There is no doubt that for many companies, business looks different in response to the COVID-19 crisis. Employees are working from home, revenue may be down, and maintaining a safe workspace is proving more challenging than ever. You may have considered an entirely remote workforce, but you want to keep your office space for valuable in-person brainstorming sessions, interactions, and teamwork innovations.
Whether your business is working on cutting expenses to keep the business alive, or simply wanting to move toward a more remote workforce, now may be a great opportunity to renegotiate your commercial lease. Before approaching your landlord, start your preparations by doing some research. To negotiate effectively, business leaders must be able to answer some key questions before embarking on lease negotiations:
What does your lease say?
It is essential to first familiarize yourself with the terms of your lease, including the rent structure and payment terms, the default, termination, and assignment/subletting provisions. When does your current lease term expire, and what renewal options are available? Are you currently in default for failing to pay rent (or any other reason), and if so, what are your landlord’s rights? The more knowledgeable you are with your current lease, the more ammunition you’ll have when negotiating.
If your lease is up for renewal at any point in the next 12 months, it is important to give yourself plenty of time to plan for and hold your lease negotiations. If you don’t, you might miss a deadline for making changes or finding a new space if you aren’t able to reach an agreement.
What do you want from the lease negotiations?
An ideal outcome will look different for every tenant. You may want to lower your rent, decrease your footprint, or terminate your lease altogether. It is important to consider all of your options, identify an ideal outcome, and have a few backup strategies.
For instance, if your goal is to reduce your rent to make ends meet, you might ask your landlord to decrease your rent for a few months, to defer your rent temporarily, or to simply reduce your rent. If your lease is a base year lease, you might ask your landlord to adjust the base year for operating expenses. If your landlord is unlikely to agree to rent reduction, you may be interested in asking for a more generous tenant improvement package or other concessions. Considerations include a cap on common area maintenance charges, a co-tenancy clause granting you rights if an anchor tenant leaves the complex, favorable options, or free or reserved parking for employees and customers.
On the other hand, if your goal is to reduce your footprint or terminate the lease altogether, consider the logistics associated with vacating and the steps you would need to take to vacate the space. If your goal is to move into a smaller space, is there a smaller space in the building that would work better for your new workforce reality? If your landlord is not willing to terminate your lease, check to see if your lease references subletting or assigning your space to a new tenant.
What does your landlord want?
Your landlord’s needs are a critical element of the renegotiation process. What leverage do you have, if any, to help with your lease negotiations?
If you have been a reliable, long-term tenant that has consistently paid rent on time, your landlord may want to keep you. It costs landlords time and money to find a new tenant. The space may sit vacant for one or more months while the landlord searches and negotiates a lease with a new tenant. The landlord may then need to offer incentives to a new tenant, including rent abatement or a tenant improvement package. Finally, the landlord would likely incur costs from legal fees and broker commissions. Thus, there are many reasons that a landlord may be willing to agree to rent reductions or other concessions when renegotiating leases.
On the other hand, if your rent rate is below market or if you are unable to pay your rent and an eviction moratorium applies, your landlord may be happy to agree to early termination in order to re-let the space to another tenant. It is wise to understand the state of the market and your landlord’s position and priorities before renegotiating your lease.
What are you willing to give?
Finally, ask yourself what you are willing to offer to your landlord during the negotiation process.
If you are seeking a reduction, delay, or abatement of rent, you may be willing to extend the term of your lease. If you are trying to terminate the lease entirely, you may want to stay on a bit longer or continue paying rent until the landlord finds a new tenant. Alternatively, you might consider buying your way out of your lease by paying a percentage of the remaining rent up front.
As a point of caution, when you open up the lease to negotiations, a landlord may require stronger guarantees from the owners of the business, which should be reviewed and negotiated carefully.
What is your backup plan?
Once you have decided what to ask for and what you are willing to give, you must then determine a backup plan in the event your landlord says no or is unwilling to engage. If you still have multiple years remaining in your current lease term, don’t give up if your landlord rejects your first proposal. Have at least one backup proposal ready. In each case, be sure your proposal is clear and actionable so that your landlord has something to react to. If all else fails, you may be able to find another company willing to sublet the space.
On the other hand, if your current lease term is expiring soon, be sure to give yourself plenty of time to find a new space and negotiate a favorable lease with your new landlord.
You are not alone – Speak with an attorney to discuss lease negotiation techniques, different commercial lease structures, understanding your terms, lease provisions, lease reviews, and more. Whatever your situation, the attorneys at Equinox are here to support you and your business. Contact us at 425-250-0205 or firstname.lastname@example.org.
Legal Disclaimer: This article contains general information and should not be viewed as legal advice. You should talk with counsel familiar with your unique business needs before taking or refraining from any action.