities at the same time so that a new lease is executed well before the old one expires (or conversely, so you both know the tenant will be leaving well before the lease expires).
Look at the Lease.
You should consult your lease, possibly with an attorney, and see whether the tenant is required to give notice by a specific date or address as set out in the lease. You and the tenant both should try and abide by the notice provisions of the lease, both because that way you have complied with your contract, but also because that way there is a written record should you need it for any reason. Even if you prefer phone calls or in person meetings, it’s worth following up with a written record so can refer back to it later, if necessary.
Are there any other clauses that might affect a renegotiation? You should also check for any other clauses, such as impossibility, force majeure, or any lease extension clauses, that may affect your renegotiation. Again, if you are not comfortable doing this by yourself, you can ask a lawyer to review your existing lease for a fee.
What is the Market Rental Rate for Your Property?
Do your homework, do not just rely on a number given to you by your tenant. What is the area like? What is your square footage? What amenities does your property offer? What are comparable properties renting for? It is important that you know in a negotiation what the going rate is and not rely on what the tenant says it is.
What can Your Tenant Afford to Pay in Rent (COVID)?
Again, do your homework. Your tenant can only afford to put a certain percentage of their profits toward their rent. The tenant should be willing to show you their books, and they may be in financial difficulty, especially with Covid-19. For some types of business, this difficulty may be temporary, and for others, it might be permanent. If the difficulty is temporary, instead of a full reduction, you may consider temporary rent reduction, rent deferral, or rent forgiveness depending on the tenant’s situation. If the issue is permanent, you may need to have a conversation about early termination with your tenant.
If your tenant is coming to you to discuss a possible reduction of their current lease, you may want to review the provisions on your current lease for force majeure or any impossibility provisions. The terms of the lease may have set out some requirements in the event of pandemics, health emergencies, government orders, or other unforeseen situation. When thinking about what the tenant can afford and considering option, think about what you as the landlord can afford. The tenant may not be able to pay rent, but you may still have a mortgage or other bills or obligations associated with the property that you will still have to fund.
Negotiate Items Other Than Rent.
When you renegotiate with your tenant, there are other items you may want to consider, such as the length of the lease and the percentage increase annually should the lease be longer than one year. If the tenant is one you may want to keep, a lower rate with a longer lease term may be something you want to negotiate. Depending on the type of lease you have, you may be renegotiating the percentage of the tenant’s business profits, so that might be something to bear in mind.
How Much do You Want to Keep this Tenant?
What incentives you decide to offer will depend on how much you want to keep the tenant. Many tenants maintain their commercial space and pay on time, but there are some bad apples. If a bad tenant comes to you about renegotiating or extending their lease, you may want to consider finding a way to end your lease with them instead of altering an existing lease or executing a new one. If you are not sure if this is an option, consult with an attorney who can confirm what options are available to you.
Get it Formally Drawn Up.
If you are both able to reach an agreement, you should consider having the new or revised lease formally drawn up with all the changes included. It’s recommended that you consult an attorney to draft and/or review anything before signing. Involving an attorney at the beginning may save money down the line if there are any disputes with the lease.
Do you have questions or concerns about renegotiating your commercial lease or re-opening your business during COVID-19? Business Law Southwest can help. Contact us today.